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Why Do Mergers and Acquisitions Occur?

Why Do Mergers and Acquisitions Occur? E-mail

Although companies acquire and merge with others for a variety of reasons, the main reason such mergers and acquisitions take place is that the purchasing company seeks improved financial performance.
Some of the following attributes could, in theory, help improve the acquirer’s financial performance:

  • Increased revenue and/or market share: This would typically occur when the buyer takes over a major competitor, reducing its competition and thus building up its market power by capturing increased market share. If it has a dominant enough position, it could then exercise greater power in setting prices as well.
  • Economy of scale: A combined company can usually cut its fixed costs by removing duplicate departments, teams and operations, thus lowering the company’s costs relative to the same revenue stream, which would result in increasing profit margins.
  • Cross-selling: This refers to the complementary products an acquiring company can sell to the customers of its acquired company. As an example, a bank buying a stock broker could sell its banking products to the stock broker's customers. At the same time, the broker could poach the bank's customers for brokerage accounts.
  • Geographical, product, or other diversification: Diversification of any kind can usually smooth the earnings results of a company. This, in turn, smooths the stock price of a company, giving conservative investors more confidence in investing in the company.
  • Synergy: Often, managerial economies such as the increased chances of managerial specialization. Another example would be the purchasing economies due to larger order size and bulk-buying discounts.
  • Absorption of similar businesses under single management: So if complementary companies can come together, they can often save considerable money by spreading management over a wider scope of employees and operations.
  • Tax Consequences: A money-making company can buy a money- losing and use the target's loss as their advantage by reducing their tax liability. Some governments have cottoned onto this tactic and seek to minimize it. In the United States and many other countries, laws have been enacted to limit the ability of profitable companies to buy loss making companies, limiting the tax motive of an acquiring company.
While some mergers and acquisitions end up bringing value to all stakeholders involved, it is not uncommon for some shareholders in a deal to be shortchanged, and as a result suffer a financial loss due to the merger or acquisition.

Own shares of a company that is involved in a merger or acquisition? Protect your rights.

Complete the form on this page or call our lawyers at 1-800-804-8140 for a free no obligation consultation.