REASONS FOR MERGERS

Analyse the possible effects when a merger of two large companies occur and discuss why there is sometimes opposition to such mergers.

The objective of firms varies according to the size of the businesses. Developing countries mostly comprise of large firms while developing countries contain large and medium size firms. Large firms exist for two main reason including economies of scale and to ignore opposition from competitive smaller firms. The need for mergers in markets cannot be under emphasised. It could be said that mergers help a market to be more efficient.

A merger in business or economics refers to the amalgamation of two companies into one larger company. Such actions are commonly deliberate and often involve a stock trade. In many instances a mergers bear a resemblance to a takeover but often results in a new company name (often combining the names of the founding companies) and in new branding. Another definition of merger is it refers to the procedure whereby at least two companies combine to form one single company. Businessfirmsmake use ofmergers and attainmentsfor efficiency of markets as well as for attaining a competitive edge in the industry. According to economists assertions they assert that it is the amalgamation of two or more commercial companies or the fusion that involves the assembly of a union.

MERGER TYPES

There are different types of mergers a namely the horizontal, vertical and conglomerate. But they can also be described into five sub heads which are Horizontal Merger, Conglomeration, Vertical Merger, Product-Extension Merger and Market-Extension Merger.

Horizontal Merger refers to the merger of two companies who are straight competitors of one another. They oblige the same market and sell the same product.

Conglomeration refers to the merger of companies, which do not either sell any correlated products or cater to any corresponding markets. Here, the two companies entering the merger process do not have any common business stalemates. Conglomerate mergers occur when the two firms function in different industries.

Vertical Merger is achieved either between a company and a customer or between a company and a supplier. Vertical mergers occur when two firms, each working at dissimilar stages in the production of the same good, form a cartel. The vertical merger comprises of forward and backward integration.

Forward integration involves the supplier merging with one of its buyers, example a car producer buying a car dealership.

Backward integration involves a purchaser buying one of its suppliers such as a drink manufacturer buying a bottling producer.

Product-Extension Merger is a merger that occurs between companies, which sell different products of a related category. They also seek to serve a similar market. Market-Extension Merger transpires between two companies that sell alike products in different or augmented markets. Instruments such as the Herfindahl index can be used to measure the impact mergers have on the market. Herfindahl is a measure of size of firms in relation to the industry and a yardstick to measuring the amount of competition among them. It basically expands the market base and share of the product. Mergers occur in other to enhance productivity in a particular sector of the market.

REASONS FOR MERGERS

When considering the reason for mergers it should be taken into consideration that firms merge in order to increase efficiency. Some reasons to mergers are cost, increased market share, and economies of scale.

COST:

Firms prefer to merge rather than to grow internally. The cost of growing internally to a firm is often very high. The more the difference between assets value the greater the motivation for firms to nurture through takeovers rather than grow internally.

INCREASED MARKET SHARE:

When two firms amalgamate more capital is added to the business and when the merged firm is able to combine all the factors of production efficiently it will be able to dominate the market efficiently.

ECONOMIES OF SCALE:

To effectively enjoy economies of scale firms will decide to merge. The firm will tend to lower their cost by joining another firm.

REWARDS FOR MANAGEMENT:

Merger profits increase due to the amalgamation of the firm. It is believed that the profit of mergers is sometimes more or less the joint profit of the two individual firms which would have been, so managers of the firm like seeing a firm grow because their rewards tend to increase.

FINANCIAL COLLABORATION:

This is the use of economies of scale. The effect it has on mergers is the joint use of resources and know-hows.

DIVERSIFACTION EFFECTS OF MERGERS

Mergers also have effects on large companies due to the advantages of diversification: enhanced elasticity of the organization, avoid some inducements problems in external capital markets, reduces bankruptcy risk, hide proprietary information, eradicate information in stock price, relevant to compensate division heads, sponsor losses out of profits from winners.

ENHANCED ELASTICITY OF THE ORGANIZATION:

Due to increase in expansion of the firm the firm will be able to resist any form of discrepancy in terms of insufficient funding and lack of market growth.

AVOID SOME INDUCEMENTS PROBLEMS IN EXTERNAL CAPITAL MARKETS:

As a result of a merger the firm will not be vulnerable to receiving rewards in other to enter into a capital market.

BANKRUPTCY RISK WILL BE REDUCED:

The effect a merger has because of expansion of economies of scale, the vulnerability of the firm going bankrupt will be low because of increased capital.

HIDE PROPRIETARY INFORMATION:

Due to diversifaction and expansion in economies of scale mergers can hide information on the property they own because of the increased market power.

ADVANTAGES OF MERGERS

MERGERS DO NOT REQUIRE EXCESS CASH:

As mergers are a combination of two firms, the funds are available from the two sectors hence the firm does not require too much money.

MERGERS CAN BE ACCOMPLISHED WITHOUT PAYMENT OF TAX:

A merger can be appropriately carried out without payment of tax for both parties due to the combined market strength of the amalgamating firms.

MERGERS ALLOW THE SHAREHOLDERS OF THE SMALLER ENTITY TO HAVE INCREASED SHARE:

The owners of shares in the smaller entity can increase the amount of shares possessed when the smaller entity embarks on a merger so hence the mergers allow the shareholders increase the overall net worth.

INCREASED APPRECIATION POTENTIAL OF THE MERGED ENTITY:

A merger lets the target (the seller) realize the admiration potential of the merged entity. Instead of being restricted to sales profits.

MERGERS DISALLOW LEASES AND BULK-SALES NOTIFICATIONS:

A merger allows the acquirer to avoid the time consuming aspects of asset acquirements such as leases and bulk sales notifications.

DISADVANTAGES

DISECONOMIES OF SCALE:

If the merger becomes excessively large it will lead to higher unit cost and thereby causing diseconomies of scale.

LEAD TO WORKER REDUNDANCY:

Mergers may lead to worker redundancy mostly at management levels and hence it may have devastating effects on worker motivation in the merger.

LEAD TO CONFLICT OBJECTIVES BETWEEN DIFFERENT BUSINESSES:

Due to mergers there might be a divergence in objectives of businesses meaning that decisions are more difficult to make causing interference in the running of the business.

LEAD TO CULTURE CLASHES:

Clashes of culture between different businesses may take place reducing the efficiency of integration.

EVALUATION

The evaluation of the advantages and disadvantages of the merger shows the actual merits and demerits a merger will have if put into practice.

MERGERS CAN BE ACCOMPLISHED WITHOUT PAYMENT OF TAX:

Mergers are normally forced to pay tax in most developing countries this is due to the government awareness to boost their economies and tax as an essential part of government aid cannot be overlooked.

MERGERS DO NOT REQUIRE EXCESS CASH:

Due to the existence of tax payment they require excess tax as the government sometimes tend to even implement the policy of progressive tax.

MERGERS ALLOW THE SHAREHOLDERS OF THE SMALLER ENTITY TO HAVE INCREASED SHARE:

In developed countries mergers allow shareholders of smaller entities to have increased share while in developing countries mergers are still liable to task so in essence in developing countries share worth might still be static.

DISECONOMIES OF SCALE:

This factor is true as it is present in very large mergers. Due to the mergers extreme size diseconomies of scale start to roll in.

LEAD TO WORKER REDUNDANCY:

This is very dormant in small scale mergers as there is not enough capital to sustain the staff the staff are often de-motivated and this situation might lead to redundancy of workers.

LEAD TO CONFLICT OBJECTIVES BETWEEN DIFFERENT BUSINESSES:

This situation is mostly rampant in large mergers as the businesses tend to demonstrate a superior authority over the corresponding firm. And so this causes conflict between the two firms.

GOVERNMENT INTERFERENCE

Government tend to interfere in mergers when competitive markets fail to allocate resources efficiently. The government policy makers thus respond to the problem of monopoly in many several ways. For the regulation of mergers government get their power from antitrust laws. The antitrust laws are a group of laws that are effected with the aim of curbing monopoly power of mergers. These laws pertain to both businesses and individuals. The belief behind this law is that trusts and monopolies serve as a check to markets. The union opposition also set up by government can threaten mergers. For instance in Britain the BA (British Airways) merger was opposed by the union. The British airways anticipated merger with Spanish carrier Iberia was tatted by the union. The Unite union, already furious with BA over redundancy rates and job cuts, said it would not back the merger unless conditions were given to avoid compulsory redundancies. So in essence unions might tend to freeze the actions of mergers. The government also restrict merger activity by deciding whether the merger does not cause any adverse effect on competition. Mergers can also be said to be against the public interest, but after talks with firms a concession may be reached.

CONCLUSION

In conclusion mergers are an integral part of the market because mergers help to bring enhanced growth in the market sector and due to the growth they also help to build the host countries economy. Government tend to involve themselves with merger activities in other to check the merged firms’ activities on other firms in other for the government to effectively enjoy taxation from all the firms. In essence mergers cannot be abolished as they drastically help in improving the market efficiency of a business.

REFERENCES:

Alain Anderton (Economics) 5th edition 2009

Brennan, Geoffrey and James .B. 2001. The motive of Rules. Cambridge.

William F. Shughart II (The Government’s War on Mergers)

http://irelandonline.com (13/11/2009)

http://wikianswers.com (05/12/2009)

http://econsguide.com (04/12/2009)