A merger is a term describing the combining of two companies, the terms of which are hashed out pre-merger. While it is definitely an exciting time for both parties involved, company executives and leaders must be aware of how such a decision affects their ability to compete in their respective niches.
Change in Competition Category
There are five categorized types of competition in the business world, namely Horizontal, Vertical, Disruptive, State-Sponsored, and Collective. Merging with another company may change who you compete with, how you make money per customer, how much you have to spend to get those said customers, etcetera.
Ability to Leapfrog Their Competitors
One of the main reasons why companies consider a merger is to realize astronomic growth in a relatively short span of time. Traditionally, it can take years of organic growth to increase the size of your business twofold. A successful merger with the right company can double your size overnight.
A merger of two companies makes them twice the threat to other smaller companies in their respective sector. That being said, a merger between two large brands may lead to a potential market monopoly, which is opposite the free-market model that many regulatory agencies and anti-monopoly watchdogs strive to maintain. If a merger does result in a monopoly situation, the newly formed company will be scrutinized by said regulators.
Companies may also decide to undergo a merger as a way to lower the corporate taxes they are subjected to. For instance, a US-based company may opt to acquire a smaller foreign company and then move their finances to that foreign company’s jurisdiction to secure a lower tax rate.
Culture and Brand Changes
The market reaction to a merger announcement is almost always divided. Partnering with a company that has too much debt on its books or has notoriously poor workplace conditions for its employees may lead to a culture clash as well as a PR problem for the other company.
Mergers, although theoretically uncomplicated, can still fail if executed poorly. And while a merger does mean a boost in resources including capital and manpower, it can also be a double-edged sword in that it can increase debt, risk of lawsuits, operational expenditures, and so on.