Key Takeaways

  • Mergers and acquisitions are driven by synergy, financing, diversification, and market expansion goals.
  • Companies use M&A to increase market share, streamline supply chains, and eliminate competition.
  • Tax strategies, risk reduction in foreign markets, and access to new technologies also motivate M&A.
  • Defensive strategies, such as preventing hostile takeovers or protecting intellectual property, can trigger deals.
  • Cultural alignment, integration planning, and regulatory compliance are critical to M&A success.

Why do mergers and acquisitions occur? There are countless reasons that two companies could decide to merge or that one company may purchase another, but the most common motivation is that one company sees value in another and wants to use this value to for its own benefit.

Improving Both Companies

If you do any research into mergers and acquisitions, you'll commonly come across the word “synergy.” Basically, the idea behind synergy is that when two companies combine their efforts, operational costs will decrease, and each company's performance will improve. Synergy is the most often cited reason for a merger or acquisition.

A company will often decide to merge with another company because the weaknesses and strengths of both organizations complement each other. Improving financing is another common reason for mergers and acquisitions. For example, the larger company in the merger might able to access financing much more easily than the smaller company. Alternately, once the two companies have merged to create a larger organization, the new company may be able to access financing that was not previously available to either business.

Strategic Synergies and Innovation

Beyond lowering costs, mergers and acquisitions often allow businesses to combine intellectual property, research capabilities, and talent. By merging innovation pipelines, companies can accelerate product development, expand service offerings, and strengthen long-term competitive advantage. For example, technology and pharmaceutical industries frequently pursue M&A to acquire patents, research teams, or proprietary systems that can significantly boost future profitability.

Diversifying Business Interests

Intensifying the focus of a business or diversifying business interests are two other motivations for mergers and acquisitions. For example, a company whose goal is diversification may purchase a company in a different field to improve overall profitability. A company that wants to intensify its business focus might decide to merge with a company in the same industry that has had better success penetrating the market.

Expanding Into New Geographies

A common motivation for M&A is entering new markets. Acquiring a local business gives an immediate presence in a new region without the delays and risks of building operations from scratch. This is particularly attractive in highly regulated industries, where partnering with or purchasing an established entity helps the acquirer navigate compliance, licensing, and customer networks.

Growing the Company

Growth is the goal of every major company, and one of the easiest ways to grow an organization is through mergers or acquisitions. Instead of doing the work required to increase market share, a company can simply buy or merge with one of their competitors, which is known as a horizontal merger. Growing a company through a merger is common if the organization wants to break into a market where another company has already found success.

Defensive Strategies and Market Protection

Not all mergers and acquisitions are purely growth-oriented. Some deals occur as a defensive maneuver to block competitors from gaining valuable assets, such as technology, intellectual property, or key contracts. Defensive M&A may also prevent hostile takeovers, ensuring that control remains with the target company’s management and shareholders.

Supply Chain Pricing and Eliminating Competition

Many companies are able to increase their pricing power related to their supply chain through acquisitions. Some examples of this practice include:

  • Buying a supplier to decrease supply costs.
  • Purchasing a supplier to save money on margins.
  • Acquiring a distributor to lower the costs of shipping a product.

Mergers and acquisitions are also an effective tool for eliminating competition. During an acquisition, for example, the company making the purchase will be able to increase their market share while removing one of their competitors. An acquisition or merger can also make it easier to fend off future competitors.

Accessing Capital and Resources

M&A transactions can provide companies with access to capital, talent, or natural resources that are otherwise unavailable. For instance, an energy company might acquire a smaller firm with exclusive drilling rights, or a financial institution might merge to broaden its lending base. This type of acquisition can also open doors to specialized teams and management expertise that accelerate growth.

The drawback to this method for decreasing competition is that the company proposing the acquisition will need to convince the other company's shareholders to agree to the merger, which usually requires paying a large premium.

Reducing Risk in Foreign Markets

When mergers and acquisitions take place between companies in foreign markets, the main goal is risk reduction through diversification. Merging with or acquiring a company in a foreign market can reduce risk in two ways. First, it can protect a company from fluctuations in exchange rates. Second, it can shield the company from a recession in either location.

Regulatory and Compliance Considerations

Regulatory environments often influence why and how mergers and acquisitions occur. Companies may merge to ensure compliance with stricter industry regulations or to align with evolving antitrust standards. At the same time, cross-border acquisitions must account for foreign investment laws, antitrust scrutiny, and sector-specific rules. Legal teams specializing in M&A law play a central role in guiding businesses through these complexities.

Tax Benefits

Acquisitions and mergers can also provide enticing tax benefits to the companies involved in the deal. For example, if one company in a merger is dealing with net losses, the profits of the other company can offset these losses. This is obviously enticing to the company with losses, but is only beneficial to the other company if the merger will result in future gains.

Mergers can also be a solution for larger companies looking to lower their tax burden. For example, if the larger company is in a country with a high corporate tax rate, they could merge with a company in a location with a lower rate. While this tactic is often criticized, it is very effective in lowering a company's taxes.

In some cases, a merger or acquisition takes place because a company is trying to fulfill a strategic goal such as:

  • Reorganizing the company.
  • Growing the company's market share or protecting its current market share.
  • Breaking into new markets.
  • Acquiring a new service or product.
  • Accessing new resources.

Ultimately, there are many reasons why companies merge or acquire other companies. It is important to understand all the potential risks, benefits, and legal implications if you're considering a merger or acquisition.

Cultural Integration and Workforce Alignment

While financial and strategic goals often dominate M&A planning, cultural compatibility between companies can determine long-term success. Misaligned values, communication styles, or management approaches frequently derail deals even when financial synergies are strong. Businesses increasingly evaluate workplace culture and leadership compatibility during due diligence to ensure smoother integration of teams and processes.

Frequently Asked Questions

  1. What is the main reason mergers and acquisitions occur?
    The primary reason is synergy—companies believe they will be stronger together by lowering costs, expanding capabilities, and increasing market power.
  2. How do M&A deals help companies expand internationally?
    By acquiring a local business, companies gain immediate access to markets, customer bases, and regulatory frameworks, reducing entry barriers.
  3. Can tax benefits be a reason for M&A?
    Yes. Mergers can offset losses with profits, reduce overall tax burdens, or relocate corporate structures to jurisdictions with lower tax rates.
  4. What role do lawyers play in mergers and acquisitions?
    M&A lawyers handle due diligence, draft agreements, navigate antitrust and regulatory compliance, and advise on risk management throughout the deal.
  5. What risks come with mergers and acquisitions?
    Risks include cultural clashes, regulatory hurdles, integration challenges, overvaluation, and the possibility that expected synergies fail to materialize.

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