(a) What is a business merger? (b) Explain the reasons why some businesses merge. (c) Give three disadvantages of business merger.

Answer Details

(a) What is a business merger?

A business merger is the coming together of two or more separate businesses to form one larger business under a single control and management. The firms combine their resources, ownership and operations and lose their separate identities in the new, combined enterprise.

(b) Reasons why some businesses merge

• To enjoy economies of scale: The larger combined firm can buy, produce and sell in bulk, reducing costs per unit.
• To reduce or eliminate competition: Merging with a rival removes competition and gives the combined firm a stronger hold on the market.
• To increase capital and financial strength: Pooling resources gives the firm more capital to expand, invest and obtain credit.
• To gain a larger market share and control of the market: The bigger firm can dominate the market and even influence prices.
• To pool skills, technology and resources: The firms combine expertise, machinery and other resources to become more efficient and to diversify.

(c) Three disadvantages of business merger

• It may create a monopoly that exploits consumers through high prices.
• It may lead to retrenchment, as duplicated jobs are removed, causing unemployment.
• The larger organisation may become too big to manage, leading to slow decisions and diseconomies of scale, and there may be conflict between the merging managements.