Mergers Essay Example | Topics and Well Written Essays - 1500 words

Mergers - Essay Example Ravenschaft and Scherer (1987) state that firms will merge because they think that this will result into an increase in efficiency in the new firm formed after merging. Efficiency is expected to rise after the increase in capital, sharing of expertise, elimination of duplicate processes in production and the realization of economies of scale. All these advantages associated with mergers will influence firms to merge, however according to Hughes (1989) mergers may not lead to the realization of efficiency and they may lead to even increased inefficiencies in the firm. Firms will merge in order to gain market power, market power increases where firms that merge are in the same industry and produce the same products in the market and when they merge they form a monopolistic firm which controls the prices and the quantity produced. The firms will also merge as a way to increase their competitive advantages over their rivals and this makes the new firm a market leader, however this may not be the case where government policies may restrict firms to form monopolistic market forms where the firms controls the prices and quantity produced. Firms have different levels of market share in the market, when the firms merge they form one big firm those market share is equal to the sum of both firms market share, as a result the market share increases and this acts as a motivating factor for firms to merge. The reason why a larger market share is preferred is because a firm will realize economies of scale, increase sales volume, increase sales revenue and therefore increase profits earned. Tax advantages: Firms will also merge in order to gain a tax advantage, all firms will pay tax to the government depending on the level of profits they have acquired, and firms will therefore merge with loss making firms as a way of reducing their tax burden. However in most countries this has been discouraged where policies have been put in place to limit the act of profit making firms shopping for loss making firms to gain tax advantages. Diversification: According to Henry (2000) firms will also merge as a way to smooth earnings, smooth earning results into a smooth stock price over time and therefore investors are attracted to invest in the companies stocks. When two firms merge their earnings and stock prices are more stable and this increases investor confidence and therefore realize increased capital base from investors equity. Increasing geographical coverage: Firms will merge as a way of increasing their geographical coverage, example two law firms namely the Battle and Booth company and the Mack and McLean company merged in order to increase their geographical coverage and therefore offer their services to a larger population, this is because when firms merge they form a larger com-any and the large company is able to invest more and diversify than a small company. Sharing of expertise and technological integration: Firms will gain expertise and gain from mergers, managers and other experts share ideas and this helps in improving the efficiency and also the productivity of a firm, this sharing is made possible when firms merge but this would not have been possible when the