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Why do Companies Merge with or Acquire Other Companies?

Show Notes Of Podcast

Reasons for Mergers and Acquisitions

  1. To grow the business
  2. To achieve revenue synergies
  3. To achieve economies of scale
  4. To diversify
  5. To vertically integrate the business
  6. To avail of tax benefits
  7. For knowledge transfer

Companies merge with or acquire other companies for growth. This growth manifests itself in different ways, such as market share, geographic expansion, knowledge transfer and product diversification. Growth is what underpins all of these motives.

However, when we say that a transaction is accretive or adds value, it means that the company has grown as a result of the deal. The opposite can be said of transactions which are dilutive or destroy value.

At DealRoom, we work with hundreds of companies and intermediaries on an ongoing basis as they attempt to maximize value from mergers and acquisitions. Most, if not all, of these companies have already established the ‘why’ for their transaction before they turn to our platform for their due diligence requirements.

The following are just some of the reasons why they, and others, decide to merge with or acquire other companies with examples.

Companies merge with or acquire other companies for growth. This growth manifests itself in different ways, such as market share, geographic expansion, knowledge transfer and product diversification. Growth is what underpins all of these motives.

However, when we say that a transaction is accretive or adds value, it means that the company has grown as a result of the deal. The opposite can be said of transactions which are dilutive or destroy value.

At DealRoom, we work with hundreds of companies and intermediaries on an ongoing basis as they attempt to maximize value from mergers and acquisitions. Most, if not all, of these companies have already established the ‘why’ for their transaction before they turn to our platform for their due diligence requirements.

The following are just some of the reasons why they, and others, decide to merge with or acquire other companies with examples.

Reasons for Mergers and Acquisitions

  1. To grow the business
  2. To achieve revenue synergies
  3. To achieve economies of scale
  4. To diversify
  5. To vertically integrate the business
  6. To avail of tax benefits
  7. For knowledge transfer

1. To Grow Your Business

This is the most commonly cited motive for undertaking a deal, and it’s hardly surprising: If you’re not at least passively looking at M&A as a strategic option for your company, you’d better be confident in your company’s prospects for significant organic growth.

A 2020 survey of 300 companies involved in M&A in 2019 said that 34% of respondents said, before the deal, growth was their priority. Everyone else, that is 66% of respondents, said that although growth hadn’t been their priority, it should have been.

Although growth is a catch-all answer, it’s first on this list because, as the survey respondents’ answers show, it’s the most important. Companies exist for value creation and that the best way to achieve this is through growth.

Virtually all of the world’s largest value creators have undertaken M&A at some stage to achieve growth, even when they could achieve double digit organic growth at the same time.

2. To Achieve Revenue Synergies

The “1+1>2” effect.

In a well thought-through deal, synergies can be found in several places.

These include revenue synergies (say, through cross-selling products: Starbucks’ purchase of Teavana being a case in point), cost synergies (cost savings that come from scale, such as supply chain efficiencies, etc), and even operational synergies (whereby the performance of the merged company is stronger than the combined performance of the two companies unmerged).

Read also:
The Ultimate Guide to Synergies in M&A: Types, Sources, Model

3. To Achieve Economies of Scale

Closely related to synergies as a motive for M&A are economies of scale.

As a general rule, the higher the production volume, the lower the unit cost. This explains why auto companies, to take one example, have merged in such numbers over the past half century.

Using the same rationale, scale also also allows companies to take advantage of bulk purchases with their partners and suppliers, again helping to bring down their unit costs.

4. To Diversify

Be it geographic or otherwise, M&A is a proven way for companies to successfully diversify.

Mars started as a humble bar of chocolate but a series of acquisitions (and, it must be said, a lot of product innovation) including several in pet food, and a merger with Wrigley (a manufacturer of chewing gum) made it a global conglomerate.

In fact, there isn’t a conglomerate that exists that didn’t do so without partaking in mergers and acquisitions to at least some degree.

Not all companies are looking to become conglomerates. Geographic diversification is a common motive for deals, particularly those cross-border deals. In theory, and very often in practice, it’s easier to gain a foothold in a different geography to your own by acquiring (or merging) with another company rather than starting from scratch.

This is true in any industry and explains why cross-border deals alone reached nearly $500 billion in 2019.

5. To Vertically Integrate Your Business

If diversification is horizontal integration, acquiring other companies on your own supply chain is vertical integration.

That means Coca-Cola buying bottling and distribution companies, Kellogg’s buying wheat producers, Apple buying a screen manufacturer, and Exxon Mobil buying oil distributors. Essentially, anywhere that a company can generate further value by bringing someone on their supply chain under their umbrella, an acquisition will be considered.

6. To Avail of Tax Benefits

Companies are less likely to talk about tax purposes as a ‘why’ for a deal for at least two reasons:

  • first, it’s more glamorous to say that you’re buying for growth.
  • second, nobody wants to attract the ire of the IRS.

Acquiring a loss-making company in a given year can also allow a buyer to enjoy some of the above benefits, while simultaneously reducing their own tax liability. Trust us, they’re far more likely to mention the former motive ahead of the latter.

Read also:
10 Benefits of Mergers and Acquisitions You Should Know

7. For Knowledge Transfer

The acquisition of knowledge - often in the form of intellectual property - is a common motive for M&A, particularly among technology companies.

If, say, Google, wanted to acquire expertise in artificial intelligence, it should be easier for them to do so by acquiring a pre-existing artificial intelligence company (and their patents) than starting from scratch.

For good examples of this, look no further than the acquisitions that big tech companies have made in self-driving car technology over the past decade.

Conclusion

At DealRoom, our clients have all manner of motives for their mergers and acquisitions. Put another way, they nearly all possess a good ‘why’ for their transactions. Whenever you’re considering a transaction, whether it be a merger or an acquisition, make sure there’s a good ‘why’ for the transaction.

As soon as it has been established, talk to us about how we can simplify the process for you.

Companies merge with or acquire other companies for growth. This growth manifests itself in different ways, such as market share, geographic expansion, knowledge transfer and product diversification. Growth is what underpins all of these motives.

However, when we say that a transaction is accretive or adds value, it means that the company has grown as a result of the deal. The opposite can be said of transactions which are dilutive or destroy value.

At DealRoom, we work with hundreds of companies and intermediaries on an ongoing basis as they attempt to maximize value from mergers and acquisitions. Most, if not all, of these companies have already established the ‘why’ for their transaction before they turn to our platform for their due diligence requirements.

The following are just some of the reasons why they, and others, decide to merge with or acquire other companies with examples.

Reasons for Mergers and Acquisitions

  1. To grow the business
  2. To achieve revenue synergies
  3. To achieve economies of scale
  4. To diversify
  5. To vertically integrate the business
  6. To avail of tax benefits
  7. For knowledge transfer

1. To Grow Your Business

This is the most commonly cited motive for undertaking a deal, and it’s hardly surprising: If you’re not at least passively looking at M&A as a strategic option for your company, you’d better be confident in your company’s prospects for significant organic growth.

A 2020 survey of 300 companies involved in M&A in 2019 said that 34% of respondents said, before the deal, growth was their priority. Everyone else, that is 66% of respondents, said that although growth hadn’t been their priority, it should have been.

Although growth is a catch-all answer, it’s first on this list because, as the survey respondents’ answers show, it’s the most important. Companies exist for value creation and that the best way to achieve this is through growth.

Virtually all of the world’s largest value creators have undertaken M&A at some stage to achieve growth, even when they could achieve double digit organic growth at the same time.

2. To Achieve Revenue Synergies

The “1+1>2” effect.

In a well thought-through deal, synergies can be found in several places.

These include revenue synergies (say, through cross-selling products: Starbucks’ purchase of Teavana being a case in point), cost synergies (cost savings that come from scale, such as supply chain efficiencies, etc), and even operational synergies (whereby the performance of the merged company is stronger than the combined performance of the two companies unmerged).

Read also:
The Ultimate Guide to Synergies in M&A: Types, Sources, Model

3. To Achieve Economies of Scale

Closely related to synergies as a motive for M&A are economies of scale.

As a general rule, the higher the production volume, the lower the unit cost. This explains why auto companies, to take one example, have merged in such numbers over the past half century.

Using the same rationale, scale also also allows companies to take advantage of bulk purchases with their partners and suppliers, again helping to bring down their unit costs.

4. To Diversify

Be it geographic or otherwise, M&A is a proven way for companies to successfully diversify.

Mars started as a humble bar of chocolate but a series of acquisitions (and, it must be said, a lot of product innovation) including several in pet food, and a merger with Wrigley (a manufacturer of chewing gum) made it a global conglomerate.

In fact, there isn’t a conglomerate that exists that didn’t do so without partaking in mergers and acquisitions to at least some degree.

Not all companies are looking to become conglomerates. Geographic diversification is a common motive for deals, particularly those cross-border deals. In theory, and very often in practice, it’s easier to gain a foothold in a different geography to your own by acquiring (or merging) with another company rather than starting from scratch.

This is true in any industry and explains why cross-border deals alone reached nearly $500 billion in 2019.

5. To Vertically Integrate Your Business

If diversification is horizontal integration, acquiring other companies on your own supply chain is vertical integration.

That means Coca-Cola buying bottling and distribution companies, Kellogg’s buying wheat producers, Apple buying a screen manufacturer, and Exxon Mobil buying oil distributors. Essentially, anywhere that a company can generate further value by bringing someone on their supply chain under their umbrella, an acquisition will be considered.

6. To Avail of Tax Benefits

Companies are less likely to talk about tax purposes as a ‘why’ for a deal for at least two reasons:

  • first, it’s more glamorous to say that you’re buying for growth.
  • second, nobody wants to attract the ire of the IRS.

Acquiring a loss-making company in a given year can also allow a buyer to enjoy some of the above benefits, while simultaneously reducing their own tax liability. Trust us, they’re far more likely to mention the former motive ahead of the latter.

Read also:
10 Benefits of Mergers and Acquisitions You Should Know

7. For Knowledge Transfer

The acquisition of knowledge - often in the form of intellectual property - is a common motive for M&A, particularly among technology companies.

If, say, Google, wanted to acquire expertise in artificial intelligence, it should be easier for them to do so by acquiring a pre-existing artificial intelligence company (and their patents) than starting from scratch.

For good examples of this, look no further than the acquisitions that big tech companies have made in self-driving car technology over the past decade.

Conclusion

At DealRoom, our clients have all manner of motives for their mergers and acquisitions. Put another way, they nearly all possess a good ‘why’ for their transactions. Whenever you’re considering a transaction, whether it be a merger or an acquisition, make sure there’s a good ‘why’ for the transaction.

As soon as it has been established, talk to us about how we can simplify the process for you.

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