Why Do Mergers and Acquisitions Occur?
Why do mergers and acquisitions occur? There are countless reasons that two companies could decide to merge or that one company may purchase another.3 min read
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.
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.
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.
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.
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.
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.
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