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Why Do Companies Combine?

Besides a public company’s general quest for continued revenue growth, companies combine for a variety of reasons, the most prevalent include:

  • Synergies – a combined entity may be thought to create revenue enhancements and cost reduction opportunities. Merging companies often cite cross-selling and marketing opportunities as revenue enhancers and the elimination of duplicate overhead costs as potential cost reduction synergies. Management may rationalize the combination of companies on these benefits alone.
  • Economies of scale – companies may benefit from greater size and market share in a particular market. Larger economies of scale often make the firms a stronger competitor in the market place.
  • Diversification – companies concerned about the risk of concentration within a particular market may argue that the company could benefit through an acquisition of another company in a separate, although perhaps related, market.
  • Taxes – tax advantages often play an important part in acquisitions. For example, a profitable acquirer may benefit from a tax loss carry-forward associated with the acquired company. While tax benefits often do not drive a merger, they may play a vital role in supporting the benefits of a potential merger.



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