One aspect of financial markets that investors might hear about every now and again are mergers and acquisitions. Marc J Leder has dealt in this area of finance throughout his long career, which has helped contribute to his present-day success.
If you wish to get involved in this area like he has, it helps to figure out whether you are interested in this area of finance. What are the pros and cons of mergers and acquisitions? In this article, we will review the upsides and downsides of this aspect of business.
PRO: The combined company has an improved ability to scale
When companies merge or one acquires another, the new entity may be able to reach more people than they were able to before. Utilizing each others strengths, the new company is able to grow in a new market that would not have been possible apart.
CON: Increased scale has its downsides
Becoming bigger doesn’t necessarily mean that the newly formed company will be better. As part of a new entity, employees may feel less motivated to succeed, especially if they are perceived to be liabilities by the new management team.
PRO: Enhanced ability to conduct research and develop products
When two companies merge to become one, or when a bigger corporation acquires a smaller business, they are able to pool their capital and their expertise to accomplish research that may not have been possible before. Additionally, skill sets brought over from one of the companies may enhance the ability of the other to produce new and improved products.
Additionally, bringing in a partner that has considerably deeper financial resources can allow a smaller business to produce a product for which they had plans, but previously lacked the capital to act on it.
CON: Prices may increase for consumers
As businesses merge, fewer players remain on the field. This results in less competition, driving up prices for consumers. Left untouched, unregulated mergers and acquisitions can lead to a monopoly situation.
PRO: Tax liabilities may decrease for the new merged company
When companies merge or are acquired by bigger competitors, the newly-formed corporation often has their tax liability decrease as a result. This gives it the capital that it needs to drive expansion plans, leading to economic benefits that can create jobs and grow the economy.
CON: A merger or acquisition may lead to job losses
On the other hand, when two companies merge, certain positions may become redundant. After a short period of adjustment, those unlucky enough to be deemed expendable will lose their jobs. When they are released from their positions, their collective spending power and tax paying ability is stripped from them, exerting a negative effect on the economy.
Conclusion
As you can see, mergers and acquisitions have both positive and negative effects. Properly done, they enhance the economic power of the newly-formed corporation, creating jobs and spurring growth. In other cases, monopolies can form, and job losses that result may outweigh economic benefits.