merger

Definition
The combining of two or more entities into one, through a purchase acquisition or a pooling of interests.
Differs from a consolidation in that no new entity is created from a merger.

Benefits of Mergers:
1. Economies of scale. This occurs when a larger firm with increased output can reduce average costs. Different
economies of scale include:

 i) technical economies if the firm has significant fixed costs then the new larger firm would have lower
average costs
 ii) bulk buying – discount for buying large quantities of raw materials
 iii) financial – better rate of interest for large company

 iv) Organisational – one head office rather than two is more efficient
· Note a vertical merger would have less potential economies of scale than a horizontal merger e.g. a vertical merger
could not benefit form technical economies of scale

2. International Competition. Mergers can help firms deal with the threat of multinationals and compete on an
international scale

3. Mergers may allow greater investment in R&D This is because the new firm will have more profit. This can lead
to a better quality of goods for consumers

4. Greater Efficiency. Redundancies can be merited if they can be employed more efficiently

The advantages of mergers and acquisitions are:

 Economies of scale, which reduces unit costs.

 Greater market share for horizontal integration, which means the business can often charge higher prices.
 Spreads risks if products different.
 Reduces competition if a rival is taken over.
 Other businesses can bring new skills and specialist departments to the business.
 It is easier to raise money if a larger business.

The disadvantages of mergers and acquisitions are:

 Diseconomies of scale if business becomes too large, which leads to higher unit costs.
 Clashes of culture between different types of businesses can occur, reducing the effectiveness of the
integration.
 May need to make some workers redundant, especially at management levels – this may have an effect on
motivation.
 May be a conflict of objectives between different businesses, meaning decisions are more difficult to
make and causing disruption in the running of the business.

Disadvantages of Mergers:
If a merger leads to a significant increase in market share, either in local or national markets, the new firm could
 exercise monopoly power. The legal definition of a monopoly is a firm with more than 25% of the market. If the firm
has monopoly power there could be the following disadvantages:

 Higher prices leading to allocative inefficiency)

 Lower Quantity and reduction in consumer surplus
 Monopolies are more likely to be productively inefficient and not produce on the lowest
point on the average cost curve
 Easier to collude
 If there is less competition complacency amongst firms  can lead to lower quality of
products and less investment in new products
 Fewer firms therefore less choice for consumers
 With increased supernormal profits the firm can engage in cross subsidisation or
predatory pricing increasing Barriers to Entry.
 The new firm can pay lower prices to suppliers
 Mergers can lead to job losses.
 If the firm becomes too big it may suffer from diseconomies of scale
 The motives for mergers is often poor. E.g. managers may prefer to work for a big
company where they get higher salaries and more prestige.

EXXON AND MOBIL SET FOR WORLD'S BIGGEST MERGER

British oil shares gained today after reports that energy giants Exxon and Mobil are planning one of the world's
biggest ever mergers in a move which would create a £144 billion company.

The two US groups, which employ around 5,100 in Britain, are said to be in advanced negotiations and the
Financial Times reported an announcement could come early next week.

Neither company was available to comment on the reports.

Exxon, or Esso in the UK, is valued on the stock market at £107.2 billion, making it one of the biggest
companies in the world. Mobil is valued £37 billion. Based on last year's figures, the combined companies
would have revenues of more than £121.2 billion.

Exxon employs 2,500 staff in Britain at its Esso UK operations - mostly at Leatherhead in Surrey and Fawley
near Southampton. It also has 780 staff at Exxon Chemicals, which operates from Fawley and Mossmorran,
Fife.

Mobil employs 1,300 at its oil and gas exploration division. Around 900 are based in London and 400 at
Aberdeen. A further 500 staff work for a Mobil joint venture with BP on petrol stations and lubricants.

Shares in Shell gained nearly 3% in early trading, while BP improved by around 2%.

Microsoft makes its biggest acquisition ever

icrosoft is shelling out about $6 billion in cash to buy digital marketing/advertising vendor aQuantive.
The aQuantive buy marks the biggest acquisition in Microsoft’s corporate history. (So much for the idea that
Microsoft isn’t into big acquisitions. Guess a Google-DoubleClick deal, on the heels of a Google-YouTube
deal, changed that dynamic.)