Module 2 — M&A: The Good and the Bad

Chapter 2.2

Issues related to Merger

The relative success or failure of a merger depends on the criteria used to evaluate success and the timescale chosen to make the evaluation. It appears to be true that relatively few mergers create long-term shareholder value in their own right.

Some of the issues related to mergers are:

 

  • Higher price: While a merger allows companies to reduce competition, it can also give rise to monopoly in the market. The market goes into monopoly when there exist only a single manufacturer/supplier for a particular product and/or service. With reduced competition and high market share, the company can demand higher price from the customers. Even in the absence of monopoly, reduced competition more often than we think, leads to higher prices for the customers.
  • Question of layoffs: When two companies merge, it often results in the reduction of labour force of the two companies. While this is one of the methods adopted by the company in order to save cost, it will have a negative impact on the employees. When they live in the constant fear of losing their job, it reduces employee motivation and results in reduced productivity.
  • Clash of cultures: The merging of two companies is more of a merger of the people associated with the companies than just the combination of two brands. Hence it is extremely important to ensure the compatibility of the culture prevailing in both organisations. If the two merging companies have different cultures and norms, then it can give rise to conflicts.
  • Consumer attitude: In the merger of two firms, it is important to consider the consumer attitude towards the individual companies and whether or not they perceive the two companies to be compatible. If the consumers don’t have the same perception about the individual companies, it will result in the merged company losing customer support.
  • Diseconomies of scale: When two companies decide to merge together, it is mainly to achieve economies of scale. A company is said to achieve economies of scale when it is able to reduce the average per-unit production cost with increased production. But at times, when two companies merge, being the bigger one will actually create dis-economies of scale since per-unit production cost increase due to increased coordination costs.