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TOPIC 19. “Speak about strengths and weaknesses of takeovers and mergers. What problems might mergering companies encounter?”

You cannot buy merely a company by buying its shares’ – this is a “gold” phrase. Because when one company buys another then it buys also stuff, ideas, the way of working, a history… and so on with shares. And to make one’s business successful it’s necessary to notice and take under the consideration all strengths and weaknesses which can cause. And that’s why it’s compulsory to say a few words about them.

Strengths of takeovers: one advantage for the existing owner of a target is that they can realize the value of the company by selling it and use the proceeds to start another company.

A company taken over may get a new lease of life in the form of new management and access to new markets: once that the acquiring company is in. It may gain better access to investment finance because of the increased size of the new company, making it more attractive for investors. The acquiring company may gain new products to sell, and new markets to sell them in, once where the company taken over is already present.

Benefits promised to shareholders often include lower costs. For instance, the human resource department of a company of 5000 employees doesn’t need to be much bigger than one of 3000 employees, so the same general costs can be spread wider, meaning increased profitability.

Weaknesses of takeovers: Employees of a company that is taken over might benefit from an increased number of career opportunities in the larger company, but usually the story is one of redundancies through cost-cutting. To go back to the human resources department example, the new owners might close the department of the company being taken over, with the personnel being administrated by its own human resources department. The people in the human resources department of the takeover target will probably lose their jobs.

Also new owners may not fully understand how the company they’re buying works, especially if they are unfamiliar with the industry it is in. They can buy the shares, but that doesn’t change the ‘culture’ of the company. New owners may damage the morale of previously motivated managers and employees, perhaps by putting their own senior managers in charge of the company, or by undervaluing the skills and experience of the existing staff.

Strengths of mergers: the benefits of mergers are usually couched in financial or commercial terms – cost-savings can be made or the two sides have complementary business that will allow them to increase revenue. Also the combined entities have to deliver better returns to the shareholders than they would separately.

But many of the points of strengths are the similar to takeovers.

Weaknesses of mergers: the majority of mergers suffer from poor implementation. And about half of existing mergers suffer from that fact that senior management failed to take account of the different cultures of the company involved. Adapting of a new corporate cultures takes time, which senior management doesn’t have after a merger.

Another minus is mergering company need to decide in advance which partner’s way of doing things will prevail. This process can be dangerous, because it is not clear usually who is in charge and it takes a lot of time to decide, while competitors are not going to hang around waiting for them to improve the performance of their new acquisition.

But in general, the word synergy may be bandied about by the partners but the partnership will almost always be unequal, and the dominate partner will often behave like an acquiring company.

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