This document discusses various types of mergers and acquisitions as well as their benefits and limitations. It describes mergers as a legal process where two companies combine, and identifies horizontal, vertical, and conglomerate mergers. Benefits include economies of scale, international competition, increased investment in R&D, and protecting struggling industries. However, mergers can also result in culture clashes between companies, increased costs due to coordination challenges, negative consumer perceptions, and employee layoffs. The document also briefly explains the concept of a reverse merger as an alternative way for a private company to go public.

1. Mergers and Acquisition
Merger: A merger is a legal process by which two companies merge into a single
company. The merger can be a friendly union or a forceful union. Reasons for initiating
mergers are plenty. It could be for bridging the gap between the various fragmented
products or services in the same customer pool or for financial reasons.
Types
Horizontal: Two direct competitors serving the same customer pool merge with one
another.
Vertical: This Happens when a merger takes place between the supplier and the
manufacturer. This merger could proving very cost effective for the manufacturer and
hence the step.
Conglomeration: Two companies with no related product or customer pool merge.
This could be for financial reasons or for diversification.
Purchase Merger: An accounting method used in mergers and acquisitions with
which the purchasing company treats the target firm as an investment, adding the
target’s assets to its own fair market value.
Consolidation: The combining of separate companies, functional areas, or product
lines, into a single one. Differs from a merger in that a new entity is created in the
consolidation.
Benefits of Merger
A merger occurs when two firms join together to form one. The new firm will have an
increased market share, which reduces competition. This reduction in competition can
be damaging to the public interest, but help the firm gain more profits.
However, mergers can give benefits:
1. Economies of scale. This occurs when a larger firm with increased output can
reduce average costs. Lower average costs enable lower prices for consumers.
Different economies of scale include:
 Technical economies; if the firm has significant fixed costs then the new larger firm
would have lower average costs,
 Bulk buying – A bigger firm can get a discount for buying large quantities of raw
materials
 Financial – better rate of interest for large company

2.  Organizational – one head office rather than two is more efficient
· Note a vertical merger would have less potential economies of scale than a horizontal
merger e.g. a vertical merger could not benefit form technical economies of scale.
However in a vertical merger there could still be financial and risk-bearing economies.
Some industries will have more economies of scale than others. For example, car
manufacture has high fixed costs and so gives more economies of scale than two
clothing retailers.
2. International Competition. Mergers can help firms deal with the threat of
multinationals and compete on an international scale.
3. Mergers may allow greater investment in R&D This is because the new firm
will have more profit which can be used to finance risky investment. This can lead to a
better quality of goods for consumers. This is important for industries such as
pharmaceuticals which require a lot of investment.
4. Greater Efficiency. Redundancies can be merited if they can be employed more
efficiently.
5. Protect an industry from closing. Mergers may be beneficial in a declining
industry where firms are struggling to stay afloat. For example, the UK government
allowed a merger between Lloyds TSB and HBOS when the banking industry was in
crisis.
6. Diversification. In a conglomerate merger two firms in different industries merge.
Here the benefit could be sharing knowledge which might be applicable to the different
industry. For example, AOL and Time-Warner merger hoped to gain benefit from both
new internet industry and old media firm.
Limitation of Merger
Merging two companies can provide the firms with synergies and economies of scale
that can lead to greater efficiency and profitability, but it is important t note that merger
can have a downside too. Managers of a firm considering a merger should consider these
potential disadvantages or limitation before going forward.
 Culture Clash
When two firms merge, it is more than a coming together of two names or brands -- it is
a real merger of people who bring along a specific corporate culture. If two firms have
very different corporate cultures, conflicts can arise. For example, if an innovative,
entrepreneurial company with a flat hierarchy were to merge with a highly hierarchical,
conservative and traditional organization, the employees in the new organization would
be likely to have difficulties working together.
 Dis-economies of Scale

3. When businesses merge, it is often to achieve economies of scale. Larger organizations
are typically able to produce goods and services more efficiently and at a lower per -unit
cost than smaller businesses because fixed costs are spread out over a larger number of
units. This is not always the case, however. Sometimes when two firms merge, being
larger will actually create dis-economies of scale, where per unit production costs
increase because of increased coordination costs.
 Consumer Perceptions
When two companies merge, they need to consider how consumers view the two firms
and whether or not they view them in a compatible way. For example, if an
environmentally friendly soap company were to merge with an industrial detergent
manufacturer with a poor environmental track record, it may alienate the customers of
the environmentally friendly soap company who don't want to support a company that
is not environmentally responsible.
 Layoffs
Merging two businesses is often a good method for reducing the labor force of the two
organizations. For instance, a company may combine its two offices into one and reduce
the number of staff performing the same duties. While this can provide cost savings for
the company, it can also have a negative effect on employees. Employees may become
fearful of losing their job and may lose their trust in the organization. This can decrease
employee motivation and reduce productivity.
CONCEPT OF REVERSE MERGER
Investors of a private company acquire a majority of the shares of a public shell
company (incurring heavy losses) which is then merged with the purchasing entity. To
consummate the deal, the private company trades shares with the public company in
exchange for its stock, thus transforming the acquirer into a public company. (This is a
simpler way to go public by skipping the IPO route. It is desirable especially if the
private company does not desire to raise capital through the IPO.)