What are the Advantages of Mergers?
The nine major advantages of mergers are depicted below.
The major benefits or advantages of mergers are as follows:
- Economies of scale.
- Tax benefits.
- Financial resources.
- Entry in global markets.
- Growth and expansion.
- Helps to face competition.
- Increase in market share.
- Increases goodwill.
- Research and development (R&D).
- Miscellaneous advantages.
Now let's understand above advantages of mergers in brief.
1. Economies of scale
Mergers result in economies of scale for the company.
Economies of scale is the cost benefit that a company obtains due to merger.
Due to merger, company became large, and therefore, it can buy materials on a large-scale and also get huge discounts on purchases.
Similarly, a merged company can produce and distribute its goods and services on a large-scale.
The types of economies of scale seen in a merger are depicted below:
The different types of economies of scale are as follows:
- Technical economies refer to the fixed technical-costs of the company before merger, this cost reduces after merger.
- Bulk-buying economies help a merged company to obtain a discount on buying raw-materials in bulk quantity.
- Financial economies help a merged company to bargain (negotiate) on a better rate of interest from financial institutions.
- Organizational economies help a merged company to have a proper or good unity of command as it is lead by one management with efficiency.
2. Tax benefits
Mergers result in a large tax benefit to the companies.
A merged company gets tax benefits:
- When a profit-making company takes over a loss-making company.
- When a company enjoys a subsidized rate of taxation.
3. Financial resources
After merger, the companies will have adequate financial resources.
The combined assets of the merged company will help to:
- Increase the credit worthiness of the companies in the financial markets.
- Increase the bargaining power to obtain loans at a subsidized rate of interest.
4. Entry in global markets
Global market means a huge world-level market in which any company can sell their goods and services.
This market does not have any restrictions for entrances.
Merger helps merged companies to get an entry in the global market which encompasses various regions.
Examples of mergers showing an entry in the global market are as follows:
- TATA Steel's acquisition of CORUS Steel increased Tata's presence in the global market.
- MITTAL Steel's acquisition of ARCELOR Steel increased Mittal's presence in the global market.
5. Growth and expansion
Mergers help companies to grow and expand their business activities.
This growth and expansion are achieved by:
- Making a strong presence in the domestic markets.
- Entering into various foreign markets.
6. Helps to face competition
Merger helps the merged company to face competition at both levels, national as well as international markets.
Generally, merged company face the market competition by:
- Merging the competitors in their company.
- Providing the goods and services at competitive prices.
7. Increase in market share
Merger aids in increasing the market share of the merged company.
This rise in the market share is achieved by:
- Providing an adequate supply of goods & services as needed by clients.
- Entering into an agreement with clients for continuous supply of goods and services.
8. Increases goodwill
Merger helps the merged company to boost its goodwill in the market.
It creates goodwill by:
- Increasing the confidence of the shareholders of the merged company.
- Creating a good image of the merged company among the customers.
9. Research and development
Merger enhances the research and development (R&D) programmes of the merged company.
This enhancement in R&D is achieved by:
- Allowing uninterrupted investment in research and development programmes.
- Appointing skilled professionals to carry out the research and development programmes.
10. Miscellaneous advantages
Miscellaneous advantages of mergers are listed as follows:
- Merger generates value of the merged company by accessing funds and assets to support its business growth and development.
- It helps a merged company to deal with the threats of multinationals companies (MNCs).
- It may prove beneficial to a struggling company by helping it to survive.
- It also assists to reduce redundancies observed in the business activities and/or operations.