A merger is a combination of companies that results in the pooling of resources, operations, and management structures into one unified entity. A company may pursue a merger for several reasons, including expanding into new markets or strengthening its market position, improving operational efficiencies, and gaining competitive advantages. Mergers involve a variety of legal processes and require adherence to antitrust laws and regulatory requirements.

Benefits of a Merger

The primary reason for a company to seek a merger is to realize synergies. These are benefits that exceed the sum of the parts and typically include revenue, cost, and operational improvements. Mergers can also lead to diversification of a company’s business operations and product portfolio, which can reduce exposure to industry specific risks and economic downturns.

However, it is important to note that synergies do not automatically translate into greater consumer benefits. In standard models with price-setting firms and constant marginal costs, a merger is expected to increase insider prices, which in turn can decrease outsiders’ investments, and in general harm consumers unless there are sufficient efficiency savings to counteract this effect.

Another potential benefit of a merger is to gain access to new markets through a market extension merger. This type of merger is commonly used by companies that sell the same products in different regions, as it allows them to gain a larger client base without the cost of competing against themselves in their home markets. Similarly, a vertical merger is used by companies to acquire distribution channels and consolidate their supply chains.