What Is A Merger Economics Essay

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The most strategic way to enhance the positive growth of a company is through mergers. William M. pride et al 1998. Merger activity has tended to be relatively uneven over time and tends to happen in waves. Over the century, there has been a significant growth in companies due to mergers (Anderton 2008)

What is a merger?

A merger takes place when two companies come together to form an entity. In a merger, current investors of both companies are still interested in the newly merged business.

Since some of the mergers do not succeed, and most are kept as secrets, it is difficult to scale how many hypothetical mergers happen in an actual year. The number can be high, though, given the total sum of lucrative acquisition and the desirability of acquisition to many companies. Merger is used for example to combine a very successful company with a shrinking company so as to use the losses to set aside tax to increase profits, while increasing the company as one whole business organisation.

TYPES OF MERGER:

There are different types of merger that give a new definition to the entire business world. These are:

HORIZONTAL MERGER:

This type of merger happens between two companies that compete in the same industry at the same stage of production ie the alliance of firms producing essentially the same good or service within the same market. This type of merger is common in businesses with few firms, because competition would be higher and the collaboration is greater for merging firms in such business.

Horizontal merger happens frequently, because larger businesses endeavour to make more effective economies of scale. When two small businesses horizontally merge the impact of them merging would not be obvious. Small businesses merging are very common. If a small local supermarket merges with another small local supermarket the effect of them merging would be insignificant. But in a large horizontal merger, the result of two large companies merging would be felt throughout the whole economy.

VERTICAL MERGER:

Vertical merger involves a manufacturer creating a relationship with a distributor. This makes it difficult for competitors to compete with the newly integrated businesses because of the benefits that the integration brings. These improvements happen because the wholesaler no longer has to pay the supplier for materials because the supplier and distributor are now one being. If they didn’t merge, the distributor would have paid the supplier money to cover the cost of materials and what the supplier would charge to make profit on the business deal. Since the two firms are merged, the distributor can get the materials at low cost and does not have to pay extra to any other company that wants to make profit.

CONGLOMERATE MERGER:

Conglomerate merger involves the coming together of two companies which have no common pursuit they do not have the same competitors, and do not use the same suppliers. Basically, conglomerate merger brings two companies with no bond under one authority. This can be very suitable when the shareholders for the new company wish to create a strong charisma in two different markets. When the two companies concerned have no direct or indirect pursuit, this is said to be PURE CONGLOMERATE MERGER. On the other hand there is another type of conglomerate merger which is known as MIXED CONGLOMERATE MERGER.

REASONS FOR MERGERS:

To gain a larger market share:

Firms may decide to amalgamate so as to gain a better allotment in marketing network. A company may want to enlarge into different markets where a comparable company is already functioning rather than starting from the creation, so the company can just integrate with the other company.

Reward to management:

It is assumed that companies are persuaded to grow because of the profit they would gain but there is much proof to suggest that profits of amalgamated companies are no more and sometimes less than the joint profit of the two separate firms would have been.

Replacing leadership:

In a private business, the company may need to amalgamate if the present owners can’t recognise an individual within the company to make them succeed. The owners may also wish to capitalise their money into something else.

Cutting costs:

When two firms have relating goods or services, merging can create a great chance to reduce costs. When companies amalgamate, they have a chance to join locations or decrease cost of operation by combining and simplifying support costs. This has to do with economies of scale when the total cost of producing goods is reduced as volume increases, the firm would then maximise total profits.

It is not easy for a business to give up its uniqueness to another business entity but sometimes there is no other choice in order for the company to still continue business. Many companies use merger to grow and last during global financial crises.

POSSIBLE EFFECTS OF MERGER:

The first thing to change in a merger is the management structure. The firms attained must take over the joint company as the lawful owner, but the directors of the merged firms know their company better. Both firms combined together can be expensive and unmanageable.

The shareholders of the gained company are the successors in merging agreement, remarkably if the shares of the business had no vision of rising. They have the chance to sell their shares and go in search for others. However, shareholders of the acquired organisation would have to deal with debt from the acquired firm needed to supply the purchase.

Employees are directly affected by amalgamation. This may be because the newly merged firm may have different proposals for the newly gained assets. Production process changes or even agenda cuts can make the employee lose his job. On the other hand. Integration can also have benefits to the workers, as the new organisation can announce high salaries of the acquired firm.

Customers too can be affected by merger because they trusted the attained firm. This is because the products of attained companies may be amended in quality and price. When this happens customers can change the way they consume such products, buying more of close substitute goods that are cheap and have better quality

REASONS FOR OPPOSING MERGER:

Merging two businesses can provide the firm with collaboration and economies of scale that can lead to greater success, but mergers can also have its shortcomings.

Dis-economies of scale:

When companies merge, it is mostly to achieve economies of scale. Large business organisations are able to produce goods and services resourcefully and at low per unit cost than smaller businesses. Sometimes when companies amalgamate, being a large business organisation would generate dis-economies of scale, where per unit cost of production increases because of increased coordinating cost

Culture clash between different types of businesses can take place, therefore, reducing the integration’s value.

There may be a dispute of objectives between different businesses, ie decisions are complex to make and causing disorderliness in running the business.

Managers may need to fire some of the workers, particularly at management levels. This may have an effect on their driving force.

CONCLUSION:

Through merger, we can conclude that it is a fast and efficient way shrinking companies need to grow and gain large market share

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