Why companies Merge?

Hi Ruben and thanks for the question.

There are several reasons why companies might consider a merger,
ranging from, expanding an organization, to the survival of an
organization !
However from my research and personal knowledge there are some reasons
that seem to be fairly consistent, these are:


1.) To improve efficiency.
2.) To increase market share.
3.) To increase knowledge base.
4.) To increase asset base, making borrowing more possible.
5.) To Survive
6.) Empire building !


I have listed below some excerpts from websites that discuss the
subject in various ammounts of detail which will give you a greater
understanding of the reasons for mergers, including some case studies.




“Giga identifies four reasons why companies merge: 
to improve operational efficiencies and reduce costs by cutting
overhead,
to obtain access to new technologies or intellectual talent, 
to increase market share, 
to eliminate competition.”
http://www.businessweek.com/adsections/cebit/cebit2k/itmanagers.htm


“According to Udell, there are four reasons why companies merge: 
to create economies of scale and scope, 
to improve efficiency, 
to develop monopoly power, or
to build empires. 
The first three make sense intuitively, but does the fourth?”
http://www3.gsb.columbia.edu/botline/fall00/10_26/Technopoly.html


“Singh cites three fundamental reasons why companies merge:
* To achieve cost savings and efficiencies. These are achieved through
workforce reductions, economies of scale, sharing resources across
products and instituting more effective cost controls in the combined
company.


* To increase market power. "This means increasing profit margins in
the combined firm," Singh explains. "This market power is not inherent
in any firm. It's driven by the firm's unique assets, such as its
brand name, technologies and reputation."


* To respond to changes in the competitive landscape. Companies
frequently feel compelled to combine forces to meet challenges they
feel they cannot tackle alone. In the telecom business, for example,
companies once competed on how much market share they could grab in
the long-distance market. But that is no longer enough. "Today," says
Singh, "companies feel that adding value-added service for customers,
such as DSL [digital subscriber lines] is essential. But this is risky
because it may not end up the way you want it to go." Witness AT&T's
ill-conceived attempt to become one giant corporation with interests
in cable TV, long distance and broadband player, only to decide later
to break up into four separate businesses.”
http://www.mba-exchange.com/db/mba2.nsf/Wharton/Will+Mergers+&+Acquisitions+Take+Off+in+Europe?OpenDocument


"Companies merge to grow
Mergers and acquisitions are one of the most significant ways for
companies to grow. The United States has seen waves of takeovers
during the last century - at the turn of the 20th century, in the
1920s, in the 1960s, and in the 1980s. A company can grow by
increasing its operations or through combining forces with other
companies. Online retailer Amazon.com, for example, built a digital
empire by purchasing stakes in smaller and specialized companies.
Internet hardware giant Cisco also grew rapidly through mergers. Since
it can be difficult to grow fast enough by expanding operations, and
sometimes industries can reach capacity, consolidation of industries
often follows. Companies also buy other companies to eliminate
competition, or to prevent competitors from acquiring the same
company."
http://www.morganbanksme.com/candidates/guides_db1/3.htm


"Well, mergers and acquisitions do always get the blood stirring a
bit. The vast scale of their strategic potentialities, and simply the
huge amounts of money at stake, force investors to look at the market
in new ways. And sometimes those new ways imply important catalysts."

"Some mergers unlock great hidden vaults of potential earnings by
consolidating redundant capacity."

"Some mergers are about helping little companies think big, and at the
same time helping big companies think young."

"Some mergers are attempts to harness that elusive force so often
cited by executives and investment bankers but so rarely actually
seen: synergy."

"There are other very positive, very exciting reasons for companies to
merge, too. Sometimes it's nothing more exotic than to achieve greater
operating scale. Or sometimes it's purely financial: The acquirer
simply believes that the target company's stock is cheap, so he buys
the whole darn thing."

"But there's another type of merger that isn't very positive, and it
isn't very exciting. I'm talking about those mergers that seem to have
no other purpose than to allow exhausted, uncompetitive, dying
companies a way out."
http://www.thestandard.com/article/0,1902,28884,00.html


"There are numerous reasons for companies to merge or acquire.  Some
of the most frequent include:
Horizontal mergers for market dominance; economies of scale 
Vertical mergers for channel control 
Hybrid mergers for risk spreading, cost cutting, synergies, defensive
drivers
Growth for world class leadership and global reach 
Survival; critical mass; sales maximization 
Acquisition of cash, deferred taxes, and excess debt capacity 
Move quickly and inexpensively 
Flexibility; leverage 
Bigger asset base to leverage borrowing 
Adopt potentially disruptive technologies 
Financial gain and personal power 
Gaining a core competence to do more combinations 
Talent, knowledge, and technology today 13 "
** NOTE: Document format**
 http://www.cba.uh.edu/ihrmc/workingpapers/Schuler5.doc


Thank you for the question, and if you need any help with my answer,
do not hesitate to ask for a clarification.

Thank you.

THX1138

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