MERGERS

MERGERS

It is a combination of two or more enterprises whereby the assets and liabilities of one are vested in the other, with the effect that the former enterprise loses its identity.

MOTIVATION FOR MERGERS..

To diversify the areas of activity and thereby to reduce business risks. To achieve optimum size so as to reap the benefits of economy of scale. To reduce the duplicate expenses and thereby to improve the profitability. To serve the customer better.

MOTIVATION FOR MERGERS..

To have cohesiveness in control of the organisation. To grow without any gestation period. Inorganic growth is believed to be much faster compared to organic growth.

TYPES OF MERGERS..

HORIZONTAL MERGER

VERTICAL MERGER

CONGLOMERATE MERGER

PRODUCT EXTENSION MERGER

MARKET EXTENSION MERGER

HORIZONTAL MERGER..

It refers to the merger of two companies who are direct competitors to one another. Example:Boeing-McDonnell Douglas, Staples-Office Depot.

VERTICAL MERGER..

It is the merger of firms that have actual or

potential buyer-seller relationships.

Example : Time Warner-TBS , Disney-ABC Capitol Cities.

CONGLOMERATE MERGER..

Consolidated firms may sell related products, share marketing and distribution channels and perhaps production processes; or they may be wholly unrelated. Example : Pepsico-Pizza Hut; Proctor & Gamble-Clorox.

MARKET EXTENSION MERGER..

It is a mergers join together firms that sell

competing products in separate geographic markets. Example : Time Warner-TCI.

PRODUCT EXTENSION MERGER..

It is executed among companies, which sell different products of a related category. They also seek to serve a common market. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market.

ADVERSE EFFECT OF MERGERS..

Mergers especially horizontal reduces the number of players and consequently the competition in the market.

Mergers amongst rivals is invariably unfriendly to consumers. Mergers often fail to create harmonisation in human relation.

ADVERSE EFFECT OF MERGERS..

Mergers often results in increased market share and thereby leads to dominance which makes the resultant enterprise complacent and thereby brings inefficiency in the organisation. Mergers between healthy and unhealthy enterprises reduces the tax liability and thereby makes the States exchequer poor.

ADVANTAGES OF MERGERS..

A merger does not require cash. A merger may be accomplished tax-free for both parties.

A merger lets the target (in effect, the seller) realize the appreciation potential of the merged entity, instead of being limited to sales proceeds. A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie, increasing their overall net worth.

ADVANTAGES OF MERGERS..

A merger of a privately held company into a publicly held company allows the target company shareholders to receive a public company's stock, despite the liquidity restrictions of SEC Rule 144a. A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases, such as the assignment of leases and bulk-sales notifications.

DISADVANTAGES OF MERGERS..

Higher prices leading to allocative inefficiency. Lower Quantity and reduction in consumer surplus. Monopolies are more likely to be productively inefficient and not produce on the lowest point on the average cost curve. Easier to collude.

DISADVANTAGE OF MERGERS..

If there is less competition complacency amongst firms can lead to lower quality of products and less investment in new products.
Fewer firms therefore less choice for consumers. The motives for mergers is often poor. E.g. managers may prefer to work for a big company where they get higher salaries and more prestige.

DISADVANTAGES OF MERGERS..

With increased supernormal profits the firm can engage in cross subsidisation or predatory pricing increasing Barriers to Entry. The new firm can pay lower prices to suppliers. Mergers can lead to job losses. If the firm becomes too big it may suffer from diseconomies of scale.

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