This article reports the results of a case study, spanning a period of 10 years, of the merger of two hospitals in a publicly-funded health system. A political economy model was used to analyse the determinants of the merger. Results show that external political economy factors, mainly pressure from the state to rationalize health services and the organization's needs to acquire critical resources, significantly contributed to the merger decision. At the internal political economy level, groups and individual strategies also played a determinant role. Our study suggests that merger in the public sector may not necessarily result from efficiency motives.