Why Do Companies Merge?

The word “Merge” basically refers to when two companies of almost same size agree to become a single new company and to operate consolidated rather than remain separate. Two equal companies make a mutually beneficial decision to become a single legal entity. Why do companies merge? Mergers take place for many business reasons. Also, mergers are undertaken to improve long-term shareholder value and overall company performance. The newly formed company will have an increased market share, which will reduce competition. This sort of reduction may decrease the public interest but will help the company to gain more profits. 


You May Like to know another term FDI and the advantages and disadvantages of Foreign Direct Investment.


Why Do Companies Merge?

There are many reasons for doing merger between the companies. A few of the reasons is being described here.

1. Gaining a Competitive Advantage or Larger Market Share: Companies like to do merge in order to get competitive advantages in the business world and to gain large market shares as well. This marketing network gives both companies a wider customer base overnight.

2. Diversifying Products or Services: Another reason for merging companies is to diversify their products and services. Two companies will be able to combine their products or services to gain a competitive advantage over others in the marketplace by diversifying their products with the help of merger.

3. Cutting Costs: Another reason for the merger is to cut off costs. Having similar products and services, two companies create a large opportunity to reduce costs. Companies also have an opportunity to combine locations and reduce operating costs with the help of merger.

4. Surviving: In order to survive, companies willing to merge with one another. Sometimes it is the only option in order for the both companies to survive in a critical situation. For example, a number of companies used mergers and acquisitions to grow and survive during the global financial crisis from 2008 to 2012.

5. Synergy: The concept Synergy means that the value of the combined companies will be greater than the joint value of the two individual companies. Another reason for the companies to merge themselves is to create synergy. The success of a merger deal is determined by the extent of the synergy achieved.

6. Eliminate Competition: Companies merge for the purpose of eliminating competition. Their another purpose is gaining a larger market share as well.

7. Market Penetration: By merging, companies penetrate the market by accessing to more customers. For example, according to the BBC, the merger of the German automaker Daimler-Benz with the American automaker Chrysler Corp. allowed the new company, Daimler-Benz, to access markets in both Europe and North America.

8. Skills and Knowledge: The merged company can make use of the skills and knowledge of both companies’ individuals. For example, allowing the scientists from two separate pharmaceutical research and development departments to work together is more likely to generate more innovative products. The combined skills of the marketing departments will then be able to sell these products more effectively and will help to increase the net shareholders’ value.

9. International Competition: Mergers can help the companies to deal with the challenges of multinational companies and compete on an international scale.

10. Mergers may Allow Greater Investment in R&D: This is another reason of merging the two companies. Through the merger, the new firm will have more profit which can be used to finance risky investment.

Mergers occur for other reasons too, but these are some of the most common. Besides these reasons, there are few more reasons which make the companies merge themselves in the business world. They are:

  • Economies of scale
  • Greater Efficiency
  • Tax and Operational Efficiency Advantages of Mergers
  • Improve Financial Position
  • Increase asset base, making borrowing more possible
  • Empire building

From the discussion above, these are the reasons why companies might consider a merger and expanding their business. We can say that mergers have one underlying motive which is to protect and improve the strength and profitability of the both companies. In other words, to maximize shareholders’ wealth.


REFERENCES:

  • dummies.com/business/corporate-finance/mergers-and-acquisitions/the-reasons-for-mergers-and-acquisitions/
  • zubairghias.wordpress.com/2015/08/17/5-reasons-why-companies-merge-or-acquire-other-companies/
  • answers.google.com/answers/threadview?id=57377
  • smallbusiness.chron.com/advantages-company-mergers-22476.html
  • boundless.com/finance/textbooks/boundless-finance-textbook/mergers-and-acquisitions-20/reasons-for-business-combinations-131/reasons-for-combining-businesses-541-5678/
  • thebalance.com/why-do-companies-merge-mergers-and-acquisitions-explained-392847
  • investopedia.com/ask/answers/06/mareasons.asp

Sadnan Bin Sattar

Sadnan is one of the top contributors of Gotabout Business Strategy and Analysis. He is an undergrad student of North South University; major is Finance and Accounting. He has a strong interest in strategy development.