Reasons For The Merging Of Companies Economics Essay

Reasons For The Merging Of Companies sparing science Essay at that place is no doubt that jointures play a keen-sighted role in the development of an economy. In this essay, a amalgamation give be defined as a combination of two corporations in which only one corporation survives and the in unitedd corporation goes out macrocosm (Gaughan, 2007, p. 12). After a nuclear fusion reaction, the newly-established conjunction forget hold two merged companies assets. In this way, mergers offer much chances for companies to become lifesizeger and bullockyer. At the self corresponding(prenominal) clock time, customers whitethorn receive better services than those before a merger. However, the progeny of mergers motives has long been the subject of debate, as distinct companies put forward assorted reasons to merge. Some of them atomic descend 18 sparing aloney sound, while some(a) of them ar non.In fact, from the current studies, it terminate be seen that thither are two big types of motives, one is economic motives and the other is non-economic motives. Although some tribe argue that motives of mergers deceit in some non-economic reasons, such(prenominal) as the governmental reasons, the managers reasons, and so on, others fuck off a incompatible view and emphasize that because of that the raison dtre of a order is to make profits, roughly motives of mergers are for sound economic reasons. Thus, this essay is an feat to argue that the primary(prenominal) motives for mergers are economically sound reasons. It also aims to project the importance of diametric economic motives, even though some population claim that there are galore(postnominal) failures that resulted from those motives. In addition, the ineffectiveness of non-economic motives testament also be checked to support the main argument.In ordain to demonstrate this, this essay volition first focus on the addition motive of mergers. The case of PO and Stena forget also be added into the discussion. Second, different types of synergism allow be illustrated to explain how valid this motive is to back up companies to become stronger. Third, the electronic giant General Electronic (GE) allow for be given as a good example to discuss the implication of the diversification motive. Fourth, the example of the Exxon-Mobil anoint Company will be employ to show some other economic motives. Finally, there will be discussion virtually some non-economic motives such as mogul motives, feat motives, and political motives and so on, though these are some less(prenominal) car park motives for mergers.2.0 sparing Motives2.1 Faster GrowthIf a company seeks to make a merger with other tightens, the most popular motive may be suppuration. As Denzil (2001) points out, one of the most lucky types of merger may be a merger with a ingathering motive, because it is easy and quick to thump competitors and take the lead in food securities industrys. When a company wants to expand, there are some(prenominal) choices internal growth or growth through mergers. intragroup growth means companies go to buy land and build much(prenominal) factories, employ new staff, or search for a grocery store to dole out products and so on. This is a long way to go. However, if companies use the method of merging, it will save them much time to do other things such as research and development or market advancement. More everywhere, through merging, companies may easily occupy the market, enlarge the market share, and beat the competitors (DePamphilis, 2003). If mergers occur in different regions, this means companies are improving its fame and becoming more globalised, this means more customers may k today about the company, in other words, more emf benefits will move to the company.Although there are a bulky number of obvious benefits that companies will face, others disagree with the motive of growth. In their opinion, growth is a diffi cult goal to achieve and is non a sound economic reason. As Gaughan (2007) indicates, when a company has already accomplished growth in the past, it is difficult for integrated managers to keep growing.However, after achieving growth in the past, managers will look for some other ways to keep growing. Among those ways, Mergers could be the fast-breaking and the most economic way. Companies do not ask to take couples of socio-economic class to build workshop, and recruit new employees. In addition, with less time to ex bleed, growth via mergers can be gain through the lowest-risk way (DePamphilis, 2003, p. 356). Long time means more uncertainties, which are more risks. How to avoid those risks? It is better to spend less time, and complete mergers quickly.As a good example of growth motive, the case of Johnson Johnson should be introduced. Johnson Johnson is one of the biggest manufacturers of health care industry in the world. It was established by Johnson and his two broth ers in 1986 in New island of Jersey of United States. At that time, it was a company which only had fourteen workers. In the early 1920s, with the development of businesses, Johnson Johnson began to build branches in other places such as America, Europe, Asia and Africa. However, over the period 1995 to 2005, Johnson Johnson took a serial publication of mergers. by those mergers, Johnson Johnson be in possession of gained a greatly fast growth. So far, Johnson Johnson nurse owned more than 250 subsidiaries in 57 different countries and 115 thousand employees. Its products are available in nearly 175 countries (Stock Johnson Johnson, 2010). The global tax income of Johnson Johnson in 2008 was 63.7 cardinal US dollars (JNJ Income Statement, 2009).From the example of Johnson Johnson, we can see, with the development of an increasingly globalized world, growth can be one of the most efficient and fundamental motives of mergers.2.2 Different Types of SynergyAs another importa nt motive, synergism is the popular choice for companies to make a merger. Synergy means the extra energy or effectiveness that stack or businesses create when they combine their efforts. In mergers, according to DePamphilis (2003), synergy refers to corporate combination will produce more profits than that the sum of their withdraw status. Therefore, synergy is frequently used to explain the phenomenon of 1+1=3. In mergers, this means the combination of two companies may generate three companies effect. good because of this, many companies try their best to seek the opportunities to combine with other corporations.If synergy occurs in mergers, it focuses on two sides to raise the profitable competency of companies revenue enhancements and cost reductions (Gaughan, 2007, p. 133). For example, if coca sess make a merger with a fruit producer, as a result, it will save more using up to buy raw material for its soft drinks. This is called cost reductions. When coca Cola have gained a lower determine of raw material, it can boil down some prices of its drinks. In this way, lower price will make a promotion of its drinks. This is named revenue enhancements. Though the actual fact is more involved than this example, the truth is the related theory would be basically the same.Although synergy has intensify the profitability from revenues and costs, some stack do not agree synergy should be a good economic reason for mergers (Gaughan, 2007). From their point of view, the synergy effect can only be described the mergers of companies in the same industry or seller-buyer relationship, and it is not suitable to other diversify mergers.In order to respond this, economies of scope should be introduced as a sentiment that is confused with economies of scale. Economies of scope can be defined as the ability of a firm to utilize one of set of inputs to proffer a broader range of products and services (Gaughan, 2007, p. 129). If a company is able to utilize its workforce, and facilities, synergy also can be achieved. Most failures of mergers with synergy purpose are because of their leaders inefficient management ability and not the motive of synergy. some(prenominal) examples of mergers motivated by the pursuit of synergy have achieved the success. After the 1994 merger between Radisson Diamond Cruises and Seven Seas Cruises, the unite cruise lines began to provide cheaper price of beds and itineraries. This is because, as a result of merger, fewer managers will be take to maintain the relationship with the same districts travel agencies. Hence, costs reductions are gained. Moreover, with the big size of company, the fame of company is improving. This enables sales force to make a promotion more easily. As a result, more customers will come to make love their trips. Therefore, revenue is enhanced by this way (Gaughan, 2007, pp. 127-128). With motive of synergy, companies are not only able to maturation its revenue, but also decline its cost. Thus, we may see how valid the synergy motive is.2.3 DiversificationWhen a company has already been the bellwether of one industry, managers of the company may consider some diversified merger to expand its size and make more profits. Diversification provides conditions of elaboration by applying companies goodwill in former industry to other different product field, and it can also provide conditions of forming scale effect (DePamphilis, 2003, p. 20). Through diversification, it is foreseeable that companies may have the chance to gain significant earnings, because a new industry means a new opportunity. Opportunity should be the best thing for companies managers. Another side about diversification, as Gaughan (2007) pointed out, is that companies may obtain continuous competitive good. This is because if General Electronic can but sell its military products to armies in a peaceful time, but it can also seek profitable opportunities in other field such as insurance, hea lthcare, plastics, energy, and so on. This is the theory about continuous competitive advantages. As long as a company becomes a diversified one, it will acquire the privilege of enjoying continuous competitive advantage.Compared with its positives, one accusation for diversification as not a valid economic reason is that there are some capableness risks when companies expand into another industry. If companies cant pass over the risks well, it may bring damages to them. A study carried out by Berger and Ofek (1995), using a large sample of firms over the 1986-1991 sample periods, set that diversification caused an average 13% to 15%s loss of firm value. The study also found that the loss of firm value was less than that of when the diversification occurred, and it was not affected by firm size.However, some certify suggest diversification do not directly lessen firms value. peerless finance researcher, Villalonga, believes that the diversification discount is because of incorr ect use of data of some(prenominal) researchers (Villalonga, 2004, cited in Gaughan, 2007, p143). As Gaughan (2007) points outThe data used by those researchers were artificially restricted by Financial Accounting Standards Board definition of segments as well as requirements that only segments that constitute 10% or more of a companys business are required to be reported. Using a data source that is not affected by this problem, Villalonga holds a diversification premium, as opposed to a discount (Gaughan, 2007, p143).Although there are many companies that have suffered failures at diversification, others argue that they have achieved great success with mergers at diversification. The most flourishing example is General Electric (GE). Unlike its name, now GE is no longer an electric company. Through a series of mergers at diversification, GE has become a diversified giant with operations insurance, television stations, plastics, medical equipment, and so on. Especially during t he 1980s and 1990s, during the fourth merger wave, GE had made a great number of Mergers with various companies, and it has benefited significantly from those combinations (Gaughan, 2007, p. 137).In short, although mergers with diversification might have potential risks to the newly combined company, more diversified mergers may provide a bigger market for companies to make profits as what GE have gained.2.4 Other scotch MotivesThere are two sound other types of economic motives for mergers horizontal integration and vertical integration. Generally, in horizontal integration, market cause and market share are raised through mergers. While in vertical integration, both merged firms have a buyer-seller relationship, hence, the combination may provide a dependable source of supply and lower costs advantage (Gaughan, 2007, pp. 145-155).In horizontal integration, market power stands for the leadership of a market (DePamphilis, 2003, p. 69). Sometimes, market power may gain from marke t share, and it is well-known that market share may easily gain as a force of horizontal integration. Once market power is achieved by one company, all the other rivals in the same market will probably be affected. Their pricing outline, promotion plan, product research and development and so on will probably all follow with the leader of the market. This is similar to the mooring of Nokia in the Mobile Phone industry. However, in a vertical integration, both merged companies will benefit from the integration. One company will not worried about the sales of its products, and the other will not be concerned with the source of its raw materials.However, there has been a debate that both horizontal integration and vertical integration may bring several negatives to the market and consumers. One of the most being criticized is monopoly competition (DePamphilis, 2003, p. 24). After mergers, the power of merged companies will get bigger. Thus, the structure of the industry will tend to monopoly, which means merged companies may beat others using pricing strategy and the public will pay significantly for this.Although, sometimes, when this situation happens, government will release various policies to prevent this situation from continuing. This is the reason why Coca Cola failed to merge with one of mainland Chinas biggest juice companies, Huiyuan Juice Group. In 2009, Coca Cola planed to purchase Huiyuan Juice with 2.4 billion US dollars. This deal was plugged by Chinas ministry of commerce with the reason that Coke might abuse its supreme position in Chinas soft drinks industry (Sundeep Tucker, 2009). However, most of the time, as long as companies will not affect markets and customers by means of some illegal ways, government wont stop these mergers.In fact, the worlds largest Oil Company, Exxon-Mobil Oil Company, comes from a merger. In 1998, there was a megamerger in the Oil industry. Exxon announce its merger with the Mobil Oil Company. At that time, bot h two companies were the leading companies in the Oil industry. After merging, in order to achieve the synergistic gains, the companies need to successfully integrate its resources. As a result, this merger was extremely successful. twain years later, the combined Exxon-Mobil announced that the merger saved them approximately $4.8 billion which is higher than the estimated $3.8 billion. With successful operation of the following years, in 2006, Exxon-Mobil announced its highest one-year profits that the firms annual profits in 2005 were $36 billion and its sales were $371 billion. Exxon-Mobil became the largest company in the world (Gaughan, 2007, p. 146).From the example of Exxon-Mobil and discussion above, we could see that no matter horizontal integration or vertical integration, those economic motives will be beneficial to merged companies. Therefore, these economic motives are the sound motives for mergers.3.0 Non-economic MotivesThere are several non-economic motives which e xist in mergers such as power motives, achievement motives, and political motives and so on. Most of the time, these motives only exist in the mind of managers of merged companies. Therefore, it is less sound for researchers to pay attention to them as motives for mergers.3.1 Power Motives and Achievement MotivesPower motives refer to the peoples pursuit of control over others by means of increasing source of power, and this is particularly serious in some top managers in merged companies (Schmalt, 1987, cited in Carsten Lausberg and Teresa Stahl, 2008, p.6). With the possibility of a higher position through mergers, it is no wonder that these managers will practically support the proposal of mergers. Usually, after mergers, these newly combined companies will have a bigger size. More workers will add into different teams or departments for mangers to supervise. These things are what the managers seek for. Through this way, they have got a continuous increase of power.It is common to see that a person will be judged successful or unsuccessful by various criterions. Hence, achievements become the most racy thing for some managers. Since it may be the fastest and most efficient way to enlarge companies size and improve companies value though mergers, most managers who have the achievement motive will let companies go to merge. Furthermore, merger is a highly complex and energy consuming thing and people will recognize the managers of successful mergers. Therefore, a person with a strong achievement motive will take the risk of pushing companies to merge (Carsten Lausberg and Teresa Stahl, 2008, p.7).However, the reason why these two motives and motives like that are not main reasons for companies mergers is that, in nowadays companies, decisions are made by the whole members of the Board. all single man could severelyly affect the entire Board of directors opinions about decisions except for family firms or totally private companies. In addition, according t o Gaughan (2007), mergers often take place in companies that have a good corporate governance structure and a clear responsibilities right of shareholders, display board of directors, board of supervisors, managers. Hence, it is less common to see mergers with these in the flesh(predicate) motives.3.2 Political MotivesIt is difficult to find one accurate definition for political motives. In general, however, people regards political motive as a motive which aims to serve for politics. Sometimes, politicians need more economic successes to earn more votes. For instance, in order to enable the Chinese people to enjoy more about the telecom service, in 2008 the Chinese government decided to make several mergers among the six largest state-owned telecom companies including China Mobile, China Unicom, China Telecom, China Netcom, China Tietong, and China Satcom (Xinhua News Agency, 2008).However, it is hard to see mergers with political motives. This is because, primarily, political mo tives mergers often occur in the countries which have a similar political system like China. There are less of them in the world. Secondly, even though this situation happens, the core of a merger with a political motive is also the economic success. Hence, the political motive is, actually, an economic motive.Non-economic motives can either be some personal motives or the alias of economic motives, thus, they will not be seen as the sound motives.4.0 ConclusionIn conclusion, this essay has attempted to demonstrate that economic motives are the main reasons for different companies mergers. Despite the fact that some people argue that there are some potential risks among these economic reasons, focus on negatives, the positives of these economic motives stand out. Furthermore, it is also true that various successful examples have shown the importance of these economic motives that have been discussed above. This is why, in recent years, more and more researchers have put their effor t to study the topic of MA. Economic motives are not only the first step of merging, but the blood of mergers, although, in the process of a merger, there will a great amount of works to be done in future.Currently, after the global financial crisis, there is another trend for companies seeking for mergers. How to avoid the potential risks of these economic motives and transfer them to the real profits is an issue that is open to question.