Why merger and acquisition take place

A business merger may give the acquiring company a chance to grow its market share. In addition, diversification in the business puts companies at an advantage when they choose to merge or acquire another business. Mergers and acquisitions are also cost-effective. The acquisition can also increase the supply-chain pricing power. Aside from that, such business restructuring is one way to eliminate possible competitors of the business. Intensifying the focus of a business or diversifying business interests are two other motivations for mergers and acquisitions.

For example, a company whose goal is diversification may purchase a company in a different field to improve overall profitability. A company that wants to intensify its business focus might decide to merge with a company in the same industry that has had better success penetrating the market.

Growth is the goal of every major company, and one of the easiest ways to grow an organization is through mergers or acquisitions. Instead of doing the work required to increase market share, a company can simply buy or merge with one of their competitors, which is known as a horizontal merger. Growing a company through a merger is common if the organization wants to break into a market where another company has already found success.

Many companies are able to increase their pricing power related to their supply chain through acquisitions. Some examples of this practice include:. Mergers and acquisitions are also an effective tool for eliminating competition. During an acquisition, for example, the company making the purchase will be able to increase their market share while removing one of their competitors.

An acquisition or merger can also make it easier to fend off future competitors. For example, in , Harris Corp. A tender offer describes a public takeover bid, where an acquiring company a. The acquiring company bypasses the target company's management and board of directors, which may or may not approve of the deal. The acquisition of assets occurs when one company acquires the assets of another, with the approval of the target entity's shareholders.

This type of event often occurs in cases of bankruptcy, where acquiring companies bid on various assets of the liquidating company. In management acquisitions, which are sometimes referred to as management-led buyouts MBOs , executives of a company buy a controlling stake in another company, in order to de-list it from an exchange and make it private.

But for management acquisitions to occur, a majority of a company's shareholders must approve of the transaction. Companies merge with or acquire other companies for a host of reasons, including:. By combining business activities, overall performance efficiency tends to increase and across-the-board costs tend to drop, due to the fact that each company leverages off of the other company's strengths.

Mergers can give the acquiring company an opportunity to grow market share without doing significant heavy lifting. Instead, acquirers simply buy a competitor's business for a certain price, in what is usually referred to as a horizontal merger. For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller outfit to produce more beer and increase its sales to brand-loyal customers.

By buying out one of its suppliers or distributors, a business can eliminate an entire tier of costs. Specifically, buying out a supplier, which is known as a vertical merger, lets a company save on the margins the supplier was previously adding to its costs.

And by buying out a distributor, a company often gains the ability to ship out products at a lower cost. On the downside, 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. Whole Foods Market. Career Advice. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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