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Reasons for a Merger

There are many reasons to consider or plan a merger. We know that many mergers are made between large and small companies. The mergers we hear about the most are those of public companies. The reasons for a public company’s merger may differ significantly from the merger of a small to medium size non public company. Mr. John (Giancarlo) Meazzo, President of GMA, is the guru of budgeting and financial management has provided some of the reasons for a merger:

Small businesses that are owned and managed by one person, typically a professional such as a physical therapist, a bakery, a CPA firm or consulting company or a manufacturing plant, may not survive upon the incapacitation of the operator owner. That means that once the person becomes incapacitated, the business could dissolve unless there is a plan of succession. If business closes, the family of the owner will not receive any value from the estate, unless the business is sold.

Increasing profits mainly as a result of reduction in expenses i.e. “economies of scale” Consider two cosmetic laboratories. They would both have similar manufacturing facilities, duplicate marketing and sales staff, laboratory personnel, same equipment (maintenance contracts), shipping and delivery.

They may only operate with one shift (8/24 or 1 of 3 possible shifts). Consider the merging of the two companies. The elimination of possibly 20% to 30% of staff, manufacturing with 3 shifts, lower supply costs (larger quantity purchases), etc. A financial model combining the two entities, using the various realizable assumptions can give the decision makers the insight as to the feasibility of the merger.

Diversification and Growth, A company that plans to enter new markets or new products can do so much more efficiently and at less costly through a merger (instead of taking the time and resources to open their own company).

Eliminate Competition. Companies may strategize to eliminate present and future competitors and gain a larger market share for its products.

Political and Legal changes sometimes force the businesses to merge. Banks show these type of mergers when governments and Central Bank of the country made the new laws about minimum branches in a particular country. It has been seen that small Banks merge to fulfill that legality.

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