You probably have heard of companies announcing acquisitions of other companies or merging with other businesses and you might be wondering why other business owners agree with such offer. It is important to note that the primary motive lie in these simple phrases – and that is to make the most of shareholder wealth. This post will unearth the other underlying legitimate reasons why mergers and acquisitions happen.
There are business firms that aim for diversification or a broader line of business and / or products. Sometimes a company merges with another company (of another industry) to diversify its line of business and / or business. The reason for this is to reduce the impact of that company to its own profitability.
It is like scattering its eggs, instead of putting all in one basket.
Refining Business Focus
Also, there are cases when a company merges with other companies having a deeper and wider market penetration which is essential for business operations.
When a company decides to buy one of its suppliers, it is able to both eliminate a percentage of costs (margins that the supplier adds to its costs). In addition, a company may also choose to buy one of its distributors for it to cut to a lower cost the shipment of its products.
This is also considered as synergy. As the Merriam-Webster online dictionary defines the word synergy, it means a combined action or operation which is considered as a mutually advantageous conjunction of elements. When synergy is given emphasis in mergers and acquisitions, the idea is that when businesses combine with one another, the opportunity to increase performance is boosted. It is also a way to decrease costs of a certain company.
Generally, a company will merge with another one if its strengths complement its weaknesses.
Mergers provide the acquiring company the chance to grow its market share even without putting much effort in doing the work themselves. A company may choose to buy a smaller competing company and authorizing it to produce more products and sell more to its loyal customers.
It can also mean a move to improve the financial stance of a certain company, especially if a company is in a deep financial problem, it may opt to look for another company that is willing to acquire it – just to go out of bankruptcy.
A lot of mergers and acquisitions activities permit the acquirer to eliminate competition and increase market share of its products’ market. However, in order to convince the target company’s management to accept the offer, a large amount of money is needed.
Mergers and acquisitions happen since companies are after following key reasons: to protect their own business, to improve the strength of their business and to boost business profits. Nevertheless, just like any complex decision mergers and acquisitions can be either successful or disastrous – yet this depends on the strategies put in place by the collaborating companies.
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