In the corporate world we have to think differently. Starting a new a company may require a lot of fixed costs and it may seem viable to reduce the cost. The common people may not understand this strategy but it can be interpreted by saying it’s akin to Darwin’s theory of evolution. One of the conclusions of Darwin’s theory was survival of the fittest. In the corporate world to survive the competition present you have to undertake few steps. Today these steps include strategies of mergers and acquisitions. These can be understood as a way to protect oneself from external damages.
The phrase merger and acquisition can be understood as two simple activities merging and taking over. In mergers the company merges with another company which is producing homogenous goods to cut down production cost. Merging can be of various types. This includes small companies merging with large companies and vice versa and interstate or cross border mergers. All these mergers are expected to be beneficial but there are certain mergers which might change the future of the merging company. The merging takes place to reduce the cost of production. If the two companies producing homogenous products merge, they will reduce the fixed cost of duplicate departments such that the total cost of production gets reduced. On the other hand if the companies are not producing homogenous products then the new departments add fixed cost and raise the cost of production. Usually these type of mergers turnout to be unsuccessful.
Coming to acquisitions, they are considered to be hostile mergers or in other words forced takeovers but they are not exactly forced they are in most cases the only solution to the problem. When the company is incurring losses, they can either stay to operate or quit the market. In some cases to stay in the market they have to allow themselves to be taken over by another company. It might not seem beneficial to the owner but it’s the only solution to prevent the closing down of the company.
Economically, it’s better because only the name of the company and the owner gets changed but the employees still retain their jobs. It also reduces the losses incurred by the company as the new company is strong and can sustain the losses. The new profits attained as a result of large scale production leads to the growth of GDP without increasing the unemployment level.
During the time of global recession many flight attendants lost their jobs as their company was unable to pay them. This mishap could have been protected by the mergers and acquisition strategy and it could have saved the day. Perhaps Kingfisher would have merged with some other firm but this did not happen and for some time thousands of people lost their jobs. Many lost confidence in private sector jobs and found that government jobs were better as they offered job security.
It may not affect the participation level in short run but may change long run attitude. In the end it only proved that private sector is really not good. The strategy of M&A has gained acceptance now. In India the new mantra of corporate sector is M&A. This has brought substantial changes in the growth of the sector. The revenue and profits incurred by the companies has increased. As a result this has increased the GDP. There is also another side to this which says that if two companies merge it gives them the power to set prices and it is feared that they might turn into a monopoly. Acquisitions done for personal purposes and they can be harmful. So, the government should always keep a check on these activities to keep things in order.