What Are Some of the Financial Motives for Various Corporate Mergers?
The basic philosophy behind most mergers holds that the combination of two different companies will create one company that embodies a whole that is greater than the sum of its parts. Companies merge to consolidate liabilities and expand enterprise assets. Value is enhanced through combining financial strengths to exert more control over economic and market risk.
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Function
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Corporate mergers happen when one company wants to acquire the customer base of another, the product lines, the branch office network, the intellectual property, the brand name, or simply sees an attractive price or strategic opportunity.
Types
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In addition to strategic mergers, many mergers take place between a failed public company and a strong company, usually a start-up, that wants to shortcut the process of becoming a public company. This is called a reverse merger because the strong company gets acquired by the failing public company, but the strong company survives and often puts its name on the resulting post-merger enterprise.
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Considerations
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There are many different assets that might attract merger interest. A merger with a company that has a lot of losses can provide tax savings for a company that has just experienced a windfall year.
Benefits
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Mergers generally cost the acquiring company less than it would cost to recreate the enterprise being acquired. Mergers provide a relatively speedy entry into a new business direction or larger business footprint and don't require a lengthy development of the corporate knowledge base.
Significance
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Shareholders of the acquired company generally receive a combination of stock and cash for their shares. The shareholders of the acquiring company will probably watch the price of their shares decline, but the capacity to make money will result in strong growth in the price of those shares.
Warning
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All best intentions between merging companies do not guarantee success as was seen when Time Warner finally decided to divest itself of AOL after both companies admitted that the merger had held both companies back even more than anyone could have anticipated.
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- Photo Credit Image by Flickr.com, courtesy of Roland Tanglao
