Merger is the process whereby two or more companies combine together such that all their operations are carried out as one. Over the recent past, there have been several mergers of firms within oligopolies. When two or more companies merge, the control of their assets becomes vested on under one control.
However, there are some regulations which guide the process. In this study, there is a need to distinguish between a merger and acquisition or takeover. The main difference between the two is that in the merger the company retains a shared interest in the corporation formed after merging.
On the other side, one company may buy a larger fraction of its partner’s stock which leads to imbalance in the ownership of the new formed company. The main aim for the companies to form merges is to increase their profitability. When two companies merge, the resultant company enjoys the advantages of bulk buying of the law materials, which significantly reduces its production costs.
There are several types of mergers. The first type of merger is known as vertical merger. This is the most common type of mergers in the business world. This is a form of merging where a corporation merges with its client (or suppliers) in order to build up on the chain of supply. The second type is horizontal merger.
This is a type of a merge between two companies which are direct competitors in the same market. In most cases, this involves a larger company taking the small one. After combining, the two companies can significantly reduce their operational costs as well as their financial obligations. Another type of merger is conglomerate merger. This type involves two companies in different businesses. These businesses are not related in any way. This form of a merger is fueled by the craving of a firm to get better its (financial) wealth.
The major concern with mergers is that they may eliminate competition in the industry. This leads to a situation where customers are left prone to exploitation by the producers. Different efforts have been laid to discourage the competitively harmful mergers. Commissions encourage the competitively beneficial or neutral mergers. These are not likely to cause suffering to the consumers. In other words, some form of mergers can lead to overexploitation of consumers.
In most cases, the Federal Trade Commission has to be notified in advance about any proposed merger in order to access the impacts of the merge to the consumer. This is in attempt to protect the customer from unnecessary merges which can be dangerous. The commission has the right to stop any merger which poses a major threat to the consumer’s welfare.
One of the proposed mergers involves Keystone Holdings and Compagnie de Saint-Gobain’s Advanced Ceramics Business. This merger raised a major concern by Federal Trade Commission over its effect on the nature of competition. It was projected that the merger was likely going to affect the competition for alumina wear tile in the Northern America Market (Federal Trade Commission, 2010, Par 1). In such situations, the commission is forced to put certain restrictions in order to protect the customers.
Alumina tiles which the two companies deal with are used in a number of plants which plays a significant role in the well being of the economy. Alumina (wear) tiles are employed to insulate equipments from rasping wear by forming a (top) coating.
This type of tiles is used in a wide range of equipments used for different functions e.g. hoppers and the pipes used in ferrying ash and coal (Federal Trade Commission, 2010, Par 1). It is also used by asphalt and cement industries as well in mineral processing equipments. These tiles come in two broad categories. One category comes in different shapes while the other one is designed in order to fit unique shapes.
The commission feared that if the transactions were left to proceed as structured, the consequences would significantly affect the nature of competition in the market for these two types of tiles. This is because Saint-Goban and Keystone are the only key companies which represent a significant share of the Northern American market. Therefore, the consequence would be a significant reduction of competition in the market. These two companies also supply the best quality tiles in the market.
Reasons For and Against Mergers
Over the past, mergers have impacted both negatively and positively in the economy. These impacts can be viewed in different perspectives, that is, the impacts of the mergers to the industry, society, and consumers.
Reasons against Mergers
Mergers have a significant impact on the top level management. That is, it may result in conflict of the egos. For instance, merger between Goban and Keystone can affect the management. These two merging companies were managed differently by different managers before merging. There are differences in the cultures between these companies. Consequently, managers may find themselves being forced to use strategies which may not be familiar or verified to them.
This presents a challenging environment for them. When this occurs, the company’s management attention gets diverted from the normal activities of an organization as the leaders try to settle the matters arising from organizational differences. However, the extent of these complications is determined by the skills of the managers. A qualified manager will take less time to adjust while less qualified managers may face too many complications.
Mergers have significant adverse impacts to the society, customers and the industry in general. This has raised a concern of whether mergers should be encouraged in the economy or not. Another effect of mergers lies on the employment level in the economy. Merging companies can significantly affect the employment level in the society. According to Gugler (2003), “a merger can significantly affect the quantity of labor supply (p.4)”. It has affected the employment level in different ways.
However, Gugler (2003) noted that “the effect of merges on the employment level is ambiguous (p. 5).” In other words, a merger can lead to an increase or decrease in the employment level. For instance, a merger may lead to a reduction in the level of output, which is followed by lay off.
For instance, due to an increase in power after the merge hence increasing the returns to scale which consequently leads to a fall in the level of employment. On the other hand, a merger may increase the level of output for instance due to the combined efficiency of the two merging companies. However, Gugler’s study has indicated that a company can reduce demand for labor by about 10% (2003, p. 18),
In situations where there is cross cultural mergers, the acquired organisation may sometimes be forced to lay a significant number of its employees. Again, this increases the level of unemployment hence affecting the society negatively in general.
According to the Maps of the World’s report (2000), when two companies come together, they can be able to hire less workers to perform a particular task (par 2). Consequently, the company will cut down its work force. Again, this will increase the level of unemployment in the society.
Combination of two companies affects the shareholders of the acquiring company most. The shareholders are affected to a great extent especially by the debt load. This presents a suffering to the society.
Merges also results in low innovations in a company. Merger encourages the new firm to pay less attention on its innovative efforts below the level of innovation that prevailed before the companies merge (U.S. Department of Justice and the Federal Trade Commission.2010, p. 26).
For instance, when Goban and Keystone forms a merger, the resultant company will pay less attention on innovating in the alumina tiles. The Northern America market will continue receiving coating tiles which are never improved. This is characterized by less attention to continued product improvement and development efforts. Since the resultant company will be dominating the market, it will pay less attention on innovations.
In most cases, innovations are encouraged by competition in the market. This is because companies will not be facing competition for customers from its competitors. In competitive environment, companies will concentrate on innovations in order to please their customers. In the case of a merger, the resultant company will dominate the market which will consequently reduce their efforts to innovate.
For instance, when Gobain combines with Keystones, the resultant company will gain monopolistic power over North America’s market for alumina tiles. This is because the largest share of the market supply comes from these two companies. As we have seen, the resultant company will therefore be reluctant in encouraging innovations since it will have no threats from any competitor.
Since merging of the two companies reduces the level of competition in the market, there is a likelihood of a rise in prices. Competition will be more affected if the combining companies are dealing with less differentiated products. In this case, both Gobain and Keystone companies deals with alumina tiles which are not very much differentiated.
The newly formed company after merging will consequently raise the prices of the tiles. This consequently leads to an increase in consumer prices by the other firms. For instance, after the combination of Keystone and Saint-Gobain into one company, the company will raise the prices of the tiles. This forces the firms to raise the consumer prices altogether from their initial level.
As a result of prices manipulation through merges, there will be a reduction in consumer surplus. This oppresses the customers at the expense of the producer’s surplus. It is also important to note that mergers may have varying impacts on different consumers. This occurs when the newly formed company practices price discrimination. For instance, a company may decide to raise the prices for a certain group of consumers. In this case, some customers suffer more than others.
Mergers are likely to lead into low quality goods & services. This is as a result of lack of competition in the market. Therefore, the resultant company will not be having any fear of losing customers to its competitors. This denies the customers a right to access high quality goods and services.
Mergers also reduce the variety of a particular product in the market. Gobain and Keystone companies supplies the North American market with alumina tiles. These types of tiles come with different varieties. The tiles from these two companies are similar but not necessarily identical.
If these companies merge, then there will be no variety of alumina tiles since the tiles will be produced from the same plant and in the same equipments. This denies the consumers a right of choice. They will be restricted to use one type of product. In other words, the resultant company will pay less attention on the needs of the customers.
As already noted, mergers will decrease or completely eliminate competition in the market. One way through which mergers can eliminate competition is through coordinated interaction among companies which will adversely affect customers (U.S. Department of Justice and the Federal Trade Commission, 2010, p. 27). This involves actions by firms which are likely to favor their profitability. The resultant outcome will be overexploitation of consumers.
Merges are associated with time wastage. For instance, all the shareholders from both firms, must first vote and agree on the merge. Whenever disagreements arise, it consumes a lot of time for the companies. This time could be used on other activities that could have contributed in other development activities in the industry.
In the cases where cross-cultural mergers take place, various problems occur. Cross-cultural mergers are the types of mergers involving companies with different cultural backgrounds. In some cases, different cultures may cause disharmony that is difficult to escape in the organisation (Blurt, not dated, par 3). This may affect the operations of an organisation at the initial stages of its development.
Reasons for Mergers
Despite of the number of shortcomings that are associated with mergers, they are sometimes important in the society. They have some positive contribution to the industry, society as well as the customers.
In some cases, mergers lead to increase in the level of employment. This may be as a result of combined efficiency of two companies. The output may also be increased through a rise in the level of efficiency as a result of demand shifts and product improvements. According to Gugler (2003), true mergers ‘results in a wage decline by approximately 4% and an equivalent of 2% employment growth (p. 8).’
Mergers have also a significant effect on the company. First, they increase the productivity of a company. When two or more companies merge together, they form a larger company. The resulting company can then be able to benefit from bulk buying of the raw materials. This significantly reduces the operational costs of the company.
When companies form mergers, they are likely to reduce expenses significantly. For instance, when two companies are combined, the license costs are significantly reduced. Companies can also be able to cut down on the insurance costs. This contributes significantly to the overall performance of an organization, that is, it can expand its activities.
The profit margin of a company increases significantly after a combination of two or more companies. When the profit is high, a company can increase its investment on research and development. This will consequently lead to high quality goods and services for their customers. For instance, when Gobain and Keystone companies merge, the profits of the resultant company will automatically increase. The company will invest more on research and development on its products. Consequently, customers will be able to get high quality tiles.
Merging of two companies has an impact on the share holders of both companies. However, these impacts vary across these two categories of shareholders. The shareholders of the acquired company are in most cases the main beneficiaries of the merger. When a company is bought at a good price, the local community benefits significantly since it improves the local economy.
According to the information from Economics Help (not dated), mergers significantly benefits the newly formed company through economies of scale (par 1). When two different companies combine together, the resultant company will automatically be larger. This is because of combined tools of production as well as the other factors of production.
This will increase the company’s output with a significant scale. A newly formed company will enjoy technical economies. This will mostly help those companies which have significant fixed costs. When two companies combine, these fixed costs are significantly lowered. This helps in increasing the profitability of the firm.
Another area where companies enjoys the economies of scale through a merger is bulk buying. Combined operations of two companies will require buying of large quantities of raw materials. This will help the company to cut down on its costs. Eventually, this will decrease the unit cost of production. When the unit cost production falls, the prices of the product is likely to fall. However, this is based on the assumption that the market will remain competitive.
Shortages are likely to take place when two or more companies merge. These shortages can be as a result of two things. First, the newly formed company may decide to cut down on the output so as to raise the prices to their desired levels. This is because they have monopolistic power over the market. Shortages may also result from adjustment delays since the newly formed firm may take time to adjust. All this will be at the expense of the consumers.
Mergers have also helped in strengthening of companies. This is achieved through the restructuring and strengthening of the resultant company (William, 2008, par 4). After merging, the merging companies can apply the strategies which each of them had been using before. This reduces the number of risks in an organisation.
The resultant company formed after a merger can also enjoy a higher level of interest (Economics Help, not dated par 2). This is because it will be engaged on transactions involving huge sums of money. This improves the financial security of the company.
In terms of organizational efficiency, one head office is better than two. It improves efficiency by reducing the time taken in making decisions or trying to link activities between the two. Having one head office also reduces the operational costs.
Mergers also help companies to solve the problem of multinational competition. They rather face international competition. This boosts domestic companies in the international market. When domestic companies do well at the international market, the whole economy will be a beneficiary. For instance, it will contribute to improving the balance of payments.
In conclusion, this discussion has clearly brought out the impacts of mergers in the economy. It has been found that it is very critical to find an exact impact of a merger in an economy. It affects the economy both positively and negatively. However, the study has indicated that mergers can significantly cause consumer suffering.
In other words, mergers pose a great danger to the consumer and the society in general. This is through manipulated prices and low quality products resulting from elimination of competition in the market. The combination of companies increases the monopoly power of the resultant company and they use this as a weapon to exploit consumer.
In order to eliminate these problems associated with mergers, there is a need to have necessary interventions whenever mergers are proposed. This will give the responsible commissions a chance to give conditions on the newly forming companies on their conduct in the market.
There should be clearly structured guidelines which should be followed by mergers (U.S. Department of Justice and the Federal Trade Commission, .2010, p. 5). Mergers should not be given an opportunity to exploit monopolistic power in the market at the expense of the customers. It is important to consider the market share represented by the merging companies. The larger the fraction they represents in the market, the more monopolistic power the two are likely to have and the more they are likely to exploit the consumers.
Blurt (n.d.). What Are The Advantages And Disadvantages Of A Cross-cultural Merger? Retrieved from http://www.blurtit.com/q172004.html
Economics Help. (n.d.). Benefits of Mergers. Retrieved from http://www.economicshelp.org/microessays/competition/benefits-mergers.html
Federal Trade Commission. (2010). Protecting America’s Consumers. Retrieved from http://www.ftc.gov/bc/index.shtml
Gugler, K. (2003). The Effects of Mergers on Company Employment in the USA and Europe-U.S. Department of Justice and the Federal Trade Commission. Retrieved from http://ftc.gov/os/2010/08/100819hmg.pdf
Maps of the World (n.d.). Impact of Mergers and Acquisitions. Retrieved from http://finance.mapsofworld.com/merger-acquisition/impact.html
U.S. Department of Justice and the Federal Trade Commission. (2010). Horizontal Merger Guidelines. Retrieved from http://www.ftc.gov/os/2010/04/100420hmg.pdf
William, P. (2008). The Advantages and Disadvantages of Mergers. Retrieved from http://www.associatedcontent.com/article/1189676/the_advantages_and_disadvantages_of.html?cat=3