Why firms merge and the dilemma they trigger:

Introduction:

According to Fairburn and Kay (1989) mergers can be dated back in the 1920′s, from the past it is evident that mergers might cause much more harm than bring the advantages they bring to the merging firms, the merging and acquisition activities have increased in the past and firms merge because they think by doing so numerous benefits will be realized and therefore increase the profits of the firm. This paper focuses on the motivating aspects toward mergers and the difficulties caused by these mergers.

Why firms merge:

In this section we discuss why firms merge, some of the factors why firms merge include the effort to gain market power, tax advantages of gaining a loss making firm, efficiency, growing market share and diversification among other aspects.

Efficiency:

Ravenschaft and Scherer (1987) state that firms will merge since they feel that this will result into an increase in efficiency in the new firm formed right after merging. Efficiency is expected to rise after the improve in capital, sharing of expertise, elimination of duplicate processes in production and the realization of economies of scale. All these benefits associated with mergers will influence firms to merge, nevertheless according to Hughes (1989) mergers might not lead to the realization of efficiency and they might lead to even increased inefficiencies in the firm.

Marketplace power:

Firms will merge in order to gain marketplace power, market power increases where firms that merge are in the identical business and produce the exact same items in the market and when they merge they form a monopolistic firm which controls the prices and the quantity produced. The firms will also merge as a way to boost their competitive advantages over their rivals and this makes the new firm a market leader, even so this may not be the case where government policies could restrict firms to form monopolistic market forms where the firms controls the prices and quantity produced.

Increased market share:

Firms have various levels of market share in the market, when the firms merge they form one huge firm those marketplace share is equal to the sum of both firms market share, as a result the marketplace share increases and this acts as a motivating factor for firms to merge. The reason why a larger marketplace share is preferred is because a firm will realize economies of scale, increase sales volume, increase sales revenue and as a result enhance profits earned.

Tax advantages:

Firms will also merge in order to gain a tax benefit, all firms will pay tax to the government depending on the level of profits they have acquired, and firms will for that reason merge with loss making firms as a way of decreasing their tax burden. Nonetheless in most countries this has been discouraged where policies have been put in place to limit the act of profit producing firms shopping for loss making firms to gain tax benefits.

Diversification:

According to Henry (2000) firms will also merge as a way to smooth earnings, smooth earning results into a smooth stock cost over time and as a result investors are attracted to invest in the organizations stocks. When two firms merge their earnings and stock costs are far more stable and this increases investor confidence and as a result understand increased capital base from investors equity.

Increasing geographical coverage:

Firms will merge as a way of increasing their geographical coverage, example two law firms namely the Battle and Booth company and the Mack and McLean business merged in order to boost their geographical coverage and therefore give their services to a bigger population, this is because when firms merge they form a bigger com-any and the big firm is able to invest much more and diversify than a tiny company.

Sharing of expertise and technological integration:

Firms will gain expertise and gain from mergers, managers and other experts share tips and this assists in enhancing the efficiency and also the productivity of a firm, this sharing is produced probable when firms merge but this would not have been achievable when the firms operated individually. For that reason the sharing of technology and suggestions will lead to greater productivity and profitability of a firm.

Enhance firm size:

It is evident that firms will merge for the reason of increasing their size, bigger firms are identified to compete greater in the marketplace than smaller firms, and as a result firms are motivated to merge due to the fact that formation of a larger firm will result into much better competitive position. The merger of these firms will generate a larger firm that is far more visible to consumers and investors, for that reason the larger firm will attract a lot more customers and investors and therefore enhance the firm’s performance and profitability, and however from past mergers firms that merge due to this reason still retain their previous operation difficulties in the market.

Difficulties caused by these mergers:

Mergers will trigger problems in the market and also to the employees and investors, these troubles include loss of jobs, demoralization of employees, loss of investor confidence and a decline in the market location and other troubles which are discussed below, from numerous scholars it is evident that mergers frequently will trigger far more difficulties than benefits gained.

Effect on employees:

Planned mergers adversely affect employees of the merging businesses, the merge process is a slow process and affects the employees of both firms, when announcements are produced about the merge of companies the working climate in those businesses change, workers are confused and anxious about what will occur when the merge takes place and this reduces productivity of these workers, employees also feel betrayed and as a result mergers will result into decreased employee loyalty. Both businesses will therefore report poor performance due to reduced productivity and efficiency during the merger negotiation process. This is evident from a report by Totenbaum (1999) who reported that the productivity of firms after a merge dropped 25% to 50% this is a substantially significant drop in productivity which will adversely affect the performance of the organization in the marketplace.

Job losses:

Mergers involve main restructuring of the firms structure of the new firm to be formed, this is due to the fact that merging firms will eliminate duplicate processes as a way of cutting down on production expenses, as a result of this employees will loose their jobs simply because of this restructuring, according to Appelbaum (2000) the merge process leads to uncertainty among employees concerning the impact of merger on their career and job, for this reason therefore employees invest a lot more time thinking about their career and job rather than their jobs and this will decrease the productivity of the employees in both businesses.

Effects on managers and other leading ranking employees:

Managers and other leading ranked employees in both firms may possibly be deprived of their authority after the merger. This is a painful process and may possibly impact their performance soon after the merger. This procedure demoralizes such employees and performance of the new firm formed may be even worse, an example is the case of the merger between Carton and Granada where the top executive employees namely Charles Allen and Michael Green were forced to have joint responsibilities soon after the businesses merged, this surely will have a negative effect on them and consequently affect the companies performance.

Slow negotiation method:

Mergers entails a process that takes time to total, much time and resources are spent in the method which may possibly adversely affect the performance of the company, managers concentrate on the negotiation procedure rather than the firms operation and this will result into poor performance of both companies. During this negotiation procedure the workers in both firms will spend most of their time gossiping and speculating on what will take place in after the merger and for this reason there will be decreased performance in the firm.

Conclusion:

From the above discussion it is evident that mergers do not usually lead to advantages they anticipated, numerous investigation reports show that there has been a reduction of firms performance soon after merging. Some of the motivating factor to mergers consists of formation of bigger businesses, bigger marketplace size, economies of scale, diversification, bigger geographical coverage, attraction of investors and customers, bigger capital base and sharing of suggestions and expertise.

Mergers also pose main troubles that may possibly lead to failure of these mergers, some of these troubles include demoralization of workers, loss of resources and time, decreased employee loyalty due to the fact employees feel betrayed, low productivity as employees invest far more time speculating about the future and finally poor performance of both businesses throughout the negotiation process.

For this reason as a result firms really should be considerably much more careful when merging, there really should be proper communication with the employees about the factors why the company is merging, a firm should choose the most proper partner and the negotiation process really should take the shortest time possible so that it does not impact the productivity of the firms. For that reason merging of companies is not a simple job and requires taking into consideration several aspects that may possibly lead to failure soon after the merger.

References:

A. Hughes (1989) The Impact of Merger: a survey of empirical evidence for the UK, McGraw Hill Press, New York

Appelbaum S. and Yortis H. (2000) Anatomy of a merger, Management Decision, Volume 38, 9

Ashkenas Ronald and Lawrence J. (1998) Making the Deal Actual How GE Capital Integrates Acquisitions, Harvard Business Review, Volume 76 Problem 1

D. Ravenscraft and Scherer F (1987) Mergers, Sell-offs and Economic Efficiency, McGraw Hill Press, New York

D. Henry (2002) Mergers Why Most Big Deals Don’t Pay Off, McGraw Hill Press, New York

Fairburn J. and Kay (1989) Mergers and Merger Policy, Oxford University Press, Oxford

Reish David (1988) the Impact of Taxation on Mergers and Acquisitions, University of Chicago Press, Chicago

 

 

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