660 – Strategic Management

Section – C

16. Explain the importance of Merger Strategy

Meaning
Mergers are events in which two or more companies take a decision to come
together and have the same strategic goals. The most common reasons why
companies merge is to share information, technology or other resources thereby
increasing the overall strengths of the company. 
In many cases, mergers also help to overcome existing challenges, reduce
weaknesses and gain a competitive edge in the market. Companies that merge
together usually consider each other of equal stature and hence they help each
other out to create a synergy. 
Therefore, mergers mostly happen on friendly a term which makes restructuring
easier for both directors and employees. 
Acquisitions
Acquisitions are events in which one company acquires another company. 
In most cases, the company that is financially stronger acquires more than 50% of
shares to take over another company. Unlike mergers, acquisitions don’t always
happen as a mutual decision which often leads to conflicts and tensions.  
In acquisitions, transitions are not always smooth as the company that takes over
can control the entire decision making on staffing, structure, processes and
resources.
Types of Mergers
There are 4 main types of Mergers, and they are mostly based on the overall goal
that the companies are trying to reach together. 
Horizontal
Horizontal mergers and acquisitions happen when companies with similar products
or services come together with the main goal to expand their offerings or markets.
Vertical
Vertical mergers and acquisitions happen when companies in the same industry but
different roles in supply chain join their forces. 
Two companies integrate vertically to improve logistics, consolidate staff or reduce
time to market their products or services. 
A good example of vertical merger or acquisition is when a clothing retailer buys a
clothing manufacturing company.
Conglomerate
Conglomerate mergers and acquisitions happen when companies in different
industries join their forces. The main reason why companies come together this
way is to broaden their range of services and products, reduce expenses or reduce
risks by operating in a wider range of industries.
Concentric
Concentric mergers and acquisitions happen when two companies share customer
bases but provide different services. Most commonly, the two firms operate in the
same industry but do not have a mutual relationship such as a buyer-seller
relationship.
The main benefit of mergers to the public are
1. Economies of scale.
This occurs when a larger firm with increased output can reduce average costs.
Lower average costs enable lower prices for consumers.
Different economies of scale include
 Technical economies; if the firm has significant fixed costs then the new
larger firm would have lower average costs,
  Bulk buying – A bigger firm can get a discount for buying large quantities of
raw materials
 Financial – better rate of interest for large company
 Organisational – one head office rather than two is more efficient
A merger can enable a firm to increase in size and gain from many of these factors.
A vertical merger would have less potential economies of scale than a horizontal
merger e.g. a vertical merger could not benefit from technical economies of scale.
However, in a vertical merger, there could still be financial and risk-bearing
economies.
Some industries will have more economies of scale than others. For example, a car
manufacturer has high fixed costs and so gives more economies of scale than two
clothing retailers. More on economies of scale

2. International competition
Mergers can help firms deal with the threat of multinationals and compete on an
international scale. This is increasingly important in an era of global markets.

3. Mergers may allow greater investment in R&D 

This is because the new firm will have more profit which can be used to finance
risky investment. This can lead to a better quality of goods for consumers. This
is important for industries such as pharmaceuticals which require a lot of
investment. It is estimated 90% of research by drug companies never comes to
the market. There is a high chance of failure. A merger, creating a bigger firm,
gives more scope to tolerate failure, encouraging more innovation.
4. Greater efficiency
Redundancies can be merited if they can be employed more efficiently. It may
lead to temporary job losses, but overall productivity should rise.
5. Protect an industry from closing
Mergers may be beneficial in a declining industry where firms are struggling to
stay afloat. For example, the UK government allowed a merger between Lloyds
TSB and HBOS when the banking industry was in crisis.
6. Diversification
In a conglomerate merger, two firms in different industries merge. Here the
benefit could be sharing knowledge which might be applicable to the different
industry.