Question

What are the motives for merging?

Answer 1

There can be a variety of reasons that motivate companies to be merged together into a single entity.

To gain a larger market share - In case of horizontal mergers in which one company buys another company that offers similar products and has their own customer base, the market share of the merged company would be greater than the individual market shares of the smaller companies on their own. In such a case, with a greater market share, the combined entity would have a greater power to influences prices.

Increased growth - In many cases, it becomes difficult for a company in a mature market to grow through investments in their internal workings. Under such circumstances, mergers offer a chance to tap into the growth potential for the company in the market.

To diversify operations - When a company finds a potentially profitable market for a particular product that they do not offer, they may try to reach an agreement for a merger with a company that already has footprints in that market to acquire their resources and diversify their operations.

Aquisition of technology - It is possible for a larger company to invest in a smaller technological company to boost their resources and share their profits or they can look to acquire the company altogether if they see some potential for that technology for themselves and they want to gain a monopoly over it.

Joint ventures for entering foreign markets - To enter a foreign market that is already loaded with local players is sometimes difficult to achieve. Thus big companies like to merge with local companies of a market so that they can use their resources and manpower to enter the market

Tax benefits - In certain cases, a company that faces net loses may help the acquiring firm to lower their taxable income.