Why M&A Happens: Key Reasons Companies Merge or Acquire Others

Companies merge or acquire others for various reasons, often to strengthen their market position, improve efficiency, or gain strategic advantages. These deals reshape industries, influence competition, and create opportunities for growth. While some succeed in delivering value, others fail due to poor integration or misaligned goals.

Understanding why companies pursue mergers and acquisitions (M&A) helps explain shifts in business strategy and industry dynamics.

Market Expansion

Companies acquire or merge with others to enter new regions or strengthen their presence in existing ones. Expanding into untapped markets provides access to a larger customer base, increases revenue potential, and reduces reliance on a single region. When Amazon acquired Souq.com in 2017, it gained a foothold in the Middle East, bypassing the challenges of building brand recognition and infrastructure from scratch.

M&A also allows businesses to reach new customer segments. A company that primarily serves enterprise clients may acquire a firm with a strong consumer presence to diversify its reach. PayPal’s acquisition of Honey in 2020 exemplifies this strategy, enabling PayPal to engage directly with shoppers rather than just facilitating transactions.

Regulatory environments influence expansion decisions. Some markets have strict foreign ownership laws or licensing requirements that make organic growth difficult. Acquiring a local company helps navigate these barriers. In the financial sector, banks merge with institutions in other countries to comply with local regulations while gaining immediate market access. HSBC has expanded in Asia through acquisitions of local banks, allowing it to operate in markets with restrictive foreign banking policies.

Diversifying Operations

Mergers and acquisitions reduce dependence on a single product, service, or industry. By broadening their portfolio, businesses create more stable revenue streams less vulnerable to market fluctuations. A technology firm that primarily sells hardware may acquire a software company to establish a recurring revenue model through subscriptions. Apple’s acquisition of Beats in 2014 expanded its presence in music streaming, complementing its hardware business.

Companies also use M&A to enter industries with different economic cycles. A corporation heavily reliant on consumer discretionary spending may acquire a business in a recession-resistant sector like healthcare or utilities. Berkshire Hathaway’s acquisition of Precision Castparts in 2016 followed this approach, adding a stable industrial component manufacturer to its diverse portfolio, which includes insurance, energy, and consumer goods.

Operational synergies can drive diversification. A company with expertise in manufacturing may acquire a logistics provider to gain more control over its supply chain, reducing costs and improving efficiency. When Tesla acquired SolarCity in 2016, it expanded from electric vehicles into renewable energy solutions, integrating solar power with its battery storage technology.

Consolidating Competition

Mergers and acquisitions strengthen a company’s industry position by reducing the number of competitors. When two firms with overlapping markets or similar products combine, they can eliminate pricing wars, increase bargaining power with suppliers, and create a more dominant presence. This is common in industries with high fixed costs, where consolidation allows businesses to achieve economies of scale and improve profitability. The airline industry has seen multiple high-profile mergers, such as the combination of American Airlines and US Airways in 2013, which helped the newly formed entity compete more effectively against Delta and United.

Acquiring a rival provides access to an established customer base, reducing the need for costly marketing efforts. Instead of battling for market share through aggressive pricing or promotional campaigns, companies that consolidate can focus on optimizing operations and improving service offerings. This strategy is common in telecommunications, where major players frequently acquire regional providers to strengthen their subscriber base. Verizon’s acquisition of Alltel in 2008 expanded its coverage while eliminating a competitor.

Regulatory scrutiny plays a significant role in consolidation efforts. Antitrust authorities, such as the U.S. Federal Trade Commission (FTC) and the European Commission, evaluate whether a proposed merger would create an unfair monopoly or harm consumer choice. Companies must often make concessions, such as divesting assets or agreeing to pricing restrictions, to gain approval. When T-Mobile merged with Sprint in 2020, regulators required the creation of a new competitor, Dish Network’s wireless division, to maintain industry competition.

Accessing Strategic Resources

Acquiring another company provides access to proprietary technology, intellectual property, or specialized expertise that would be costly or time-consuming to develop internally. In industries driven by innovation, such as pharmaceuticals and semiconductors, firms acquire smaller companies with breakthrough research or patented processes to accelerate product development. Pfizer’s partnership with BioNTech for its COVID-19 vaccine is an example of how M&A can fast-track access to critical advancements without the delays of in-house R&D.

Beyond intellectual property, companies pursue acquisitions to secure supply chains or gain control over scarce materials. This is particularly relevant in manufacturing and energy, where access to raw materials or key components determines competitive advantage. Automakers have increasingly acquired battery suppliers or lithium mining operations to ensure a stable supply of essential materials for electric vehicle production, mitigating risks from volatile commodity markets or geopolitical disruptions. Tesla’s investment in lithium mining partnerships reflects this strategy.

Workforce expertise is another valuable resource gained through acquisitions. Instead of competing for top talent, businesses absorb skilled employees with specialized knowledge, particularly in fields like artificial intelligence or cybersecurity. Major financial institutions have acquired cybersecurity firms to strengthen their defenses against digital threats. JPMorgan Chase’s acquisition of Zelle’s parent company, Early Warning Services, reinforced its position in digital payments and fraud prevention.

Balancing Financial Profiles

Mergers and acquisitions strengthen a company’s financial position by improving cash flow, reducing debt burdens, or stabilizing earnings. When a business with strong liquidity but inconsistent revenue acquires a firm with steady cash flow, the combined entity achieves a more balanced financial structure. This approach is common in industries with cyclical revenue, such as construction or retail, where companies seek to merge with businesses that generate more predictable income streams.

Debt management is another financial motivation for M&A. A company with high leverage may acquire a firm with a lower debt ratio to improve its overall creditworthiness and borrowing capacity. This leads to better financing terms and reduced interest expenses. Similarly, businesses with excess capital but limited growth opportunities may acquire undervalued firms to deploy cash more effectively, increasing shareholder returns. Technology firms with large cash reserves, such as Apple and Google, frequently acquire smaller companies to reinvest surplus funds into high-growth opportunities. Apple’s acquisition of Beats and Google’s purchase of YouTube both reflected this strategy, using available capital to strengthen their market positions.