The economy today is not perfectly stabilized, we experience periods of boom then bust, known as business cycles. Even big companies have to confront the ups and downs that come their way. They have to survive in the market and progress swiftly or gradually. One strategy to advancement is that of mergers and acquisitions of companies. There are numerous deals that take place locally but they do not have a great effect on the market especially the consumers. But the M&A that take place at the national or international level have a profound impact on the economies of the concerned countries.
There exist diverse types of mergers:
- Horizontal Mergers – two competing companies conjoin to form a single large company. The companies in horizontal mergers are selling the same product in the same market and so are contenders to each other. Such a merger can have a tremendous influence on the market from creating a monopoly to escalating prices of the commodity. This is precisely the reason that The Federal Trade Commission is worried about the market and the consumers keep a hawks eye on such mergers and at times detains the companies from merging in the interest of the people.
- Vertical Mergers – are the mergers between a supplier and the distributor company of the supplies. This is an anti-competitive merger but can be highly beneficial to the company. It is because the distributor will no more have to pay for the manufacturing of the supplies, it gets the product at the base price thus a good cost saving due to this. A vertical merger also rules out a lot of competition from the market.
- Market Extension Merger – between the companies selling same product but in different markets. This merger enhances the market for the two companies since they now act as one sole company.
- Product Extension Merger – is one between an eminent company making motor parts and another that makes their own cars. So, the companies involved here sell different but more or less the same product in the same market. This merger promotes the sale of both the companies significantly.
- Conglomeration – a merger where the concerned companies have nothing in common to sell.
There are various reasons behind mergers:
- Synergy factor prompts the merger of most of the companies. The synergy in business pertains to the cost-saving and revenue enhancement. The companies after merger decrease the staff keeping only the skilled labor, work with a single managing director, CEO etc. So there is good outlay saving. Moreover the economy of the sale i.e. the purchasing power of the company booms after a merger.
- To increase the output and rule the market- many mergers are made with the intention to oust the competition and jointly rule the market. This presupposes healthy relations between the competing companies.
- Mergers also take place when a company is not able to perform well due to some or the other cause like the lack of required investment in the form of capital, tremendous competition etc. In such a situation this company can merge with one its parent company or any other company that has faith in the prior goodwill of the declining company and in its potential to grow and enhance. So companies also merge in order to overcome their internal inconsistencies.
- Many mergers besides economically are also politically driven.
- Acquisitions which imply taking over of one stronger company with the other weaker one are also at times veiled by the name of the merger.
However, the directors who plan to merge their companies should actually contemplate over it, keeping in mind all the possible pros and cons. They must seek advice from neutral financial consultants who do are more inclined towards the welfare of the company and not their own. Their own benefit is also hidden in a merger since the wages of the employees increase with the advancement due to a merger. So it is recommended to take advice from all those who are the well-wishers of the company before taking any concrete step in this direction.