BENEFITS OF MERGERS

1. Economies of scale.

It occurs when a larger firm with increased output can reduce average costs. Lower average costs enable lower prices for consumers.

Different economies of scale include:

• Bulk buying – A bigger firm can get a discount for buying large quantities of raw materials
• Financial – better rate of interest for large company
• Organisational – one head office rather than two is more efficient

A merger can enable a firm to increase in size and gain from many of these factors.

2. International competition.

Mergers can help firms deal with the threat of multinationals and compete on an international scale. This is increasingly important in an era of global markets.

3. Mergers may allow greater investment in 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. This is important for industries such as pharmaceuticals which require a lot of investment. It is estimated 90% of research by drug companies never comes to the market. There is a high chance of failure. A merger, creating a bigger firm, gives more scope to tolerate failure, encouraging more innovation.

4. Greater efficiency.

Redundancies can be merited if they can be employed more efficiently. It may lead to temporary job losses, but overall productivity should rise.

5. Protect an industry from closing.

Where firms are struggling to stay afloat, mergers may be beneficial in a declining industry. Example, the UK government allowed a merger between Lloyds TSB and HBOS when the banking industry was in crisis.

6. Diversification.

The benefit could be sharing knowledge which might be applicable to the different industry. Example, AOL and Time-Warner merger hoped to gain benefit from both the new internet industry and an old media firm.

By Eve Ojal, FIMS