Motives Behind Mergers


Merger involves fusion of two or more firms into one entity. This is one of the important concepts in corporate valuation and one of the most accepted strategies for company expansion. The first thing that we consider when we hear word ‘merger’ is synergy i.e. relatively greater competitiveness of combined entity when compared with the individual competitiveness of the merging companies. Similarly, there are other various motives behind merger decision. Some of the widely deduced motives behind the merger decision are discussed as follows.

Merger enhances Accelerated Growth

Merger leads to the expansion of the organization. The organization can expand its operation in potentially new markets or can continue to operate in old markets with new combined strategy.  The resulting growth factor is supposed to be positive than the individual growth factors of the merging organizations.

Merger can achieve Higher Profitability

Economies of Scale(EOS) is another advantage in Mergers. Merger can lead to profitability of the organization by the concept of Economies of Scale.

  •  EOS decreases cost per unit of production leading to better profitability figure.
  • EOS makes workers efficient in their work, increasing productivity and decreasing labour cost per unit. Hence, profitability can be increased.
  • EOS serves to Operating Economies, increasing overall efficiency of the business.

Merger is done to Complement Business Cycle

Most of the business has a particular product or business cycle i.e. seasonal operation. Many companies with complement seasonal products, infrastructures etc. merge so that they can have complete business operations and all the idle resources are utilized.

Merger is also a Tax-Saving Strategy

There are provisions and linenancies for Loss making companies for Tax provisions. Capitalizing this opportunity, many profit-making companies merge with Loss-making companies to enjoy the Tax-benefit given to loss-making companies. They cross trade profits to manage the tax bracket.

Eliminating Financial Constraints

Merger can enhance the debt capacity of the organization. The credibility to manage the higher debt is more for the big merged company than the individual companies. The creditors are also confident in raising the credit limit to merged firms rather than the individual firms.

Enhancing Market Power

When two companies merge to form one larger company , it is obvious that a merged single entity will definitely have a higher power. Such entities formed will have higher market share, bargaining power and negotiating position than two separate entities prevailing before merging.

Merger as Strategy for Global Expansion

Many mergers take place as an expansion strategy. In many cases, mergers are considered for global expansion. Suppose, one company wants to capitalize the potential of another country but the entry is difficult due to standards issues, quality issues, government policies or marker efficiencies etc., companies merge with the companies across borders and show its presence to foreign land and operate.

The classic example is Tata Motors and Daewoo Commercial Vehicles.

Merger as Strategy for Market Penetration

Economies of Scale due to merger will help as market penetration strategy. Companies merge and operate in the market (new or old) with a low price strategy. For new markets, market penetration helps to increase market power and in existing markets, low price leads to elimination of competitors.

Example:  ICICI Bank merged with Anagram Finance Company to enter into the Retail Market. Anagram Finance Company has a good customer base of retail customers with around 50 Branches and 200,000 customers

Merger is Threat for New Entrants

The enhanced market power due to merger will stand as a threat to new entrants. The customer base, capital available, market share etc. will hold strong for a merged entity and it will be difficult for new entrants to overcome such barriers.

Example:  Glaxo Wellcome & SmithKline Beecham merged to form World’s Sixth Largest Pharmaceutical Company. Merger deal worth $ 110.58 billion in 2000.

Revival of Sick Companies

Merger is also a revival strategy for sick or dying companies. Many mergers have taken place just for reviving the dying companies. Well, performing companies many times invests in mergers with dying companies because one considers the potentials of the dying companies and holds confidence that they can make the dying companies work and sometimes such mergers are done to avoid the panic situation during open market operations . Such revival, sometimes, is also due to government interference.

Apart from such core motives, there are various other reasons for the Mergers. Some of them are:

  • Merger for Synergy.
  • Merger for enhancing managerial skills (Exchanging the expertise and R&D)
  • It increases the external financial capability
  • Merger for building Business Empire (Business Integration: Reliance Group)
  • Merger has personal incentives for management and workers
  • Mergers for unlocking hidden values (Whirlpool entry in India)

For the link of the dictionary Financial dictionary


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