28/04/2003

IMPACT ON SOCIETY

Mergers and acquisitions are indisputably an important economic phenomenon concerning the companies that are influenced by them, but at the same time this economic phenomenon has inevitably various social extensions. It is understood that companies are not isolated systems, thus when they operate society is being influenced as well.  To begin with M&A, especially in the last decade, have brought unemployment. This can be clearly seen from the fact that when two companies are combined, they suddenly have created a company with a large number of employees and workers who work in similar places. Thus it is obvious in order the new company to be more flexible need to dispose some jobs and keep a certain number of employees that are needed.

On the other hand there are cases where through M&A new jobs are created. This occurs when during the negotiation process of the merger, it may be required an increased number of employees in certain sectors of company. There is the case where due to the merger process the need for the creation of new departments may happen, so a large number of workers can be occupied then.

Moreover the phenomenon of M&A creates cases of monopolies in the market, which may have severe causes in the society. As it is known, in monopoly the present competition is minimized in a certain sector and the company is dominating. Hence this large company is able to maximize its profits by increasing the prices of its products in the market and cause serious problems to the consumers. This becomes more harming for the consumers, when the company decides to reduce the quality of its products in order to have profit from its production factors.

 Of course the establishment of a monopoly can prove to be beneficial for the society. For example if the company is cautious about the entrance of another company that may offer the same product at a lower price, then the company of the monopoly is forced to keep the prices at a low level and at relatively high level of quality. But even if the monopolistic company is certain for its position in the market, it may associate with other factors, like technology. So through M&A the capital becomes bigger and research and development aims to the development of new technological factors of production, but simultaneously the development of the same product as well as of new products, aiming for the benefit of the consumers.

IMPACT ON THE MARKET VALUE OF THE FIRM

Most of the decisions of the companies relate to the maximization of their profit. Particularly mergers have as ultimate goal the increase in the value of their shares. In M&A the criterion for the increase in the shares is fulfilled when the added value that is being created after the merger overcomes the cost from the process of merging.

Initially it is known that a long time before the announcement of the merger, the price of shares of the target firm fluctuates in low levels. But when at the time being the merger is to be announced, it is observed the opposite phenomenon, i.e. an increasing tendency for the share prices of the target firm. This occurs probably because the information for the coming event has leaked out or because investors recognize that the company is a good target for merger or acquisition. So when the merger has been announced publicly the share prices increase dramatically. If the merger is fulfilled the shares of the acquired company are lost, while if the merger is unsuccessful there is for the share prices to fall. All these movements in the share prices are considered very important in the business and the majority of the cases has shown an increase in the value of the shares of the acquired companies or a very few cases with zero increase. This proves that on average M&A are profitable for the market value of a company. Simultaneously the stock market of competitors is rises, since investors hope for a general increase to gain profits.