Most successful firms that we see nowadays started as small business entities. Microsoft is such a company that started from humble background and expanded into a multinational corporation. Microsoft is considered as the biggest software producer with a current market share of approximately 88%. In order to extend its operation, Microsoft can consider a merger with other software producing companies such as Apple, Google or Linux.
A merger involves a combination of two or more firms to form a single bigger entity. A merger helps a company in growing rapidly in its market niche, or new markets without creating subsidiary companies. When two or more firms merge, the new entity formed is management as a single entity.
When two companies merge, the less significant company losses its identity and the new firm formed opt to use the name of the larger firm in branding. There are three types of mergers. Horizontal mergers which are formed when two or more companies that sell similar or identical products/services in the same geographical area combines.
This type of merger is mainly done in order to eliminate competition between the merging companies. Vertical mergers are formed when a customer joins with a supply and vice versa. Conglomerates mergers occur where two companies producing similar products, but operating in different regions merges (Ginsburg & Levin, 1989).
In United States of America, the Federal government plays a significant part in the merger process. Federal government is interested in mergers because mergers eliminate competition between the merging companies. Federal government is even more interested if the merging firms happen to be direct rivals.
The Federal government is more interested in such mergers because it considers them as strategies that companies use to restrict output in order to raise prices. It is known that firms have a propensity of merging in order to reduce competition between competing firms. Competition is healthy in an economy as it helps in regulating demand and supply in an open market. Shortage of supply and high demand are associated with high prices.
Therefore, the Federal government carefully evaluates any proposed mergers in order to avoid any merger whose benefits are outweighed by resulting consequences on the external stakeholders. It is observed that monopoly in businesses result in deliberate reduction in outputs in order to escalate prices. Federal government is keenly interested in scrutinizing proposed mergers to avoid monopoly of trade that can lead to inflation of prices.
It is noted that some mergers can greatly influence future prices and mainly when the merging entities command a great market share and happen to be direct business rivals. However, Federal government does not prevent any merger that is aimed at increasing the market share of a company in order to enjoy the volume of scale (Lee, 2003).
Mergers are associated with some social benefits. Mergers are noted in improving performances of companies through acquisitions of extra technical skills that support exploitation of underused resources. A merger between Microsoft and Apple can help Microsoft to enhance its technology of producing mobile software which is currently the competing factor. Mergers augment economies of scale and scope that reduce operation costs, increase output as well as quality.
A merger between Apple and Microsoft will help the company in regaining its former market share in order to enjoy the economy of scale. However, despite many benefits associated with mergers, some companies that are aspiring to merge may fail to agree on the way forward and mainly because of lack of appropriate disclose which ends the proposed merger process. In such cases, the companies opt to undertake the expansion process on their own.
Because of the weak financial status of the business entities, the owners can opt for various strategies to raise money for expanding the business. One strategy they can employ to raise the fund needed to expand the business is to borrow money from commercial banks. In order for the bank to grant them a loan, the bank will require the loan to be collateralized with the owners’ properties such as their investment accounts or houses.
If the management opts to raise the money through this process, the loan will be paid back over a fixed period of time together with some interests. Alternatively, the owners can decide to reinvest the profits generated in the business instead of sharing it among themselves. Though this is a good idea the challenge with this process of raising capital is that the business may take a very long time to realize a significant growth.
Similarly, the owners can decide to incorporate more partners in the business who will contribute the money that is required for expansion of the business. Through this process the new partners will join the company with cash investments and assume equal partnership and the firm will raise the money it requires for the anticipated growth.
The complexity that will arise from these new methods of expansion is that the firm may take a very long period to expand and especially if it opts to expand from the profits generated by the business.
On the other hand, if the shareholders take a loan from a bank for expansion and later there occurs an economic recession that greatly affects the performance of the business, the profits realized from the business sales may not be enough to service the loan and thus, the owners may loss their properties if the bank decides to sell their properties to recover its money (Bierman & Smidt, 2006).
The best solution to converge the interest of the shareholders as well as those of the managers in this scenario is by incorporating the senior managers as shareholders. The shareholders should request senior managers to buy some shares at a discounted rate in order to be incorporated as equal partners.
In addition, the senior managers should agree to be paid lower salaries in order for the business to realize greater profits it can use for expansion. Through this strategy, the company will be in a position to cater for both the interests of shareholders as well as those of managers.
The initial aim of any business is to concentrate on a business growth and expansion strategy in order to maximize business profits. Currently, Microsoft is losing its market share. Previously, it commanded a market share of over 90%, but its current market share has reduced to 88%. In order for Microsoft to reduce the loss of its market share, its goal should be based on enhancing its profits through expansion. However, after regaining its former market share, the management can embark on the goal of maximizing shareholders wealth.
Bierman, H. & Smidt, S. (2006). The Capital Budgeting Decision: Economic Analysis of Investment Projects. 9th ed. New York: Rutledge.
Ginsburg, D. and Levin, J. (1989). Mergers, Acquisitions and Leveraged Buyouts. Chicago: Commerce Clearing House.
Lee, M. (2003). Charging Back up the Hill: Workplace Recovery after Mergers, Acquisitions, and Downsizings. San Francisco: Jossey-Bass.