Merger

Merger:

Merger is an external growth strategy. When different companies combine together into new corporate organizations, such a process is known as mergers. Merger ideally happens when one firm purchases another firm of approximately same size. Merger can occur in two ways: (a) Acquisition of takeover and (b) amalgamation.

Takeover or acquisition takes place when a company offers cash or securities in exchange for the majority shares of another company. It involves one company taking over control of another.

Amalgamation takes place when two or more companies of equal size or strength formally submerge their corporate identities into a single one in a friendly atmosphere.

Advantages

(i) A merger provides economies of large-scale operations.

(ii) Better utilization of funds can be made to increase profits.

(iii) There is possibility of diversification.

(iv) More efficient use of resources can be made.

(v) Sick firms can be rehabilitated by merging them with strong and efficient concerns.

(vi) It is often cheaper to acquire an existing unit than to set up a new one.

(vii) It is possible to gain quick entry into new lines of business.

(viii) It can provide access to scarce raw materials and distribution network

and managerial expertise.

Disadvantages

(a) The combined enterprise may be unwieldy. Effective co-ordination and control becomes difficult. As a result efficiency and profitability may decline.

(b) Mergers give rise to monopoly and concentration of economic power which often operate against the interest of the society and the country.