Mergers and takeovers are methods of external growth where two companies combine their business operations. This allows firms to expand much faster than they could by growing on their own.
The main difference is:
- Merger: Two independent companies agree to join together to form one new, single entity.
- Takeover (or acquisition): One company buys another company. This can happen through a mutual agreement or even against the wishes of the target company’s management.
Types of Mergers:
- Horizontal Merger: Two companies in the same industry at the same stage of production join forces (e.g., two airlines merging). This increases market power.
- Vertical Merger: Companies at different stages of the production process join (e.g., a film studio buying a cinema chain). This helps secure supplies or sales channels.
- Conglomerate Merger: Companies in completely unrelated industries join together. This helps the business spread its risks.
Types of Takeovers:
- Friendly Takeover: The management of the company being bought agrees to the deal.
- Hostile Takeover: The management of the company being bought opposes the deal, often forcing the buyer to deal directly with the shareholders.
Why companies merge or take over:
- To grow their business quickly.
- To gain a larger market share.
- To access new technology or specialized skills.
- To enter new geographic markets.
- To achieve economies of scale, which reduces costs per unit.
Consequences:
These actions often lead to higher market concentration and potential monopoly power. While they can lead to increased efficiency, they frequently result in job losses due to staff redundancies. Additionally, these deals are often subject to strict regulatory scrutiny to ensure fair competition.
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