Through concentration

Rather than solely relying on internal efforts, companies can expand their presence in an industry by collaborating with or merging with one of their rivals. Mergers and acquisitions are often employed as a means to increase a company’s size and outpace competitors. Doubling a company’s size through organic growth can take years or even decades, whereas strategic mergers or acquisitions can expedite this process. This approach is known as horizontal concentration. In contrast, when companies join forces with their suppliers (upstream) or distributors (downstream), this is referred to as vertical concentration.

Consolidation can offer several benefits:

Consolidation often aims to reduce costs by achieving greater economies of scale, which can indirectly reduce rivalry within an industry and increase profitability. Additionally, consolidation can provide access to new distribution channels.

What factors drive consolidation?

Competition

Competition serves as a powerful motivator and is the primary reason why mergers and acquisitions occur in distinct cycles. Companies often desire to acquire a business with an attractive asset portfolio before their rivals do, resulting in a flurry of activity in booming markets.

Synergies

Companies may also merge to take advantage of synergies and economies of scale. Synergies arise when two companies with similar businesses combine, allowing them to consolidate or eliminate duplicative resources such as branch and regional offices, manufacturing facilities, and research projects.

Domination

Mergers and acquisitions can also be pursued as a means for companies to dominate their industry.

Fiscal objectives

Mergers and acquisitions can serve tax-related purposes as well, although this may be an implicit rather than an explicit motive.