The World of Business: Why do Companies Merge and Split?
During the past few years, there have been a lot of news about company splits or mergers, across all types of industry and business. One of the most media prevalent splits and mergers in recent years has been that of Citroen. In 2015, headlines read that Citroen split from DS, their parent company, followed in 2016 by the announcement of a new merger as the UK Citroen Retail Group dealerships rebranded and combined to form Robins and Day.
While you read about a number of splits and mergers, it can be difficult to understand why they occur. So why do businesses choose to divide and acquire?
Why Do Companies Split?
Divorce, split, breaking up: terms that most would associate with personal relationships, but go hand-in-hand with business relationships, too. However, when it comes to business, splits are usually decided on a strategic basis for one of two reasons:
1. Improve Effectiveness
Many companies have multiple functions and often split so that these diverse processes can be managed separately. By dividing a business in this way, it allows room for flexibility and the adoption of new management processes. This approach improves effectiveness when compared to management under a single business model.
2. Increase Profits
Another purpose is to increase company profits through the means of benefitting shareholders and attracting investors. Of course, increasing profits is largely dependent on the former reason, as the splitting up of a company allows each to be individually managed, thus maximising efficiency while increasing profits.
Why Do Companies Merge?
While the reasons behind company splits trend to be relatively straight forward, there are a huge number of motives behind company merger and acquisition. These include:
Growth
Typically classified as horizontal mergers, a business can acquire another to grow and increase their share of the market. This allows a company to purchase another and immediately grow their business, without having to start from the beginning.
Diversification
While some companies split in order to better manage different strands of their business, others acquire with the hope of diversifying. This is usually because by combining two or more different business elements, the company hopes to gain a competitive edge.
Reduce Competition
Unlike acquiring with the intention of diversifying, many mergers happen in response to a desire to eliminate competition. Buying within their own market allows a company to gain a larger share of the market, but does often come with a high purchase price.
