Mergers and acquisitions are very present in the modern organisation of economies. This article deals with the fundamentals of such a phenomenon, highlighting the consequences of such a trend and providing the basics for understanding the workings of mergers and acquisitions
During the last century the concept of business went through major changes in terms of the company ownership (Papers4you.com, 2006). Nowadays, fierce competition is no longer only in the access to market, but also in what regards to business ownership. Most of times, deals involving mergers and acquisition involve billions and are reported in newspapers all the time. The process of globalisation had an increasing effect on access to foreign firmsí ownership control, and thus becoming the process of controlling other firms more usual. The traditional family business concept is now under threat and the concept of business has changed as a consequence of the trend. Basically the operation of merger and acquisition is defined as when two companies get together, either by resulting on a new firm or by one being controlled by the other. The former form of merging firms is known as concentration and defined as A+B = C and the later is known as incorporation and represented by A + B = A. Another important issue is related to the nature of the firm business activity or the market in which they operate. A process of merging companies is a strategy of diversification of the business and can be of three forms. Vertical diversification occurs when two or more firms in different stages in the value chain are merged into the same company. Horizontal diversification is present when the merging occurs between firms operating in different business (e.g. Virgin). Finally, geographical diversification happens when firms expand their territorial control by merging or acquiring companies operating in different geographical location. There is a huge number of examples on mergers and acquisitions. Although only the one involving higher amounts of money become known to the public. And it is so widely used that there is also a great number of academic literature devoted to the study of the phenomenon. The consequences of a higher number of mergers and acquisitions is a higher concentration of the business, which implies possibly implies a higher level of monopoly (under certain circumstances) and the business ownership control in the hands of few (Papers4you.com, 2006). In both cases there are losses for the economy, via the increase of the prices and because the overall economy becomes more dependent on few economic agents. On the other hand, the concentration of activities permits higher levels of profits (when economies of scale and economies of scope are present) and eventually increasing the investment levels in the country (in the case that these profits are reinvested).