Mergers and Acquisition

Merger: A merger is a legal process by which two companies merge into a single

company. The merger can be a friendly union or a forceful union. Reasons for initiating

mergers are plenty. It could be for bridging the gap between the various fragmented

products or services in the same customer pool or for financial reasons.

Types

Horizontal: Two direct competitors serving the same customer pool merge with one

another.

Vertical: This Happens when a merger takes place between the supplier and the

manufacturer. This merger could proving very cost effective for the manufacturer and

hence the step.

Conglomeration: Two companies with no related product or customer pool merge.

This could be for financial reasons or for diversification.

Purchase Merger: An accounting method used in mergers and acquisitions with

which the purchasing company treats the target firm as an investment, adding the

target’s assets to its own fair market value.

Consolidation: The combining of separate companies, functional areas, or product

lines, into a single one. Differs from a merger in that a new entity is created in the

consolidation.

Benefits of Merger

A merger occurs when two firms join together to form one. The new firm will have an increased market share, which reduces competition. This reduction in competition can be damaging to the public interest, but help the firm gain more profits.

However, mergers can give benefits:

1. Economies of scale. This occurs when a larger firm with increased output can reduce average costs. Lower average costs enable lower prices for consumers.

Different economies of scale include:

Technical economies; if the firm has significant fixed costs then the new larger firm would have lower average costs,

Bulk buying – A bigger firm can get a discount for buying large quantities of raw materials

Financial – better rate of interest for large company

Organizational – one head office rather than two is more efficient

· Note a vertical merger would have less potential economies of scale than a horizontal merger e.g. a vertical merger could not benefit form technical economies of scale. However in a vertical merger there could still be financial and risk-bearing economies.

Some industries will have more economies of scale than others. For example, car manufacture has high fixed costs and so gives more economies of scale than two clothing retailers.

2. International Competition. Mergers can help firms deal with the threat of multinationals and compete on an international scale.

3. Mergers may allow greater investment in R&D This is because the new firm will have more profit which can be used to finance risky investment. This can lead to a better quality of goods for consumers. This is important for industries such as pharmaceuticals which require a lot of investment.

4. Greater Efficiency. Redundancies can be merited if they can be employed more efficiently.

5. Protect an industry from closing. Mergers may be beneficial in a declining industry where firms are struggling to stay afloat. For example, the UK government allowed a merger between Lloyds TSB and HBOS when the banking industry was in crisis.

6. Diversification. In a conglomerate merger two firms in different industries merge. Here the benefit could be sharing knowledge which might be applicable to the different industry. For example, AOL and Time-Warner merger hoped to gain benefit from both new internet industry and old media firm.

Limitation of Merger

Merging two companies can provide the firms with synergies and economies of scale that can lead to greater efficiency and profitability, but it is important t note that merger can have a downside too. Managers of a firm considering a merger should consider these potential disadvantages or limitation before going forward.

Culture Clash

When two firms merge, it is more than a coming together of two names or brands -- it is a real merger of people who bring along a specific corporate culture. If two firms have very different corporate cultures, conflicts can arise. For example, if an innovative, entrepreneurial company with a flat hierarchy were to merge with a highly hierarchical, conservative and traditional organization, the employees in the new organization would be likely to have difficulties working together.

Dis-economies of Scale

When businesses merge, it is often to achieve economies of scale. Larger organizations are typically able to produce goods and services more efficiently and at a lower per-unit cost than smaller businesses because fixed costs are spread out over a larger number of units. This is not always the case, however. Sometimes when two firms merge, being larger will actually create dis-economies of scale, where per unit production costs increase because of increased coordination costs.

Consumer Perceptions

When two companies merge, they need to consider how consumers view the two firms and whether or not they view them in a compatible way. For example, if an environmentally friendly soap company were to merge with an industrial detergent manufacturer with a poor environmental track record, it may alienate the customers of the environmentally friendly soap company who don't want to support a company that is not environmentally responsible.

Layoffs

Merging two businesses is often a good method for reducing the labor force of the two organizations. For instance, a company may combine its two offices into one and reduce the number of staff performing the same duties. While this can provide cost savings for the company, it can also have a negative effect on employees. Employees may become fearful of losing their job and may lose their trust in the organization. This can decrease employee motivation and reduce productivity.

CONCEPT OF REVERSE MERGER

Investors of a private company acquire a majority of the shares of a public shell company (incurring heavy losses) which is then merged with the purchasing entity. To consummate the deal, the private company trades shares with the public company in exchange for its stock, thus transforming the acquirer into a public company. (This is a simpler way to go public by skipping the IPO route. It is desirable especially if the private company does not desire to raise capital through the IPO.)