Why do companies merge with or acquire other businesses?
Companies undergo mergers when they seek economies of scale, diversification, greater market share, increased synergy, cost reductions or new niche offerings
Mergers happening in business have many reasons. Business mergers and acquisitions (M&A) can be an effective strategy for growing the bottom line. Most often, companies merge or acquire because they want to grow, with the goal of providing new top line revenue or bottom-line profitability
Companies undergo mergers when they seek economies of scale, diversification, greater market share, increased synergy, cost reductions or new niche offerings. They undergo mergers for improved capacity utilization and to gain new technology. Companies for engaging in promotional activities, for introducing new ways by which product value can be increased, which in turn increases the production rate leads to maximum capacity utilization is the voluntary fusion of two companies on broadly equal terms into one new legal entity.
Merger occurs when two separate entities combine forces to create a new, joint organization. Horizontal merger is a merger or business consolidation that occurs between firms that operate in the same industry.
A vertical merger is when a company acquires another company that isn't a direct competitor but operates within the same supply chain.
Conglomerate on the other hand, is the combination of firms in different industries or firms operating in different geographic areas. Conglomerate mergers can serve various purposes, including extending corporate territories and extending a product range.
Now, lets get into some details that why companies undergo mergers?
Two companies undertake a merger to increase wealth of their shareholders. The purpose is to bring synergies that increase value of a newly created business entity. Essentially, synergy means that the value of a merged company exceeds the sum of the values of two individual companies. In 2017, when Amazon acquired Whole Foods, it was a clear attempt for Amazon to bring the power of its e-commerce machine to traditional food retail. Clearly, the markets thought it was going to be a success: within hours of the deal, most other food retailers in the US were down by a few percentage points on the news. There are two types of synergies:
Revenue synergies: Synergies that primarily improve the company's revenue-generating ability. For example, market expansion, production diversification, and R&D activities are only a few factors that can create revenue synergies.
Cost synergies: Synergies that reduce the company's cost structure. Generally, a successful merger may result in economies of scale, access to new technologies, and even elimination of certain costs. All these events may improve the cost structure of a company.
Mergers are frequently undertaken for diversification reasons. Companies may use a merger to diversify its business operations by entering into a new market or by offering new products or services. Additionally, it is common that the managers of a company may arrange a merger deal to diversify risks relating to the company's operations. Market-extension, product-extension, and conglomerate mergers are typically motivated by diversification objectives.
An acquisition can be another reason of a merger. A merger can be motivated by a desire to acquire certain assets that cannot be obtained using other methods. In M&A transactions, it is quite common that some companies arrange mergers to gain access to assets that are unique or to assets that usually take a long time to develop internally.
Mergers also occurs to increase financial capacity. Every company faces maximum financial capacity to finance its operations through either debt or equity markets. Lacking adequate financial capacity, a company may merge with another. As a result, a consolidated entity will secure a higher financial capacity that can be employed in further business development processes.
To meet substantial taxes, can also be a reason of any merger. A company generates significant taxable income. It can merge with a company with substantial carry forward tax losses. After the merger, the total tax liability of the consolidated company will be much lower than the tax liability of the independent company.
To acquire new technology/expertise: Industries change and if companies don't, they don't survive. That's why companies are often on the lookout to acquire other companies which give them new technologies and expertise. In the next decade, as the energy transition continues, we can expect many of the oil and gas majors to begin investing in renewable energy firms, for example. Over the course of the last decade, Google has acquired over 30 artificial intelligence (AI) startups, acquiring a range of capabilities in a technology which is set to be hugely influential in the years ahead.
Geographical diversification has been a huge value-driver in M&A over the years and this stands to reason. Why build a company from scratch in a foreign country when you can acquire a cash generating entity that already exists and use it as a platform for your own company's growth in that country? Arguably the most successful example of this has been Spanish bank Santander, which has acquired banking chains in 9 countries outside of Spain to become one of the world's largest retail banking institutions.
Mergers also occurs for cross-selling. It can be a powerful way to deliver revenue synergies. The idea that two companies have more to offer their customers by being together. One recent example of a cross-selling deal is provided by Starbucks' acquisition of Teavana for $750 million in 2017. What could be more synergistic for revenues than selling tea and coffee together? Now, you can get tea at Starbucks and coffee at Teavana. Everyone's a winner.
Many companies see mergers as a best source of opportunity. Companies aren't always looking for an acquisition when one lands on their doorstep. 'Opportunistic' is a word that CEOs are keen to play up as it suggests that the transaction as a sort of 'once in a lifetime deal.' Really what's at play in an opportunistic deal is buying a company below its intrinsic value. JP Morgan's 2008 'fire sale' deal for BearStearns, which it acquired at a supposedly knockdown price, is an example of a deal that found a company rather than the other way around.
Mergers happening in business have many reasons. Business mergers and acquisitions (M&A) can be an effective strategy for growing the bottom line. Most often, companies merge or acquire because they want to grow, with the goal of providing new top line revenue or bottom-line profitability. When the market perceives an M&A strategy sound, a company's stock price can be rewarded. Companies today exist in a global marketplace and are no longer bound by region or country. Today's most successful companies merge and acquire businesses across country borders.