Mergers & Investments

Following on form our previous article hear are a few more things you should take into account in relation to Mergers & Investments.

a) Market Extension Merger is between the companies selling same product but in different markets. This merger enhances the market for the two companies since they now act as one sole company.

b) Product Extension Merger is like the one between an eminent company making motor parts and another that makes their own cars. So, the companies involved here sell different but more or less the same product in the same market. This merger promotes the sale of both the companies significantly.

c) Conglomeration is a merger where the concerned companies have nothing in common to sell.

There are various reasons behind merger of companies. Like

1) Synergy factor prompts the merger of most of the companies. The synergy in business pertains to the cost saving and revenue enhancement. The companies after merger decrease the staff keeping only the skilled labor, work with a single managing director, CEO etc. So there is good outlay saving. Moreover the economy of the sale i.e. the purchasing power of the company booms after merger.

2) To increase the output and rule the market- many mergers are made with the intention to oust the competition and jointly rule the market. This presupposes healthy relations between the competing companies.

3) Mergers also take place when a company is not able to perform well due to some or the other cause like the lack of required investment in the form of capital, tremendous competition etc. In such a situation this company can merge with one its parent company or any other company that has faith in the prior goodwill of the declining company and in its potential to grow and enhance. So companies also merge in order to overcome their internal inconsistencies.

4) Many a mergers besides economically are also politically driven.

5) Acquisitions which imply taking over of one stronger company with the other weaker one are also at times veiled by the name of merger.

However, the directors who plan to merge their companies should actually contemplate over it, keeping in mind all the possible pros and cons. They must seek advice from neutral financial consultants who do are more inclined towards the welfare of the company and not their own. Their own benefit is also hidden in a merger since the wages of the employees increase with the advancement due to merger. So it is recommended to take advice from all those who are the well wishers of the company before taking any concrete step in this direction.

For more any questions relating to asset management if they could be directed to Nigel Walter Chairman of Connaught asset management.

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