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Merger Motives For a Business


When it comes to a business that is looking to merge or takeover another business, there are reasons they are doing this. Using an abbreviation of Merger, we can see seven reasons why businesses would want to merge with another business or takeover it.


Market Structure

This includes whether the market is a niche or mass market and the number of competitors in the market. A monopoly market is where there is one dominant firm (such as Apple). A oligopoly market is where there are a few dominant firms such as the car industry. An oligopoly market is perfectly competitive. Therefore, some firms may want to make their market go from oligopoly to monopoly making them the market leader.

Expertise Gaps

Some businesses merge to get hold of knowledge, skills or expertise. This is examples of forward and backward integration. However, lateral and horizontal mergers can fill in expertise gaps. Google took over Motorola to gain valuable patents in the smartphone industry bringing them on par with Apple and Microsoft on the number of patents they had.

Relative Performance

This is to do with sales, profit, market share, customer service etc...

Growth Potential

The new merged business,  no matter what part of the Ansoff matrix it is in, will have growth potential.

Eliminate Competitors 

This is a typical defence strategy for businesses. If they see a competitor that has an increasing market share, they might considering taking over the business just like Coca Cola did against Innocent drinks. However, in the UK, the business needs to remember that the Competition Commission (CC) might not let the takeover from happening if the merging business's market share is more than 25%.

Reconfigure the 5 Forces

A business may be able to reconfigure the five forces of Porter's model to make them favourable to the business increasing profitability (with the bits in green being the perfect market for maximum profitability):
  • Threat of New Entrants - Low - Coca Cola took over Innocent because they saw them as a threat. They were a new entry into the soft drinks market gaining good market share early on.
  • Threat of Substitutes - Low -  An example of this is with a petrol company taking over and buying out an electric car company. They are removing the threat of new entrants providing a better chance of profit for the mother business.
  • Bargaining Power of Suppliers - Low - You will want your suppliers to have less power over prices of your resources that you purchase from them. This is why many companies perform backward vertical integration. Taking over the suppliers means they can reduce the bargaining power of suppliers to a minimum increasing profit margins. An example is with Apple who are trying to integrate backwards and buy out a chip company called ARM.
  • Bargaining Power of Customers - Low - A market where the customers have low bargaining power if with fuel. They cannot look for alternatives and have to put up with the prices of the fuel as they are: even if they increase. Customers have high bargaining power when there are many sellers in the market and not many customers. Therefore, a business could merge/takeover other businesses in the same market to reduce the amount of competitors reducing the customer's bargaining power.
  • Intensity of Competition - Low - If there are more competitors in the market, the chances are that each company will have to gain dominance through being price competitive. If not, the business may have to look for a USP of some sort being a normal USP (like Apple's has with it's 'wow' factor) or an ethical USP like Marks and Spencer have with their corporate social responsibility strategy, 'Plan B'.

Synergy

Synergy goes along the concept 1 + 1 = 3. The value of two businesses together may be more than the value of them separately. As well as this, the businesses will be able to benefit from economies of scale more producing more cost savings. This is most common with horizontal/lateral integration. However, with horizontal integration, culture clashes may occur more depending on the businesses merging.

About Will Green

A student in England studying Automotive Engineering with Motorsport, Will created Ask Will Online back in 2010 to help students revise and bloggers make money. You can follow AskWillOnline via @AskWillOnline.

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