A:

Some of the reasons for mergers and acquisitions (M&A) include:

1. Synergy: The most used word in M&A is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses.

2. Diversification / Sharpening Business Focus: These two conflicting goals have been used to describe thousands of M&A transactions. A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry's performance on its profitability. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations.

3. Growth: Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves - instead, they buy a competitor's business for a price. Usually, these are called horizontal mergers. For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller company to make more beer and sell more to its brand-loyal customers.

4. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost.

5. Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product's market. The downside of this is that a large premium is usually required to convince the target company's shareholders to accept the offer. It is not uncommon for the acquiring company's shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.

For more on this topic, read The Basics Of Mergers And Acquisitions and The Wacky World Of M&As.

RELATED FAQS

  1. How often should a small business owner go through a bank reconciliation process?

    Learn about the bank reconciliation process, its purpose and how often it is recommended that small businesses perform a ...
  2. How can a company reduce the unsystematic risk of its own security issues?

    Understand the basic concepts of systematic and unsystematic risk, and learn steps a company can take to reduce its level ...
  3. Why is a company's Cash Flow from Financing (CFF) important to both investors and ...

    Find out about the cash flow from investing activities. Understand why a company's CFF is important to both investors and ...
  4. What are the best free online calculators for calculating my taxable income?

    Find out where to locate the best online calculators to determine your taxable income and why it is important to know this ...
RELATED TERMS
  1. Mass Merchandising

    A method of selling insurance policies in which an employer or ...
  2. Reinsurance Ticket

    A notification made by an insurer which discloses the different ...
  3. Shortfall Cover

    A reinsurance agreement used to temporarily reduce gaps in an ...
  4. Securities-Based Lending

    The practice of making loans using securities as collateral. ...
  5. Gross Net Written Premium Income

    The amount of an insurance company’s premiums used to determine ...
  6. Extra-Contractual Obligations (ECO) Clause

    A clause in a reinsurance contract requiring a reinsurer to pay ...

You May Also Like

Related Articles
  1. Stock Analysis

    Teva Pharma to Acquire Allergan: Analysts ...

  2. Stock Analysis

    Here's Why Analysts Bullish On Skyworks ...

  3. Investing Basics

    Is Divestment Destroying The Coal Industry?

  4. Trading Strategies

    IPO Flippers And The Companies Who Hate ...

  5. Entrepreneurship

    Netflix's New Strategy: Penetrate Your ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!