A merger is the combination of two companies into one by either closing the old entities into one new entity or by one company absorbing the other. In other words, two or more companies are consolidated into one company.
A merger is a financial activity that is undertaken in a large variety of industries: healthcare, financial institutions, private investments, industrials, and many more. There are two main types of mergers: horizontal and vertical.
Horizontal mergers occur when two businesses in the same industry combine into one. This type of combination can cause anti-trust issues depending on the industry. For instance, GM and Ford may not be allowed to merge because of anti-trust laws.
Vertical mergers occur when two businesses in the same value chain or supply chain merge. For example a hamburger restaurant might merge with a cow farm.
Strategies of Mergers
- The most crucial strategy of M&A is the hunting of the target company. Once the company has decided its target company for acquisition, it can plan further acquisition steps.
- The next step is a thorough study of the business of the company to be purchased. The study of the expected business, demand, and future growth is also to be undertaken. It will also give the idea of risks involved in the acquisition or future business.
- Next, the study of the market should be undertaken. It will give the idea of growth factors in the market. The company can also get the idea of future opportunities, trends in the market, and customers’ demands.
- There should be the consent of both the companies, i.e., the acquiring company and the target company, taking part in the merger and acquisition before implementing the strategy.
- Plans and strategies should also be studied like staff involving process, work environment, Work to be done by the staff by gathering knowledge and information.
- Finally, there should be shareholders, promoters of both the companies, management, and other key persons of both the companies. Then, the merger & acquisition deal should be finalized.
Advantages of a Merger
Reduces the cost of operations
Companies can achieve economies of scale, such as bulk buying of raw materials, which can result in cost reductions. The investments on assets are now spread out over a larger output, which leads to technical economies.
Increases market share
When companies merge, the new company gains a larger market share and gets ahead in the competition.
Avoids replication
Some companies producing similar products may merge to avoid duplication and eliminate competition. It also results in reduced prices for the customers.
Prevents closure of an unprofitable business
Mergers can save a company from going bankrupt and also save many jobs.
Expands business into new geographic areas
A company seeking to expand its business in a certain geographical area may merge with another similar company operating in the same area to get the business started.
Drawbacks
Expenses associated with the deal
The business that acquires the other is responsible for many fees, including the legal fees of the professionals assisting with the logistics of the merger. They also pay a sum of money for that business and its assets. Typically, company accountants and other finance professionals review the company’s assets and financial standing before deciding to commit to a merger or acquisition.
Increased legal costs
Merging two companies is a legal business transaction that often requires the involvement of several key professionals. Those involved will typically have to bring in lawyers who specialize in this type of deal, as well as financial professionals who can assist with the assets and other financial details. The legal costs associated with merging and acquiring can be high.
Potentially lost opportunities
The time, energy and money that goes into a merger or acquisition could require the businesses involved to forego other potential opportunities. Though, if a company allocates its resources correctly, it can assign one team of employees and experts to oversee the merger while other employees within the company can focus on other opportunities. A company may also deem the advantages it can experience from this business decision more valuable than other potential opportunities it may lose.
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