Sunday, November 25, 2007

Understanding Business Mergers

A merger is one of the methods of business combinations between two companies where only one of them becomes the surviving entity. The assets and liabilities of one company become part of the assets and liabilities of the surviving company. Usually, the bigger company survives, acquiring the smaller one as part of its assets. No new entity is created.

Mergers may be:

Horizontal or the merger of companies with the same or related product lines
Vertical or the merger of a vendor or a customer.
Friendly or hostile. Acquiring another company is one way to add to shareholder value and also for the following reasons:

Economies of scale:

This is a commonly used set of words in business. With the operations of the two companies merged, the cost of operations is lowered since the duplication processes are turned into one. The combined operations that would help reduce costs are as follows:

Purchasing. This would also enable the surviving company a better bargaining power with the increase in volume.
Financial. Can negotiate for better interest rates.
Organizational. There shall be only one general manager and some employees maybe terminated for redundancy

Increased Sales Volume or Increased Market Share. Almost, if not all mergers are between major competitors or companies with the same or related products. Naturally, there will also be a combination of product or services output resulting to increase in sales volume. The combination also includes the bigger market share.

Synergy. The surviving company can have better, efficient use of the combined resources.
Taxes. In a merger, it is also common that the merged company is a financially losing company, entitled to some tax write off. The surviving company can use this to its advantage. Increase in R&D budget.

Post Merger Scenario. In a merger, the most affected are the employees. Some problems can not be avoided because people are also merged. Some of the concerns that should be anticipated are:

Job security, especially on the part of the acquired of merged company. In fact, the managers in the acquired companies may lost their jobs due to redundancy. Concerns that may not have been anticipated by the surviving company. Employees of the acquired company need training to know the processes in the surviving company. Different cultures in the two companies. This also means a difficult mind set which would make it difficult to blend in the new workplace

Merger is one way to expand the company. For example, a bank may suddenly have an additional 200 branches through mergers with another bank. As in any new venture, mergers need an honest, thorough discussion between the two merging parties during the negotiating phase.

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