MERGERS AND ACQUISITIONS

Mergers and Acquisitions



Mergers and Acquisitions

Introduction

A Merger occurs when two or more corporations join together to form one company. Common examples of mergers include: Cadbury and Kraft, Exxon and Mobil and JP Morgan chase and Bank one corp. There are two common types of mergers which exist and they are: Horizontal mergers and Vertical Mergers. A horizontal merger occurs when a two or more firms that are in the same sector of production i.e. primary, secondary or tertiary, merge together to form one company. An example of this type of merger involves a car manufacture such as Renault joining with another car manufacturer such as Nissan. Vertical Mergers include companies in different sectors of production merging together. A good example of this a vertical merger involves an oil refinery such as Exxon or shell merging with a petrol station (Donald, 2008, Pp. 32).

DiscussionA deal is usually agreed between the chief executive officers (C.E.Os) of the merging company and the terms and conditions are mutually established. Once the deal has been done, the newly formed merger begins to operate and each individual company enjoys the rewards of joining companies. This includes: Higher market share, lower costs of production, increased profits, reduced competition, greater value generation and strong support during times of downturn. Higher market share allows a financially strong firm to support a distraught company by increasing its market share. The merger proves to be more competitive than the parent companies. Lower costs of production improve the firm's efficiency. This is due to economies of scale and as the new firm grows and develops, production is carried out on a large scale leading to more output. As a result, the cost of production per unit of output gets reduced. Mergers and acquisitions often lead to an increased value generation for the company. The newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies when a merger takes place. High profits imply the success of a company and tend to encourage investors. Mergers are also advantageous as they support firms entering the market. They also secure firms that are heading towards a downfall by cutting costs significantly and maintaining sales through the large market share (Marks, 1998, Pp. 85). 

Although Mergers may seem faultless when the advantages are concerned, there are flaws with merged companies. A booming stock market leads to thoughtless mergers. Decisions are made irrationally as the intentions are flawed and this can be a risk to companies engaging in mergers. Some Executives may decide on mergers not because of the gains to the company but because of the big bonus for merger deals, no matter what happens to the share price in the future. On the other hand several mergers are created by fear of being left behind technologically and geographically. Companies become eager to acquire their competition before they get purchased. Some mergers are also prone to the risk that certain companies cannot simply work ...