According to Fairburn and Kay (1989) mergers can be dated back in the 1920s, and from the past it is evident that mergers may cause more harm than advantages. Merging and acquisition activities have increased and businesses merge because they think by doing so various advantages will be realized, therefore increase the profits of the business.
Ravenschaft and Scherer (1987) state that businesses will merge because they think that this will result into an increase in efficiency in the new firm formed after merging. Efficiency is expected to rise after the increase in capital, sharing of expertise, elimination of duplicate processes in production and the realization of economies of scale. All these advantages associated with mergers will influence companies to merge; however, according to Hughes (1989) mergers may not lead to the realization of efficiency and they may lead to even increased inefficiencies in the business.
Companies will merge in order to gain market power, market power increases where industries that merge are in the same products in the market and when they merge they form a monopolistic business, which controls the prices and the quantity produced. The companies will also merge as a way to increase their competitive advantages over their rivals and this makes the new business a market leader, however, this may not be the case where government policies may restrict organizations to form monopolistic market forms.
Industries have different levels of market share in the market, thus when the businesses merge they form one much larger market share, as a result the market share increases and this acts as a motivating factor for a merger. The reason why a bigger market share is preferred is because an industry will realize economies of scale, increase sales volume, increase sales revenue and therefore increase profits earned.
According to Henry (2000) firms will also merge as a way to smooth earning results into the stock price over time; therefore, investors are attracted to invest in the company’s stocks. When two companies merge their earnings and stock prices are more stable. This increases investor confidence.
Industries will gain expertise from mergers. Executives and managers share ideas, and this helps in improving the efficiency and productivity. Sharing is made possible only when businesses merge.
Mergers will cause problems in the market and to the employees and investors. Problems include loss of jobs, demoralization of employees, loss of investor confidence and a decline in the market area.
Planned mergers adversely affect employees. The process is slow. When an announcement is made about the merge of companies, the working climate in those companies will immediately change. Employees are confused and anxious about what will happen when the merge takes place and this reduces productivity. Employees also feel betrayed; hence, mergers will result into reduced employee loyalty. Both companies will report poor performance due to reduced productivity and efficiency during the merger negotiation process. This is evident from a report by Totenbaum (1999) who reported that the productivity of business after a merge dropped 25% to 50%.
Mergers involve major restructuring of the new company to be formed. This is due to the fact that merging businesses will eliminate duplicated processes as a way of cutting down on production costs. Employees will lose their jobs. According to Appelbaum (2000) the merge process leads to uncertainty. For this reason, employees dwell more time thinking about their career and job rather than the business at hand. This will reduce the productivity of the employees in both companies.
Upper leaders in both companies may be deprived of their authority. This is a painful process and may affect their performance. This process demoralizes such employees and performance of the new company formed may be even worse.
Mergers do not always lead to the advantages anticipated, and research shows that there has been a reduction of companies’ performance after merging.
Mergers also pose major problems: demoralization of workers, loss of resources and time, reduced employee loyalty because employees feel betrayed, low productivity as employees spend more time speculating about the future and finally poor performance of both companies during the negotiation process.
Companies should be careful when merging. There should be proper communication with the employees about the reasons why. The industry should select the most appropriate partner and the negotiation process should take the shortest time possible so that it does not affect the productivity. Therefore merging of companies is not a simple task and requires taking into consideration many factors that may lead to failure.
A. Hughes (1989) The Impact of Merger: a survey of empirical evidence for the UK, McGraw Hill Press, New York
Appelbaum S. and Yortis H. (2000) Anatomy of a merger, Management Decision, Volume 38, 9
Ashkenas Ronald and Lawrence J. (1998) Making the Deal Real; How GE Capital Integrates Acquisitions, Harvard Business Review, Volume 76 Issue 1D. Ravenscraft and Scherer F (1987) Mergers, Sell-offs and Economic Efficiency, McGraw Hill Press, New York
D. Henry (2002) Mergers; Why Most Big Deals Don’t Pay Off, McGraw Hill Press, New York
Fairburn J. and Kay (1989) Mergers and Merger Policy, Oxford University Press, Oxford
Reish David (1988) the Impact of Taxation on Mergers and Acquisitions, UniverSity of Chicago Press, Chicago