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Company Mergers – Pros and Cons

The latest developments in the machine market are a good reason to think about what business mergers mean, also for suppliers and customers and what possibilities they can offer.

When different companies decide to merge, it always means that one loses its economic independence and the different companies are united under a corporate management.

Source: John Deer June_2017_Investor-Call-Presentation

One example for a company merger is John Deere acquiring Wirtgen Group.

 

Aims and advantages

One main aim is profit maximization. Other aims are to increase growth as well as efficiency, which is possible by synergies. That includes that existing double departments can be joint and rationalized and for example purchase can be combined and this way better conditions can be reached. Another advantage is the merging of know-how and development so that new and innovative products can be offered and invest in research and development rises.

In many cases productivity also increases as the company size grows. Also the market power and the corporate image can be improved and the market share is bigger as now two companies build one. The capital base is more solid, that also implements new financing options. Plus, the portfolio can be expanded, like John Deere expanded with Wirtgen in the road construction sector, as seen on this graphic.

Source: John Deer June_2017_Investor-Call-Presentation

Merging companies also want to minimize their risks: By diversifying their product range and their markets they hope to gain a more stability against fluctuations and crises of markets. That also means a safeguard of jobs.

A big advantage for suppliers is that sales opportunities grow as the whole company grows and as sales are organized together, so that there is more sales potential (cross-selling potential) also for the supplier without needing more efforts in marketing or coordination and structuring of new channels. This offers the chance to gain bigger market shares with preexisting products. There is also the possibility to develop new products, as now the customer base is more diversified and probably other products are also needed.

For customers there can also result positive effects out of company mergers: More products are available, production and service are often more efficient, that means waiting times can be reduced.

 

Challenges and risks

Of course, mergers also implement huge challenges, as two complete companies have to be united, that means structures have to be aligned, the joint appearance and image has to be developed and staff, customers and suppliers have to be taken along.

Also, there is the risk of competition restriction and power abuse, for instance with excessive prices. Plus, often rationalizing can also cause to cut jobs.

FrankSchnee 20.09.2017 0 186
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