Why Do Corporate Enterprises Enter Into Mergers And Acquisitions?

In the corporate world, mergers and acquisition play a critical role in the growth and development of companies. Mergers take place when one company purchases another with the aim of becoming a larger business entity in the market environment, where it conducts its commercial activities.

On the other hand, acquisitions occur when one corporate enterprise takes over a similar establishment. This form of corporate consolidation is appealing to the investors of the individual companies that go through this process. This is because such corporate growth strategies go a long way in increasing or decreasing the value of their stock in these business entities besides affecting corporate taxes.

Reasons for Mergers and Acquisition

According to Robert Stefanowski , an expert of corporate mergers and acquisitions, there are a number of reasons for such corporate takeovers. However, the main reason behind such business consolidations is money. Large corporate enterprises are always looking out for opportunities to take over smaller companies that have a competitive edge in the marketplace.

This advantage may be due excellent brand recognition, large customer bases, vast distribution channels or superior technological innovation that set them apart from their competitors. In addition to this, such growth strategies help large business establishments achieve economies of scale, diversify risks and increase their share in the market place.

Benefits

Mergers and acquisition can prove to be advantageous to all the parties that take part in this form of business consolidation. Larger corporate entities look for right set of circumstances to purchase small business enterprises so that they can expand their client base, retain employees and acquire new technologies. In addition to this, the company that comes into existence as result of this consolidation can strengthen its position in the market over its rivals. In many cases, such growth strategies also result in the change in the management of both organizations including the appointment or resignation of chief executive officers.

Types

The type of transformations that will occur when two corporate enterprises merge depends on the kind of business consolidation that takes place. In general, business mergers come under the following categories:

  • Vertical

In this form of business consolidation, a corporate enterprise purchases a business organization that manufactures and sells products that compliments its own.

  • Horizontal

This type of business merge takes place between two companies that compete against each other in the market environment.

  • Conglomeration

This sort of business consolidation occurs when companies that produce and sell products that are neither substitutes nor compliments of each other.

  • Market-extension

A market-extension merger takes place when two corporate enterprises manufacturing and selling similar products in different market segments decide to combine.

  • Product-extension

A product-extension merger occurs when two companies producing identical products in the same market segment choose to come together to form a larger corporate entity.

Robert Stefanowski says the primary objective of any merger or acquisition between two corporate enterprises is to generate synergy that acts as a catalyst in enhancing the value of each individual business. This ultimately results in an increase in sales and profit margins.