Improve financial power
Merger is often associated with research and development as it requires the combination of power between both parties and takes advantages of each other’s knowledge and talent. R&D department always plays a vital role in innovating new products, services, and technologies. For example, a merging process is indispensable in industry like semiconductor, where the company has a higher risk of encountering financial difficulties in order to afford failures. If a company decides to advance its own internal processes or existing technology, huge costs will incur on the budget line.
Therefore, a merger enables companies to share financial responsibility and attain goals together. In the long run, it also helps businesses to increase profitability and gain more significant capitals for R&D.
In addition, the consolidation of entities can eliminate redundant processes and streamline support functions, including administration, accounting, marketing, sales, and information technology. Since many companies already have experienced and talented employees who familiar with the position, operating expenses can be cut off.
It also helps to decrease the costs driven by assets like an office tower, devices, system, and equipment. A horizontal merger is a merger happens in the same industry. For example, in 2017, the National Bank of Abu Dhabi merged with First Gulf Bank, and the costs are expected to decrease around Dh1 million. (Dheeraj Vaidya, 2019) They were combining common business functions and removing duplicate departments in order to minimise cost because both operations are similar. In sum, when the cost of production is decreased, the profits will be maximised.
Create growth opportunity
At present, the competition within industry is very fierce. Firms have to possess outstanding technology development and user-friendly applications to maintain competitiveness. Without adopting proper strategies, many companies may fail to survive in this wave of innovations. Therefore, the market arises a lot of merger companies as they take this approach to open up new markets where the partnering company already exploited. By merging small companies with high technologies, they can remain or grow their competitive advantages which may result in expanding the market. Brand loyal customers are also able to maintain brand loyalty meanwhile transferring to new products. Figure 1 shows the number of merger and acquisition worldwide. In 2018, the number of transactions had increased by 33% to about 12,743 deals compared to five years ago. (Institute for Mergers, Acquisitions and Alliances (IMAA), 2019)