Why Mergers and Acquisitions Happen

What is the reason for mergers and acquisitions? There's five or six important reasons for mergers and acquisitions to happen. One is synergy, diversification, growth, supply chain, and the one I love, eliminating competition. And why you'd want to have a merger and acquisition is usually to gain economies of scale, or lower your cost of capital. But a lot of mergers and acquisitions you hear about, even with small private companies or public companies, happen for reasons that don't usually make sense.

A lot of it is, it's based on management pride. They think that they can acquire this other company and fix it, and make more money, or they need busy work. Think of some of the mergers and acquisitions that you've heard about, and you said, "This doesn't make any sense." Think about when Microsoft acquired Nokia, okay? That was 10 or 15 years ago. I don't think I met a person alive that thought that was good, except for the management of Microsoft. And you know what, there's hundreds and thousands of times where these companies merge and the shareholders are left going, "I don't understand it." And even if you're at a small public company, or private company, you'll see an acquisition and say, "Why are we merging with them? It just doesn't make sense."

So, if you are involved or read about a merger and acquisition, you need to take a step back and see what is the reason for it, is it synergy, diversification, growth, supply chain? Are they eliminating competition? Does it make sense? Is management going to be able to execute, and do that? A lot of times management isn't capable of the execution. It sounds great when you're on TV talking, but later on, you know, four or five years, you don't hear anything about it when they write it off. They buy a company for 5 billion, and sell it for 100 million. It happens every single day. If you have any questions about mergers and acquisitions, feel free to give me an email.