7 Reasons Why Companies Merge

Merging happens all around us. If you feel like there’s a new story every day about merged businesses, you would be ...

Merging happens all around us. If you feel like there’s a new story every day about merged businesses, you would be correct. In 2021, over 62,000 merger and acquisition (M&A) deals were announced globally, the most in history. But why do companies merge? In this blog, we’ll discuss the merging process and how it can benefit all parties involved.

Why Do Companies Merge?

Businesses merge for complex reasons. For some, it comes down to money—they simply want to increase profits. Others are looking to tap into new markets and access innovative technologies.  Here are the seven most common reasons companies merge.

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1. The Benefits of Teamwork

We’re all familiar with the saying “stronger together,” and that couldn’t be more true when it comes to mergers. Benefits can manifest in various forms, including cost savings and improved operational efficiency.

When companies merge, they can streamline operations by eliminating redundant departments, consolidating facilities, and integrating technology systems. Unsurprisingly, this allows them to save a lot of money and, in turn, compete at a higher level in the market.

2. Improved Risk Management

You should never put all your eggs in one basket. By merging with companies in different industries or geographic markets, businesses can mitigate the risk associated with market volatility. When one goes up, the other comes down, and it all balances out in the end.

For example, if you rely heavily on the domestic market, you might consider merging with a firm that has a strong international presence. That way, you’re much more resistant to regional economic downturns or political instability.

Similarly, product diversification helps companies navigate changes in consumer preferences and technological advancements. This is key to adapting to market shifts and sustaining your competitive edge.

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3. More Market Share

There are many benefits to companies merging, one of the most common reasons companies merge is to gain larger market shares. When they come together, two companies can create a powerful team capable of competing effectively against rivals.

A larger market share allows the merged company to achieve economies of scale, reducing per-unit costs and improving profit margins. Take the automotive industry, where merging companies can benefit from shared research and development efforts, as well as bulk purchasing of raw materials. This efficiency benefits both companies tremendously.

4. Access to Technologies and Expertise

Looking for the latest and greatest technologies? Consider merging with another organization. You’ll get access to expertise and intellectual property that can accelerate the growth of your business. And in today’s fast-paced business climate, staying at the forefront of technological advancement isn’t optional, it’s a necessity.

Consider a traditional manufacturing company that merges with a tech firm specializing in automation and artificial intelligence. With this integration, the manufacturing company adopts advanced technologies that improve production efficiency and cut costs.

5. New Markets

Breaching new markets is a strategic objective of many organizations, and there’s no better way to do it than merging with other businesses. Joining a company with an established presence in your target market can open new doors.

For example, a North American company aiming to enter the European market may merge with a European firm that already has a robust distribution network and customer base. This essentially topples any entry barriers that would have otherwise prevented market penetration for the American company.

6. Better Financial Health

It’s no secret that financial health and stability are crucial for business success. Mergers can improve financial performance by combining resources and increasing cash flow to both parties. Strong financial positioning will allow you to invest in growth initiatives without fretting over money.

Even better, your shareholder value will increase as you become more financially fit. A merger’s combined growth and profitability can lead to higher stock prices and dividends, greatly benefiting shareholders.

7. Eliminating Competition

You know what they say: if you can’t beat them, join them. Rather than competing with other organizations, some companies merge to boost market share and reduce rivalry. This can ultimately result in better resource allocation and market positioning.

Bear in mind that these types of mergers are heavily regulated to prevent monopolistic practices. Section 7 of the Clayton Act prohibits M&A where “in any line of commerce…the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 

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What Types of Businesses Can Benefit Most From Merging?

Mergers are a godsend for many companies, but certain types of businesses stand to gain more than others.

Tech Firms

More so than most businesses, tech firms need to stay ahead of the competition. This requires constant innovation and access to cutting-edge technologies. By merging, technology firms can pool their resources and research.

Healthcare Companies

Like tech, the healthcare sector faces enormous pressure to drive research and development. They have to tackle all kinds of regulatory hurdles and costs to maintain profitability and meet patient needs. Merging with other businesses allows healthcare companies access to new products and shared regulatory expertise.

Financial Institutions

Banks, insurance companies, and other financial institutions can find great value in mergers. The financial industry is highly competitive, and mergers can help companies expand their customer base while diversifying product offerings. For example, two merging banks will expand ATM access, making things so much more convenient for customers.

Consumer Goods Businesses

Brand recognition and market reach are everything in the consumer goods space. By merging, these companies can grow their product lines and access new distribution channels. They can also achieve economies of scale and, by extension, reduce costs in areas ranging from manufacturing to marketing.

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How Should Companies Prepare For Merging?

No two businesses are exactly alike, which means the merging process may look a bit different for each organization. However, by following a few universal tips, you can better prepare your company for the transition:

  • Do your research/due diligence
  • Make sure you are financially compatible with the merging company
  • Align your corporate cultures
  • Establish clear communication channels
  • Create a detailed integration plan

Remember, the ultimate goal should be a mutually beneficial approach that drives profits and serves your customers’ needs.

Streamline Merging With Cloudficient

Merging is a great way to drive business growth, but the process is far from simple. It often involves retiring legacy systems, a challenge for even the most experienced businesses. At Cloudficient, we provide the tools they need to successfully transition systems.

We help mid- and enterprise-sized organizations migrate data with little to no disruption. We’ll guide you through the entire process while preventing data loss. Understanding why companies merge is key to a successful transition. If you’re ready to make that leap, contact us today.

With unmatched next-generation migration technology, Cloudficient is revolutionizing the way businesses retire legacy systems and transform their organization into the cloud. Our business constantly remains focused on client needs and creating product offerings that match them. We provide affordable services that are scalable, fast, and seamless.

If you would like to learn more about how to bring Cloudficiency to your migration project, visit our website, or contact us.

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