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. In M&A how does an all-stock or all-cash deal affect the equity of the buying company? ...

    Mergers and acquisitions (M&A) are forms of corporate restructuring that are becoming increasingly popular in the modern ... Read Answer >>
  2. What is the difference between a merger and a takeover?

    In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously ... Read Answer >>
  3. What is the difference between a merger and an acquisition?

    Read about the legal and practical differences between a corporate merger and corporate acquisition, two terms often used ... Read Answer >>
  4. What is a stock-for-stock merger and how does this corporate action affect existing ...

    First, let's be clear about what we mean by a stock-for-stock merger. When a merger or acquisition is conducted, there are ... Read Answer >>
  5. How can I develop a profitable merger arbitrage strategy?

    Learn how to utilize a simple merger arbitrage trading strategy to profit from the typical temporary price discrepancies ... Read Answer >>
  6. What's the difference between a merger and a hostile takeover?

    Understand the difference between a merger and a hostile takeover, including the different ways one company can acquire another, ... Read Answer >>
Related Articles
  1. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller. We tell you what to look for.
  2. Investing

    How Mergers and Acquisitions Can Affect A Company

    M&A can have a profound effect on a company’s growth prospects and outlook, but with a significant degree of risk.
  3. Financial Advisor

    Acquire A Career In Mergers

    This exciting sector demands a lot from its advisors. Are you up for it?
  4. Tech

    M&A Report: Will These 5 Trends Carry into 2016?

    Find out what was behind the record level of merger and acquisition (M&A) activity in 2015 and whether the trend will continue in 2016.
  5. Investing

    Mergers Put Money In Shareholders' Pockets

    Learn the five ways mergers and acquisitions can increase a company's value.
  6. Financial Advisor

    Selecting Mergers & Acquisitions Advisories For Small Businesses

    Mergers and acquisitions advisories aren't just for big players. Many advisory firms cater to small and medium businesses.
  7. Small Business

    How To Profit From Mergers And Acquisitions Through Arbitrage

    Making a windfall from a stock that attracts a takeover bid is an alluring proposition. But be warned – benefiting from m&a is easier said than done.
RELATED TERMS
  1. Mergers and Acquisitions - M&A

    A merger is a combination of two companies to form a new company, ...
  2. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  3. Vertical Merger

    A merger between two companies producing different goods or services ...
  4. Synergy

    The concept that the value and performance of two companies combined ...
  5. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
  6. Conglomerate Merger

    A merger between firms that are involved in totally unrelated ...
Hot Definitions
  1. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  3. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  5. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  6. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
Trading Center