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Impact of Mergers and Acquisitions

5 chapters

Impact of Mergers and Acquisitions

Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers and acquisitions on various sectors of the company differs.

Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers and acquisitions on various sectors of the company differs. In the chapter, details of how the shareholders, employees and the  management people are affected has been briefed.
Mergers and acquisitions are aimed at improving profits and productivity of a company and also, the objective is also to reduce expenses of the company.

Aftermath of mergers and acquisitions impact the employees or the workers the most. It is a well known fact that whenever there is a merger or an acquisition, it is followed by lay offs. In the event when a new formed company is efficient in business, it would require less number of employees to perform the same task. Under these circumstances, the company would have to downsize their labour force. If the employees who have been laid off possess sufficient skills, they may benefit from the lay off and move on for other good opportunities. But it is usually seen that the employees those who are laid off would not have played a major role under the new organizational set up. This results in their removal from the new company set up. These workers in turn would look for re employment and may have to be satisfied with a much lesser pay package than the previous one. Even though this may not lead to drastic unemployment levels, nevertheless, the workers will have to compromise.

The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the cases that the acquiring company usually pays a little extra than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks. So that the shareholders forgo their shares, the company has to offer an amount which is more then the actual price, and which is prevailing in the market.

The shareholders of acquiring company: They are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed. This can be attributed to debt load, which accompanies an acquisition.

In last couple of years we have seen record levels of merger and acquisition (M&A) activity but also there is increasing concern about industry concentration and its negative effects. And there is always a debate going on whether mergers improve or harm economic welfare, there is little evidence supporting either side of the argument. In recent research, we provide new evidence that while mergers may raise profits, many fail to deliver efficiency gains that could increase overall prosperity.

Firms engage in mergers because they see a profitable opportunity. If profits rise due to lower costs — through higher productivity or economies of scale, for example — the result can be lower prices for consumers and improved overall economic welfare. However, if increased profitability comes from greater concentration of market power within a firm and if firms use that power to mark up prices, then the net effect on welfare can be negative.

While these concepts are relatively intuitive, measuring what occurs after mergers take place presents obstacles that have limited systematic study of their effects on efficiency and market power.

On average, mergers do not have a discernible effect on productivity and efficiency. Specifically, there is no evidence for plant-level productivity changes, nor there is evidence for the consolidation of administrative activities that is often cited as a way in which mergers yield lower costs through economies of scale. There is no evidence that merged firms are more likely to close down less-efficient plants. By contrast, it is found that substantial average increases in the amount that firms mark up prices over cost following a merger, ranging from 15% to over 50%, depending on the control group we use.

Theory suggests that the market power effects of mergers are likely to be largest for horizontal mergers. Consistent with this, we find that increases in price mark ups are higher in horizontal mergers. By contrast, when we look at non horizontal mergers, we find little evidence of price mark ups and even find some positive effects on plant-level productivity.

There is always a doubts about the ability of mergers to drive productivity, particularly when two firms in the same industry merge. In such cases, companies may well profit, but not necessarily in ways that improve the economy overall.

  • M&A have different impact on the target company and the acquiring company, and we have discussed these affects in the chapter.
  • Although Mergers and Acquisition are done in the anticipation of increasing efficiency and profitability, but sometimes M&A does not leads to all the effects, in fact it can bring some challenges with it, these challenges we will se in the next chapter.