Q:

Why do companies merge?

A:

Quick Answer

Specific motivations for a business merger are varied and may include increased growth or market share, increased diversification, market synergy or economies of scale. Mergers between two companies are agreed upon to maximize shareholder wealth through the creation of a singular business formation.

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Full Answer

The general benefit of a merger is that the combination of two business entities bolsters performance through improved efficiency and decreased costs. Effective mergers are initiated between companies with complementary strengths and weaknesses.

Companies may opt to engage in a merger to diversify their business and reduce exposure to a specific industry. Businesses that merge for diversification purposes are typically in unrelated markets and often result in the larger business absorbing the smaller business.

The prospect of increasing market share is another reason why companies engage in mergers. The acquiring company in a merger increases its market share without increasing its supply chain or workforce. These horizontal mergers allow the acquiring company to purchase another company's product and consumer base for a premium. In exchange for the cost of acquisition, the merger increases the acquiring company's market share while eliminating its future competition.

Companies may also engage in vertical mergers to increase their supply-chain pricing power. This type of merger occurs when a business purchases one of its distributors or suppliers. Under this merger, the acquiring company reduces its costs by eliminating the margins previously charged by the supplier or reducing the transportation costs charged by the distributor.

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