Mergers & Acquisitions

Corporate mergers are becoming increasingly commonplace in the 21st-century. In order to properly discuss the recurrence

of mergers in businesses today we must understand the definition of a merger, present a history of company mergers, determine why businesses find it beneficial to merge and identify what are the potential consequences involved with a merger. As one merger follows another, the benefit for owners and investors becomes very obvious. From this information this paper will show that for our society as a whole, the consequences of mergers seem far less beneficial.

The term merger is loosely used to indicate any combination of two companies or businesses. A more detailed definition would be that a merger allows "the assets and liabilities of the selling company to be transferred to and absorbed by the buying corporation." Today mergers have become a significant part of the corporate strategy. The combination of companies can be classified into one of three categories. A horizontal merger, this occurs between two organizations competing against each other in the same product or service range, for example financial institutions. A vertical merger, this occurs between two firms in different stages of production or distribution of a particular good, for example the oil industry. A conglomerate merger, this occurs between two companies whose activities are not related.

During the final years of the 19th-century, the United States witnessed a rash of corporate mergers. The Industrial Revolution had taken firm hold, and the nation was changing rapidly. Millions of Americans who had once been independent farmers or tradesmen now found themselves in the position of what some termed "wage slaves." At the mercy of their corporate employers, they worked long hours at low pay, and often under appalling conditions. The reasons for the merger mania of this period are many and complex, as are its effects upon the population as a whole. In breaking down the vocational environment, the new conglomerates also transformed the entire social landscape. Work was no longer a family business shared by all generations. Communities no longer clung together for mutual protection and aid. Suddenly, the citizen of this new world was out on his own. He did what he was told and hoped for the best, though what was deemed the best often fell far short of what was desirable. More than any other time, the late 19th-century was a time in which the modern world and all its social safety nets were formed.

To begin with, the new conglomerates acted in much the same way as traditional employers. Employers expanded their enterprises as they were able to do so. In this sense, the corporate merger represented a natural process of growth. Successful companies purchased other companies in order to expand into new markets and eliminate competition. As with the old, traditional-style family business, the new corporations could be a source of pride and social prestige. Strangely enough, Americans demonstrated an extraordinary willingness to sell out when the price was right. Given that the owners of the new corporations were inclined to view their enterprises, not as family business, but as money-making entities. With this it's no surprise that workers were increasingly perceived as parts of the manufacturing process rather than as human beings.

The typical industrial worker became subordinated to the means of production leading to unhealthy processes and working conditions. To these owners, the worker became little more than figures on a balance sheet. Indeed this situation intensified as corporations grew to sizes unimagined. As profits declined because of the intense competition, money that might otherwise have been available for the improvement of the work environment was simply not available.

Mergers continued in waves over the years but in smaller scale in the 1920's, and between 1960 and 1970. There was an increase of merger activity throughout the 1980's with a peak taking place in the late 1980's. This pattern changed in the late 1990's with fewer mergers taking place, but with more expenditure being spent on each acquisition. There are a number of factors that enabled this increase including elevated stock markets, which allowed companies to finance mergers, and deregulation, which has increased companies' competitive opportunities. Mergers have also occurred because of increased regulatory and legislative pressures and changing needs of the customers.

The motivation behind many mergers is the desire to achieve expansion and growth by obtaining a more dominant power base in the market. Mergers can offer a number of advantages. A company can increase their market power by entering into offensive coalitions which are intended to improve their competitive advantage through the reduction of their competitors market. Alternatively they can increase their market power by entering into defensive coalitions which increase barriers to entry for other companies, thereby securing their own position rather than increasing it. Mergers are particularly beneficial to companies who individually lack competitive advantage in their market, but when put together have a means of achieving success.

Examples of merging are clearly evident in the media and telecommunications industries. An instance of this was the takeover by America Online of Time Warner creating the world's biggest media company. Conglomerate mergers are particularly advantageous when attempting to achieve monopoly power because mutual buying agreements can be introduced or the monopoly can cross fund their operations, forcing out other companies from the market.

A firm may also find it advantageous to merge because it will increase shareholder wealth and a company's value. There is a significant relationship between merger activity and conditions on the stock exchange. When a company merges and the deal is announced, the share price of the target, along with the share price of the acquiring company will rise. This was evident with the announcement by Johnson Controls to purchase York International in late 2005, both companies stock rose overnight. This type of merger can provide benefit from a number of advantages, including increased profits through gaining a larger market share, and a reduction in costs of production.

Mergers may also prove advantageous because through reorganizations overlapping costs can be eliminated and a reduction in operation costs can be achieved. Other results from a merger include improved operating efficiency, a potential technological edge, protection against unwanted takeovers, and the ability to receive easier borrowing. This can lead to an improvement in quality, and in the short-term increase profitability.

...