In the ever-changing world of business, companies are obliged to strive for the attainment of excellence and quality in their areas of operation. A company’s external growth may be achieved through the merging and acquisition of existing business organizations. Merger relates to a legal consolidation of two companies into one entity (Shah and Khan, 2017). In the current globalized economy, mergers are used extensively as an approach for attaining an extensive asset base, generating significant market shares, achieving complementary competencies and strengths, and for accessing new markets. The previous decades have witnessed an extensive level of mergers as a tactical means of attaining a compelling competitive advantage in the corporate world. Mergers are considered a primary force in the dynamic environment and an important feature in corporate structuring as they are perceived as an integral part of the business strategy in the long-term. An example of a successful merger is the Anheuser-Busch InBev; this is a corollary of the merging of three multinational beverage companies which include Anheuser-Busch (U.S), Ambev in Brazil, and Interbrew in Belgium. Interbrew merged with Ambev and Ambev merged with Anheuser-Busch (Sinkin & Putney, 2017). The paper will critically analyze the disadvantages and advantages of mergers and provide an example of a successful merger.
One major advantage of mergers is perceived in its effectiveness in the attainment of efficiencies in costs. When two firms are consolidated through a merger, the joint organization often benefits in regards to cost efficacy. Cost efficiencies may be attained by increasing the bargaining power of consumers through merging, developing internal capital markets, and rationalization (Shah & Khan, 2017). A merger can generate the economies of scale, which subsequently enhances the cost efficiencies. A company is said to have the economies of scale in instances where there is a decline in its average costs and an increase in the firm’s total output.
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Additionally, the economies of scale are usually achieved in instances where there is an increased level of production and a decreased marginal cost level. In the short-run, the economies of scale often reduce the cost of production in instances where the physical capital is fixed. In the long-run, the economies of scale could be acquired via the coordination of merging companies’ investments in physical capital. The economies of scale in the short-run could be obtained from mergers since the joining of the two companies allows the organization to get rid of the double-fixed costs (Vargas, Paniagua & Leon, 2018). The economies of scale in the short-run could be attained through the output reallocation across distinct operation units of the merged organization. The economies of scale in the long-run may be obtained from the merger in instances where there is a significant increase in output compared to the increases in inputs; this may arise where a large and financially strong company invests in modern technologies that significantly improve the company’s production process and its development and research areas.
Mergers also foster synergy benefits. Synergies are efficacies that may be attained through the merging process. Synergies are often linked to a significant shift in the production capacities of the merging entities that progress above technical efficacies. There is a widespread acknowledgment that synergies incorporate the learning process, the transfer of expertise and skills amid the merging firms, or the direct integration of certain assets. For instance, when a start-up company instigates new merchandise but lacks an extensive scale of sales, reputation, and marketing strategies, merging with a well-developed company will possibly increase its gains (Vargas, Paniagua & Leon, 2018). The diffusion of proficiencies may be attained when the merging organizations exchange distinct human skills, R&D activities, organizational culture, and patents. Mergers also enhance financial cost saving through diversification, tax benefits, and the reduction in interest rates. Financial advantages may institute corporations and mergers that effectively establish the use of tax-shields, the use of tax benefit alternatives, and increase monetary leverage. Small organizations may not borrow funds at competitive rates of interest as opposed to large companies due to various asymmetric data in the external market or liquidity constraints. Mergers may, therefore, be considered an important aspect in enhancing the capacity of the entity to borrow at cheap interest rates.Mergers also enhance the capacity of the organization to strengthen its market power. Market power relates to the capacity of a company or a grouping of companies to increase the prices of products beyond the level that may be prevalent under competitive circumstances. The capacity to exclude a firm’s competitors is also perceived as an outcome of extensive market power (Shah & Khan, 2017).
Besides the advantages that come with mergers, there are equally many limitations that come with these mergers. The first disadvantage of mergers involves the cost increments in instances where the merger implementation and the adjustment of the right management are delayed (Sinkin & Putney, 2017).
Secondly, mergers reduce the entity’s level of flexibility. As firms come together to make one big firm, there is a probable increase in the number departments, increased number of employees and general growth of its market share and presence. All these come with an increased scale of operation as a result of many companies merging. Bigger firms are not as flexible as compared with the small firms as there is an increased bureaucracy, hence more time and consultation required to make decisions. Also in mergers, employees from small merging entities may require an extensive level of training and experience. Employee training and capacity building increase the cost of operation for any company, and this has a negative effect on the profit margin (Shah & Khan, 2017).
Lastly, according to Sinkin & Putney (2017), there is a probable loss of experienced employees apart from those in the leadership position. Mergers come with a lot of internal restructuring that includes a review of responsibilities for each position, departments, skill sets for employees and at some time there is an increase in the Key performance indicators for each employee. All these restructuring may work against employees who are not well equipped with the knowledge to deliver on their mandate and hence they are rendered retardant or normal job dissatisfaction.
References
Shah, B. A., & Khan, N. (2017). Impacts of Mergers and Acquisitions on Acquirer Banks' Performance. Australasian Accounting Business & Finance Journal , 11(3), 30-54.
Sinkin, J., & Putney, T. (2017). Mergers and Acquisitions of Accounting Firms. CPA Journal , 87(12), 30-35.
Vargas-Hernández, J. G., Paniagua, D. G., & León, C. H. (2018). Mergers and acquisitions as corporate restructuring resources in México. Amity Global Business Review , 13(1), 7-17.
