The Economic Reasons And Motives For Mergers Economics Essay

There is no uncertainty that amalgamations play a great function in the development of an economic system. In this essay, a amalgamation will be defined as “ a combination of two corporations in which merely one corporation survives and the merged corporation goes out being ” ( Gaughan, 2007 ) . After a amalgamation, the newly-established company will keep two incorporate companies ‘ assets and liabilities. In this manner, amalgamations offer more opportunities for companies to go bigger and stronger. At the same clip, clients may have better services than those before a amalgamation. However, the subject of amalgamations ‘ motivations has long been the topic of argument, as different companies put frontward different grounds to unify. Some of them are economically sound, while some of them are non.

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In fact, from current surveies, it can be seen that there are two large types of motivations, one is economic motivations and the other is non-economic motivations. Although some people argue that motivations of amalgamations lie in some non-economic grounds, such as the political grounds, the directors grounds, bettering research and development, and so on, others take a different position and stress that because of that the raison d’etre of a company is to do net incomes, most motivations of amalgamations are for sound economic grounds. Therefore, this essay is an effort to reason that the chief motivations for amalgamations are economically valid grounds. It besides aims to demo the importance of different economic motivations, even though some people claim that there are many failures that resulted from those motivations. In add-on, the invalidness of non-economic motivations will besides be checked to back up the chief statement.

In order to show this, this essay will first concentrate on the growing motivation of amalgamations. The instance of P & A ; O and Stena will besides be added into the treatment. Second, different types of synergism will be illustrated to explicate how valid this motivation is to assist companies to go stronger. Third, the electronic elephantine General Electronic ( GE ) will be given as a good illustration to discourse the significance of the variegation motivation. Fourth, the illustration of the Exxon-Mobil Oil Company will be used to demo some other economic motivations. Finally, there will be treatment about some non-economic motivations such as power motivations, achievement motivations, and political motivations and so on, though these are some less common motivations for amalgamations.

2.0 Economic Motivations

2.1 Faster Growth

If a company seeks to do a amalgamation with other houses, the most popular motivation may be growing. As pointed out by Denzil ( 2001 ) , one of the most successful types of amalgamation may be a amalgamation with a growing motivation, because it is easy and speedy to crush rivals and take the lead in markets. When a company wants to spread out, there are several picks: internal growing or growing through amalgamations. Internal growing means companies go to purchase land and construct more mills, employ new staff, or hunt for a market to sell merchandises and so on. This is a long manner to travel. However, if companies use the method of meeting, it will salvage them much clip to make other things such as research and development or market publicity. Furthermore, through meeting, companies may easy busy the market, enlarge the market portion, and beat the rivals. If amalgamations occur in different parts, this means companies are bettering its globalisation, this means more clients will cognize about the company, in other words, more possible benefits will travel to the company.

Although there are a great figure of obvious benefits that companies will confront, others disagree with the motivation of growing. In their sentiment, growing is a hard end to accomplish and is non a sound economic ground. As Gaughan ( 2007 ) mentioned, when a company has already accomplished growing in the yesteryear, it is hard for corporate directors to maintain turning.

However, after accomplishing growing in the past, directors will look for some other ways to maintain turning. Among those ways, Amalgamations can be the fastest and the most efficient manner. Companies do non necessitate to take twosomes of twelvemonth to construct workshop, and enroll new employees. In add-on, with less clip to pass, growing via amalgamations can be gain through the lowest-risk manner. Long clip means more uncertainnesss, which are more hazards. How to avoid those hazards, it is better to pass less clip, and complete amalgamations rapidly.

As a good illustration of growing motivation, the instance of Johnson & A ; Johnson should be introduced. Johnson & A ; Johnson is one of the biggest makers of wellness attention industry in the universe. It was established by Johnson and his two brothers in 1986 in New Jersey of United States. At that clip, it was a company which merely had 14 workers. In the early 1920s, with the development of concerns, Johnson & A ; Johnson began to construct subdivisions in other topographic points such as America, Europe, Asia and Africa. However, over the period 1995 to 2005, Johnson & A ; Johnson took a series of amalgamations. Through those amalgamations, Johnson & A ; Johnson have gained a greatly fast growing. So far, Johnson & A ; Johnson have owned more than 250 subordinates in 57 different states and 115 thousand employees. Its merchandises are available in about 175 states. The planetary gross of Johnson & A ; Johnson in 2008 was 63.7 billion US dollars. ( The History and Development of Johnson & A ; Johnson, Johnson & A ; Johnson, 2010 )

From the illustration of Johnson & A ; Johnson, we can see with the development of an progressively globalized universe, growing can be one of the most efficient and cardinal motivations of amalgamations.

2.2 Different Types of Synergy

As another of import motivation, synergism is the popular pick for companies to do a amalgamation. Synergy means the excess energy or effectivity that people or concerns create when they combine their attempts. In amalgamations, harmonizing to DePamphilis ( 2003 ) , synergy refers to corporate combination will bring forth more net incomes than that the amount of their separate position. Therefore, synergism is frequently used to explicate the phenomenon of 1+1=3. In amalgamations, this means the combination of two companies may bring forth three companies ‘ consequence. Just because of this, many companies try their best to seek the chances to unite with other corporations.

If synergy occurs in amalgamations, it focuses on two sides to raise the profitable ability of companies: gross sweetenings and cost decreases. For illustration, if Coca Cola make a amalgamation with a fruit manufacturer, as a consequence, it will salvage more disbursement to purchase natural stuff for its soft-drinks. This is cost decreases. When Coca Cola have gained a lower monetary value of natural stuff, it can cut down some monetary values of its drinks. In this manner, lower monetary value will do a publicity of its drinks. This is gross sweetenings. Though the existent fact is more complex than this illustration, the truth is the related theory would be fundamentally the same.

Although synergism has enhanced the profitableness from grosss and costs, some people do non hold synergism should be a good economic ground for amalgamations ( Gaughan, 2007 ) . From their point of position, the synergy consequence can merely be described the amalgamations of companies in the same industry or seller-buyer relationship, and it is non suited to other diversified amalgamations.

In order to react this, economic systems of range should be introduced as a construct that is confused with economic systems of graduated table. Economies of range can be defined as “ the ability of a house to use one of set of inputs to supply a broader scope of merchandises and services ” ( Gaughan, 2007 ) . If a company is able to use its work force, and installations, synergism besides can be achieved. Most failures of amalgamations with synergy intents are because of their leaders ‘ inefficient direction ability and non the motivation of synergism.

Several illustrations of amalgamations motivated by the chase of synergism have achieved the success. After the 1994 amalgamation between Radisson Diamond Cruises and Seven Seas Cruises, the combined sail lines began to supply cheaper monetary value of beds and paths. This is because, as a consequence of amalgamation, fewer directors will be needed to keep the relationship with the same territory ‘s travel bureaus. Hence, costs decreases are gained. Furthermore, with the larger size of company, the celebrity of company is bettering. This enables gross revenues force to do a publicity more easy. As a consequence, more clients will come to bask their trips. Therefore, gross is enhanced by this manner. ( Gaughan, 2007, pp. 127-128 ) With motivation of synergism, companies are non merely able to increase its gross, but besides worsen its cost. Therefore, synergy becomes a more and more common motivation for meeting.

2.3 Diversification

When a company has already been the bellwether of one industry, directors of the company may see some diversified amalgamation to spread out its size and do more net incomes. Diversification provides conditions of enlargement by using companies ‘ good will in former industry to other different merchandise field, and it can besides supply conditions of organizing scale consequence ( DePamphilis, 2003, p. 20 ) . Through variegation, it is foreseeable that companies may hold the opportunity to derive important net incomes, because new industry means new chance. Opportunity should be the best thing for companies ‘ directors. Another side about variegation, as Gaughan ( 2007 ) pointed out, is that companies may obtain uninterrupted competitory advantage. This is because if General Electronic can barely sell its military merchandises to ground forcess in a peaceable clip, but it can besides seek profitable chances in other field such as insurance, health care, plastics, energy, and so on. This is the theory about uninterrupted competitory advantages. Once had a company go a diversified one, it will get the privilege of basking uninterrupted competitory advantage.

Compared with the positives, one accusal for variegation as non a valid economic ground is that there are some possible hazards when companies expand into another industry. If companies ca n’t manage the hazards good, it may convey amendss to them. A survey carried out by Berger and Ofek ( 1995 ) , utilizing a big sample of houses over the 1986-1991 sample periods, found that variegation caused an mean 13 % to 15 % ‘s loss of steadfast value. The survey besides found that the loss of house value was less than that of when the variegation occurred, and it was non affected by house size.

However, some grounds suggest variegation do non straight lessen house ‘s value. One finance research worker, Villalonga, believes that the variegation price reduction is because of wrong usage of informations of several research workers ( Villalonga, 2004, cited in Gaughan, 2007, p143 ) . As Gaughan ( 2007 ) points out:

“ The informations used by those research workers were unnaturally restricted by Financial Accounting Standards Board definition of sections every bit good as demands that lone sections that constitute 10 % or more of a company ‘s concern are required to be reported. Using a information beginning that is non affected by this job, Villalonga finds a variegation premium, as opposed to a price reduction ” . ( Gaughan, 2007, p143 )

Although there are many companies that have suffered failures at variegation, others argue that they have achieved great success with amalgamations at variegation. The most successful illustration is General Electric ( GE ) . Unlike its name, now GE is no longer an electric company. Through a series of amalgamations at variegation, GE has become a diversified giant with operations insurance, telecasting Stationss, plastics, medical equipment, and so on. Particularly during the 1980s and 1990s, during the 4th amalgamation moving ridge GE had made a great figure of M & A ; As with assorted companies, and it has benefited significantly from those combinations. ( Gaughan, 2007 )

In short, although amalgamations with variegation might hold possible hazards to the freshly combined company, more diversified amalgamations provide a bigger market for companies to do net incomes as what GE have gained.

2.4 Other Economic Motivations

There are two other types of economic motivations for amalgamations: horizontal integrating and perpendicular integrating. Generally, in horizontal integrating, market power and market portion are raised through amalgamations. While in perpendicular integrating, both merged houses have a buyer-seller relationship, hence, the combination may supply a reliable beginning of supply and lower costs advantage ( Gaughan, 2007, pp. 145-155 ) .

In horizontal integrating, market power stands for the leading of a market. Once market power is achieved by one company, all the other challengers in the same market will be affected. Their pricing scheme, publicity program, merchandise research and development and so on will all followed by the leader of the market. This is similar to Nokia in the Mobile Phone industry. Sometimes, market power may derive from market portion. As a effect of horizontal integrating, market portion may easy derive. However, in perpendicular integrating, both merged companies will profit from the integrating. One company will non be worried about the gross revenues of its merchandises, and the other will non be dying about the beginning of its natural stuffs.

However, there has been a argument that both horizontal integrating and perpendicular integrating may convey several negatives to the market and consumers. One of the most being criticized is monopoly competition. After amalgamations, the power of merged companies will acquire bigger. Therefore, the construction of the industry will be given to monopoly, which means merged companies may crush others utilizing pricing scheme and the populace will pay significantly for this.

Although, sometimes, when this state of affairs happens, authorities will let go of assorted policies to forestall this state of affairs from go oning. This is the ground why Coca Cola failed to unify with one of China ‘s biggest juice companies, Huiyuan Juice Group. In 2009, Coca Cola planed to buy Huiyuan Juice with 2.4 billion US dollars. This trade was blocked by China ‘s ministry of commercialism with the ground that Coke might mistreat its dominant place in China ‘s fizzing drinks industry ( Sundeep Tucker, 2009 ) . However, most of the clip, every bit long as companies will non impact markets and clients by agencies of some illegal ways, authorities wo n’t halt these amalgamations.

In fact, the universe ‘s largest Oil Company, Exxon-Mobil Oil Company, comes from a amalgamation. In 1998, there was a megamerger in the Oil industry. Exxon announced its amalgamation with the Mobil Oil Company. At that clip, both two companies were taking companies in the Oil industry. After amalgamation, in order to accomplish the interactive additions, the companies need to successfully incorporate its resources. As a consequence, this amalgamation was highly successful. Two old ages subsequently, the combined Exxon-Mobil announced that the amalgamation saved them about $ 4.8 billion which is higher than the estimated $ 3.8 billion. With successful operation of the undermentioned old ages, in 2006, Exxon-Mobil announced its highest one-year net incomes that the house ‘s one-year net incomes in 2005 were $ 36 billion and its gross revenues were $ 371 billion. Exxon-Mobil became the largest company in the universe ( Gaughan, 2007 ) .

From the illustration of Exxon-Mobil and treatment above, we could see that no affair horizontal integrating or perpendicular integrating, those economic motivations will be good to unify companies.

3.0 Non-economic Motivations

There are several non-economic motivations which exist in amalgamations such as power motivations, achievement motivations, and political motivations and so on. Most of the clip, these motivations exist in the head of directors of merged companies. Therefore, it is less common for research workers to pay attending to them as motivations for amalgamations.

3.1 Power Motivations and Achievement Motivations

Power motivations refer to the peoples ‘ chase of control over others by agencies of increasing beginning of power ( Schmalt, 1987, cited in Carsten Lausberg and Teresa Stahl, 2008, p.6 ) . This is peculiarly serious in some top directors in incorporate companies. With the possibility of a higher place through amalgamations, it is no admiration that these directors will frequently back up the proposal of amalgamations. Normally, after amalgamations, these freshly combined companies will hold a bigger size. More workers will add into different squads or sections for troughs to oversee. These things are what the directors seek for. Through this manner, they have got a uninterrupted addition of power.

It is common to see that a individual will be judged successful or unsuccessful by assorted standards. Hence, accomplishing something becomes the most critical thing for some directors. Since it may be the fastest and most efficient manner to enlarge companies ‘ size and better companies ‘ value though amalgamations, most directors that have achievement motivation will allow companies travel to unify. Furthermore, amalgamation is a extremely complex and energy devouring thing and people will acknowledge the directors of successful amalgamations. Therefore, a individual with strong accomplishment motivation will take the hazard of forcing companies to unify.

However, the ground why these two motivations and motivations like that are non chief grounds for companies ‘ amalgamations is that, in nowadays companies, determinations are made by the whole members of the Board. Any individual adult male could barely impact the full Board of managers ‘ sentiments about determinations except for household houses or wholly private companies. In add-on, amalgamations frequently take topographic point in companies that have a good corporate administration construction and a clear duties ‘ right of stockholders, board of managers, board of supervisors, directors. Hence, it is less common to see amalgamations with these personal motivations.

3.2 Political Motivations

It is hard to happen any one accurate definition for political motivations. In general, nevertheless, people regards political motivation as a motivation which aims to function for political relations. Sometimes, politicians need more economic successes to gain more ballots. For case, in order to enable the Chinese people to bask more about the telecom service, in 2008 the Chinese authorities decided to do several amalgamations among the six largest state-owned telecom companies including China Mobile, China Unicom, China Telecom, China Netcom, China Tietong, and China Satcom ( Xinhua News Agency, 2008 ) .

In fact, it is seldom to see amalgamations with political motivations. This is because, chiefly, political motivations ‘ amalgamations frequently occur in the states which have a similar political system like China. There are less of them in the universe. Second, even though this state of affairs happens, the existent root of amalgamation with political motivation is economic success. It is, really, economic motivations.

Non-economic motivations can either be some personal motivations or the assumed name of economic motivations, therefore, companies are less likely to unify with these motivations.

4.0 Decision

In decision, this essay has attempted to show that economic motivations are the chief grounds for different companies ‘ amalgamations. Despite the fact that some people argue that there are some possible hazards among these economic grounds, concentrating on negatives, the positives of these economic motivations stand out. Furthermore, it is besides true that assorted successful illustrations have shown the importance of these economic motivations that have been discussed supra. This is why, in recent old ages, more and more research workers have put their attempt to analyze the subject of M & A ; A. Economic motivations are non merely the first measure of meeting, but the root of amalgamations, although, in the procedure of a amalgamation, there will a great sum of plants to be done in hereafter.

Presently, after the planetary fiscal crisis, there is another tendency for companies seeking for amalgamations. How to avoid the possible hazards of these economic motivations and reassign them to the existent net incomes is an issue that is unfastened to inquiry.


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