Mergers and Acquisitions | Managerial Economics Assignment
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Added on 2020-03-16
Mergers and Acquisitions | Managerial Economics Assignment
Added on 2020-03-16
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Mergers and Acquisitions 1MANEGERIAL ECONOMICSStudents NameCourseProfessor’s nameUniversity(City)StateDate
Mergers and Acquisitions 2Introduction Predominantly, horizontal mergers imply the consolidation of businesses in the samemarket structure or industry. Unlike vertical mergers, horizontal mergers are meant to promoteefficiency in the economies of scales. Typically, there are various reasons behind the formationand acquisition of horizontal usually ,mergers are for profit maximizing reasons and non profitmaximizing reasons such as expansion of operations, provide better services at low prices amongother reasons. Curently, the banking industry has experienced consolidation in the recent yearsdue to various reasons. Majorly risk diversification and deregulation of the sector are among thenotable reason for this trend.Profit-maximizing Mergers and AcquisitionPredominantly, for-profitmaximizing horizontal mergers, the main reasons firmsconsolidate their operations is to maximize their profits margins through enjoying largeeconomies of scale(Collino 2011). Mostly,firms do form mergers and acquisitions to maximizetheir profit levels through increased production and increased market share which is availablethrough the formation of mergers and acquisitions.Acquisitions happen when a firm is absorbedby another firm,resultingin the company absorbing the other company to continue existing.Moreover, the desire to eliminate competition within a given geographic location has encouragedthe formation f mergers and acquisition(West Encylopedia of American law 2016).Usually,horizontal mergers happen between firms producing same or identical products thus throughconsolidation and acquisition these two firms become one, facing no competition in thatgeographical area allows them to control large market shares thus resulting in huge profits.
Mergers and Acquisitions 3Also, there are high chances of exemplary management in cases of horizontal mergersand acquisitions which is likely to contribute to better resource allocation and quality of productsby the merger resulting in normal and supernormal economic gains. The desire to produce high-quality goods to boost sales and in turn multiply the profits is a major motivator for profit-maximizing mergers to form (US Department of Justice 2006).Mainly, due to low operating andmarketing costs enjoyed by mergers ,profit margins are bound to increase significantly thus theforce behind mergers for profit maximizing. Inevitably, there s reduced marketing andadvertising costs with the formation of mergers thus leading to low operations costs and moreprofit for the company. In addition, due to the large economies of scale available following themerger, the firm is likely to venture into research and development, an innovative product whichin the long run maximizes the profit margins of the company.In addition, the need to enjoy large economies of scale that are available after mergersand acquisition is a strong motivator for profit-maximizing mergers (Economy watch2010).Primarily, mergers experience large economies of scale through the elimination ofcompetition which guarantees large market control, reduced operating capital and lowadvertisement costs. All these economies of scale guarantee profit maximization for the mergedfirm. In the event that a horizontal monopoly is formed,there's no market or industry competitionthus increased market share and a lot of consumers which is ideal for profit maximization formergers and acquisition firms. Moreover,through horizontal mergers,there s reduced productioncosts which implies the firm is able to save its operational costs and still maintain substantialprofit margins.Through horizontal mergers,there s massive firm growth which implies increased marketshare,ideal for profit maximization. The growth of a firm can be through increased
Mergers and Acquisitions 4production,increased market share, employees among other factors which are achievable undermergers and acquisitions hence for profit-maximizingreasons,some companies may considermerging or acquisition to achieve firm growth(Martin 2015).Usually, individual firms possessshare market power unless the market structure is a monopoly in nature. Through the need toincrease market share,horizontal mergers resulting into monopolies might arise or otherwiseincreased market share and power which is beneficial to all profit-maximizing firms. Moreover,the desire to possess unique capabilities such as licenses, patent capabilities could be behind thereason for mergers and acquisition.Through mergers and acquisitions,a firm can engage in diverse activities on a productdue to the ownership or permission to use the patented rights which could lead to supernormalprofits for the firm (Martin 2015).Also, efficiency is a major motivator for the formation ofmergers and acquisition(Elgar 2006).Due to the changing economic conditions, competition,globalization, most firms aim to achieve economic gains which means low operations costs,allocative efficiency to maintain profits thus the need to form mergers and acquisitions to boostfirm efficiency. The desire to have low productions costs as opposed to the profit margin and toavoid wastage or underutilization of resources has prompted the formation of mergers. Underhorizontal mergers, there's production efficiency and proper utilization of resources leading tolow operational costs due to the efficiency experienced in mergers and acquisitions.For-profitmaximization,there need to operate on low production costs, proper utilizationof resources which is achievable under mergers and acquisition. Mergers are considered moreefficient as compared to cartels that are why mergers are sometimes encouraged by differentgovernments.
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