Unlike in acquisition, a merger is when two, or more companies, or businesses combine to form a new entity.
This form of partnership could be to gain access to a larger market and customer base, to reduce competition, or to achieve economies of scale.
But whatever the objective, or type of merger, one cannot deny the many benefits business mergers offer.
The effects of COVID-19 has severely affected the fortunes of many companies, making many to consider, merging with other similar companies that are stable.
Factors that determine business mergers include the following:
To Achieve Financial Capacity
When businesses lack adequate finances to ensure day-to-day operations, such businesses can look to mergers.
The move will result in achieving higher financial capacity. Such capacity can be used to finance more business development processes.
With mergers, businesses that offer similar products, or services can penetrate more markets. They can also get into new ones with new, or enhanced products, or services.
In addition to market penetration, advanced resources and more assets, the newly formed business can increase profit margin with business mergers.
Value For Shareholders
When businesses undertake mergers, they can increase value, wealth and make profits for the shareholders.
This is because the partnership between businesses will result in increased value. A value that exceeds the sum of the values of two individual businesses, or companies.
Advantages of mergers for businesses also include the following:
Reduction in Cost of Operations
With mergers, businesses can cut down on the cost of operations. This means that they can now achieve economies of scale.
For instance, they can now afford to buy raw materials in bulk. An option that will be next to impossible, when separately managed.
Since investments around assets are now spread out over a larger output, there will also be technical economies.
This means an overall reduction in the cost of operations.
Increase in Market Share
With a larger market share, when businesses merge, the newly formed entity can now get ahead of their competition
This will mean the expansion of the business into new geographic areas. Areas that both businesses, operating separately, will not be able to penetrate.
Rather than compete for the same set of markets or consumers, similar businesses can opt for a merger.
The move will eliminate replication and competition. The result will be, reduced prices for customers, market expansion and increased productivity for the newly formed company.
To penetrate new markets, or to develop a new product, service, or technology, there will be a need to invest in research and development.
With a business merger, a newly formed business will be more profitable and will boast bigger funds, for research and development.
Mergers are quite advantageous, but there may be some cog in the wheel, sometimes. Sone cons of business mergers include:
Mergers can create gaps in communication, as merged businesses may have different work cultures.
Consequently, effective communication will be lacking. This can, ultimately, affect the performance of the employees.
The lack of communication can mean that, the merged businesses have little in common with each other.
This can also cause a strain in the synergy, between the merged businesses and their staff.
Increase in Price
Since mergers result in reduced competition and a larger market share, the newly formed business can gain monopoly power.
It may, then, decide to increase the prices of products, or services, to the disadvantage of consumers.
In a merger that is non-cordial, the business with the upper hand can decide to eliminate under-performing assets or staff of the other business.
This would mean a loss of jobs for some employees.
With these apparent downsides of business mergers, notwithstanding this form of partnership, or collaboration, can help businesses meet set goals.
It can, also, help them infiltrate new markets, introduce new products and services. It can, also, effectively, help manage the day-to-day operations of both businesses.
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