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A merger is a corporate strategy to combine with another company and operate as a single legal entity. The companies agreeing to mergers are typically equal in terms of size and scale of operations.
Such mergers happen between companies operating in the same market. The merger results in the addition of a new product to the existing product line of one company. As a result of the union, companies can access a larger customer base and increase their market share.
Conglomerate merger is a union of companies operating in unrelated activities. The union will take place only if it increases the wealth of the shareholders.
Companies operating in different markets, but selling the same products, combine in order to access a larger market and larger customer base.
Companies operating in markets with fewer such businesses merge to gain a larger market. A horizontal merger is a type of consolidation of companies selling similar products or services. It results in the elimination of competition; hence, economies of scale can be achieved.
A vertical merger occurs when companies operating in the same industry, but at different levels in the supply chain, merge. Such mergers happen to increase synergies, supply chain control, and efficiency.
When companies merge, the new company gains a larger market share and gets ahead in the competition.
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.
Some companies producing similar products may merge to avoid duplication and eliminate competition. It also results in reduced prices for the customers
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.
Mergers can save a company from going bankrupt and also save many jobs.
A merger results in reduced competition and a larger market share. Thus, the new company can gain a monopoly and increase the prices of its products or services.
The companies that have agreed to merge may have different cultures. It may result in a gap in communication and affect the performance of the employees.
In an aggressive merger, a company may opt to eliminate the underperforming assets of the other company. It may result in employees losing their jobs.
In cases where there is little in common between the companies, it may be difficult to gain synergies. Also, a bigger company may be unable to motivate employees and achieve the same degree of control. Thus, the new company may not be able to achieve economies of scale.
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
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