The motives behind mergers identified by the management experts are many: a firm’s need to improve market coverage, garner promotional profits, expand production without price reduction, acquire capacity at reduced prices, obtain economies of scale, rationalise production using complementary inputs and diversify into new products and markets.
The relative importance of these motives would differ between firms in any particular economy and between one firm and another. The importance is more situations specific. Consolidation can also be used as a means of restructuring and enhancing a firm’s equity base in order to gain credit access, acquire more importance in terms of presence, improve cash flows and exploit new tax advantages. Besides, it may obtain cross-selling and cross-promotional benefits.
Acquisitions are undertaken to reduce instabilities such as wide fluctuations in demand and product mix, excess capacities related to slow sales of growth and declining profit margins and absorb technological shocks.
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M&As are a popular mode of investment for firms wishing to protect, consolidate, and advance their global competitive positions, by consolidating more efficient units in the industry in corresponding value chains and leaving the less efficient ones.
Thus it would restore industry’s health by acquiring strategic assets that enhance their corporate competitiveness to enhance profits, expand market share and employing international production networks more efficiently.
They would streamline their core competencies, increasing competitive advantage over others. Firms adopt M&As as a route to growth if alternative investment opportunities for financing corporate expansion and for more meaningful existence. The host country firms, which are protected from competition from trade, FDI or even other domestic enterprises, may follow defensive strategies such as combining their operations or entering into joint ventures with TNCs in order to strengthen their competitiveness. (World Investment Report, 1997). Further, the motives behind transnational or cross-border acquisitions differ from those, which result in purely domestic acquisitions.
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A firm might decide to go for international merger in order to take advantage of cheap raw materials and labour, particularly from developing countries to capture profits from exchange rates, to invest its surplus cash and expand market show in new countries.
While there are firms’ specific motives for undertaking CBM&As, there are also macro-economic forces which have acted to unleash the CBM&As such as: the economic integration of the European Nations initiated through the single market system which began in 1992 after Mashtrict Treaty.
Economic environment arising out of government regulations can greatly increase the time and cost required for building facilities abroad and therefore firms use “merger” as a strategic took to enhance the existing facilities by internalising investment in the target’s product. Regulations in India are not totally free for unconditional foreign investment. So many firms opted for joint venture in India, with Indian Companies.
Globalisation of the market place for many products, with the convergence of consumer needs, preferences and tastes; increase in competition which has assumed a global character with companies competing in several markets are other reasons for cross-border mergers. Availability of capital to finance acquisitions and innovations in financial markets, such as, junk bonds can also be one among the reasons for cross-border mergers.
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The immediate impact of a merger is to increase the degree of concentration of economic power as it reduces the number of firms in the market. Another effect of mergers on competition is on the formation of barriers to entry.
Artificial barriers can be created through or strengthening of product differentiation establishing legal rights in designs, patents, and know-how. Merger lead to increased efficiencies, if there is overlap in the firms’ product markets, processes or costly inputs.
Such efficiencies and cost advantages could flow from economies of scale and possible scope from the intensified post-merger operations, greater control over key inputs, product rationalisation, combining marketing, advertisement and distribution or from cutting down overlapping research and development.
However, MNC’s participation and conduct might increase or decrease concentration, depending upon the size of the market and its openness. For a backward economy, mergers may ruin the prospects of domestic firms.
Greenfield investment in new production facilities would increase the number of firms engaged in the production of a goods or services and it would reduce or may leave unchanged the pattern of concentration of production in an industry. The effect of merger is situation specific and country specific.