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Pros and cons for takeover and merger

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  • Pages: 2
  • Word count: 457
  • Category: Economics

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1. Distinguish:

Takeover and merger are very similar corporate actions – they combine two previously separate firms into a single legal entity. A merger involves the mutual decision of two companies to combine and become one entity; “equals”, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. A takeover is characterized by the purchase of a smaller company by a much larger one. This combination of “unequals” can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar’s shareholders all approved the decision to be acquired.

2. Pros of Takeover:

To the internal environment
Increase in sales/revenues.
Increased efficiency.
Increase in economy of scale
Profitability of target company
To the external environment
Venture into new businesses and market. Enlarge brand portfolio. Increase market share.
Decreased competition (for the acquiring company)
Reduction of overcapacity in the industry
Disney is famous for fairy tales stories and pencil drawed animation. After buying Pixar, Disney now also known as one of the best 3D animation producers in the world. 3. Cons of Takeover:
To the internal environment
Monetary cost
Corporate culture clashes between employees and conflict with new management. Lack of motivation for the acquired company.
To the external environment
Reduce choices for the customers
Job cuts

4. Pros of merger:
To the internal environment
Greater efficiency. Redundancies can reduce if the available employees work effectively. Better R&D. 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. Diversification. When two companies merge, the benefit is that they can share information and knowledge. Monopoly. Imagine a market with only 3 companies, if two merges, the new firm will have the monopoly of that market.

To the external environment

Protect an industry from closing. Mergers may be beneficial in a declining industry where firms are struggling to stay afloat. International competition. Mergers can help firms deal with the threat of multinationals and compete on an international scale.

5. Cons of merger:

To the internal environment
Less competition however can lead to less motivation, lower quality and less investment in new products. Poor motive. The motive of merger are usually poor. Most managers just want to work in a bigger company so they can have higher paycheck. To the external environment

Higher prices. A merger can reduce competition and give the new firm monopoly power. With less competition and greater market share, the new firm can usually increase prices for consumers Fewer choices for customers.

Job losses.

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