Merger and acquisition occur when a business attains the highest position of achievement or loss and starts looking for profits from other sources. Companies typically want an upsurge in the market part using an already developed corporation to change its organizational face. Through merging, companies generate more profit and decrease the cost of resources for managing one company, which is usually high (Oppong 2016). In addition, a merger is also driven by the company's need to increase its customers and reduce competition on a global scale. Merging succeeds when both firms assess their strengths and weaknesses before the process begins.
Advantages of a Merger
Tax gains are one of the advantages of merging companies. Companies enhance their revenues through sharing markets, expecting more value than when operating as a separate company. In fact, most governments provide tax reductions when companies complete the process of merger or acquisition. According to Cuc (2019), for instance, Singapore encourages mergers or acquisitions where people open a new business and merge with a smaller existing company that attracts substantial tax benefits.
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Industries and firms merge to gain a network of economies globally. This provides the firm with considerable economies of scale where the merged firm becomes the most efficient and productive. For example, when Orange merged with T-Mobile in the United Kingdom, they said the reasons for combining both networks are to cut the cost of duplication and to develop one super network for its customers. This meant broad and improved network coverage while decreasing the quantity of sites and stations that, in turn, cuts the cost of capital. According to Cuc (2019), merging increases access to large market shares, making significant market development for small companies.
Merging allows the company to gain higher financial power and influence on the global market scale. Merging is a representative of growth in both firms that are involved in the transaction. Furthermore, merging means, the firms will gain more power financially because they will generate revenue by pooling the profits of both firms (Cuc 2019). Having high great financially means the firm will occupy a significant market share and will have more customer influence by competition reduction. Typically, the firm gains ahead in competition above all other businesses.
Firms struggle to enter into a new market. Merging offers these businesses a unique possibility to access the market. It saves cost and time spent in starting up a new business from the beginning. New opportunities enable the firm to gain more income, and the collected funds can be put into other firms' objectives, such as research and development (Pettinger 2019). The firm ends up discovering new technology and products that aid in diversification of the firm's market.
Most firms also merge to avoid duplication of products and services in the market. For instance, bus companies may be operating on the roads, but only one bus company is benefiting; merging helps both companies gain similar market value while also benefiting the consumers with a lower cost of commuting. More often, merging reduces traffic congestions as well as air quality degradation. According to Pettinger (2019), merging regulates the monopoly of prices of either services or products. A single bus firm may gain a monopoly of power, but the gains are lower because of competition. Merging regulates the cost of commuting; thus, both firms benefit from the price increase, enabling them to gain from economies of scale.
Merging benefits the firms to access a skilled workforce easily where both firms retain their staff and combine them in the newly formed company. Cuc (2019) states that it is a legal requirement executed by international and national regulations. Countries such as UAE implemented strict measures that are related to merging and acquisition internationally. Starting a business firm in Dubai by merging benefits the firm from the skilled force and employees able to speak in English because most workers in the UAE are English-speakers.
Additionally, mergers and acquisitions offer benefits of exploration related to the broad range of products or services from both firms, thus diversifying the company's portfolio. When firms combine resources, their new company's portfolio increases significantly and achieves higher shares in the market. This is commonly the case where Information Technology companies use innovation to diversify their market access. It is very beneficial to both companies where the new firm gets a new face, introduces new services and products, and gains financial leverage.
According to Oppong (2016), merging businesses is cost-efficient. This is a crucial benefit for companies that go through merging and acquisition gains. This helps the firms create an economy of scale that allows the generation of reasonable cost-efficiently income. Merging increases production scale, increasing the production output, and lowering the cost of production per product. Cuc (2019) points that merging company usually are cheaper because starting a business from scratch by constructing production centers, distribution, and storage facilities are very expensive, but merging with another firm that already has a well-laid structure is cheaper. Malaysia is an excellent example of a country that allows business owners to join their businesses with a running firm with all the facilities. This means a substantial economy that is related to the cost of expansion.
Disadvantages of a Merger
Merging of businesses is affected by several setbacks. First, it results in higher prices of products and services. Merging reduces competition but gives the novel firm the monopoly of power in the market. According to Pettinger (2019), the firm achieves less competition in the market, accesses a more significant share of the market. Still, it can increase the price of its products to consumers. For instance, the merger of BMI and British Airways is opposed because that merging would benefit British Airways with increased percentage of air flights that would leave Heathrow and then more possibility of setting higher flight prices.
Furthermore, merging means less choice for consumers and job losses. Consumers are left with no option rather than to rely on the firm. This should be considered by companies such as retail, food, and clothing industries where the choice of customers is highly regarded as compared to prices. More so, it is evident that most employees lose their position jobs after the merging of companies (Pettinger 2019). This happens when an aggressive firm takes over a small company by stripping that company; in that, merging the company gets rid of the underperforming departments of the target firm.
Diseconomies of scale are familiar with merging. The newly formed large company may be subjected to diseconomies of scale from the big size of the firm. A newly formed large firm may lose the same energy of control and struggle to encourage the employees. This occurs when the employees feel like they are only part of the big firm. Also, if the merged companies had fewer similarities, it might be challenging to gain the cooperation between the two companies. This may result in low production output per product and also low revenue gains. Eventually, the big firm loses the market share allowing competitors to take its position, and even consumers may lose interest in their products or services.
According to Clark (2018), merging may result in a clash of business cultures. Merging means combining or joining together two brands or names of both firms. It is the joining of people who bring in their specific business culture together. Therefore, conflicts of culture clash may arise when the two different business cultures merge. For instance, if a highly hierarchical innovative business company was to combine with a flat hierarchy business, the workers in the novel firm may be probable to experience problems while working together.
Example of a Merger: Pixar and Disney/Marvel Acquisition
Disney Walt in 2006 Co. acquired Pixar Company for $7.4 billion. This pooled resources together and lead to the production of movies such as WALL-E, Bolt and Finding Dory which resulted in high revenue gains ( CNBC 2009) . After three years of acquisition of Pixar, CEO of Disney, Igner Bob set out to $4 billion to acquire Marvel. Acquisition of Marvel II contribute to higher revenue generation of more than $3.5 billion.
Conclusion
It is easier to start a business. Conversely, a company will find it challenging to grow itself at a certain point, and merging becomes one of the best practical ways for growth and market share acquisition. The usefulness of merging is determined when firms want to get a market share. The process of merging needs a proper assessment of both firms. This process benefits both firms, employees, and customers in the introduction of new products, technology, and services. However, it is essential to consider the downside of merging businesses. It might become difficult for the joined firms to work cooperatively and communicate, thus risking the company. This can result in the new firm losing the competition and raising consumer prices.
References
Clark Wendel (2018). The Disadvantages of Merging Companies. https://bizfluent.com/info-8199594-disadvantages-merging-companies.html
CNBC (2009). Top 10 Best (and Worst) Mergers of All Time
Cuc Alex, (2019). Seven big benefits of international mergers & acquisitions. https://www.thedrum.com/industryinsights/2019/01/11/seven-big-benefits-international-mergers-acquisitions
https://www.cnbc.com/2009/12/29/Top-10-Best-(and-Worst)-Mergers-of-All-Time.html
Oppong Thomas, (2016). Understanding the Benefits of Mergers and Acquisitions. https://alltopstartups.com/2016/05/05/mergers-and-acquisitions/
Pettinger Tejvan, (2019). Pros and Cons of Mergers. https://www.economicshelp.org/blog/5009/economics/pros-and-cons-of-mergers/
