Understanding the strategic reasons for a merger and acquisition

While global M&A activity hasn’t fully recovered after the slowdown started in 2022, dealmakers see positive signs that it might rebound in 2025. 

Even though the global transaction volume in the first half of 2024 fell 25% compared to the same period in 2023, deal value grew by 5%.

Amidst those positive signals and cautious expectations for the M&A market, we wanted to look at the core objectives of M&A deals to learn what dealmakers aim to achieve by initiating a transaction.

So what are the reasons for a merger and acquisition? Find the answers in this article.

Primary reasons for a merger or acquisition

Let’s first review the primary reasons why companies merge or acquire other organizations. 

Growth

The most obvious reason for a merger or acquisition is growth.

M&A is one of the fastest ways for an acquiring company and a target company to scale their operations. Instead of spending years building new infrastructure or expanding organically, a company can instantly double or triple in size or scale of operations by merging with another company. 

Such an acquisition or merger can significantly boost companies’ development. It allows them to expand rapidly and access new markets, customer bases, and distribution channels. 

Synergies

Realized synergies are the goal for most M&A deals. Simply put, synergies are the benefits or advantages companies can achieve from the transaction. There are two main types of synergies:

Apart from the main types of synergies, there are also financial and operating synergies. Financial synergy results from the improved financial efficiency of the merged company (for example, a reduction in the cost of capital). Operational synergy is about the improvement of operational activities (for instance, when merged companies achieve economies of scale).

Market expansion

Merging with a company in a different region or industry can provide access to new markets, and therefore increase market share. This is often more efficient than trying to enter those markets independently, since this way an acquiring company can quickly gain access to the target’s customer base without the need to win those customers autonomously.

However, it’s not always about new market expansion. The same corresponds to vertical mergers where a product manufacturer, for instance, acquires distribution companies to consolidate operations, get control over supply chains, and access a bigger market share.

An example of a market extension merger could be the 2018 deal between Vodafone and Idea Cellular in India. It was driven by the need to strengthen Vodafone’s presence in India’s growing telecom market, helping Vodafone access millions of new customers without having to build a new infrastructure from scratch.

Diversification

Mergers and acquisitions are often helpful for companies that plan to diversify their product lines and enter new markets. 

Diversification can stabilize a company’s revenue by spreading its business across different industries, which may not be affected by the same economic changes. 

A good example here is a conglomerate merger between Amazon and Whole Foods in 2017. This deal helped Amazon to expand beyond just e-commerce and cloud services. It gave Amazon a physical retail presence and access to the growing organic food market, reducing its dependence on online sales and opening up new opportunities.

Secondary strategic motives for mergers and acquisitions

Apart from primary motives for M&A, there are also secondary reasons for a merger or acquisition, which are still no less important. Let’s review them.

New technologies

Getting access to new technologies helps companies boost their operations, especially in technology-driven industries such as IT or healthcare.

Developing new technologies in-house can be costly, time-consuming, and risky. Instead, companies acquire firms with proprietary technologies to integrate them into their existing business. 

For instance, access to new technologies was one of the reasons for Google’s acquisition of Nest Labs in 2014. This deal helped Google gain access to smart home technology, which it then incorporated into its broader strategy for connected devices. This allowed Google to stay competitive in the emerging Internet of Things (IoT) market.

Talent acquisition

Sometimes the key motive behind a deal is talent acquisition. It’s especially relevant in industries where skilled employees and innovative leadership are in high demand, such as tech. 

Acquiring another company can be the fastest way to bring on new talent. And there’s even a dedicated term to this, ‘acqui-hiring’, which basically can be explained as “acquiring another company primarily to absorb its talent”. 

The acqui-hiring approach is often associated with Meta (previously known as Facebook) which had acquired such big tech companies as Instagram and WhatsApp.

Facebook has not once bought a company for the company itself. We buy companies to get excellent people.

Mark Zuckerberg
CEO of Meta

Competitive advantage

A merger or acquisition can also be a strategic move to outpace competitors by gaining access to resources or capabilities that set the company apart. By merging, businesses can achieve a stronger position in their market through increased size, brand recognition, or by gaining exclusive access to key assets.

This is often the case with a horizontal merger that occurs when companies operating in the same or similar industry combine their operations.

Improved financial strength

An M&A deal can strengthen a company’s balance sheet, allowing it to better manage market fluctuations and economic downturns. 

Mergers and acquisitions often result in pooled resources, reduced costs, and stronger financial backing, which can improve credit ratings and lower borrowing costs. 

Tax benefits

Companies sometimes get involved in M&A because of the potential to reduce overall tax liability.

By merging, organizations may be able to combine their tax strategies to lower the amount of taxes they owe. For example, if one company has losses, these can be used to offset the profits of the other, reducing the combined company’s taxable income. 

Additionally, merging companies can sometimes move operations to regions with lower taxes, further decreasing their tax liability. This can free up more cash for investment or growth, making the merger financially attractive.

How to assess if a merger is right for your company

A merger or acquisition can accelerate a company’s growth, but it can also introduce challenges. That’s why a structured approach that addresses both strategic fit and potential risks is important. 

When assessing whether a merger or acquisition is right for your company, consider these aspects:

The table below introduces examples of questions to ask yourself when considering a merger or acquisition:

Aspect	Questions
Strategic alignment	Does the merger align with our company’s long-term goals and strategy? How will this merger enhance our competitive advantage?
Financial health	Can we afford this merger, and what is the expected return on investment? How will the merger impact our balance sheet, cash flow, and profitability? Are there hidden costs in terms of integration, restructuring, or regulatory compliance?
Cultural fit	Do the two companies share similar cultures and values? What challenges might arise during the integration of teams and organizational processes? How can employee morale and productivity be potentially affected?
Synergy potential	What are the potential cost synergies? Are there revenue synergies? How quickly can we achieve these synergies?
Operational fit	Are the business models of both companies compatible? Will there be significant challenges in integrating IT systems or operational processes? Can our current infrastructure support the additional operations?
Market impact and competition	How will the merger affect our position in the market? Will we gain access to new markets, customers, or products? Could this merger trigger antitrust or regulatory concerns?
Risk assessment	What are the main risks associated with this merger (regulatory, operational, cultural)? Do we have a plan for addressing potential challenges? How do we ensure business continuity during and after the merger?

Key takeaways

• The motives for mergers and acquisitions can be divided into primary and secondary.
• Among the primary reasons two or more companies combine their operations are growth, synergies, market expansion, and diversification.
• Secondary reasons for M&A typically include access to new technologies, talent acquisition, competitive advantage, improved financial health, and tax benefits.