Why Do Companies Merge With or Acquire

Other Companies?
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By 
BARCLAY PALMER
 
 
Updated Jul 28, 2019
Mergers and acquisitions (M&As) are the acts of consolidating companies or
assets, with an eye toward stimulating growth, gaining competitive advantages,
increasing market share, or influencing supply chains.

KEY TAKEAWAYS

 Mergers and acquisitions (M&As) are the acts of consolidating companies

or assets, with an eye toward stimulating growth, gaining competitive
advantages, increasing market share, or influencing supply chains.
 A merger describes two companies uniting, where one of the companies
ceases to exist after becoming absorbed by the other.
 An acquisition occurs when one company obtains a majority stake in the
target firm, which retains its name and legal structure.
Types of M&A
A merger describes a scenario where two companies unite, and one of the
companies ceases to exist after becoming absorbed by the other. The boards of
directors of both companies must first secure approval from their respective
shareholder bases.

An acquisition occurs when one company (the acquirer) obtains a majority stake

in the target firm, which incidentally retains its name and legal structure. For
example, after Amazon acquired Whole Foods in 2017, the latter company
maintained its name and continued executing its business model, as usual.1

A consolidation results in the creation of an entirely new company, where the

stockholders of both companies approve of the consolidation and receive
common equity shares in the newly formed entity. For example, in 2018, Harris
Corp. and L3 Technologies Inc. joined forces under the new handle L3 Harris
Technologies Inc., which became the nation’s sixth-largest defense contractor.2
A tender offer describes a public takeover bid, where an acquiring company
(a.k.a. the bidder), directly contacts a publicly traded company's stockholders and
offers to purchase a specific number of their shares, for a specific price, at a
specific time. The acquiring company bypasses the target company's
management and board of directors, which may or may not approve of the deal.

The acquisition of assets occurs when one company acquires the assets of

another, with the approval of the target entity's shareholders. This type of event
often occurs in cases of bankruptcy, where acquiring companies bid on various
assets of the liquidating company.

In management acquisitions, which are sometimes referred to

as management-led buyouts (MBOs), executives of a company buy a controlling
stake in another company, in order to de-list it from an exchange and make it
private. But for management acquisitions to occur, a majority of a company's
shareholders must approve of the transaction.

Reasons for M&A

Companies merge with or acquire other companies for a host of reasons,
including:

1. Synergies: By combining business activities, overall performance efficiency

tends to increase and across-the-board costs tend to drop, due to the fact that
each company leverages off of the other company's strengths.

2. Growth: Mergers can give the acquiring company an opportunity to grow

market share without doing significant heavy lifting. Instead, acquirers simply buy
a competitor's business for a certain price, in what is usually referred to as a
horizontal merger. For example, a beer company may choose to buy out a
smaller competing brewery, enabling the smaller outfit to produce more beer and
increase its sales to brand-loyal customers.

3. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or

distributors, a business can eliminate an entire tier of costs. Specifically, buying
out a supplier, which is known as a vertical merger, lets a company save on the
margins the supplier was previously adding to its costs. Any by buying out a
distributor, a company often gains the ability to ship out products at a lower cost.

4. Eliminate Competition: Many M&A deals allow the acquirer to eliminate

future competition and gain a larger market share. On the downside, a large
premium is usually required to convince the target company's shareholders to
accept the offer. It is not uncommon for the acquiring company's shareholders to
sell their shares and push the price lower, in response to the company paying too
much for the target company.