Why Do Firms Undertake Mergers and Acquisitions?

Firms undertake mergers and acquisitions to create larger companies, maximize shareholder value and strengthen the financial position of the company, according to Investopedia. These deals also bolster the purchasing power of the acquiring company.

Firms engage in mergers and acquisitions to foster efficiency and gain greater market share, states Investopedia. Directors also can increase the size of their company, which gives them more leverage when negotiating with suppliers. Takeovers also allow companies to make staff reductions and save money.

Company leaders who wish to acquire other entities may seek new technologies, reports Investopedia. This allows larger companies to stay ahead and remain competitive. Mergers and acquisitions may expand distribution and marketing operations. Acquiring another company can place an organization in good standing, allowing that company to raise more capital.

There is a distinction between mergers and acquisitions, and the nature of the deal depends on whether it was a hostile or a mutual takeover, explains Investopedia. Mergers occur when two companies of the same stature agree to merge because it would be mutually beneficial to do so. This deal is otherwise known as "merger of equals," and a new entity forms in place of the two companies. However, many mergers are technically acquisitions, because the company being bought agrees to be purchased by the larger company.