Why do companies merge and acquire?

While there are a variety of reasons why companies decide to either merge or acquire other entities, this article will provide a few of the most common reasons.

This article will highlight some of the most common reasons why companies either merge or acquire other entities. However, before detailing the reasons, it is important to note the difference between the two processes. It is common practice for the terms to be used interchangeably by some, however, the terms refer to different agreements and processes.

A merger is a business process of combining one business with another to form a single entity. This means that either one or both companies will cease to exist and take on a new name. An acquisition, on the other hand, refers to the purchase of a portion or the entire company’s shares and assets by another entity. Additionally, according to the Corporate Finance Institute, “Acquisitions are typically made in order to take control of, and build on, the target company’s strengths and capture synergies.”

The definitions of the two terms alludes to some of the primary reasons for businesses opting to either merge or acquire another. Firstly, an avoidance of competition, which is tied to an increase in a company’s market share price, may be a reason. For instance, if two rival brands merge, it eliminates the competition. Therefore, previous customers of the brands will then make use of the merged entity’s products or services, which will increase the newly formed company’s market share price. This was the case with the acquisition of Sprint by T-Mobile.

Another reason may be to diversify product offering. While companies can attempt to start completely new brands, it is less risky to acquire or merge with a company with a track record and a market within the sector that the business is looking to diversify into. For instance, when Amazon was looking to diversify its online offering to include fresh produce and supermarket product lines, instead of starting from scratch, it purchased Whole Foods. Amazon then used the data previously collected by the business as a template to enter into the market.