Mergers refer to a case where two existing smaller companies are brought together, forming one large organization. This strategy in cooperates business aims at collating individual operational and financial abilities of the first enterprises. The resultant company is bigger and more competitive its market ( Lebedev et al., 2015) .
There are different types of mergers such as horizontal, vertical and concentric mergers. The horizontal mergers occur where the first companies come together and operate from an initial standard industry. Vertical mergers refer to where two companies run in a conventional industry value chain. Lastly, concentric mergers arise from two related businesses coming together though not from the same industry (Arvanitaki et al., 2017). Mergers serve a common purpose with specific characteristics, costs, and benefits as discussed below.
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Merits of a merger
Mergers facilitate network economies as one of its characteristics. This implies that companies that exist across such savings are substantial, most often with a national look and operational scale. Merging into big enterprises creates efficiency in industry, broader markets and reduces functional costs
Mergers develop and encourage research. In today's business environments, a company's research and its development are crucial for its sustainability in the long run. Owing to big chunks of monies for such research, mergers tend to be more competitive and profitable than smaller individual companies that may not necessarily have such funds at their disposal.
Mergers facilitate reduction of duplication of roles and departments resulting in the production of lower costs goods. Mergers prevent companies in the same industry from doing what other smaller companies in the same sector do hence there is no duplication. Production is in large scale and at lower costs facilitating reduction of products’ prices. Additionally, mergers avert congestion on the areas different business premises would otherwise have been built improving the environmental conditions ( Deng, P., & Yang, M., 2015).
Mergers regulate the monopolies through reducing competition and low costs production. The economy of scale in a networked economy is majorly characterized by mergers, large companies lack monopoly powers especially from the benefits of large-scale production and government's regulations.
Mergers facilitate large-scale production of goods resulting to the firms enjoying economies of scale. They encompass more significant market shares from the collations of each firm’s strengths and diminish the advertising costs per a unit of production. They also reduce the business risks, increase management efficiency. Mergers also enable firms to enjoy broad capital bases and reduce borrowing and interest rates.
Demerits of merging firms
Mergers allow limited choices for its end users. The customers are disadvantaged as they have limited choices of products.
Mergers lead to increased products’ prices in a given market. Once smaller enterprises merge into bigger ones, they have the ability to increase market prices. With even more prominent market shares, these firms tend to determine prices for end consumers single-handedly.
Most mergers come with job losses. The case is highly prevalent in takeovers by other assets stripping firms; the merging corporations often get rid of unnecessary resources such as the human capital of the target company.
Mergers may lead to loss of market controls by some companies. Mergers In the past, multinational companies formed from mergers have often had their workers demotivated, especially with the change of their entire operating business environment. Additionally, the more substantial firms may lose market control in the process and eventually face diseconomies of large scale owing to the increase in the size of the company and its operations (Yunes et al., 2016).
Instances of successful mergers are:
When Orange merged with T mobile in the United Kingdom on the grounds of the creation of a network, produced in large scale and averted duplication.
When XM and Sirius radio merger of July 2008. The two rivals merged and increased their revenue and market bases.
References
Arvanitaki, A., Baryakhtar, M., Dimopoulos, S., Dubovsky, S., & Lasenby, R. (2017). Black hole mergers and the QCD axion at Advanced LIGO. Physical Review D, 95(4), 043001.
Deng, P., & Yang, M. (2015). Cross-border mergers and acquisitions by emerging market firms: A comparative investigation. International Business Review , 24 (1), 157-172.
Lebedev, S., Peng, M. W., Xie, E., & Stevens, C. E. (2015). Mergers and acquisitions in and out of emerging economies. Journal of World Business , 50 (4), 651-662.
Yunes, N., Yagi, K., & Pretorius, F. (2016). Theoretical physics implications of the binary black- hole mergers GW150914 and GW151226. Physical Review D, 94(8), 084002.
