Mergers, Types, and Merits and Demerits

Mergers refer to restructuring procedures that accompany the combination of different forms into a single entity. The overall goal of mergers is to boost the market share. Mergers are perhaps the most common means of business combination after acquisitions. Their main aim is to alter firm operations in case the company is experiencing immense growth hence the need for reshaping. The biggest determinant of a successful merger is certainly a higher combined expected cash flow (Junni et al., 2019). One of the combining entities should be ready to forego its corporate existence. The ongoing corporation takes up the merged entity’s assets and liabilities. The merged business can choose to retain its identity or acquire a new name. Mergers involve intensive negotiations on all these terms before the combination is executed.

Mergers are categorized based on the stage of the combining entities in the industry and the companies' business. According to Fich, Nguyen, & Officer (2018), there are three main types of mergers; horizontal and conglomerate mergers. Horizontal mergers involve the combination of two or more entities dealing in virtually the same products, at the same stage and in the same industry. The areas of business for both entities are likely to overlap, thus resulting in synergies. Vertical mergers involve firms operating at different stages in the same market. These mergers confer higher control over timing and the supply chain besides enhancing profitability and improving the economies of scale. Conglomerate mergers bring together companies from entirely distinct industries. The entities in question barely have anything in common, not even experiences and skills. The complexity of such arrangements has seen conglomerate mergers become less common.

While mergers are not as common as acquisitions, the benefits of this type of corporate restructuring abound. Mergers have proven efficient in cutting down on operating costs, expanding product offers, conferring competitive edge, and enhancing economies of scale (Fich, Nguyen, & Officer, 2018). The combined entity sheds off some staff as it forms one company that can be run with lower operating costs. Both firms can tap into the established research and development, therefore, creating a competitive advantage. Also, mergers enable the new entity to benefit from a wider valley of resources, thus enhancing economies of scale. On the downside, mergers increase unemployment as employees lose their source of living. Also, mergers do not eliminate the possibility of increasing product prices since the new entity is likely to gain a competitive advantage and monopoly of power in the market (Junni et al., 2019). Mergers also reduce the product variety for consumers.

In a nutshell, mergers entail the combination of two different entities into a single business unit. The main types of mergers include horizontal, vertical, and conglomerate mergers. Horizontal mergers are for companies at the same level in the same industry, while vertical mergers involve companies at different stages but in the same sector. Conglomerate mergers entail the combination of entities from different markets altogether. Mergers improve economies of scale, reduce running costs, and enhance efficiency while increasing unemployment, reducing product variety, and possibly increasing product prices.