The Advantages and Disadvantages of Mergers

June 2006 was one of the busiest periods in merger history. In a span of less than 100 hours, mergers and acquisitions totalling about $ 110 billion were finalized around the world in various industries. A merger is the complete absorption of one firm by another. Merger has its own pros and cons.

A primary advantage of the transaction is that a merger is legally simple and does not cost as much as other forms of acquisition. The reason is that the firms simply agree to combine their entire operations. Thus, for example, there is no need to transfer title to individual assets of the acquired firm to the acquiring firm.

Besides that, merger also reduces the number of competition in the market and captures additional economic scales of the market. This will keep the company growth with the amalgamation of the competitive advantages of both firms.

Merger also enables the company to restructuring and strengthening the organization as firms involved in the transaction share strategies to strengthen the organization, thus eliminate weaknesses in the firm. By the way, two heads are better than one.

After the merger transaction took place, acquiring firm enables to make new investment with the surplus money available. Perhaps, the organization may invest in larger investment to yield more profit.

The transaction also allows the acquiring firm to gain more market share, thus results better confidence from its current customers as the firm seems more reliable. This also results increase of new customers and also attracts other parties to have relationships with the organization in loads of kinds.

Merger also has its own disadvantages. One of the disadvantages is that a merger must be approved by votes of the stockholders of each firm. Typically, two-thirds (or even more) of the share votes are required for approval. Obtaining the necessary votes can be time-consuming and difficult. Furthermore, the cooperation of the target firm existing management is almost a necessity for a merger. This cooperation may not be easily or cheaply obtained.

Moreover, the diseconomies of scale if business become too large which leads to higher unit costs. Its also will create clashes of culture between different types of business. Thus this reduces the effectiveness of the integration.

Merger also may be creating a conflict of objective between different businesses, meaning decisions are more difficult to make and causing disruption in running of the business.

It also results dissatisfaction among current staffs as positions will be limited and the management have to decide which staffs to hold the position after the transaction has taken place.

Organization merger would provide loads of benefits to both parties. Each party should ensure that the transaction made benefits all parties involved, and not biased to either party before seal the deal.