In business transactions, firms may be assessing worth chains that might enable progress in the enterprises. One way in which companies develop their businesses is by having mergers. Mergers refer to any concurrence by two existing businesses to form one firm. On the same note, another strategy is known as an acquisition, where are firm buys the shares of the other company to take full control of the operations. This paper evaluates the advantages and disadvantages of mergers and gives an example of an unsuccessful merger in the real world of business.
Advantages of Mergers
One of the pros of merging is that it boosts network economies in some fields where companies have to provide a national network. That means there could be a significant level of economies of scale. The national network may imply that the most effective number of companies in a given industry may be just one (Salop, 2016). For instance, a merger between Orange and T-Mobile in the UK was justified based on combining the two companies’ networks and creating a large connection for customer satisfaction. That means clients will have to benefit from the extensive coverage and network boost, which may reduce the number of platforms and stations (Pettinger 2019). Therefore, for that case, network economies will have served cost reduction and being fair for the environment.
Mergers sometimes do happen when there is a need for efficient research and development (R&D). Some industries require players to invest largely in R&D so that new technology and production processes. During the merging period, there is enabling of the firm to obtain more profits and have an enhanced innovation strategy. When R&D is done in the required manner, companies can invent new processes that may call for new products (Salop, 2016). The moment production is boosted, the portfolio is improved, and there is business sustainability. For instance, in industries such as medical research, a firm may need to merge to the potential failures in the business venture.
Another reason why merging is beneficial is the shared risks and costs in the business. Some of the industries may be playing roles that require instance capital investment. A company might not be able to invest in a costly practice where there is no guarantee of success in the task (Pettinger 2019). When companies merge, the risks that may come along the way becomes liabilities for the two companies and not one as opposed to single entrepreneurship. Similarly, if there are huge profit margins from the combined efforts, it becomes a motivation to invest more since profits are shared effectively. This collaborative base is permanent, and therefore, firms should ensure they set a feasible framework that shall enable their merging initiative to work.
Merging is advantageous since there is effective regulation of monopoly. It is important to note that even when a company gains monopoly power from the merger, it cannot lead to higher prices, assuming the government is controlling it. For some industries, such as manufacturing electricals, the governments may restrict control to themselves so that companies won’t make the price rise (Badubi, 2017). Due to that reason, firms are enabled to benefit from the economies of scale where buyers do not face monopolistic pricing. Therefore, that may be a fair way to have regulated businesses and enable effective methodology and transactions.
Disadvantages of Mergers
One of the key cons of the merger is the effect of higher prices, where a merger can reduce competitive advantage hence giving the new firm a monopoly power. Therefore, with less competition and a huge share in the industry market, the new firm can increase the prices for the buyers, which may be a limitation in terms of customer demands and requirements (Chibuzor, 2016). In some circumstances, a merger gives one party a higher percentage of business transactions, hence setting the prices more than the normal range. If a company had a dominating role, there would be chances of an unfair competitive advantage.
The other disadvantage that comes alongside merging paraphernalia is job losses where there is an aggressive takeover. When a company fires the existing employees and hires other personnel, affected persons eventually lose their jobs because of a merger decision (Salop, 2016). Although the individuals may get new jobs in more efficient companies, there is no guarantee hence it might lead to psychological torture. The impact of losing jobs affects families where the fired group is the breadwinners.
Mergers prevent economies of scale when there is little common for the two companies to gain synergies. On the same note, an outstanding firm may be incapable of motivating the employees and gaining the same level of control for the business transactions. Therefore, companies may not reach a better point to achieve economies of scale (Pettinger, 2019). Other disadvantages of merging may be issues with gaps created in communication due to different business cultures. Additionally, it may impact competition where a firm is not allowed to leverage on price strategy due to existing governmental controls.
Sprint and Nextel Communications is an example of a merger that failed. Sprint merged with Nextel, where the two firms ultimately become the third-largest telecommunications business entity after AT&T and Verizon (Fich et al., 2018). After the merging process had occurred, many Nextel executives and other junior team leaders left the company, alleging difficulty in comprising their culture into one. The reason is that Sprint believed in bureaucracy while Nextel focused on entrepreneurial policies. Therefore, the two would not combine for any business synergy, and thus, due to customer service demands, the merger failed.
Mergers happen when two companies come together to form synergies in business transactions. Merging has advantages such as the shared costs and risks in business ventures. The other advantage is that there is effective R&D which means new processes hence huge returns on revenue. Furthermore, merging boosts network economies where the firm may have a strong connection from the two environments. Disadvantages of merging include higher prices, weak economies of scale achievement, and communication gaps. Companies should be keen when forming a merger so that the goals set are achievable. Nextel and Spring’s merger failed due to bureaucracy and entrepreneurial differences that were highly influenced by the previous business culture for the two businesses.
Badubi, R. (2017). Managing diversity in enterprises after the mergers and acquisitions process. International Journal of Management Science and Business Administration, 3(6), 23-27. Web.
Chibuzor, I. (2016). The effect of merger and acquisition on development of a firm a case of Migros and Tansaş merger in Turkey. International Journal of Management and Economics Invention, 5(3), 11-17. Web.
Fich, E., Nguyen, T., & Officer, M. (2018). Large wealth creation in mergers and acquisitions. Financial Management, 47(4), 953-991. Web.
Pettinger, T. (2019). Pros and cons of mergers. Economics Help. Web.
Salop, S. (2016). modifying merger consent decrees to improve merger enforcement policy. SSRN Electronic Journal, 5(8), 23-32. Web.