Why Firms wish to Merge

Readers Question: “Merger activity represents a major force for structural change in competitive markets. Examine the principal objectives underlying such strategic developments and consider the degree of success enjoyed by firms in pursuit of those objectives.”

This question is a rather complicated way of saying:

• Discuss why firms wish to merge.
• Using examples, discuss whether firms have actually benefited from mergers.

Why Firms wish to Merge

1. Increase Market Share. A merger enables a firm to have more market share and therefore it is in a position to set higher prices and make more profit. Increasing market share may be necessary in a declining market with falling profitability.
2. Economies of scale. A merger can enable greater efficiency because the larger firms can share fixed costs. This argument is important for industries with high fixed costs such as car manufacture. It is less important for industries with low economies of scale e.g. cafes.
3. Profit for Research and development. A merger enables a firm to make more investment. This is important for risky investments in industries such as oil exploration.
4. Greater prestige from working in a bigger firm.
5. Higher salary from working in a bigger firm. Managers may expect an increase in salary if they work for a bigger firm.
6. Greater political and social influence. For an industry like newspapers, the motive for a merger may not be just economic, but to have greater political and social influence.
7. Prevent a firm going bankrupt. For example, at the height of the banking crisis, Lloyds TSB were allowed to merge with HBOS to help absorb the losses of HBOS and reduce the burden on the government. (see: monopoly power in banks)

See also:

• Benefits of Mergers
• Advantages of Monopolies 

The degree of success enjoyed by firms, requires some research. Bear in mind the benefits of mergers will vary depending on the type of industry. Recent mergers include:

Safeway and Morrisons Supermarket

In this industry, there is still significant competition, e.g. Safeeway still faces significant competition from big supermarkets like Sainsburys and Tesco.

A merger between Tesco and Sainsbury would have more potential drawbacks as the firm would have over 50% market share.

Mergers in Car Industry

Daimler-Benz took over Chrysler and also control Suzuki and Mitsubishi

The car industry is a good example because the industry was suffering from over capacity and therefore there were many good reasons for mergers.

Related

• Pros and Cons of Mergers