Atty. Marlen Kruzhkov: The motives behind mergers and acquisitions

Marlen Kruzhkov photo credit: assets.portfolio.com

Sustaining robust growth has never been an easy job for business owners. Corporate lawyers like Marlen Kruzhkov believe that for a company to survive in an economically vulnerable sphere, it’s sometimes necessary to hinge a partnership deal with another company, effectively managing the entire system, reducing costs, and augmenting cash flow. Hence, there is the existence of mergers and acquisitions (M&A).

The governing rationale behind the idea of M&A is that acquiring another business can dramatically improve financial performance. The following are some of the specific motives that make M&A an influential force in the corporate arena:

Economy of scale. Profit margins are often significantly increased when companies consider a merger. This is generally due to the reduction of fixed expenses, removal of duplicate departments or operations, and the lowering of the costs of the company relative to the same revenue stream.

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Economy of scope. Atty. Marlen Kruzhkov agrees that in order to systematize the operations of a certain business, parameters in all areas of concern should be set. The economy of scope refers to the range of demand-side changes that businesses undertake, such as increasing or decreasing the scope of marketing and distribution of different types of products.

Increased revenue or market share. When two separate companies in the same industry combine, the weight of competition is lessened. Therefore, there is the tendency to increase the market power (through an increased market share) to set prices.

Resource transfer. Because not all firms share the same kind and number of resources, establishing mergers can maximize and heighten the value of these resources. This process can create significance through either overcoming information asymmetry or by combining scarce resources.

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Marlen Kruzhkov is a partner at Gusrae Kaplan Nusbaum PLLC, an AV-rated law firm founded more than three decades ago by the Chief Attorney of the U.S. Securities and Exchange Commission's New York Enforcement Division. For more information, visit www.gkblaw.com.