Reasons for mergers and acquisitions
The key reasons for mergers and acquisitions, is to maximise shareholder wealth otherwise it wouldn’t be worthwhile.
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Reasons for mergers and acquisitions
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Economies of scale
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Larger capacity results in reduced costs. With vertical integration it's easier to achieve this as duplication is avoided. For conglomerates, combining of some of the departments will achieve this (centralised head office, HR department, Marketing etc.)
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Increased market share
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Thus increasing profitability and becoming a leader in the market, which improves earnings quality.
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Improved efficiency
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Poor management and inefficient operations would be improved.
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Reducing the competition
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Profitability can be increased if competition was removed. However the implications from the competition commission need to be considered.
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Tax relief
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Group companies and taxation relief. A company which is not being able to obtain tax relief as it isn't generating profits can merge or acquire a company which generates profits.
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Liquidity
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Target company may be cash rich and this will improve group's statement of financial position (balance sheet).
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Asset stripping
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Acquiring other entity and then selling off their assets.
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Diversification
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This helps reduce risk by attaining businesses in other industries.
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