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Introduction
Studies define acquisition as an instance when a firm takes control of the liabilities and assets of another firm. The identity of the acquiring firm remains while that of the organization being acquired is lost. A merger, on the other hand, is a voluntary joining of two companies in almost equal terms into a new single legal enterprise (Siegel and Simon 21). The consolidations come with several benefits that this paper seeks to explore.
The benefits of business consolidations
Business consolidations are characterized by constant growth in revenue. Besides, firms that merge have a higher possibility of enlarging their market share, which in effect, contributes to the growth in sales. The firm may acquire better technologies and new skills, which also contributes to increased productivity (Stunda 4). Another benefit associated with industrial mergers in America is the reduction in labor and production costs. From most straight consolidations, economies of scale are created.
A vertical merger, on the other hand, provides opportunities for cost reduction resulting from the closer coordination of distribution and production. Cases of companies having resources that complement each other also tend to help in getting economies of scale.
In fact, it is normal for the new consolidated company to lay off less productive workers through downsizing and retain productive workers. The strategy will ensure that the remaining employees are those who are highly productive and the costs incurred in paying the laid off workers is avoided (Stunda 5).
The consolidations are also associated with other benefits including tax gains. The benefits arise due to the unexploited tax losses, unexploited debt capacities, appraisal of assets that depreciate, and the availability of surplus funds (Stunda 2).
The acquiring firm has the possibility of increasing its returns on investments through efficient utilization of the newly acquired assets including the working capital. The case becomes more applicable where the existence of the targeted firm depicts redundant assets that can be divested (McGuckin and Nguyen 740).
Reduced cost of debt is another ground why businesses combine their assets. In most cases, this will accrue from the reduction in how variable the cash flows will be as the corporations continue to operate. The instances that would have existed before a firm defaulting on its debts will be reduced or completely non-existent. In case such a scenario occurs, it will lead to safer debts and a reduction in the borrowing costs (Stunda 3).
The shortcomings of mergers and acquisitions
Even though the consolidations in the American industry have proved beneficial, there are also a few shortcomings. The first major shortcoming occurs in the existence of conflicting resources and organizational cultures and practices between the two companies that are consolidated.
These may lead to rifts within the newly consolidated organization. In fact, the differences in the cultures, processes, and systems may make the company lose part of its brand and highly estimated synergies. In turn, inadequate understanding of the targeted business may lead to an awful decline in the worth of the shareholders and the firm’s stock price (Gersdorff and Bacon 6).
Conclusion
Even though consolidations have both benefits and shortcomings, the benefits outweigh the shortcomings. Firms should, therefore, embrace consolidation but ensure that they find solutions to any unanticipated complication resulting from the mergers to ensure their success. Consolidations provide a bright future for firms in various American industries. Thus, the relaxation of the anti-trust law is apparently good for the renowned firms, but bad for the infant corporations.
Works Cited
Gersdorff, Nick, and Frank Bacon. “U.S. Mergers and Acquisitions: A Test of Market Efficiency”, Journal of Finance and Accountancy, 2013: 1-8. Print.
McGuckin, Robert and and Sang Nguyen. “The Impact of Ownership Changes: A View from Labor Markets”, International Journal of Industrial Organization, 19.5 (2001): 739-762. Print.
Siegel, Donald and Kent Simon. “Assessing the Effects of Mergers and Acquisitions on Firm Performance, Plant Productivity, and Workers: New Evidence from Matched Employer-Employee Data”, Strategic Management Journal, 2009: 1-30. Print.
Stunda, Ronald. “The Impact of Mergers and Acquisitions on Acquiring Firms in the U.S.”, Journal of Accounting and Taxation, 6.2 (2014). Print.
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