Question

Two of UK’s larger wine distribution companies, Bibendum and PLB, merged their businesses in October 2014. Bibendum is primarily a restaurant supplier while PLB focuses on supplying wines to retailers. Does this suggest a means through which the merger might create value added? Hint: in your response, consider both economies of scale and scope for the new firm structure.

Answer 1

ANSWER- A Merger occurs when one firm acquires the whole business (assets and liabilities) of another. Generally mergers are performed with a view of future economic gain.

The above situation is a case of horizontal merger (one of the type of merger) as the firms are in same line of business.

The merger creates a means of value addition by following ways-

(1) Synergy

Companies merge to take benefit of "synergy" and " economies of scale". synergy happens when two companies with similar business combine, as they can eliminate duplicate resources like branch and regional offices,production facilities,research and development projects etc. A fraction of many millions of dollars thus saved and boosting shareholders earnings.

(2) Domination

It means creating monopoly in the market.it helps the business to compete internationally.however this move may bring them under surveillance of anti-competition watchdogs and regulatory authorities.

(3) expand business in new geographical area

A company seeking to expand its business in a certain geographical area may merge with another similar company operating in the same area to get the business started.