What is a Merger?
A merger is a business strategy to combine with another business and operate as a single legal entity. Companies that accept mergers are generally equal in terms of size and scale of operations.
Firms seek mergers to gain access to a larger market and customer base, reduce competition and achieve economies of scale.
There are different types of mergers that companies can go through, depending on their goals and strategies.
A merger is a different form of acquisition. Mergers occur when two or more firms agree to merge to establish a new organization, whereas acquisitions happen when one company takes acquisition another.
Why Do Mergers Occur?
After the merger, companies will get more resources, and the scale of operations will increase.
Companies can be merged for the benefit of their shareholders. Prevailing shareholders of both organizations get shares of the new company after the merger.
Companies may agree to a merger to enter new markets or to diversify their product and service offering Products and services. A product is a concrete object sold for purchase, consideration, or consumption, but service is an intangible aspect that occurs to enhance profits. Mergers can occur when businesses want to buy assets that would take a long time to develop internally.
A company generating substantial taxable income may consider merging with a company with a carry-forward of significant tax losses to reduce tax liability. Companies use a carry-forward of NOL tax losses to carry over losses from previous years to offset future profits and reduce future income taxes.
A merger between companies will eliminate competition between them, thus reducing the advertising price of the products. In addition, the price reduction will benefit customers and eventually increase sales.
Mergers can lead to better planning and better use of resources.
Types of Merger
1- Congeneric Product Fusion / Product Extension
Such mergers occur between two or more companies operating in the same market. The merger brings the results in the form of a new product to the company’s existing product line. Through the union, companies can access a larger customer base and increase their market share.
2- Merger of Conglomerates
The merger of conglomerates is a union of companies engaged in independent activities. The partnership will only take place if it upsurges the capital of the shareholders.
3- Market Extension Merger
Companies functioning in different markets, but they are selling the same products, team up to access a larger market share and a bigger customer base.
4- Horizontal Merger
Firms operating in markets with limited market share so, such firms merge to capture a bigger market. A horizontal merger is a type of alliance of companies selling similar products and services. This results in the elimination of competition; therefore, economies of scale can be realized.
A vertical merger happens when businesses operating in the similar industry, but having different levels of the supply chain, merge. Such types of mergers increase synergies, the supply chain. The supply chain is the perfect production and delivery system of the products or services, from the start of the supply in raw materials to final control and efficiency.
Benefits of a Merger
1- Increase Market Share
When two firms combine, the new entity acquires more market share and gains a competitive advantage.
2- Reduces the Cost of Operations
Businesses Can Achieve Economies of Scale, Economies of Scale Economies of scale refer to the cost advantage that a business experiences when it increases its level of production. The higher the quantity of output produced, the lower the fixed cost per unit. Types, examples, and guides such as the bulk purchase of raw materials can lead to cost savings. Investments in assets are now spread over a larger production, which leads to technical savings.
3- Avoids Replication
For example, Some companies making similar products may merge to avoid duplication and eliminate competition. This also translates into reduced prices for customers.
4- Expands Its Activities into New Geographic Areas
Similarly, if a business looking to expand its business in a certain geographic area might unify with a similar company operating in the same zone to start the business.
5- Prevents the Closure of an Unprofitable Business
However, mergers can prevent a business from going bankrupt and save many jobs.
Disadvantages of a Merger
1- Raise the Prices of Products or Services
A merger leads to less competition and more market share. Thus, the new business can gain a monopoly and increase the prices of its products or services.
2- Creates Communication Gaps
Similarly, the companies that have settled to merge might have varied cultures. This can lead to a lack of communication and affect employee performance.
3- Creates Unemployment
In an aggressive merger, one company may choose to eliminate the underperforming assets of the other company. However, this can result in the loss of employment of employees.
4- Prevents Economies of Scale
In cases where there is little commonality between companies, it can be difficult to achieve synergies. Additionally, a large corporation may be unable to motivate its employees and achieve the same degree of control. Thus, the new business might not be able to achieve economies of scale.
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Tags: Market Share, Merger, Business, Marketing, economies scale