Merger Pros and Cons
When a business is faced with the prospect of a merger, whether it is the one initiating the offer or another company, there are pros and cons that need to be looked at. While a merger might prove to be an excellent strategic fit or while it might allow a company to expand to new markets, there are business interruptions or integration difficulties that might outweigh any synergies to be gained.
Cons of mergers
- High prices-Mergers can reduce competition giving the new firm monopoly power. With less competition and great market share, the new business can increase prices for consumers.
- Less choice-with mergers, consumers are left with less choice on which business to deal with.
- Job losses-More often than not, mergers lead to loss of jobs and this causes concern if the takeover is aggressive and the company is stripped of its assets. There are firms which also seek to merge and go ahead to get rid of sectors in the target firm that are under-performing.
- Diseconomies of scale-There are instances when the newly established firm might experience diseconomies of scale as a result of its increased size. After the merger, the new, larger firm might lack the same level of control and struggle needed to motivate employees. When workers feel they are part of a large multinational, they might not feel motivated to work or try hard.
Pros of mergers
- Network economies-Firms in certain industries need to provide national networks. This means that the most efficient firms in the industry can be merged into one. This helps cut down duplication and creates a single firm that is more powerful.
- Monopoly regulation-Even when a firm merges and gains monopoly over a market, it does not necessarily lead high prices as long as it is regulated properly by the government. For instance, in some industries governments have price control in order to limit the increase of prices. This makes it possible for the firms to benefit from economies of scale while ensuring con summers don’t face monopoly prices.
- Avoids duplication-There are industries that are better off with mergers rather than dealing with duplication. For instance, two bus firms might be competing over the same stretch of roads. Consumers can benefit when the two merge as it will translate to lower costs. It will also ensure that environmental benefits are enjoyed and congestion is reduced.
The desirability of mergers varies and depends on several things such as the significance of scale in the industry, how contestable the market is and the margin with which competition is reduced.
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