What are advantages and disadvantages of vertical mergers?

Answer 1

Advantages:

it gets a larger set of resources at its disposal, which includes manpower, inventory and other assets. With the larger set of resources, efficiency is increased which in turn increases the output. The increase in output leads to lower cost of producing services or products, which is the input. The increased output or lowered input definitely translates to better business growth for any entity. Another advantage of a takeover is that brand awareness increases as the business expands, allowing more advertising, products and services.

Disadvantages:

The bigger the business the harder to control

More decision making and more risks

More expensive e.g. more running costs, more demand, more supplies, more products need to be made, new location

Answer 2

Advantages of Merger

A merger does not require cash.

· A merger may be accomplished tax-free for both parties.

· A merger lets the target (in effect, the seller) realize the appreciation potential of the merged entity, instead of being limited to sales proceeds.

· A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie, increasing their overall net worth.

· A merger of a privately held company into a publicly held company allows the target company shareholders to receive a public company's stock, despite the liquidity restrictions of SEC Rule 144a.

· A merger allows the acquirer to avoid many of the costly and time-consuming aspects of asset purchases, such as the assignment of leases and bulk-sales notifications.

· Of considerable importance when there are minority stockholders is the fact that upon obtaining the required number of votes in support of the merger, the transaction becomes effective and dissenting shareholders are obliged to go along.

The disadvantages of Mergers and Acquisitions are:
Diseconomies of scale if business becomes too large, which leads to higher unit costs.
Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration.
May need to make some workers redundant, especially at management levels - this may have an effect on motivation.
May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business.