Q. Reasons of mergers?
Growth: a company may not grow rapidly through internal expansion. Merger or amalgamation enables satisfactory and balanced growth of a company. It can across many stages of growth at one time through amalgamation. Growth through merger or amalgamation is also cheaper and less risky. A number of costs and risk of expansion and taking on new product lines are avoided by the acquisition of a going concern. By acquiring other companies a desired level of growth can be maintained by an enterprise.
Diversification: two or more companies operating in different lines can diversify their activities through amalgamation. Since different companies are already dealing in their respective lines there will be less risk in diversatisfication. When a company tries to enter new lines of activities then it may face a number of problems in production marketing etc. when some concerns are already operating in different lines they must have crossed many obstacles and difficulties. Amalgamation will bring together experiences of different persons in varied activities. So amalgamation will be the best way of diversatisfacation.
Utilization of tax shields: when a company with accumulated looses mergers with a profit making company it is able to utilize tax shields. A company having looses will not be able to set off looses against future profits because it is not a profit earning unit. On the other hand if it mergers with a concern earning profits then the accumulated looses of one unit will be set off against the future profits of the other unit. In this way the merger unit amalgamation will enable the concern to avail tax benefits.
Increased in value: one of the main reasons of merger or amalgamation is the increase in value of the merged company. The value of the merged company is greater than the sum of the independent values of the merged companies. For example, if X led, and Y ltd, merge and form Z ltd, the value of Z ltd, is expected to be greater than the sum of the independent values of X ltd and Y ltd.
Eliminations of competition: The merger or amalgamation of two or more companies will eliminate competition will them. The companies will be able to save their advertising expenses thus enabling them to reduce their prices. The consumers will also benefit in the form of cheaper or goods being made available to them.
Better financial planning: the merged companies will be able to plan their resources in a better way. The collctive finaces of the merged companies will be more and their utilization may be better than in the seperate concerns. It may happen that one of the merging companies will short gestation period while the other has longer gestation period. The profits of the company with short gestation period will be utlized to finance the other company. When the company with longer gestATION PERIODS starts earning profits then it will improve financial position as a whole.
Economic necessity: economic necessity may be force the merger of same units. If there are two sick units, government may force their merger to improve their financial position and overall working. A sick unit may be required with a healthy unit to ensure better utilization of the resourses, improve returns and better management. Rehabilitation of sick units is a social necessity because their closure may result in unemployment etc.