Mergers occur when two companies combine to form one. The new company will have a larger market share, allowing it to achieve economies of scale and become more successful. Additionally, the merger will diminish competition and may result in higher pricing for consumers. In this article, why mergers are good, we take a look at the process involved and the options available to you.
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What are the different types of merger?
- Product Extension Merger
Such mergers happen between businesses operating in the same market. The merger will result in the addition of a new product to one company’s existing product line. Companies can gain access to a broader consumer base and enhance their market share as a result of the merger.
- Conglomerate merger
A conglomerate merger is the amalgamation of businesses with unrelated operations. The merger will only occur if it boosts the stockholders’ wealth.
- Market extension merger
Companies that operate in distinct markets, but sell the same products, merge to get access to a broader market and more customers.
- Horizontal merger
Companies operating in markets with fewer competitors merge to expand their market share. A horizontal merger is a sort of consolidation of businesses that sell comparable goods or services. It eliminates competition; hence, economies of scale can be realised.
- Vertical merger
When companies in the same industry, but at separate levels of the supply chain, unite, this is known as a vertical merger. These mergers promote synergies, supply chain management, and efficiencies.
What are the benefits of mergers?
- The principle of economies of scale. This occurs when a larger company with a higher output is able to cut its average costs. Reduced average expenses result in reduced pricing for customers.
- International competition. Mergers can assist companies combat the threat of multinational corporations and compete internationally. In an age of global markets, this becomes increasingly vital.
- Mergers may permit increased investment in R&D. This is due to the fact that the new company will generate greater profits, which may be utilised to fund risky investments. This can result in improved product quality for consumers. This is crucial for companies requiring significant investment, such as the pharmaceutical industry. A merger, which creates a larger company, allowing for greater failure tolerance, will promote more innovation.
- Increased efficiency. There may be justification for layoffs if employees can be utilised more efficiently. It may result in temporary employment losses, but productivity should increase overall.
- Protect an industry from extinction. Mergers may be advantageous in a decreasing industry where companies are struggling to survive. During a crisis in the banking system, for instance, the British government permitted Lloyds TSB and HBOS to merge.
- In a conglomerate merger, two companies from distinct industries combine. In this case, the value could be the sharing of knowledge applicable to the other industry.
What are the disadvantages of mergers?
- Mergers increase the price of goods and services, which is undesirable. A merger decreases competition and increases market share. Thus, the new company can establish a monopoly and raise the pricing of its goods and services.
- Creates communication gaps
The cultures of the companies that have decided to merge may differ. It may result in a communication breakdown and negatively impact the performance of the personnel.
- Creates unemployment
In an aggressive merger, one business may decide to dispose of the underperforming assets of the other. It may result in the loss of employment.
- Prevents economics of scale
In situations where companies share few similarities, it may be difficult to achieve synergies. In addition, a larger organisation may not be able to motivate people or reach the same level of control. Thus, it is possible that the new company will not be able to obtain economies of scale.
How we can help
We have a proven track record of helping clients deal with the process involved in company mergers. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a business merger. However, expert legal support is crucial in terms of ensuring your business is set up correctly.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
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