Companies pursue mergers and acquisitions for a variety of reasons and purposes. The main goal is to strengthen one’s position on the market – it’s a type of corporate „symbiosis“ that lets startups coexist with large corporations and conglomerates.
Before we begin analyzing the exact reasons why companies decide to pursue mergers and acquisitions, it’s important that you understand the difference between these two categories. Although some people use mergers and acquisitions interchangeably, they mean completely different things.
Mergers include two entities that have decided to join forces and create a completely new organization. Acquisitions, on the other hand, are essentially a takeover – it’s when one entity purchases the other.
Although they’re different in nature, these takeovers come with similar benefits, which is exactly what we’ll discuss down below.
1. Economies of scale
As the old saying goes: „two heads are better than one“. The same rule applies in business. When two companies join their resources, they’re able to grow together and become bigger players in the market. It’s one of the main reasons why big companies merge with small businesses and startups and vice versa. When it comes to acquisitions, the logic is quite similar – bigger companies want to expand their market reach, while smaller ones might not be able to overcome the existing market barriers alone. It’s usually to sell or to go bankrupt for them.
With both mergers and acquisitions, companies can join their resources and improve their operations in many different ways. They’re also quite healthy for the economy, as they allow new ideas and economic resources to „breach“ certain layers of the market that are out of reach for smaller companies.
As we’ve mentioned before, while mergers and acquisitions are different, they both bring similar results. Economies of scale are just one of the reasons why companies decide to take this step.
2. Eliminating competition
The corporate world is a complex system – it goes through many changes quite often. New players arrive in the market, old ones retire – it’s what constantly goes on in almost every industry (apart from natural monopolies, but that’s a topic for another day). Companies compete with each other for the share of the market they all operate in. One of their main goals is to beat their competitors by getting an advantage over them.
Now, companies can eliminate their „opponents“ by buying them or merging with them. Many times, this could be explained by the „if you can’t beat them, join them“ rule, but it’s not all there is to it. Sometimes, merging with a competitor can bring an advantage over other competitors that are bigger than both of the companies undergoing a merger or acquisition.
Either way, these takeovers are an excellent way to „get rid“ of the competition and do it quickly and efficiently.
As noted at the Imaa Institute, mergers are an excellent way for a company to cover different industries and markets with their goods and services. It’s why mergers between companies that operate in different industries exist – they’re, in fact, quite common. In these types of mergers or acquisitions, the economies of scale aren’t the end goal. Instead, companies are benefiting from diversifying their portfolio.
To explain this further, diversification is when a company invests in different projects to ensure stability and reduce its business risks. If a company only produces one type of service or product and the market ends up crashing, they’ll be in loads of trouble.
Of course, deciding to switch industries all of a sudden can be quite expensive. It would mean opening up a new business from scratch. In most cases, it’s not a viable option for the company to even consider. Instead, they’ll buy or merge with other companies that already operate in their industry of interest.
4. Managerial decisions
Now, this one is quite rare, but it’s still worth the mention as it does happen from time to time. Sometimes, the management of a company will decide to pursue a merger or an acquisition simply because they want to create the biggest company in the industry. This type of thinking doesn’t really make much sense from an outsider’s standpoint, but corporate greed is a real issue that impacts many industries over the globe.
So, yes, sometimes the top management will decide to value size over quality – they’ll pursue mergers and acquisitions for no other reason but to grow their company’s size. As you can probably guess, it’s usually because larger companies offer better incentives for the management.
Of course, even if the decision to pursue a merger or an acquisition comes from the upper management’s personal goals, it doesn’t mean it won’t be beneficial to the company. As we’ve already mentioned before, both of these takeovers can lead to a valuable competitive advantage that will help the company go forward.
5. Increase financial capacities
Some companies may decide to pursue a merger in order to achieve better financial stability. As you already know, every business has its financial maximum. Takeovers can be a great way to expand their financial capacities, which can then be used to further develop and grow their companies.
Similarly, companies can merge with others for different tax purposes.
For example, companies with large taxable incomes can merge with others that have large tax loss carryforwards. Most of the time, it’s a win-win situation for both entities involved in the process.
All in all, one of the major reasons why companies choose to pursue mergers and acquisitions is to increase their financial capacities – it’s also one of the most common goals of these types of takeovers
The bottom line
Mergers and acquisitions are common practices in the corporate world. There are many reasons why companies decide to go for it – most of which we’ve covered throughout this short article.
We hope our analysis has helped you understand these processes a bit more clearly and we wish you the best of luck in all of your future endeavors.