Since the introduction of globalization the business world has been constantly evolving. The twentieth century witnessed some of the greatest evolution that most top organization went through. Most of these organizations which started from the scratch reached peak of success within a very short span of time. Indeed the transformation of these organizations was something extraordinary.
The constant hunger for success of the business entities compelled them to reach the markets which they could not have imagined a few years ago. One can argue that the advancement in internet technology may have made their aim a bit easier to achieve but no one can deny the visionary thinking of those business entities. This led to transformation of world into a global village.
The objective of going global has not only served the business entities but has vastly benefited the humanity. The countries which were under developing stage started to make rapid strides towards getting listed among developed countries. The foreign investment allowed them to build infrastructure on advanced basis and boost their economy which ultimately was used for the welfare of their nation.
The expansion of businesses into far off places by no means was an easy task. However, the will and determination of business entities enabled them to think out of the box and look for ways to achieve their goal. That very aim gave a new concept to business world which was termed as a merger. Businesses used this concept for different purposes including; increasing financial strength, collaborate in operations, expansion of businesses, etc. If it is said that the term "merger" was of the most influential factors in transforming the business it would not be wrong.
What is a Merger?
Different experts have defined "merger" in a variety of words, but the actual theme was same. Gaughan (2005) defines merger in the simplest form as the combination of two corporations in which the identity of only one firm remains. The firm whose identity remains overtakes the operations of the other company, their assets and their liabilities as well.
Whenever the two firms undergoes merger the objective or purpose is always different even the two firms involved in a merger can have varying goals from each other. For example one firm which is financially very weak and unable to meet its liabilities may very well look to sell its operations to a firm which is financially strong and can handle the liability issues of the first firm. This will help firm one to prevent itself from the legal obligations. On the other hand the firm two may look to acquire the operations to expand their business with the lowest possible investment and the firm provides them exactly that.
Why Firms need Merger?
The firms merge with other firms for a variety of purposes. The benefits and purposes vary from firm to firm and industry to industry. However, most firms look for mergers in order to increase their efficiency, improved market share, increased and enhanced resource capability, increase brand recognition, strong asset base, etc (Chui, 2011). The benefits of the merger for the firms are enormous that is the very reason we witness more frequent mergers in the business world.
Most of the companies which started on the smaller scale increased their capability with the help of mergers. The firms used mergers to enter into new markets and geographic locations. Furthermore, the urge to have increased expertise in technology and management is another influential factor in the mergers.
Advantages of Merger
The merger can bring lots of benefits and fruits for the organizations. If properly planned and thought out, the use of mergers in successful business operations becomes unavoidable. Some of the major advantages of the mergers are described below.
Entry into the New Markets
The mergers allow companies to enter into new markets without any hassle. The statement is especially true when the companies started to go global. The collaboration with the local firms can help firms get a deeper insight of the issues related to a country where they plan to initiate their operations. The dos and don'ts of that specific culture will be more adequately taken care of if the firm merges with one of the local company from the same industry.
Increased Market Share
The properly thought out and planned mergers will allow firms to increase their market share. The company which overtakes the operations of another will be in a position to enjoy the market share of that company which ultimately have a positive effect on the bottom line of the income statement of that company.
Transfer of Expertise
One of the major benefits that a firm can enjoy from the merger is the availability of expertise which it might be lacking previously. This will allow the companies to better utilize their resources which will ensure that firm meets its goals and objectives.
Development of Synergies
The mergers between the companies will allow them to create synergy among different departments of the companies. The weakness of one company may be the strength of the other hence eliminating weaknesses of both firms. This result in better performance of the companies and targeted markets is well served.
Competitive Advantage
The mergers will allow firms to achieve a sustained competitive advantage as they will be in a better position to capture most of the market share, create synergies among the departments, and achieve economies of scale and enhanced resource capabilities including human resources and technological resources.
Disadvantages of Mergers
The mergers can be associated with a number of benefits and advantages; however all is not green with mergers. There are some loopholes with mergers which can have devastating consequences for the firms. The problem in most cases is a direct result of the poor planning or lack of planning before initiating mergers. Some of the disadvantages are given below.
3.1. Clash of Cultures
The clash of cultures is one of the biggest issues found in mergers. The firm finds it difficult to gel together as one unit which cannot be a good sign for the firms. The clash of culture may result in difference of goals which ultimately kills the purpose of creating synergy among the firms.
Brand Image
If one the firm in the merging process has bad repute in customer perception it can be appalling for the organization with high brand image. The merger may affect the customer loyalty of the firm with an enhanced brand image as a customer would start perceiving it in the same way.
Employee Firing
In most mergers the employees of the merging firm are the frost one to face the music. If they did not meet requirements of the company they probably have to face a layoff. This is the reason that the employees of the most companies resist mergers.
Mergers and Profitability
If the main aims of the mergers are examined, the common element found would be the underlying purpose i.e. profitability. Most of the firms look to increase the bottom line amount of their income statement for which they are constantly explore different options and merger is one of them. In most cases the result of the merger is more or less same.
Firms use mergers to enhance their competitiveness and to broaden their portfolio in an effort to minimize the risk factor (Kemal 2011). This elaborate the motive of a merger as firms look to increase their market share and expand their business. Mergers allow firms to increase their reach and they can touch those market segments which they could not have before. This will help them enhance their reputation as company hence increasing their share price which is always profitable for any company.
The cross border mergers can be extremely beneficial for both sides. With the entrance of foreign company the country's foreign direct investment increases. Moreover, it creates new employment chances for the natives. The new concept of corporate social responsibility can directly improve the welfare of that society. The natives of that country get to enjoy much more enhanced services and products. So, the mergers cannot only be profitable for the firms but it can benefit the country and its people in many different ways.
Downsides of Mergers
Not every merger has borne fruit for the organization. When mergers have failed it also damaged the stronger firms as it immensely affected their returns. The effect on returns means that the shareholder's wealth goes down which is critical for any organization as it can bring severe consequences for the organization.
The basic criteria in measuring the success of the merger are to examine the returns after merger for a period of three to five years. The period of five years will provide a good idea that whether the merger between the two firms served the underlying purpose or it created the opposite effects.
Stahl GK, Mendenhall ME (2005) believes that the major issues that merger can bring for the firms are the HR issues. One of the most famous mergers of Daimler Chrysler encountered the same problem. The merger which was expected to bring profits from the start did not live up to the expectations as it struggled from culture clashes. Stahl GK, Mendenhall ME (2005) believes the varying cultures of both the organization was a major factor that made the firms to take long time to adjust
The cultural clashes are norm in any merger. The main reason of the culture clashes is the difference of mission and vision of the two organizations. The difference in mission and vision creates a huge gap in the approaches or strategies of two organizations. It is like two trains destined for opposite direction are joined together which ultimately will bring catastrophes.
Some famous Mergers (Profitable and Unprofitable)
As the competition within industry grew business world discovered a new method of dealing with it i.e. collaboration and merging into each other. The business world witnessed infinite mergers over the years, some of which changed the entire fate and the complexion of the firms either negatively or positively. The profitable mergers helped the firms to reach the heights they were never destined for and some unprofitable which in most cases end up in winding up of the operations. Some examples of profitable and unprofitable mergers are discussed below.
6.1. Successful Merger
The merger between the Disney and Pixar is still still considered to be one of the most perfect mergers of all time. The timing at which this merger took place exhibited the effective thinking and strategy.
The famous Walt-Disney had released several of Pixar's movies previously and at the time of the release of "Cars" their contract ended which prevented Walt Disney to release the movie. So, the two firms decided to merge which could free them from the walls of contract and they can work together without any hassle. The success of the merger can be witnessed from the movies that released after the merger including "Up" and "Wall E".
Unsuccessful Merger
The most famous example of unsuccessful merger was the merger between the Daimler Benz and Chrysler. It was one of the most anticipated mergers but did not meet its potential hence turned out to be unprofitable deal between the two organizations. The two firms which went through the merger for a sole purpose of creating dominance in the automobile industry and to capture the major chunk of the market.
However, the things never went as planned for both the firms. The difference in the work environment and culture were considered to be major issues in the downfall of both organizations. The merger which was expected to yield high returns for both firms end up in selling its operations Cerberus Capital Management in just seven billion dollars.
Merger a Viable option or not?
Ever since the introduction of the mergers the one question that has been discussed most frequently is whether a firm should look to merge or not? The answer might not be as simple as most people think. The most suitable answer to the question however, remain is that it depends on the scenario or situation. The diplomatic nature of the answer might not satisfy the main essence of the question as it requires in depth detail.
As discussed earlier mergers have been successful and equally unsuccessful as well. The successful mergers have yielded greater returns for the firms whereas the unsuccessful mergers created havoc for some firms.
The successful mergers would have one element common in them i.e. the merger created synergy among the firms which boosted the performance of the organizations. They were able to identify the market gaps, enhanced their reach to the customer and more importantly were able to achieve sustained competitive advantage. All these elements were essential in their success.
A simple view of successful merger will elaborate that the weakness of one company was the strength of the other. Moreover, the similarity of goals is another aspect that is considered important in the success of any merger. The defining feature that this merger will create is that it will equip the firms more adequately to meet the dynamic challenges of the industry.
The next question in this regard would be how to identify that a synergy would be created or not among the firms. The answer to the question is proper planning and formulation of effective strategy. Sometimes the merger would create an automatic synergy among the firms as it happened with the Walt Disney and Pixar case but sometimes proper planning and strategizing the mergers would assist in building synergy.
The mergers cannot always be an automatic choice for firms. They, however, can be transformed into something substantial by carrying out research and devising methods that can complement the characteristics of the firms. A simple examination of the firms might portray the difference in the nature of the firms but an apt process of merger that involves proper research, and then the formulation of strategy including the contingency planning can turn the table in the favor of firms.
A recent example of the merger between the rivals Sirius and XM radio gave both firms the much needed synergy to excel their operations. Before merger both firms were considered to be rival to each other but a merger that took place almost four years ago helped them increase the bottom line of the income statement.
So, the mergers are not always a viable option but they can be turned into a beneficial state for both firms. If a merger is not successful it is purely because both the firms did not perform proper homework. Mergers can have an abundance of benefits in store in it for the firms. There is no single corporation that can declare it as perfect. Every organization has weaknesses that can prevent them from meeting their potential.
A properly thought out and planned merger would always bring some kind of benefits for the firms. They enhanced reach of the market is critical not only for the firms but for customers as well. The mergers would serve the exact same purpose as it allows the firms to eliminate the concept of boundaries which transformed our world into the global village.
