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Mergers and acquisitions• cost reductions in core operating processes through economies ofscale (easier to achieve);• financial synergies such as lowering the cost of capital (cost ofborrowing, flotation costs);• more competent, clearer governance (as in the merger of two hospitals).However, there may be other gains. Some acquisitions can be motivatedby the belief that the acquiring company has better management skills,and can therefore manage the acquired company’s assets and employeesmore successfully in the long term and more profitably.Mergers and acquisitions can also be about strengthening quitespecific areas, such as boosting research capability, or strengthening thedistribution network.DiversificationDiversification is about growing business outside the company’s traditionalindustry. This type of merger or acquisition was very popularduring the third wave in the 1960s (see box). Although General Electric(GE) has flourished by following a strategy that embraced both diversificationand divestiture, many companies following this course have beenfar less successful.Diversification may result from a company’s need to develop a portfoliothrough nervousness about the earning potential of its current markets, orthrough a desire to enter a more profitable line of business. The latter is atough target, and economic theory suggests that a diversification strategyto gain entry into more profitable areas of business will not be successfulin the long run (see Gaughan, 2002 for more explanation of this).A classic recent example of this going wrong is Marconi, which tried todiversify by buying US telecoms businesses. Unfortunately, this was justbefore the whole telecoms market crashed, and Marconi suffered badlyfrom this strategy.Integration to achieve economic gains or better servicesAnother increasingly common motive for merger and acquisition activityis to achieve horizontal integration. A company may decide to merge225