2.2 Motives for m&a
The main goal for each company is to be profitable, otherwise it has no possibility to exist in today's competitive market. From this point it can be said that the primary motivation for M&A is growth. When company realize that there is no internal growth, M&A can be the only way to create growth (Kummer, Steger, 2008, p.4). Weber argue that mergers and acquisitions objective is to achieve "two plus two equals five" effect (Weber, 2014, p.8). It is assumed that synergy is being realized if the efficiency of the joint companies is greater after coming together (Paulo Rotela Junior et al., 2013, p. 1584). Motis defines synergy as "efficiency obtained through the close integration of the merging firms' hard-to trade assets" (Motis, 2007, p.8). However Cooper states that synergism does not guarantee positive financial expectations (Cooper, 1993, p. 57). There are a wide list of motives that may force company into the combination process, but according to Bower, five of them are more general. They are (Bower,2001, p.94) :
to deal with overcapacity through consolidation in mature industries;
to roll-up competitors in geographically fragmented industries;
to extend into new products o markets;
as a substitute for R&D;
to exploit eroding industry boundaries by inventing an industry.
The above motives differ on fundamental elements, specifically their strategic objectives. The first motive- overcapacity motive, can be described as a desire of the acquiring firm to keep its own staff and facilities in order to gain market share in a more efficient way and not to allow to the target company to do so. This motive usually in mature and capital-intensive sectors, such as automotive, petrochemical market (Bower, 2001, p.95). The objective of the roll-up usually occurs at the beginning, when industry starts to operate. Companies follows this motive if they aimed to grow geographically and eliminate their competitors in the cross-border countries. If it is needed, operating units can stay local in order to keep the relationship with local customers. Roll-ups aimed to achieve economies of scale and scope, and so creating industry giants (Junior, 2013,p.1584). According to Motis, economies of scale appear in the result of merging firms, especially in the short run. Because during this time when two companies start the production process together, they can get rid of double fixed costs like costs that usually involve administrative tasks, customer service and billing. In the long run, economies of scale can be achieved when larger firm invests in new technologies that improve its production process and if the inputs twice smaller than output ( Motis, , p.9). Horizontal integration and vertical integration are additional motives of economy of scale. Horizontal refers to the increase in market share and market power that results from acquisitions and mergers of rivals, while vertical refers to the relationship between buyer and seller (Gaughan, 2007, p.145). In geographic roll-ups, as Bower stays, it is important to hold on to high skilled workers if the company want to reach desired results quickly (Bower, ,p.99). The objective of market extension is similar to geographic roll-ups. Acquirer tends to extend its product line or international coverage. The companies' size plays an important role, as Bower said : "The bigger you are relative to your target company, the better your chances for success" ( Bower, p.99). The R&D motive is as follows, for the acquirer it is very important to make a deal with a high R&D target company. The reason is obvious, it is cheaper to get what is already exist than to build from the scratch, it is one of the way of saving costs. If there is an industries with short product lifetime cycles, it can be so that one is not able to develop resources in-house quick enough, acquiring the development is the only opportunity or miss it. According to Motis, transferring more efficient technology from one firm to another clearly decreases total costs (Motis, ,p.11). The last motive for a merger or acquisition is the industry convergence. The core idea of this motive is to get resources from the industries whose boundaries seem to be disappearing. A company is confident that a new industry is emerging and collects resources from existing industries. The task complexity fall on management "shoulders" and success depend on smart personnel, who actually make a decision about the purchase and able to predict the consequences after the purchase realization (Bower, 2011, p. 100)
There are exist a lot of specific motives for M&A, but those five are the main. And to know how they can be realized it is necessary to look through M&A process.