In the business world, a merger is when two firms join together to create a single firm, with a new name and new stock. The assets of both are pooled, while the old owners continue together as new owners. The ultimate goal is always increased profitability and stability for both firms, which can be gained through a merger in different ways.
When two firms in the same industry merge, they gain a larger share of the market, which means they decrease their competition and so can raise prices. The government regulates mergers in order to prevent a monopoly, which is when one company owns the entire market for a single product. Such a company can set almost any price it wants on its product. Competition, on the other hand, drives companies to lower prices and improve services in order to gain customers, but it can reduce their profitability as well.
Just like you can get a lower price per item by buying in bulk, a single large business operates with lower average costs than multiple small businesses. This concept is called economies of scale. The larger the scale of the operation, the more economic it becomes, when factored in terms of per product or employee. Two similar companies may merge for that specific reason, so that by working together, they can both reduce their expenses.
For smaller companies, a merger with an industry giant represents security against failure. A large corporation has the financial resources to ride out market storms or handle expensive lawsuits, whereas a small business might go bankrupt on its own. While the large firm gains new ideas and talent, the small one gains a ready-made support structure and the prestige of a well-known and highly respected industry brand name. Two moderate-sized firms might consider that their combined resources represent greater security to both of them.
Two firms might have different areas of expertise or strength that can complement each other. One company, for instance, might be particularly good at administration and cost cutting, while the other might be better at marketing or creating new ideas. Combining the two has the potential to create a business with both strengths that will be much more profitable than either of them alone. A firm with an exciting new product but no ability to market it is doomed, while one with great marketing strategy but no product is likewise doomed. Put them together, and you can have both product and marketing.
- Hemera Technologies/AbleStock.com/Getty Images