Question

Varied reasons are cited by firms for joining hands with another company to enhance their growth. Analyse any two reasons for the same.

Answer 1

Some of the commonly identified reasons are:

1. Synergy - Synergy is the most essential component of mergers. In mergers, synergy between the participating firms determines the increase in value of the combined entity. In other words, it refers to the difference between the value of the combined firm and the value of the sum of the participants. Synergy accrues in the form of revenue enhancement and cost savings. For example, if firms A and B merge and the value of the combined entity - V(AB) - is expected to be greater than (VA + VB), the sum of the independent values of A and B, the combined entity is said to be benefitting through synergy.
2. Acquiring new technology - To remain competitive, companies need to constantly upgrade their technology and business applications. To upgrade technology, a company need not always acquire technology. By buying another company with unique technology, the buying company can maintain or develop a competitive edge. A good example is a merger of a logistics company such as a land transport entity with an air-line cargo company. Another example is a merger between Blackberry and Treo which can incorporate cell phone capability and e–mail connectivity in one device; palm pilots and tablet laptops can provide benefits to both entities.