Editing Mergers and acquisitions (section)

===Improving financial performance or reducing risk===
The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance or reduce risk. The following motives are considered to improve financial performance or reduce risk:
*[[Economy of scale]]: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.
*[[Economy of scope]]: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products.
*Increased [[revenue]] or [[market share]]: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.
*[[Cross-selling]]: For example, a [[bank]] buying a [[brokerage firm|stock broker]] could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.
*[[Synergy]]: For example, managerial economies such as the increased opportunity of managerial specialization. Another example is purchasing economies due to increased order size and associated bulk-buying discounts.
*[[Tax]]ation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.
*Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below).
*Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming [[information asymmetry]] or by combining scarce resources.<ref>{{cite journal |last=King |first=D. R. |author2=Slotegraaf, R. |author3=Kesner, I. |year=2008 |title=Performance implications of firm resource interactions in the acquisition of R&D-intensive firms |journal=Organization Science |volume=19 |issue=2 |pages=327–340 |doi=10.1287/orsc.1070.0313 |url= https://epublications.marquette.edu/cgi/viewcontent.cgi?article=1037&context=mgmt_fac|url-access=subscription }}</ref>
*[[Vertical integration]]: Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalise an [[externality]] problem. A common example of such an externality is [[double marginalization]]. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. After a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm's output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable.<ref>{{cite journal |last=Maddigan |first=Ruth |author2=Zaima, Janis |year=1985 |title=The Profitability of Vertical Integration |journal=Managerial and Decision Economics |volume=6 |issue=3 |pages=178–179 |doi=10.1002/mde.4090060310 }}</ref> Vertical integration can, however, negatively affect other firms through [[market foreclosure]] channels.<ref>{{cite journal |last1=Boehm |first1=Johannes |last2=Sonntag |first2=Jan |title=Vertical Integration and Foreclosure: Evidence from Production Network Data |journal=Management Science |date=January 2023 |volume=69 |issue=1 |pages=141–161 |doi=10.1287/mnsc.2022.4363|url=https://hal-sciencespo.archives-ouvertes.fr/hal-03393115 }}</ref><ref>{{cite journal |last1=Rey |first1=Patrick |last2=Tirole |first2=Jean |title=Chapter 33 A Primer on Foreclosure |journal=Handbook of Industrial Organization |date=1 January 2007 |volume=3 |pages=2145–2220 |doi=10.1016/S1573-448X(06)03033-0|isbn=978-0-444-82435-6 }}</ref>
*Hiring ([[acqui-hire]]): some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires ("acquhires") the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and few legal issues are involved.{{Citation needed|date=June 2011}}
*Absorption of similar businesses under single management: similar portfolio invested by two different mutual funds namely united [[money market fund]] and united growth and income fund, caused the management to absorb united money market fund into united growth and income fund.
*Access to hidden or nonperforming assets (land, real estate).
*Acquire innovative intellectual property. Nowadays, intellectual property has become one of the core competences for companies.<ref>{{Cite journal|last1=Ng|first1=Artie W.|last2=Chatzkel|first2=Jay|last3=Lau|first3=K.F.|last4=Macbeth|first4=Douglas|date=2012-07-20|title=Dynamics of Chinese emerging multinationals in cross-border mergers and acquisitions|journal=Journal of Intellectual Capital|language=en|volume=13|issue=3|pages=416–438|doi=10.1108/14691931211248963|issn=1469-1930}}</ref> Studies have shown that successful knowledge transfer and integration after a merger or acquisition has a positive impact to the firm's innovative capability and performance.<ref>{{Cite journal|last1=Zhang|first1=Yu|last2=Wu|first2=Xianming|last3=Zhang|first3=Hao|last4=Lyu|first4=Chan|last5=Zhang|first5=Yu|last6=Wu|first6=Xianming|last7=Zhang|first7=Hao|last8=Lyu|first8=Chan|date=2018-05-30|title=Cross-Border M&A and the Acquirers' Innovation Performance: An Empirical Study in China|journal=Sustainability|language=en|volume=10|issue=6|pages=1796|doi=10.3390/su10061796|doi-access=free|bibcode=2018Sust...10.1796Z }}</ref>
*Killer Acquisitions: Incumbent firms may acquire innovative targets solely to discontinue the target's innovation projects and preempt future competition.<ref>{{Cite journal|last1=Cunningham|first1=Colleen|last2=Ederer|first2=Florian|last3=Ma|first3=Song|date=2018|title=Killer Acquisitions|url=http://dx.doi.org/10.2139/ssrn.3241707|journal=SSRN Electronic Journal|doi=10.2139/ssrn.3241707|s2cid=219391535|issn=1556-5068|url-access=subscription}}</ref>
*Exit Strategy: Some start-ups in technological and pharmaceutical industries explicitly cite a potential future acquisition as an "exit strategy" when seeking early VC funding. The potential for an acquisition therefore leads to higher levels of funding for risky or innovative projects.<ref name="Hollenbeck2020">{{cite journal |last1=Hollenbeck |first1=Brett |title=Horizontal Mergers and Innovation in Concentrated Industries |journal=Quantitative Marketing and Economics |date=2020 |volume=18 |pages=1–37 |doi=10.1007/S11129-019-09218-2|s2cid=219125831 |url=https://mpra.ub.uni-muenchen.de/90764/1/MPRA_paper_90764.pdf }}</ref>

Megadeals—deals of at least one $1 billion in size—tend to fall into four discrete categories: consolidation, capabilities extension, technology-driven market transformation, and going private.