Why Companies Merge, and Why They Split

merge-and-split

In the world of business, you’ll often see companies merge, or else do the opposite and split into two or more separate entities. There are lots of different reasons for this, but watching from the outside, it can be hard to gauge whether there was any real advantage in either move, and whether these practices could one day be of benefit to your own venture.

That’s why we thought it would be interesting to explore both why companies merge, and why they split…

Why Do Companies Merge?

There are many reasons why two business may choose to make themselves into a single entity, but the most common are:

  1. Synergy

Synergy relates to the idea that combining business activities will both decrease costs and increase performance. Thus, by merging, two complementary companies join together to make themselves into a stronger whole.

  1. Diversification

Another reason that companies might merge is to diversify. By moving into an industry that is essentially unrelated to their own, each minimises the extent of sector-specific risks to their profitability.

  1. Growth

Perhaps the most common reason for mergers is an attempt by one business to invest in another in order to grow and increase their market share. This enables two competitors to make themselves into a stronger and more successful single entity.

Why Do Companies Split?

As well as merging, companies will sometimes choose to go the opposite way and split. This is where a single business becomes two or more separately run enterprises, independent of the others. A perfect example of this is the recent separation of the Citroen Retail Group into Robins & Day and DS.

As with mergers, there are multiple reasons that companies might choose to split up, with the most frequently cited being:

  1. Strategic Reasons

When companies experience exponential growth across a number of sectors, it can become hard for a single management team to maximise the profitability of multiple business lines. By splitting the enterprise into several independent companies, a greater focus can be centred on each.

  1. Government Mandates

Another reason that you might see companies choosing to split is because of government concerns regarding monopolistic practices. Where this is the cause, it can be mandated that the various segments be split into individual concerns independent from the others in order to break the monopoly.

Understand the reasoning behind big business decisions and maybe one day soon it will be your own company that benefits from your knowledge.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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