Companies merge in order to take advantage of each other's strengths. Companies may merge in order to increase product offerings for their consumers. Grocery store chains may merge with pharmacies in order to expand their own in-store pharmacy offerings. Grocery stores also merge with delivery services in order to provide customers more options for shopping online in order to compete with larger online companies such as Amazon.
Companies also merge in order to streamline their business. Amazon now makes more money from its computing services than it does from sales. Banks are closely tied with insurance companies since both businesses appeal to the same demographic who are concerned with money management. Many companies are looking into buying their own trucking services in order to save money by not having to go to outside vendors to move their product.
Companies also merge in order to gain larger market shares. News media outlets often buy smaller news providers in order to maximize profits. A news media outlet can buy a newspaper, a television network, and a website in order to maximize its profit. Disney has expanded into merchandise as well as having its own streaming service. The same company that owns the American ABC network also owns Disney and ESPN. By appealing to a larger demographic, the company can expand. The company can also diversify if one market does not do as well as planned.
A merger of companies occurs when they unite to form a single, larger company, while an acquisition involves one company purchasing and absorbing another company. Mergers of companies in various industries are becoming increasingly common because of the numerous advantages to the unification of the businesses.
For instance, the merger of businesses saves money due to the economies of scale. When companies merge, they can bulk buy raw materials, consolidate technologies, and combine administration facilities. When costs to produce goods and services diminish, then customer needs can more easily be fulfilled and as a result revenues increase. Larger companies can also afford to invest more in research and development, which in turn spurs further growth.
Mergers enable businesses to combine the talents of their employees. For example, one company may excel in technology and innovations, while another company is great at sales and marketing. Together they complement each other and can then go further than either could individually.
The merging of companies may enable growth into new market areas. This may include new industrial niches as well as new geographical areas. Mergers may enable some businesses to expand on an international scale, while mergers on smaller scales can help companies spread to nearby towns or states.
Mergers can enable companies to acquire larger market shares by reducing competition and combining the customer bases of the merging companies. By merging with distributors or suppliers, businesses can save money by eliminating a complete tier of costs. Additionally, companies that merge can often offer more comprehensive lines of products and services that are already ready for distribution and sales.
The increase in mergers and acquisitions in the past decade are part of a larger scale concentration in markets and reduction in competition that has marked an era in which network effects are especially valued. The strategy of "blitzscaling" means that size is often valued for its own sake.
In the case of mergers across different industries, there are several potential reasons behind them. The first reason is getting control of supply chains. Another reason is developing complementary strategic businesses.
For example, Amazon was originally a retail firm that made money selling to consumers. Because it needed massive computing power, it developed Amazon Web Services. Logistics was essential to its mission, and now it has one of the largest transportation fleets in the world. Just as grocery stores profit most by selling their own branded merchandise, with its purchase of Whole Foods and development of private labels such as Amazon Basics, Amazon can increase its profits. Amazon and the other FAANGs use strategic acquisition to further long term strategic goals.
Many large firms have massive amounts of cash on hand. Alphabet dominates the search industry but makes strategic investments in other firms in an attempt to diversify its revenue stream into other areas of technology.
Pure conglomerate mergers can reduce economic risk if the two business areas perform best in different types of economic cycle. For example, a discount retailer, which would most benefit from an economic downturn, might invest in an unrelated firm that did best in an economic upturn.
There is an increase in the number of mergers from different industries out of fear of Silicon Valley companies. Companies such as Netflix, Amazon, and Apple are taking over the media industry with their streaming services platform. This growth has brought about fears that these companies may dominate everything one day.
Competition has led the largest media firms to own both the content as well as the platforms on which the content appears. This year, the value of the announced media deals has jumped to $323 billion, up nearly 440 percent from a year ago. Examples of deals making headlines include the expected merger between Disney and Fox. There is also the acquisition of Time Warner by AT&T. Another notable merger happened in the health industry—CVS Health announced a $69 billion merger with the health insurer Aetna. This event happened after Amazon announced plans to enter the healthcare industry.
There are more and more mergers between companies in different industries today because many companies believe that they can benefit from merging to make larger companies. There are instances in which the mergers are between companies that feel they can help one another because their businesses are complementary. For example, you could have a bank and an insurance company merge with one another because their products could appeal to the same kinds of people. In other cases, one firm may feel that it can benefit from being associated with the other firm’s name even if they are in very different industries. The tendency towards globalization also helps to drive this process as bigger firms become the norm.