In the financial world, we often get to hear about mergers of companies. A merger is a corporate strategy to combine with another company and operate as a single legal entity. The companies which agree to mergers are typically equal in terms of size, customers and scale of operation. In other words, a merger is the voluntary fusion of two companies on broadly equal terms, into one legal entity. There are several types of mergers and also several reasons why companies get into merger.
REASONS FOR MERGER :
There are several reasons for merger, some of which include
• After merger, companies are in a better position to secure more resources and the scale of operation will increase.
• Shareholders benefit from merger as the existing shareholders of the original organisations receive shares in the new company after merger.
• Companies may agree for a merger to enter new markets or diversify their offering of products and services, to increase profit.
• Mergers also take place when companies want to acquire assets that would otherwise take time to develop.
• A merger between companies will eliminate competition among them, thus reducing the advertising price of the products and eventually increasing the sales.
TYPES OF MERGER :
• Co-generic/ product extension merger – This kind of merger happens 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.
• Conglomerate merger – Conglomerate merger is a union of companies operating in unrelated activities.
• Market extension merger – Companies which are operating in different markets but are selling the same products, often combine in order to access a larger market or a larger customer base.
• Horizontal merger – A horizontal merger is a type of consolidation of companies selling similar products or services. It results in the elimination of competition and thus economies of scale can be achieved.
• Vertical merger – This type of merger occurs when companies operating in the same industry, but at different levels in the supply chain, merge.
ADVANTAGES OF MERGER :
• Increases market share – When two businesses merge, the new company gains a larger market share and gets ahead in the competition.
• Reduces the cost of operation – Companies can achieve economies of scale, such as bulk buying of raw materials, which can result in cost reduction.
• Avoids replication – Some companies producing similar products may merge to avoid duplication and eliminate competition. It results in reduced prices for the customers.
• Expands business into new geographic areas – A company seeking to expand its business in certain geographical areas, may merge with another similar company operating in the same area to get the business started.
DISADVANTAGES OF MERGER :
• May raise prices of products or services – A merger results in the reduced competition and larger market share. Thus the newly formed company can gain monopoly and increase the price of products/services.
• Create gap in communication – Two merging companies may have different cultures, resulting in a gap of communication. This may affect the performance of the employers.
• Creates unemployment – In an aggressive merger, a company may opt to eliminate the underperforming employees of the other company. It may result in unemployment.