Advocacy Group Children\'s Defense Fund

Advocacy Group

Children's Defense Fund

Advantages and disadvantages of mergers and acquisitions

Mergers and acquisitions both combine two separate entities into a single, incorporated firm. While the economic rationale behind the two of these business strategies is similar, they are legally different processes. In a merger, two separate firms become one in a partnership of equals. In an acquisition, a larger firm 'takes over' a smaller firm, either with the smaller firm's consent -- or without its consent in a hostile takeover (What is the difference between a merger and a takeover, 2010, Investopedia).

The usual rationale behind a merger or acquisition is achieving an 'economy of scale.' Organizations with similar purposes can often accomplish their objectives more efficiently when they are larger or are able to use one another's strengths. (Of course, each firm also acquires its partner's weaknesses as well). Often, a company can charge a lower price for its products as a result of a merger, given that operating costs per unit have decreased due to economies of scale, increasing the profit on the items sold. The ability to price low can correspondingly increase the company's overall market share. Conversely, 'horizontal integration' and market dominance in the same product line can reduce competition and give the firm greater leverage in raising prices, although if the new entity is so large and consolidated it is a monopoly, this would be prohibited under anti-trust law (Growing a business, 2010, tutor2u)

Sometimes, companies producing similar products merge, but in other cases, such as RJR Reynolds and Nabisco, diverse types of companies merge to engage in 'risk management' -- so that when one sector of the economy is doing poorly, the other branches may still thrive (Growing a business, 2010, Tutor2U). Smaller companies may seek the refuge of a larger organization, while a larger organization may seek to absorb a potential competitor within its fold, like Whole Foods' acquisition of Wild Oats. Wild Oats was a more regionally-based natural foods market and a former Whole Foods rival. Mergers and acquisitions also offer the potential for expansion into a new regional market if the old one is super-saturated, if one of the merging or acquired entities is located in a different area of the world.

On paper, it would seem that mergers and acquisitions can often convey value to a company, but two-thirds of most large mergers fail (Mergers and acquisitions: Why they can fail, 2010, Investopedia). One critical question to ask when evaluating if a merger or acquisition is likely to be successful is if the merging organizations have a similar enough corporate culture and standard operating procedures to truly generate such mutual synergy. Worker motivation may decrease if the corporate cultures are inharmonious. When straight-laced Disney acquired the more freewheeling Pixar studios in a friendly takeover, creating a common culture still proved to be a challenge, despite the fact that both entities were animation studios (What is the difference between a merger and a takeover, 2010, Investopedia).