Companies can decide to merge or acquire other businesses to grow further or solve a problem within the firm. For example, some organizations may see a merger to reach a new market or expand to new locations. In contrast, others wish to reduce the number of potential competitors and acquire a larger portion of the market. With the different intentions behind each union, businesses may reach unique results that can be beneficial or detrimental to the company’s success. The present paper considers the benefits and drawbacks of mergers for the company and its employees. It also provides an example of a failed merger and investigates the potential reasons behind the negative outcomes.
Merger: Description
To review a merger’s advantages and disadvantages, one must consider what it is. Mergers differ from acquisitions, as the latter describes a process of one company buying another but retaining its higher position and having no requirements of changing internal processes in either entity. In contrast, mergers are often transformative in nature, and the participating organizations are encouraged to change their strategies and goals to become a single entity (Kumar & Sharma, 2019). For example, if two retail companies join, it is possible that the stores from both businesses will be changed to fit a new unified image (Kumar & Sharma, 2019). Similarly, production or media companies may also integrate products, technologies, and departments to move forward as a united organism. This description demonstrates that a merger requires sufficient resources and calls for all members of the merging companies to engage with the process.
Advantages of a Merger
Successful mergers can bring many benefits to the new organization. The first benefit is the most apparent in horizontal mergers, where two companies from the same market segment share their resources and processes. As the two businesses have their own unique customer bases, the result of them becoming one company leads to increased market share (Kumar & Sharma, 2019). Thus, the two entities stop competing with one another while also becoming a stronger presence in the market. At the same time, if the merging companies offer similar products or services, the result of this union eliminates the issue of duplication (Kumar & Sharma, 2019). Therefore, the business may produce goods that are more easily distinguished in the market and attract more customers who would otherwise be divided into two customer bases.
Apart from the market share and presence, other advantages are financial. As mentioned above, reduced replication leads to more unique offers and stronger competitive ability. At the same time, the merged company can lower its prices for the customers and expand the number and type of produced goods (Kumar & Sharma, 2019). The costs for the business also undergo changes and can be reduced. One of the achievements of successful mergers is economies of scale – benefits that large companies receive due to their size (Borodin et al., 2020). For instance, it may become easier for merged entities to purchase materials at lower prices or produce goods with cost reductions. If one or both companies provide valuable assets, the technical economy improves after a merger is finalized.
Finally, an alliance between companies can lead to new opportunities geographically and save failing businesses. For example, two firms may cater to similar customer bases but have limited reach due to the type of products or services offered. A merger of these enterprises may lead to expanding their consumer outreach without spending significant resources to build new facilities or create brand loyalty (Kumar & Sharma, 2019). As both businesses are likely to have a presence or offer helpful resources, such unions lead to expansion quickly. In other scenarios, where one or more companies are failing financially, a merger can be a new chance to improve performance. A more successful business can merge with an unprofitable one to share resources and technologies while taking advantage of available locations, employee knowledge, or another beneficial element of the firm.
Disadvantages of a Merger
While collaboration between companies can bring many benefits, it can also result in negative consequences for businesses, customers, and the market. As mentioned above, horizontal mergers can decrease the competition between firms with similar products. This change in the market share can lead to its monopolization, resulting in more control over the segment and the company’s ability to increase prices and destabilize established customer relationships (Shapiro, 2019). At the same time, achieving economies of scale may be challenging if the merging entities do not have many similarities (Shapiro, 2019). In contrast, the new business may encounter additional financial difficulties and be unable to redistribute the resources to support the new structure.
Additional problems may arise if the uniting companies fail to adequately prepare and implement their plan. If the cultures in the businesses are different, employees and management can struggle to communicate and create new goals, resulting in a decline in employee performance quality (Kumar & Sharma, 2019). Similarly, if the merger plan does not account for communication and motivation, the firms may not be able to engage all employees, leading to increased pushback, low interest in the new processes, and a lack of internal control. Overall, it is vital to review the new organization’s structure to avoid the disadvantage that large companies face when communicating with an increased number of workers. Finally, if the new business does not account for the distribution of workers, some employees may lose their jobs, contributing to unemployment.
Example: Kmart and Sears
A case that shows how the lack of planning has resulted in a financial failure is the merger of Kmart and Sears that took place in 2005. At that moment, Sears was an unsuccessful retail store chain that could not compete with such major rivals as Walmart and Home Depot (Marsh & Gower, 2019). Kmart was struggling in a similar way, and the two companies decided to unite their assets and resources to create a stronger presence on the market and attract more customers. Nevertheless, the decisions made during the merger process have demonstrated that the two firms did not have a consistent and thought-out plan for dealing with financial problems, restructuring, and growth. The new company invested in an online shopping program, which, although necessary for a younger consumer group, did not interest older customers who preferred Sears and Kmart (Marsh & Gower, 2019). As a result, the new entity failed to grow its consumer base and is currently struggling to avoid bankruptcy and complete closure.
Conclusion
As seen from the investigation, mergers can bring many benefits to companies. Uniting resources and knowledge can expand the business geographically, attract new customers, and lead to financial growth. However, mergers also pose a risk to the stability of the market and prices. Moreover, the process is challenging, and mistakes can result in significant failure for the new firm with a risk of losing even more money and assets than before the union. The example of Kmart and Sears demonstrates that mergers are not always the best option for avoiding bankruptcy and that planning for a merger is essential for its success.
References
Borodin, A., Sayabek, Z. S., Islyam, G., & Panaedova, G. (2020). Impact of mergers and acquisitions on companies’ financial performance. Journal of International Studies, 13(2), 34-47. Web.
Kumar, V., & Sharma, P. (2019). An insight into mergers and acquisitions. Palgrave Macmillan.
Marsh, J., & Gower, K. (2019). Options for exit: The end of Sears. Southeast Case Research Journal, 16(2), 88-94. Web.
Shapiro, C. (2019). Protecting competition in the American economy: Merger control, tech titans, labor markets. Journal of Economic Perspectives, 33(3), 69-93. Web.