The financial industry set a new record for mergers and acquisitions. This isn’t necessarily a good indicator. It’s not uncommon for 70%-90 percent of acquisitions to fail. But what motivates companies to make these deals? In essence, mergers and acquisitions let a company be more successful than the sum of its parts. Companies acquire and merge for various reasons, such as to increase market share, increase revenue, lower costs, increase efficiency, or diversify their product range.
Mergers usually occur between two companies operating in the same industry. There are three kinds of mergers: statutory, consolidation, and subsidiary. In a statutory merger, the shareholders of both companies transfer their shares to another business which absorbs the other business. In a subsidiary merger, the company that acquires the business and assumes all of its liabilities and assets. Consolidation is the process of buying its competitors to consolidate its position in the industry.
A common motive for a company to purchase and join forces with another company is to acquire intellectual property. This is among the main reasons why some of the largest tech companies today purchase companies that are producing high-tech. Apple’s purchase of NeXT saved years of research and development and capital investment.
Tax benefits are an additional aspect to consider for companies when they make acquisitions. The acquisition of a business that has a loss allows the buyer to deduct its losses for the same year and avoid paying taxes on its income.