For this week’s blog I will be discussing the ins and outs of companies merging or acquiring other companies and the reasons behind them.
The term Mergers and Acquisitions is general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.
There are several different reasons why a company may want to merge with another and these can all be categorised into 4 sub categories: Synergy, Superior Management, Managerial Motives and Third Party Motives.
The term synergy refers to when the value of a completed merger or takeover is larger than the sum of the two companies when separate. Value is created from a merger or takeover when the transaction costs are lower than gain made.
Market power is one example of a synergy through a merger or takeover. With companies merging to gain market power and possibly become part of an oligopoly or monopoly in the market place, it allows them to have a lot more control over the price that they set for products. However there are regulations that are in place to stop companies that have a lot of market power from setting too high a price tag. In my opinion this is highly necessary! Especially in industries such as the phone industry, where the likes of Orange and T-Mobile have merged to make EE. With there being only a few phone companies, it would be very easy for them to set as high a price as they wish and consumers would have very little choice other than to pay it. So in this case it is very important that they are regulated on what prices they are allowed to charge.
There is also the fact that a company would benefit from economies of scale if they were to merge with another company. This is due to larger companies generally having lower cost per unit output. This comes about as the company does not need to share the central services that both companies will have had, such as the human resources department.
Mergers and Acquisitions do not always occur for the benefit of a company! Like so many other things managerial agreed has been the main driving force behind it! From a manager’s perspective if they acquire or merge with a smaller company, it gives them the opportunity to give themselves a larger salary, as they are seen to have a lot more power and status!
A merger or acquisition driven my managerial greed seems ridiculous in my opinion. If the merger does not create any synergy then surely there is no point in it, as only a few individuals will benefit and the company would incur unnecessary costs!
It is often the case that there is a smaller company involved in the movement of an acquisition and they do not always want to be bought out, which can lead to a hostile takeover. One way that a company is able to defend itself is by selling off its assets that the hostile company want to purchase, so that it leads the attention away from them. However, this may not be feasible if the assets are too large for a company to sell without it becoming financially unstable.
This is just a brief overview of why mergers and acquisitions occur and in my opinion why they seem so appealing for some companies.
If you can think of any other motivations behind a merger or takeover or have anything else to add, please comment.
Until next time fellow bloggers...