What are the disadvantages of merging with another company?

By Laurie Brenner Updated February 23, 2022

It's unsettling to work for a business that is being acquired by another company. Company acquisition types vary and often bring a mixture of welcome and not-so-welcome changes to the workplace. The new company might have a different mission, different values and goals.

On the other hand, it might offer new opportunities or have better benefit programs. The way in which you view the changes at work, can help you make the most of both the advantages and disadvantages of merger situations.

During a merger, job security is a disadvantage that lurks on the horizon. The new company – when it is in the same industry – might already have more than enough people that do the same job as the existing employees of the merged company, explains the Corporate Finance Institute.

During a merger, this period of uncertainty works as a disadvantage to employees of the company being taken over. These employees also have less trust and commitment to the new organization, which might also include a resistance to the changes the new company brings.

On the other hand, if the new company is in a related, but different industry, the merger can bring multiple advantages to employees of the purchased company. New job opportunities loom in the distance, with a chance of promotions or different jobs to those employees who are skilled and take advantage of the change.

This is especially true of the benefits of merging departments. With the change comes internal restructuring that can also offer a new supervisor or manager with whom you might enjoy working with much more than your previous supervisor.

Employee morale drops to an all-time low during a company restructuring during a merger. With the instability of the situation, employees often lose the desire to come to work or to do their best work, points out American Express's small-business blog.

The new company might bring a reduction in benefits or employee programs, which further affects morale. Employees of the purchased company often become disengaged and disenchanted. Weakened morale often drives employees to leave the new company before the changes are complete.

A merger also brings new ideas and can breathe new life into a dying organization. The new company might be more financially stable than the old company, which can create a better sense of job security.

The new company structure might also offer the chance to receive training and further individual career goals. Instead of shedding jobs, the new company might need to increase jobs. The new company might offer a different company culture that can bring about positive change for employees and the company overall.

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Merger is nothing but an agreement between two or more organizations or companies to form as a one company or organization.

The main objective of merger is to gain more market share or to enter into new market areas or sectors and maximize their profits. It also helps companies to restructure their business units according to market changes.

Merger helps companies to sustain market changes and go for more customer base.

Types of mergers

The types of mergers are explained below −

Horizontal Merger − If one company merges with another company or companies which have indirect competition in terms of product lines/markets is called horizontal merger.
Vertical Merger − If one company merges with another company or companies which are in the same supply chain is called vertical merger.
Extension Merger − If one company merges with another company or companies who are in the same service or product to expand their market share is called market extension merger.
Product extension Merger − If one company merges with another company or companies who are in different services or products but there are in related services or products is called product extension merger.
Conglomerate Merger − If one company merges with another company or companies who are in different sectors (to explore different sectors) is called conglomerate merger.

Advantages of mergers

The advantages of mergers are as follows −

Economics of scale.
Increase in investment for research and development.
Market share increases.
Operation cost decreases.
Duplication is avoided.
New geographical areas.
Unprofitable businesses can be saved from bankruptcy.

Disadvantages

The disadvantages of mergers are as follows −

Increase in prices
Increase in unemployment
Communication and coordination between employees can be difficult
Decrease in competition, increase in monopoly in market
Diseconomies of scale
Premium for shareholders may increase
Choice for consumers will decrease

Updated on 13-Jul-2021 12:41:15

Career development
Pros and Cons of Business Mergers and Acquisitions

By Indeed Editorial Team

Updated February 22, 2021 | Published December 7, 2020

Updated February 22, 2021

Published December 7, 2020

When businesses consolidate or one business acquires another, this process is referred to as mergers and acquisitions. Working to ensure a smooth transition is critical in avoiding merger and acquisition problems. In this article, we will discuss how a merger and acquisition can be beneficial, as well as tips for undergoing this process.

What are mergers and acquisitions?

Mergers and acquisitions are business transactions in which one business consolidates with another, known as a merger, or one business takes over another, known as an acquisition. In business, people often refer to the entire process as acquisitions and mergers, even though the two words technically have different meanings. You may also see the term shortened to M&A. Acquisitions and mergers can generate significant profits for the companies involved, as well as the investment banking industry, which is often involved in the M&A legal process.

Related: Investment Banking: Everything You Need To Know

Differences between mergers and acquisitions

In an acquisition, the company acquiring the other company typically maintains its business name, legal structure and operations. In a merger situation, the companies involved may choose a new name that better reflects the vision of the new, joined company, or they may choose to use one of the existing company names to maintain brand awareness and loyalty.

From a legal standpoint, the company acquired by another company essentially ceases to exist under its previous name and as its own legal entity. It is absorbed by the acquiring company, and if the acquired company sold or traded stock, the stock would be owned and managed by the acquiring company.

Although the two terms are often used interchangeably, certain situations are mergers and others are acquisitions, depending on the terms of the business deal. If a company does not wish to be taken over by another, this situation is regarded as an acquisition and may be referred to as a hostile takeover. The difference often presents in the way the merger or acquisition is presented to the employees, board of directors and shareholders. However, many merger and acquisition situations are mutually beneficial and allow companies to grow their presence and expand their reach.

Related: What Is a Merger? A Guide to Company Mergers

Advantages of mergers and acquisitions

Merging companies or acquiring another company can bring a number of benefits to those involved with the business. Some advantages relate to how the business can interact with and serve its customers, while others improve efficiencies for employees. Here are some of the advantages that can come with mergers and acquisitions:

Improved economic scale

A larger business, or one that has joined forces with another business, will typically have higher needs in terms of material and supplies. By purchasing the necessary raw materials and/or supplies at higher volumes, the business can improve its scale through lower costs and potentially pass those lower costs onto the end consumers.

Lower labor costs

A merger or acquisition may result in multiple staff members doing the same job at each individual company. By coming together and eliminating extraneous staff, a business can reduce its overall labor costs while maintaining a stronger, more effective labor force. Those involved in the M&A may review the performance of individuals in similar roles and choose the best talent for each position in the new company.

When two companies come together that operate in the same industry or provide similar goods or services, the newly formed company can enjoy a greater market share, tapping into the resources that both bring to the business deal.

More financial resources

All companies involved in a merger or acquisition pool their financial resources, increasing the overall financial capacity of the new company. New investment opportunities may present or the company may be able to reach a wider audience with a larger marketing budget or more significant inventory capabilities.

Enhanced distribution capacities

A merger or acquisition may expand a company geographically, which would increase its ability to distribute goods or services on a wider scale.

Related: Mergers and Acquisitions: Definitions, Types and How They Work

Disadvantages of mergers and acquisitions

While mergers and acquisitions can be beneficial for the businesses involved, certain drawbacks may present that should be carefully considered by all parties. Some examples of potential disadvantages associated with mergers and acquisitions include:

Increased legal costs

Merging two companies is a legal business transaction that often requires the involvement of several key professionals. Those involved will typically have to bring in lawyers who specialize in this type of deal, as well as financial professionals who can assist with the assets and other financial details. The legal costs associated with merging and acquiring can be high.

Expenses associated with the deal

In addition to the need to pay the professionals assisting with the logistics of the merger or acquisition, the business that is acquiring the other would be responsible for paying a sum of money for that business and its assets. That cost may be viewed as a disadvantage for a business.

Potentially lost opportunities

The time, energy and money that goes into a merger or acquisition could require the businesses involved to forego other potential opportunities.

Tips for undergoing mergers and acquisitions

Whether you are involved in the process or working for a company that is being acquired by or merging with another company, follow these tips to smooth out the M&A process and feel more confident as you go into the situation.

You can always negotiate

The terms of a business deal are always negotiable, so make sure to review all the information carefully to make the best decision for your business. If you want to negotiate, work with your legal representative or financial professional to provide data that backs up your adjusted offer or request. Some of the key points that impact the terms of a business deal include:

Projected or actual growth
Prices paid for shares of the company
What type of buyer you are dealing with (private equity firm vs. strategic buyer)
Most recent fair market valuation
Financial performance
Business sector of the company
Any proprietary technology or information held by the company
Potential legal, financial or business risks of the company

Be patient

Any legal transaction can take time to close, and mergers and acquisitions tend to be among the slower transactions in the business world. Some take between four and six months to complete, while others have taken years. The size of the businesses involved will impact the timeframe, as well as the urgency on the part of the acquiring company.

Invest in professional development

When bringing on new team members due to a merger or acquisition, invest in professional training and development to make sure that all employees feel equipped to handle their tasks. Some of the key areas for development include training on new systems and business processes, communication, building strong teams and adapting to change.

Strengthen the company culture

Those coming into a new company may feel unsure about the situation, so developing a strong culture is important to maintaining a positive work atmosphere. All companies involved may want to come together and identify the strengths of their individual company cultures, creating a new and unified culture that can be rolled out to all staff members of the newly formed company.

Rely on experts

Working with experienced consultants or experts in their fields can smooth out the process of a merger or acquisition. You may need financial, legal and/or regulatory assistance, so finding people who can provide this assistance can help you avoid potential pitfalls or legal concerns.

Maintain communication

Keeping the line of communication open during the M&A process spans from the employees up to the board of directors. Make sure everyone involved has a clear picture of what to expect and provide timelines whenever possible to alleviate worry. You may also want to set up a designated communication method for questions, such as an email inbox or an individual assigned to answer M&A-related inquiries.