Sunday, 27 December 2015

Corporate finance: why do companies merge? Think of a marriage!

2015 was a great year for mergers and acquisitions (M&A). Many acquisitions as well as mergers have taken place. But why do companies merge? It's like with marriages. The answer is "synergy potentials".

Through business combinations two kinds of synergies can be created: 1) revenue synergies and 2) cost synergies. Revenue synergies can be achieved through combination or optimisation of  distribution/ sales channels, but those kind of synergies are harder to achieve than cost synergies (reduction of redundant costs). 

If you merge two companies you can shut down one headquarter and manage the newly merged entity with one common headquarter. In general, by latest after marriage, couples tend to move together and live in a common home. Thus, in total, they save at least one rent expense.

Marriage is also a institution by law, so that tax advantages come into place. Typically the merger of two companies is often related with reduction of tax expenses.

Of course, I could go far more into detail (e.g. becoming the market leader by combining market shares, leverage technology know-how, takeover a competitor), but we leave it at the basic idea.




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