Question

explain what reasons are good motives for mergers

Answer 1

Companies join mergers and acquisitions for numerous reasons.
The good motives for mergers involve the following:

Value creation
Two companies may initiate a merger to increase the wealth of their shareholders. Generally, the merger of two businesses results in synergies that increase the value of a newly created business entity.

Diversification
Mergers are commonly engaged for diversification reasons. Market-expansion, product-expansion, and conglomerate mergers are driven by diversification objectives.

Procurement of assets
A merger can be motivated by a desire to procure certain assets that cannot be achieved using other approaches. It is normal for some companies to design mergers to gain a way to unique assets or to assets that usually take a long time to generate internally.

Improvement in the financial position
Every company faces a maximum financial capacity to support its operations through either debt or equity markets. Wanting sufficient financial capacity, a company may merge with another.

Tax purposes
If a company produces significant taxable income, it can merge with a company with solid carry forward tax losses. The company can gain a tax advantage.

Incentives for managers
Sometimes, mergers are fundamentally driven by the personal concerns and intentions of the top management of a company. Managers may prefer mergers because experimental data implies that the size of a company and the benefit of managers are correlated. The more prominent companies can provide to offer higher salaries and rewards to their managers.

SYNERGIES
It is expected that when two companies merge to create a new, the new company's value will be higher than the combined value of two separate companies.

Usually, there are two types of synergies that are aimed for:
COST SYNERGIES and REVENUE SYNERGIES

COST SYNERGIES
Synergies diminish costs through the economies of scale in various company departments, including research and development, production, procurement, sales and marketing, distribution, and general administration.

REVENUE SYNERGIES
Synergies that strengthen the overall wealth through extended markets, output cross-selling, and an improvement in rates.

RAPID GROWTH
Usually, any company has two options to grow, one is organic growth and the other is external growth. An improvement in sales attains organic growth by making private investments. External growth is achieved by an improvement in sales by acquiring external resources through mergers and acquisitions. Normally, companies prefer to grow externally, particularly the ones in a developed industry, as the industry offers inadequate opportunities for growth.

MARKET POWER
A horizontal merger in a tiny industry will assist in increasing the market share. An increased market share will provide the ability to control prices. A monopoly is an ultimate example of a horizontal merger. A vertical merger can also enhance market power by diminishing the dependence on outside suppliers.

Conclusion
The motives for mergers are varied and may be unique or complicated. It is crucial to understand the specific reason behind a merger to estimate the resulting synergies and improved margins. A sharp or substantial motive could result in the precise combination resulting in the excellent value of time and resources.

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