How Mergers Could Be The Answer To The Recession Problem

With predictions of no let up in the current economic downturn it seems that more and more big businesses are in for a rough time with some disappearing completely. Already we have seen high street names like Woolworths and Adams going into administration, something that would have been unthinkable not too long ago.

Companies and businesses are being forced to cut back in all areas, making people redundant, lowering prices and freezing wages. As well as these cost cutting measures lots of businesses are looking at the possibility of joining forces in an attempt, not to expand, but just to survive the next few years. Even charities, organizations that rely largely on volunteers, are feeling the pinch. Experts are even saying that in the next few months some well known charities may be forced to join other like minded organizations in mergers, in an attempt to weather the economic downturn.

Such mergers are not uncommon in the business world but they are almost unprecedented in the field of charity. Together with the fact that many businesses are looking at mergers as a survival tactic it seems that we are set for a year of headlines about joint ventures and mergers. So what exactly is a merger?

The most common mergers in the business world occur when two companies, usually dealing with similar products or services, combine. If the companies involved are both open to the idea this is called an agreed merger. If the merger involves one company trying to gain control of another without its agreement then this is called a hostile takeover.

Mergers often take place when a larger company uses its power and influence to take over smaller companies or companies that have the potential to become very powerful and successful. It's a way of a company protecting its interests and securing its position. Hostile takeovers are very often successful but sometimes a third party appears, call a 'white knight', and offers better, more attractive terms and what looked like a hostile takeover turns into an agreed merger.

Mergers rely on the approval of shareholders to be completed. Shareholders are usually directed by a board as to what decision they should make and more often than not they agree. At the end of the day though the decision to merge or not is based on money. Will the merger make money for the shareholders or not. In the case of a larger corporation swallowing up a smaller business the answer is usually yes and the larger corporation can afford to make the shareholders an attractive offer due to the finances at its disposal.

The main motivation behind mergers is expansion. It makes sense that rather than lots of small companies fighting for the same market if there is just one company it will be more successful. Although it is usually the bigger company that drives the merger procedure sometimes it can be the smaller company. They may realise that they have gone as far as they can without getting extra help, which often means capital, and the only way to move forward is through the cash injection that can result from a merger.

When the motivation isn't expansion it's probably cost cutting. This is the trend that the mergers market seems to heading for right now. The integration of companies in the same area can save a small company thousands of pounds and a larger, international, company millions.

Mergers do not always achieve the desired goal, which is more to do with success, growth and money for shareholders. However in the current climate these concerns are likely to take a back seat as the need to just stay afloat takes precedent.

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