Briefly Discuss Some of the More Logical Reasons for Mergers

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The Answer is The overriding reason for mergers to occur is when the value of the combined firm exceeds the combined value of the separate firms. There are several reasons that this could occur, including economies of scale, economies of vertical integration, the combining of complementary resources, or as a use for surplus funds. Economies of scale occur most frequently in horizontal mergers, but can also occur in conglomerate mergers. These economies occur due to spreading fixed costs out over larger production bases such that average production cost is reduced. With vertical integration, a firm basically adds profit potential to the extent that a step before or a step after in the production or distribution system is no longer needed. The combination of complementary resources can of course take several forms but, specifically, when it would not be cost-effective for one firm to obtain a resource in the quantity that would be most appropriate, it may make sense to combine operations. Finally, when a firm has few attractive investment options of its own, and for one reason or another is not entertaining the option of repurchasing shares, it may make sense to buy another's attractive investment opportunities. The key here is whether these opportunities can be obtained without giving away all the gains to the sellers.

Briefly Discuss Some of the More Logical Reasons for Mergers

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