The terms merger and acquisition are sometimes used interchangeably, but they mean slightly different things. When one company takes over another company and establishes itself as the new owner, the purchase is called an acquisition, while a merger happens when two companies, sometimes about the same size, agrees to become a single new company, rather than remain separately owned and operated. Also, when a deal is made between two companies in friendly terms, it is often proclaimed as a merger.
Reasons why companies merge or acquire other companies include;
- Synergy: One of the main reasons why companies merge or acquire other companies is to create a synergy. Synergy is the concept that, the value of the combined companies will be greater than the joint value of the two individual companies. The success of a merger or acquisition deal is determined by the extent of the synergy achieved.
- Diversification: Sometimes, a company may acquire another company in an unrelated industry in order to diversify their investment or reduce the impact of that particular industry on their profitability. Also, two companies may merge to complement a product or service and to gain a competitive edge over other companies in the market.
- Survival: Sometimes, companies opt for a merger or acquisition deal in order to survive, especially during the period of global financial crisis.
- Economy of scale: Two companies with similar products or services can merge to reduce cost of production, and thereby maximize profit. Also, a company can buy one of its suppliers, as a means to decrease reliance and save on the margins that the suppliers are adding to its costs, or buy out a distributor so that it may ship its product at a lower price.
- Eliminate competition: Companies merge for the purpose of eliminating competition, and gaining a larger market share.
Zubair Ghias has a vast experience in merger and acquisition deals. He worked primarily on merger & acquisition deals while he was at JPMorgan. He graduated from the University of Chicago with a degree in Economics and currently runs a private equity firm.