Policy in Corporate Mergers
Mergers and acquisitions (M&As) are popular tools in the modern markets used by companies to achieve different objectives. And these tools largely affect the employees of the said organization at different levels as they must try to integrate into one. Mergers are very popular across the business realm and have been on the ground for many years. A merger is generally the joining of two or more organizations to create ownership or management structure. An acquisition is generally a process by which one firm or corporate entity acquires the control or another firm through purchase, stock swap, or other ways.
Unfortunately, 70% to 90% of M&As fail to achieve their targeted strategic and financial objectives. Merging firms come with different challenges, which brings out most of these failures. Some of the issues include HR factors like incompatible cultures, management approaches, lack of motivation, loss of important talent, lack of proper communication, and uncertainty of long-term relationships, among other factors. When there is no trust between management and employees of the merged companies, it becomes very hard for them to achieve their desired goals. It is crucial that both stakeholders come together and have a proper strategy for taking over these new systems.
Students taking economics at university and college level are introduced to this subject because it helps them learn different market operations. Corporate mergers and acquisitions are one of the main subjects, both for academic purposes and real-life applications. As much as it seems easy, M & As are not very easy to understand. There are a lot of processes involved, which may or not be easy to grasp.
For instance, one way of ensuring the success of mergers is by managing "people issues." If the management focuses on resolving HR professionals' issues, they will have a better chance of achieving their goals. Addressing issues like the creation of new policies to guide the new organization and retention of one key employee should be among the main agendas for acquisition or mergers. There also needs to be a proper system for employee selection and downsizing to ensure the company operates within its limits. Also, workers who have been laid off will require compensation, which should be included in the new company budget. There are many other key issues that should be well considered when creating a new company by merging. Sometimes, these companies' long-term goals may not be clear from the start until the company has clearly set its operations in motion.
Types of mergers
Companies operating in the same market are bound to face stiff competition from each other. Since we do not have perfect competition, there will always be companies trying to get ahead of others. They use different strategies to get where they want to be, which is why big companies and small ones operate in the same environment. And based on these competitive relationships, there are three forms of corporate mergers.
The first form is the horizontal merger. In this case, the firm acquires another firm that produces and sells an identical or similar product and operating in the same geographic area. These mergers good for the companies because it eliminates competition between the two firms. The new company can then have more ground to cover, helping them reach more customers and get more revenues.
The next type if the vertical merger, in which one firm takes over either a customer or a supplier. In this case, the firm does not take over another company's whole operations, but only a specific customer or supplier. The third type of merger is a conglomerate merger, which encompasses all other acquisitions. Such mergers can include conglomerate transactions where the two companies do not show any evidence of a relationship. For instance, when a shoe producer buys an appliance manufactures, they are said to be in a conglomerate merger. A geographical extension merger is a type of merger where the two firms make the same product but from different geographical regions (for instance, a baker in New York buys another bakery in Miami. Geographical extension mergers are good for companies that want to open new offices in the selected regions. It is different from a product-extension merger, in which a company that produces a specific product buys another company that makes a different product. This happens when the product of the acquiring company requires the application of similar manufacturing or marketing approaches. An example when a household detergent producer buys a liquid bleach producer.
Procedures for Corporate Mergers
Corporate mergers may be more complicated than you thought. It involves more than just two CEOs having to share the same office. The processes follow procedures established by state statutes to guide corporate mergers and to ensure everything is successful. In general, the board of directors from both companies must initially pass a resolution to accept a for merging. This resolution should specify the names of the concerned firms, the title of the proposed merged company, the procedure for converting the shares of both companies, and other legal provisions the lead to a successful merger. Each firm will then send a notification to each of its shareholders to call for a meeting to approve the merger. It is crucial to have a free and fair voting exercise, from which the results will determine the companies' fate. Suppose the right number of stakeholders agree with the plan. In that case, the directors will need to sigh paper and sign them with the state, under the Secretary of State who issues a certificate of merger authorizing the new corporation.
Some laws allow the directors to abandon the merger arrangements at any stage until the final papers are filed. In states that have more liberal regulations, surviving firms can absorb other companies by a merger without following the approval of shareholders, unless it is a requirement in the certificate of incorporation. Statutes and regulations often call for corporations formed in two different geographical regions to follow the regulations in their respective regions for the effectiveness of the merger. And ins some policies, the surviving corporation must purchase the shares held by stakeholders who did not agree with the merger.
Concerns in Mergers
We already have the three main types of mergers, which each raise unique competitive concerns. Here are some of the concerns to be expected;
There are three basic competitive issues that arise from horizontal mergers. First, there is the elimination of competition between the two firms. This may be significant, depending on the size of the companies. Lack of competition creates a perfect market for the remaining company since they will own more customers and cover a larger market than when the companies operated differently. However, such a merger could create a monopolistic market where the product's price is determined by one company – this is never good for the consumer.
The second problem is the unification of the operations of the merging firms. This process might create s significant market power and may allow the new company to raise product prices by reducing output. Where consumers have not alternative, they are forced to accept the new prices without complaining.
The third issues come from increasing concentration on the relevant market. In this case, the process might give more power to the market's remaining players to easily coordinate their pricing and output decisions. The fear is no in if entities get involved in secret collaborations, but that reducing market players will enhance tacit coordination of behaviors.
The vertical merger seems fair, in terms of concerns that come up. Nevertheless, there are several issues that should cause an alarm.
First, note that vertical mergers appear in two basic forms. There is the forward Integration, through which a firm buys customers, and there is backward integration where firms acquire a supplier. There are at least two benefits that come from market exchanges with internal transfers. First, this type of merger internalizes all processes between a manufacturer and their supplier, in which case they convert a potentially harmful relationship into more of a partnership. The second benefit is that internalization can help a firm's management more and create better ways of monitoring and improving performance from their employees.
Vertical integration does not reduce the number of players in the market, and hence, it might not create a monopoly. However, it can change the patterns of industry behavior. The newly acquired company may decide that they will only deal with the acquiring firm. By doing so, the alter competition among the suppliers, customers, or competitors of the acquiring firm. It could cause a loss of market for the goods of suppliers, deprive retail outlets of supplies, and block outlets for competitors. All these are situations that may arise, raising concerns that vertical integration will foreclose competitors by creating limited access to sources of their supplies, or customers. In other words, these mergers may be anti-competitive since their entrenched market may discourage new businesses from joining the industry.
There are many forms of conglomerate mergers. They include short-term joint ventures all the way to complete mergers. A conglomerate merger may be pure, geographical, or product-line extension. In any case, it involves companies from companies that do not share obvious relationships. Hence, transactions in these mergers do not have a direct effect on competition. It does not change the number of players in the market.
Such a merger can supply a market, or 'demand' for firms, which gives entrepreneurs more liquidity at an open market price. Also, they can be a key inducement to forming new companies. Since the threat of a takeover is imminent, managers may be compelled to increase efficiency in competitive economies. In addition, firms can be incentivized to reduce capital cost and overhead, besides achieving other efficiencies.
However, these mergers may lessen future competition as they eliminate the possibility that the surviving firm would have independently entered another firm's market. It could also make a large firm dominant, and with a decisive competitive advantage, or it can just make it hard for other companies to join the field. The merger may also reduce the number of small firms in the market while increasing one firm's political powers. Monopolies are not always the best market for consumers.
Policies and regulations in Approving Mergers – Antitrust Policies
Some several laws and provisions give the government power to block certain mergers. This is why the mergers have to be reported and registered first with the government. You may have thought the government is not involved since the decision to create a merger remains between the firms. However, governments get involved, and in some cases, it can even break up larger firms into smaller ones. These laws are called antitrust laws. Prior to a larger merger, the antitrust policies at the FTC and the US Department of Justice allow the merger, stop it, or use certain criteria to approve. One of the most common conditions is the merger will happen if the firm accepts to sell certain parts. A good example in the 2006 case where Johnson and Johnson bought the Pfizer's 'consume health' division. This merger included the acquisition of brands like Listerine Mouthwash and Sudafed cold medicine. One condition for allowing this merger was that Johnson & Johnson would sell six brands for other firms.
The US government has the power to approve most mergers, as proposed by many firms. In other situations, under market-focused economies, companies have the freedom to make their own choices. Private companies can do the following without asking for permission. They can:
· Expand or reduce production
· Set their own prices
· Open new factories or facilities, or even close them.
· Acquire new worker or let them go
· Start or stop selling a new product.
Generally, private firms have the freedom to go through some processes without looking for permission. In the owner wants their company merged with another, it is a decision they can make themselves. But these conditions lead to many mistakes from managers of private firms, which may cause the firms to even close down would have been profitable. Still, mergers can be a great way for firms to achieve their goals, if they get the right process, and follow the right procedures.
Author: James Hamilton