Financial Planning Process- M&As
In corporate finance, mergers and acquisitions (M&A) are arrangements in which two companies start operating as one (Sarala, Junni, Cooper, & Tarba, 2016). Under M&A, company assets and liabilities get consolidated using various types of financial transactions. A business merger involves two firms together joining forces to come up with a new business. In an acquisition, one organization purchases another smaller firm by the parent company absorbing it or being run as a subsidiary firm (Schmidt, 2015). Globalization has taken roots in modern business, and M&A have been a faster and easier approach to expanding and improving company goodwill. Successful M&A’s enable companies to expand the target market in the industry. In this research paper, the advantages and disadvantages of a merger will be discussed.
The Advantages of a Merger
Normally, mergers occur due to a mutual agreement or a takeover. The advantages of company mergers include:
Economies of Scale: In most sectors, companies have to offer a national network; meaning that there are significant economies of scale. When a bigger company with high output reduces average expenses, the reduced average expenses aid reduced prices of the target customers (Schmidt, 2015).
International competition: Formation of a merger enables a company to gain global competitive advantage against the top rivals in the industry (Serdar Dinc & Erel, 2013). Through mergers, companies are able to counter the competitive threat posed my multinationals and thus able to compete on an international scale. In global markets, this practice has increased.
Greater investment in R&D: In nearly all industries, it is vital for companies to invest in research and development in order to generate new technologies and products (Tejvan, 2017). Formation of a merger gives a company the financial muscles and profitability to finance R&D.
Diversification: In a conglomerate merger, two companies operating in varying sectors join together. The benefit realized here is sharing knowledge applicable to the other different sector (Schmidt, 2015). For instance, AOL and Time-Warner merger was aimed at gaining benefit from both old media firm and the new internet industry.
Disadvantages of a Merger
While mergers add incredible benefits to the general operations and objectives of a company, formation of mergers still has some disadvantages and the main ones include:
Higher prices: Formation of mergers lowers competition and provides the new company with monopoly power. A greater market share with less competition gives the new firm the freedom to raise prices for consumer product (Tejvan, 2017)s. A good example is the opposition to the merger between BMI and British Airways.
Less choice: Through mergers, consumers are left with lesser choices. This effect is significant in industries such as clothing, retail, and food where product choice is as important as the price for the product (Tejvan, 2017).
Job losses: Formation of mergers results to loss of employment. In aggressive takeover by an asset striping firm- a company that plans to merge and discard the under-performing industries of the target firm is a good example for this adverse effect (Serdar Dinc & Erel, 2013). This act is considered as a creative destruction of employment.
Diseconomies of scale: The new larger company could encounter dis-economies of scale as a result of increased size. Once the merger is formed, the new larger company could lack the older rate of control and hence finding it difficult in motivating the workforce (Sarala, Junni, Cooper, & Tarba, 2016). When workers get demotivated, they become less productive.
Example of Company Merger
For companies to merge, their business cultures must match. When business cultures do not match, the merger creates no value and vice versa. A good example of unsuccessful merger is AOL/ Time Warner.
AOL & Time Warner: AOL & Time Warner are two media companies that joined together to form a revolutionary merger with the objective of fusing the old with the new. The old-school media giant, Time Warner consolidated with American Online (AOL) in 2001, the email and internet provider of the people for $164 billion. This merger was considered as the best combination, but this was not true. Although AOL merged with Time Warner, the business cultures for the two companies never matched. As a result, the dot-com bubble burst resulting to dial-up internet access burst hence spelling disaster for the merger’s future. In the year 2003, AOL & Time Warner merger reported $45 billion write-down resulting to a $100 billion annual loss. In 2009, the merger was finally dissolved as a corporate dissolution.
Mergers and Acquisitions (M&A’s) have both advantages and disadvantages to a company. In the modern world of globalization, the number of M&A’s is increasing. A successful M&A requires the involved firms to share a similar culture, market, and profitability objective. If all factors of successful merger are considered, the M&A results to market diversification, increased efficiency, economies of scale, research and development, and protection of an industry from collapsing. With mismatch of business cultures, the M&A leads to higher prices, reduced consumer choice, dis-economies of scale, and unemployment.
Sarala, R. M., Junni, P., Cooper, C. L., & Tarba, S. Y. (2016). A sociocultural perspective on knowledge transafer in mergers and acquisitions. Journal of Management, 1230-1249.
Schmidt, B. (2015). Costs and benefits of friendly boards during mergers and acquisitions. Journal of Financial Economics, 424-447.
Serdar Dinc, I., & Erel, I. (2013). Economic nationalism in mergers and acquisitions. The Journal of Finance, 2471-2514.
Tejvan, P. (2017). Pros and Cons of Mergers. Economics, 1-26. Retrieved from https://www.economicshelp.org/blog/5009/economics/pros-and-cons-of-mergers/