Question

What are the main benefits assumed to flow from a merger and consolidation
or takeover? Why do so many mergers and takeovers fail to deliver improved
financial performance?

Mergers and takeovers in economics.

Answer 1

Merger and consolidation is a step undertaken by businesses in order to combine two or more businesses together. Also takeover being similar to marger, means acquiring a firm by another firm. This is done for various reasons. The reasons are the benefits that merger or consolidation or takeover provides.

• Such an act by businesses help to lower the cost of operations. It can be understood as : when two firms are working separately cost of operation increases as there will be more branches working under the firm. Often small business dont find economies of scale due to limited scope. Thus merger or takeover helps to lower the cost of operations.
• Merger or consolidation or takeover actually helps to share technical know how, also share expertise thus promoting efficiency in the organisation. For example : firm A is efficient in handling marketing and advertisement related activities. And firm B has hold over manufacturing products. Hence when these two companies come together it will help them to share their expertise and technical know how.
• Operational effeciency is achieved when firms come together as they more they are able to share their expertise the more they will become efficient. This also helps to reduce outsourcing.
• Merger or consolidation or takeover helps to increase the shareholder's wealth maximisation. This can be understood as : when firms/businesses go for merger or consolidation , it leads to converting of stocks of both individual companies into stock of a combined new company formed. Thus by this way, shaeholder's value is increased.
• Merger or acquisition helps to diversify the field of operations. It means that by coming into such partnerships means one firm's abilities and potential is now accessible to the other firm, which helps to diversify their field of operation. As given in the example above, now firm A and B are expert in both production and marketing. Thus field of operation has increased, which also means increase in market capture.

There are many examples seen where merger and takeover or consolidation actually dont serve the benefits as stated above. This becomes the case because of poor management. Often when firms come together, they grow in lines of operation(as stated above) , thus when they grow, it becomes difficult to manage the whole thing, leading to failure . At times it is seen that both companies that merger or consolidate, have different background and cultural differences, which often may clash and bring out chaos in the organisation. Also at times, it is seen that model and goals of both the organisation was different when they came together. Thus it creates complexities in bringing goals and model of new organisation at par with the both organisation's earlier set goals. Also it may fail due to some external factors like change in evonomic policy or political stability of the government within the nation, which may hamper the growth of the newly formed organisation. Merger and acquisition also fail because of miscalculation or evaluation of whether or not to merger or consolidate . Often what seem satisfactory in the papers may not be true in practical situation. It means that while the papers of the company to be consolidates looks clean but it may not be efficient or good enough in practical life. Such an miscalculation may take the newly formed company to fail miserably.