Merger Pros and Cons
Considering the merger pros and cons can enable you to determine whether this business move is beneficial to shareholders and top executives of the involved firms or it is done in the interest of the public. Just like most business moves, a merger has its pros and cons.
One of the pros of a merger is the establishment of network economies. In some business sectors, it is important to offer a national or regional network. This implies that economies of scale are very significant because a regional or national network can mean that firms pull resources to offer more efficient services.
A merger can also boost research that is needed to develop a business or an industrial sector. For companies to create new products or invent new technologies, they need to spend money in research, analysis and development. A merger makes companies more profitable because it brings the funds required for research from the two or more companies together. This is vital for industries like those involved in drug research.
Monopoly regulation is another pro of a merger. A company can gain monopoly in a sector that it specializes in through a merger. This is because the companies that come together use their resources in developing products for the same niche of consumers. By benefiting from the economies of scale that comes with a merger, consumers are saved from possible monopoly prices.
A merger enables a company to avoid duplication. Mergers are sensible in certain industries. For instance, if businesses are competing for passengers on the same road, consumers can benefit from having a single firm with low charges in the region. Apart from this, a merger can also reduce congestion and benefit the environment.
Nevertheless, a merger has its cons as well. These include higher prices that come from reduced competition. A newly established firm has monopoly power due to the reduced competition which gives it a larger market share. Thus, the company can increase prices and consumers will pay if there are no competitors in a region.
A merger can leave consumers with fewer choices. This implies that they will buy the products or hire services of a newly formed company even if they are not pleased by them.
In some cases, a merger can cause job losses. This is usually a concern for most parties especially if the takeover is hostile or caused by the need for an asset stripping. A company that wants to merge might do so because it wants to eliminate some of the under-performing sectors.
A merger can also lead to diseconomies of scale. The newly established company can experience diseconomies of scale due to its increased size. Once a merger has taken place, the new firm that is larger than the initial ones may not have the capacity to ensure effective control and it might have difficulties in motivating workers. Workers who feel like they are a mere part of a large multinational can also be less motivated to perform.
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