Why Do Companies Pursue Mergers and Acquisitions?

Imagine that one company has developed a product that will take industries by storm but that is too expensive and too labor-intensive to be produced on a large scale. Another company has the capacity and technology for the production of similar products that are more efficient and cheaper. The two companies will merge and combine their advantages in order to provide innovative solutions to the mass market where neither was able to do so separately. Consumer demand-driven mergers can enable some truly remarkable innovations. The bottom line: These developments are most likely to come out from future mergers and acquisitions.

1. Expansion and Growth

Probably the most common reason for M&A is rapid growth and expansion. The alternative of developing capabilities organically involves much more hassle and time, so it makes more sense to acquire an existing business to scale operations rapidly, enter new markets, or develop new product lines.

Example: Broadcom acquires VMware

In 2022, Broadcom acquired VMware for $61 billion in the huge deal that enriched the former with a substantial software business and greatly boosted its products in terms of cloud and virtualization technologies.

2. Synergies and Efficiency

M&A can generate synergies—cost savings, operational efficiencies, and improved performance—that can be achieved by combining operations, hence reducing redundancies, streamlining processes, and allowing for economies of scale.

Example: ExxonMobil

In 1999, a merger between Exxon and Mobil created ExxonMobil—the largest publicly traded oil firm globally—with major cost savings and operational efficiencies from this combination.

3. Market Power and Competitive Advantage

Acquiring a competitor reduces competition and increases market share; this can be considered a strong foothold in that market. This market power can lead to increased pricing power and higher profitability.

Example: Microsoft and Activision Blizzard

In 2022, Microsoft announced the buying of Activision Blizzard for $68.7 billion to enhance its presence in the gaming sector and extend its influence through some of the biggest gaming franchises.

4. Acquisition of Talent and Technology

Acquiring another company provides access to new talent, new technologies, and valuable intellectual property, all of which help spur innovation, enhance the development of products, and improve competitive positioning.

Example: Broadcom and VMware

The acquisition of VMware brought Broadcom a robust portfolio of software solutions and a talented workforce with deep knowledge and experience in cloud computing and virtualization.

 Conclusion

Mergers and acquisitions are the strong tools for growth, efficiency, market power, diversification, and innovation that firms use to their best potential. Businesses will be better equipped to handle such complex transactions and chart the possible benefits coming out of them once the real reasons behind the M&A are known.