Incentives for Mergers and Acquisitions

Followings are incentives for financial managers for mergers and acquisitions:

Economies of Scale: Economies of scale characterizes a production process in which an increase in the number of units produced causes a decrease in the average cost of each unit. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.

Economies of Vertical Integration: Achieving lower operating costs by bringing the entire production chain within the firm rather than contracting through the marketplace. The most common way is merging with a company at a different stage in the production process, for instance, a car maker merging with a car retailer or a parts supplier.Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Complementary Resources: Most likely to end up with acquisitions when a big firm sees an opportunity in the small one which has technology, competitiveness talented team etc. If small company has insufficient resources to finance its own projects two companies may prefer to merge and complete each other's needs.

Surplus Funds: It is about spending excess of earnings to fund mergers and acquisitions instead of investing it on new projects of paying out dividends or buying back stocks.

Eliminating Inefficiencies: As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.

Industry Consolidation: If market has too many entities and each one is competing to gain more slice from it, merging can be seen as a good way to consolidate to gain more competitiveness.

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