Reasons for mergers or acquisitions

Depending on the type of merger or acquisition, there are different reasons for it:

1 Economies of horizontal integration.
2 Economies of vertical integration.
3 Combination of complementary resources.
4 Tax Advantages unused.
5 Mergers and use of surplus funds.
6 Clearing inefficiencies.

1. Economies of horizontal integration

Horizontal mergers and horizontal acquisitions are those involving companies in the same sector of economic activity. Then, fusions is produced looking for an operational synergy. Operational synergies are produced through two ways:

  1. Increasing the revenue: This operational synergy is called REO (Revenue-enhancing opportunity). It is occurs because of the grow in revenues due to opening new lines of products or services, increasing the corporate reputation or use the business opportunities only available for the combined company.
  2. Reducing the cost: The reduction in cost comes from the so-called economies of scale. They occur then the production cost per unit is reduced by increasing the total production. This is usually the natural target in horizontal mergers. The reduction in the production cost per unit is due to the distribution of the fixed costs over a larger production volume.

2. Economies of vertical integration

Vertical mergers generally are motivated by controlling they production processes. It can be achieved by two expansion ways:

  1. Going back, looking for the product raw materials (backward integration).
  2. Going forward, looking for the final product (forward integrations)

Usually companies merge with a supplier or a customer. Vertical integration closers the costumer an the supplier, facilitates coordination, administrations and economies of scales and reduces contractual, communication and coordination costs.

3. Combination of complementary resources

Two companies can have complementary resources which could make them have a higher value together. This resources can have different nature. For example a successful small company can have lack of organizations and sometimes is easier and cheaper merger to a bigger company than develop the structure on it own.

4. Tax Advantages unused

Merger or acquisitions sometimes generate a decrease in the taxes which should be paid by the resulting company. It could be due to tax advantages which are unused for one of the companies, maybe because of the lack of profit.

5. Mergers and use of surplus funds

Sometime mature companies generate large cash surplus which could not invest. With the merger they find a way to new investments.

6. Clearing inefficiencies

A bad management could also generate situations of waste assets in companies. In this cases the synergy come from changing the direction equipment.

En colaboración la Dra. Inés Martín de Santos.