Why Might a Company Decide Merge, What Are the Motives Behind a Merger? (unit 4 Business A-Level)

A company may decide to merge in order to benefit from economies of scale. When the two companies merge, if it is a horizontal merge, they are able to combine their production and finance. Through combining their finance they are likely to benefit from reduced costs through bulk buying their stock, as opposed to previously buying separately as independent companies. An example of a business which has used this successfully is Morrisons and Safeway, they were both in the same market buying similar products, so were able to benefit from buying jointly. These cost savings are then passed onto consumers, giving both companies a competitive advantage through cost leadership, in accordance with Porters Generic Competitive Strategies.

Businesses may also decide to merge to try increase their profitability through marketing synergies if they are in the same market sector. An example of this would be Glencore and Xstrata, two mining companies. Figures jointly released by the two companies indicated that $500m would be saved per year in marketing synergies alone, showing that the whole really is greater than the sum of its parts. This would increase joint net profits from $9.8b to $10.3b, a 5% rise which will definitely be looked upon favorably by shareholders and other stakeholders for a number of reasons. Firstly, shareholder will benefit from an increased dividends (if the company decides to grant this). Secondly, although some employees will inevitably be made redundant, those who remain will have an increased sense of job security due to the increase in competitiveness of the merged company.

As it can be seen, there are a variety of reasons and motives behind mergers and these will be determined by the companies corporate aims and the markets they operate in. Morrisons and Safeway are in highly cost competitive markets, and so the main motives behind their mergers will be cost savings. Other companies such as Glencore and Xstrata, who