Benefits Of Merging
The act of joining two things, where the individual identities of both are lost is known as merging. In corporate context, merging refers to the combination of two different companies, resulting in the formation of a new company. Two types of merging primarily occur in the market. These are horizontal merging and vertical merging. When two or more competitors that are into the selling of same categories of products unite, the process is called as horizontal merging. When a supplier of a product merges with the buyer of the same product the process is known as vertical merger. There are many benefits of merging for both the players. Some of these benefits include:
Economies of scale.
A common thing that applies to all businesses is that large investment and output reduce the average cost incurred in manufacturing a product. When two companies merge together, their total output increases benefiting them through the economies of scale. If together the companies have considerable fixed cost, this investment has already happened and reduces the average cost of manufacturing a product. When raw materials are purchased in large quantities, the merged company gets huge discounts on their purchase. The larger company gets better rate of interest on funds and finances arranged from outside.
Improved organizational efficiency.
The merged company has a single head office rather than continuing with two offices of earlier companies. This results in improved organizational efficiency.
Two small individual players can sustain within a country but seldom are able to face international competition. When both these small players are merged together, the firms become capable of facing international competition. Thus, they can thus thrive on the international scale.
Improved research and development.
Merging of two firms or companies improves their research and development as together they can spend huge amounts of money in the process. This will create improved quality of products for the consumers and profits for the merged company.
Large companies when merged with small companies that have unique innovative technology, become technologically advanced without making little or no investment in terms of cash.
Reduction in staff cost.
No company can have two vice CEOs to take care of the merged company and only person can handle the post. Merging of two companies reduces the staff cost for the resultant company.
The benefits of merging depend upon whether or not the companies achieve the condition of synergy. When synergy is achieved, the value of combined firms or companies becomes higher than the individual values of either of the companies- a situation that is beneficial for the players, consumers and the market.