A merger is the amalgamation of two or more firms into a single business, with the approval of the shareholders and management concerned; it brings together to companies which agree to assimilate production under a single board of directors. Mergers commonly happen because the companies involved believe that the resources (capital, possessions, income and wealth) of the separate companies could be managed more efficiently as a combined enterprise. This new corporate will try its best to retain its original identity.
Businesses may wish to expand for the Benefit from economies of scale; this means that there are lower unit costs due to an increase in the size of the firm. Businesses may be interested in gaining larger market share meaning that they can charge higher prices and gain more profit. Expanding a business may promise a means of survival if they wish to compete with other growing businesses. Some businesses merge to help alleviate some or all of their debts, these debts will be taken over by the merging company.
The advantages of mergers include producing economies of scale, which reduces unit costs, gaining many competitive advantages. There will be a greater market share for horizontal integration, which means the business can often charge higher prices for its own benefit. Merging often reduces competition if a rival is taken over by another firm. Another advantage of mergers would be the fact that other businesses can bring new skills and specialist departments to the business. It is also much easier to raise finance within the business if it is larger.
Another major advantage is that a merger would give a company the opportunity to expand by establishing their presence in a host country, freely inviting the merged company to compete in other markets. The disadvantages of mergers may follow with the business becoming too large, as it may produce diseconomies of scale, which will lead to higher unit costs. There may be clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration of the merger.
There may need to make some workers redundant, which may have an effect on motivation within the workplace. There may also be a conflict of objectives and aims between different businesses, which means that decisions will be more difficult to make, causing disruption in the running of the business. With the struggle for competitive advantage becoming stronger, it is a wise idea to form alliances. Mergers and takeovers (acquisitions) are popular methods of expanding and diversifying in order to form these alliances. There are two main types of mergers; horizontal and vertical.
A horizontal merger or acquisition combines firms that competed with one another at the same stage of production into a single new firm. These mergers usually involve basic produce. A vertical merger, being more common in producer-goods industries, takes the entire production process, from raw materials to the end finished product, and combines them together under single ownership. Many times mergers are completed to save a failing business. Others reasons for mergers include reduced competition and product diversification.
These goals are closely related to the possible advantages (and disadvantages) of mergers. Firms are merging due to pressures from their competitors. Businesses today must understand the financial and industrial difficulties as well as the problems associated with the actual communication of the people involved and their plans when participating in mergers, and they must struggle to carry out all of their plans to their maximum potential. Safeway is the fourth largest grocery retailer in the UK, measured by reported turnover..
In the five years to 31 March 2003, Safeway reported a 23 per cent increase in turnover, from i?? 7. 0 billion to i?? 8. 6 billion, but its operating profit decreased by 15 per cent from i?? 410 million to i?? 347 million over this period. Morrisons and Safeway joined forces to achieve profitable growth for both companies… On 8th March 2004, it was announced that Morrisons, a major Northern grocery retail outlet, would be teaming up with Safeway in a $2. 9 billion deal that created the UK’s fourth leading supermarkets.
This deal gives large stake in Safeway, a company that has been struggling financially for the past few years. The $2. 9 billion deal between Morrisons and Safeway hands over effective control to the Northern grocery retailer in exchange for badly needed cash and a company revival Both of these corporations plan on benefiting from the merger. This alliance will resolve Safeway’s very substantial financial problems. Morrisons will be given the opportunity to join the supermarket big leagues at a time of global expansion in the hypermarket industry.
Market expansion will be possible because Morrisons is strong in northern grocery retail- markets where Safeway may have had no presence. On the other hand, Safeway’s is one of the top marketers in UK; while Morrisons has jus beeen recently established and is getting the middle of England used to it. Nissan is strong in trucks and luxury cars, and Renault is strong in small, mass-market cars. Even though the deal sounds promising, it does not come risk-free. Many sceptics believe that the teaming up of two struggling supermarkets will not result in profitability or flourishing.
Morrisons may be taking a risk at the risk of becoming unprofitable, and the company may not yet be stable or strong enough to save Safeway from its great debts. Just as any proper merger should have, Morrisons-Safeway has already disclosed some of their strategies for achieving a smooth merger. Morrisons is counting on its expertise in cost-cutting to turn Safeway around. As a result of the merger between Morrisons and Safeway, they estimate they will save $3. 3 billion in 3 years. Sharing purchasing costs. Morrisons-Safeway will now operate together in hopes of competing in a diversified, competitive Supermarket market