Reasons for Merger

Reasons for Merger

Reasons of merger includes Time saving, saving of set up costs, buying of Goodwill, Creation of monopoly, risk diversification, and asset backing for the company.

1.    Time Saving

The building a new business is a time taken exercise, on other hand buying a business is not a time consuming job. Some business buying deals can be finalized in weeks, while some business development can take several years.

2.    Saves Set up Charges

There are number of costs involved in setting a new business, which can be saved by buying a business. These costs include different types of installation costs, initial production losses, trial production etc.

3.    Buying of Goodwill

A new business have no goodwill, therefore goodwill is always come with purchase of a business. Goodwill creation is a difficult task and depends on many factors. Therefore people prefer to buy business with goodwill than creating goodwill.

4.    Creation of Monopoly

Elimination of competition may be the reason of merger. Many multinational companies adopt this strategy to eliminate the local competitors. With elimination of competition, company is in a position to charge high prices and high profit on its product.

5.    Risk Diversification

Risk diversification may also be an important reason for merger. A lot of risk is involved, if a company is engaged in only one business. For example a company is producing umbrella, and if there is no rain in the summer, the company is expected to suffer heavy losses. This risk can be avoided by investing in a ice cream factory.

6.    Asset Backing

A company with good asset backing may be acquired as strategy, because earning can fall sharply but asset does not loss value sharply, instead some asset gain value (Land).