Influence of Mergers on Firm Performance Essay Example | Topics and Well Written Essays - 1500 words

Influence of Mergers on Firm Performance - Essay Example The result of a merger may therefore have a positive or negative influence on a firm’s productivity. This paper draws on theory and evidence in evaluating the extent to which mergers influence the performance of firms. Influence of Mergers on Firm Performance Mergers increase market power of firms, which is the ability to influence the price and supply of a commodity in the market without affecting customer loyalty (Peterson, 2002). The merging firms within a particular industry are able to establish a monopoly that is capable of controlling the quantities and prices of commodities produced. On the other hand, as DePamphilis (2002) observes, merging increases the competitive advantage of firms over competitors. A market leader results from mergers so long as government policy favors a monopolistic market and hence with the perspective of market power, mergers can be considered to have a positive influence on a firm’s performance. Organizational effectiveness can also be accomplished through mergers that pool resources from the merging organizations to form one firm with a strong resource base. A firm that has success to sufficient resources is capable of maintaining a competitive advantage. ... This allows the firm to have sufficient time to test the applicability of emerging inventions; hence it can not incur heavy losses. Moreover, merging firms enjoy the economies of scale due to the combined production (Sudarsanam, 2004). Mergers increase the new firm’s market share as a result of the amalgamation of the different levels of market share existing before the merger. In other words, firms do not lose their customers after the merger. A successful merger requires that each firm accounts for its input in to the merger, including its human resources and customers. A greater market share resulting from the merger leads to economies of scale, increased turnover and hence increased profitability (Bruner & Perella, 2004). Tax reduction has significant implications on a firm’s profitability. Each firm submits tax as a single entity depending on the level of profits. When a firm’s external environment is unfavorable and makes losses yet it continues paying taxe s, a merger comes in hardy to save it from collapse. Merging with a larger profit making company enables the loss making firm to continue producing while the larger firm enjoys a tax advantage. This may not be a favorable merger for the loss making firm and hence it may not have any positive impact on performance (Sudarsanam, 2004). Mergers develop a positive outlook of the new organization with regards to the stock market. The larger organization has the capacity to maintain stock stability than the original smaller firms. This stability is significant in maintaining the confidence of investors in the stock market, which on the other hand translates to a strong capital base that is necessary for a firm’s long term strategic