Corporate Finance

February 10, 2023

Corporate Finance

Order Number	65363737383
Type of Project	ESSAY/DISERTATION
Writer Level	PHD/MASTERS CERTIFIED
Format	APA/MLA/HARVARD/OXFORD
Academic Sources	10 -20
Page Count	4-8 PAGES

Instructions/Descriptions

Corporate Finance

Abstract

The paper will explore mergers and explain their benefits and disadvantages. Mergers are common today because many companies seek to grow but lack enough resources. Mergers could be horizontal, vertical, or conglomerate. They can share similar characteristics, produce different products in the same industry, or produce unrelated activities that merge to share synergies and improve shareholders’ wealth. Whatever the reason, merging makes companies grow and occupy a significant market share. It also reduces operations costs and sets firms ready to access new markets and new customers. They also lead to diversification of risks. Although the mergers are beneficial, they also pose drawbacks, including increasing prices of goods and services, increasing diseconomies of scale, and causing unemployment. Understanding these downsides helps to table essential considerations and objectives, creating a successful merger. Key considerations should comprise appropriate objectives and merger integration processes. Failure to include this would lead to an unsuccessful merger. A case of merger failure is America Online and Time Werner.

Keywords: Merger, market share, resources, diseconomies of scale

Introduction

Companies are often seeking to expand into other markets and satisfy more customers. However, only a few succeed. Companies that prosper include those that merge with other companies. Merging involves two separate firms combining to form one company. Usually, one company, the smaller company will pass its assets and liabilities to the larger company, creating a merger. Companies can merge to enter new markets, access new customers, diversify their offerings, and increase profits (Bebenroth, 2015). A merger could also help eliminate competition and result in better planning and utilization of resources and reduction of operating costs. Despite the broad significance, mergers can raise the prices of products and services, create gaps in communication and cause unemployment. Also, firms merging should have clear objectives and reasons for merging; otherwise, the merger could not achieve desired results. Therefore, the paper will describe the features of a merger and explain the advantages and disadvantages of a merger.

Features and Types of a Merger

The concept of a merger is not new. Mergers have existed and continue to exist because companies need to expand their operations and diversify their offerings to customers. Worth noting is that there exist different types of mergers. The first type involves a horizontal merger that involves companies selling similar products and services to merge and gain a larger market. The firms must sell similar products to create a horizontal merger. Another significant type includes the vertical merger, which comprises firms operating in a similar industry but combining different levels to increase synergies and efficiencies (Bebenroth, 2015). Thirdly, mergers could be conglomerates, whereby companies operating unrelated activities combine to increase diversification and boost shareholders’ wealth.

Regardless of the type of merger, some pertinent features must be available to form successful mergers. Firstly, the mergers should have defined objectives to showcase the expected goals that the merger will attain. The defined objectives include increasing sales, gaining new markets, and acquiring patents, technology, or other resources. Another feature is transparency, whereby the parties forming the merger must sign non-disclosure agreements for proper operations (Bebenroth, 2015). Communication is another crucial feature that helps stakeholders accept the merger and minimize confusion. The communication should begin from the day the merger is announced to the integration process day. Also, it is fundamental to provide suitable leadership and resources. Sufficient resources and leadership make it easy for the merger to thrive because they give energy for success. Above all, legal representation provided by expert attorneys is needed to ensure the merger succeeds and every party is satisfied.

Advantages of a Merger

The benefits of a merger are manifold. Merging helps to increase the market share of firms. When firms merge, they gain a larger market share than each party had in isolation. The growth in market share implies that the new company, merger, becomes more competitive than what the parent firms had initially. The larger market share will also increase shareholders’ returns (Li, 2016). Next, a merger decreases the costs of operations. Firms attain significant economies of scale, including bulk buying of raw materials. As a result, the extensive economies of scale lead to cost reductions and increased output levels. Simply put, a merger will involve larger-scale production; hence purchases of inputs like raw materials will take place in bulk, cutting down the costs involved.

Additionally, a merger enhances distribution capacities. It increases the ability of merged companies to distribute their offerings widely to new markets and customers. Also, a merger helps to avoid duplication. The merging parties combine efforts, not duplicate products and eliminate unnecessary competition. A merger also paves the way for accessing diversified talents and skills. Skilled employees could be absorbed into the merged company, improving productivity and increasing profits. Further, merging could permit the diversification of risk. The two companies could share risks leading to revenue streams withstanding any shocks and normally continue operations. Above all, mergers can prevent the closure of an unprofitable venture. Sometimes companies that were once profitable could be facing challenges causing bankruptcy. Mergers could help save these companies from bankruptcy and jobs by restoring the company to greater heights than before (Wang, 2019). Therefore, the benefits of mergers are plenty. From increasing firms’ market share to saving falling companies, mergers are beneficial in today’s industries.

Drawbacks of Mergers

Despite the many advantages, mergers also pose different challenges. One downside of a merger includes increased legal costs. Merging often involves a legal business transaction requiring several professionals like lawyers and financial professionals to help verify and move the right assets (Masulis & Simsir, 2013). The presence of these professionals would amount to more legal costs making merging costly. A merger, especially a horizontal merger, could also increase market share, making the merged entity a monopoly and increasing overall product and service prices. Forming a merger could be time-consuming, requiring a lot of time, money, and effort. At worse, the companies must forego other significant opportunities to merge and become one. A merger could also result in unemployment, whereby a company can opt to retain skilled employees and terminate the unskilled employees and underperforming assets. Further, mergers involve moving people from one company to another to form a united company. During the first days, there will be gaps in communication that would need training to be solved. If not realized earlier, the gaps could negatively affect the employees’ performance. Lastly, due to the increased size, the new firm could lack control and struggle to motivate workers leading to diseconomies of scale.

Example of Unsuccessful Merger

Destruction of value usually implies unsuccessful mergers. Practical examples of unsuccessful mergers include America Online (AOL) and Time Warner in 2001, Google and Motorola in 2012, and Microsoft and Nokia in 2013 (ZDNet, 2016). The managers of AOL and Time Warner rushed into a merger in 2001 to venture into new media. However, the rush prevented them from truly comprehending the dynamics of the new media landscape. The merger by AOL and Time Warner CEOs typically turned into a fiasco. The new company did not take advantage of Time Warner’s strengths. As a result, the total AOL subscribers reduced drastically from 30 million to five million. Further, the company’s market valuation plummeted from $240 billion to $1.73 billion. After continuous difficulties in running operations, in 2009, AOL declared the moving of Time Warner into a distinct public company, winding up the unsuccessful merger.

The deal between Google and Motorola in 2012 failed despite great planning to the extent that Google had to reach other parties like LG and Samsung to produce its headsets. Besides that, the merger helped Google to integrate Motorola production concepts and develop the Moto X handset. However, it was not a big hit, and after a two-year merger, Motorola was sold to Lenovo for $2.91 billion (ZDNet, 2016). A year later, a merger between Microsoft and Nokia would see them create their headsets. However, shortcuts saw the merger fail (ZDNet, 2016). By 2015, Nokia struggled to keep up with developments even though it had been the most significant handset manufacturer globally. By this point, Microsoft had already suffered a loss of 7.6 billion US dollars and terminated 15,000 Nokia workers. Therefore, although mergers are good, they could also fail due to a lack of focus on desired objectives and not establishing appropriate integration processes.

Conclusion

A merger entails two or more firms coming together to share resources and become one. Usually, merging firms share some similarities or operate in the same industry. So, they merge to acquire a larger market share and reach more customers to grow their brand and make more profits. Indeed, merging is essential in helping companies expand, decrease their costs of operations, share risks and increase distribution capacities of the firms. Despite this, mergers could cause monopolies resulting in increased commodity prices. They could also cause unemployment and diseconomies to scale. Therefore, firms considering merging should focus on desired objectives and develop the right integration processes.

References

Bebenroth, R. (2015). Setting the stage for mergers and acquisitions. International Business Mergers and Acquisitions in Japan, 71-85. doi:10.1007/978-4-431-54989-5_6

Li, Tianqi. (2016). A study on the impact of mergers & acquisitions on shareholders’ wealth and efficiency. School of Economics, Shanghai University, Shanghai, China. doi:10.1051/shsconf/20162502013

Masulis, R. W., & Simsir, S. A. (2013). Deal initiation in mergers and acquisitions. SSRN Electronic Journal. doi:10.2139/ssrn.2297817

Wang, Y. (2019). Executive migration and international mergers and acquisitions. International Business Review, 28(2), 284-293. doi: 10.1016/j.ibusrev.2018.10.001

ZDNet Editors. (2016, February 12). Worst tech mergers and acquisitions: HP and autonomy, Google and motorola, and more. ZDNet. https://www.zdnet.com/article/worst-tech-mergers-and-acquisitions-hp-and-autonomy-google-and-motorola-and-more/

ZDNet Editors. (2016). Worst tech mergers and acquisitions: Nokia and Microsoft, AOL and Time Warner. Enterprise Software. Retrieved from https://www.zdnet.com/article/worst-tech-mergers-and-acquisitions-nokia-and-microsoft-aol-and-time-warner/

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Corporate Finance

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40-38 points

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83-76 points

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52-49 points

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48-1 points

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