Why Do Companies Engage in Merger and Acquisitions Activity?

Why Companies Engage in M&A Activities
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Why Companies Engage in M&A Activities
Mergers and Acquisition (M&A) activities describe various financial transaction that involves the transfer or consolidation of ownership of business entities or units with other entities. Merger describes the joining of two equal entities into one, while acquisition describes the purchase of an entity by another. Companies engage in M&A activities for several reasons.
Notably, M&A activities have been identified as one of the most cost-efficient approaches for organizations keen to grow through diversification. Janiuk (2017) observe that milk and dairy companies in Poland achieve growth through M&A activities. To this end, M&A activities allow an entity to acquire companies with the desired resources and capabilities as opposed to taking time to build new products, hire new employees, or open new markets. Agliardi, Amel-Zadeh, and Koussis (2016) observe that M&A activities increase the growth options for a company, especially in instances where the company merges to achieve diversification in the sense that such M&A activities increase the financial synergy of the acquiring firm. Thus, organizations engage in M&A activities to achieve growth through diversification.
Further, M&A activities have been identified as an ideal approach for organizations keen to increase their overall levels of profitability. In the case of a merger or acquisition, there is significant cost saving as the increased size of an entity enables the company to enjoy the economy of scale. The cost of producing goods and services as well as the cost of customer acquisition is likely to lower because of the increased entity size following M&A activities. Rahman and Lambkin (2015) observe that entities that effectively manage the post-merged entities report enhanced sales performance as well as increased marketing efficiency as M&A activities result in synergies that organizations can leverage to improve performance. In addition, the M&A activities facilitate increased profitability as it leads to market expansion or the addition of new product lines. Lin, Wang, and Shi (2020) note that properly matched merging entities can effectively achieve technica...