When two companies join hands to consolidate legally their operating units, usually by proffering securities to the stockholders of one company in reciprocity of the surrender of their stock; it is called a “Merger.”In such a situation, two companies cease to be distinct and work together to achieve the shared objective i.e. to maximize the profit of the merged entity. (Mueller,2003)
Types of Mergers Horizontal Mergers- A situation wherein two companies working in the same space, often as competitors offering the same good or services consolidate their resources to become a single distinct entity, it is called a “Horizontal Merger.” The potential idea is to increase the market share by merging with a competitor. Examples- Lloyd's TSB &
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The value of a merged company(VXY) is expected to be greater than the values of individual companies (VX, VY) (VXY > (VX+VY) These mergers are undertaken to achieve cost savings in the long run. By eliminating intersecting costs like administrative expenditure, marketing expenditure; financial performance can be improved by decreasing fixed and variable costs. Merging removes a competitor from the market and thus increases the market’s HHI, giving greater power in the hands of the merged firm.(Mueller,2003)
Cost-Benefit Analysis of Horizontal Mergers Economies of Scale- In the case of a merger, the firm gets the advantage of economies of scale and can reap into the benefits of low cost and high returns. (Andrade,2001) Complementary resources, patents, and factors of production- Various intersecting costs can be cut which saves money, effort, and time. (Andrade,2001) Increased market share- When two competitors in the same marketplace join hands, they get the advantage of increased market share. Power position in the market- Horizontal mergers may allow firms to cross-subsidize products and thus limiting competition in more than one market. It establishes market power by deterring entry of new