Mergers and takeovers are said to be twin brothers, with a thin line separating one from the other. Both involve the combination of two business entities into one entity. A merger is a mutual decision taken by two different firms to come together and form one legal firm with the view of producing a company that is of more worth than the sum of the firms making it (Fell 2017). The key element in mergers is that the two combining firms are relatively equal. A good example of a merger is the coming together of American Automaker Chrysler Corp and German Automaker Daimler Benz to form DaimlerChrysler back in 1998.  A takeover, on the other hand, is when a big firm buys a smaller firm and the two forms a bigger company. A takeover is almost the same as a merger only that in the takeover, it is not always a mutual agreement. Sometimes a larger company can initiate a hostile takeover of a smaller company. Both mergers and takeovers play a vital role in the governance of an organization.

            One of the obvious reasons for mergers and takeovers is to improve performance. After the merger or takeover, the two combining firms come with their employees, top management team, and the capital. In this sense, the resulting firm enjoys a pool of resources ranging from good governance to sufficient working capital (Barbopoulos, Cheng, Cheng & Marshall 2019, p91). The firm consolidates the top management team and enhances specialization since the managing team can concentrate on different lines of operations. This also ensures that decision making is smooth and efficient. The idea is that the firm creates synergy as it becomes worth more than the sum of the individual parts, making it. The firm can make use of the latest technology and improve different lines of products and consequently expands to the new markets.


            Another role of takeover and merger is to increase the market share. The market is the reason why firms create their products. Production of goods and services could be useless if there will be no ready market where such goods and services can be sold (Huang, Goodell, & Zhang 2019). Sometimes firms can make a mutual decision to merge and avoid unnecessary competition. This often happens when the firms are operating in the same industry and involved in substitute goods or services. By coming together, they can enjoy a larger share of the market, which was initially segmented between the former companies before the merger. Another benefit that comes with this is reduced marketing costs. After the merger or takeover, the resulting firm enjoys a sense of monopoly and thus less need for regular advertisement (Marquardt & Zur 2015, p.604). The money saved from this is ploughed back to the company to finance other development projects, and thus, the overall growth is improved.

            Mergers and takeovers lead to greater financial power. Company size is measured by its capital structure or the volume of its output. The combination of two firms means each of them brings to the table its share of capital. According to Joash and Njangiru (2015 p.101), the overall capital structure after the merger should be at least equal to the sum of the capital structures of the two merging firms. There will be pooling of incomes from the two firms and thus increased financial strength and more influence on the customers. Moreover, there will be an elimination of overlapping operations as the two businesses combine their processing activities under one roof. There will also be an improvement in purchasing power as the firm is likely to consolidate its bargaining power and enjoy quantity discounts due to bulky buying. Mergers and takeovers improve the agency relationship between the management and the shareholders. After mergers, the value of shares is likely to go up and this is in line with the interests of the shareholders. The increased financial power in itself is a satisfaction to the shareholders as it guarantees the going concern of the firm.

            The importance of mergers and takeovers in the business world cannot be overemphasized. The sole reason why companies will prefer to come together is to minimize the costs of operation by cutting down the unnecessary competition and improving their services through research and development. All this will be aimed at gaining an advantage in the market. Improved financial strength and a good capital structure, together with high-quality goods and services, are the benefits of mergers and takeovers. In conclusion, therefore, mergers and takeovers play a crucial role in improving the governance of an organization.

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Barbopoulos, L.G., Cheng, L.T., Cheng, Y. and Marshall, A., 2019. The role of real options in the takeover premia in mergers and acquisitions. International Review of Economics & Finance61, pp.91-107.

Fell, D., 2017. Merger and takeover attempts in Taiwanese party politics. Issues & Studies53(04), p.1750010.

Huang, W., Goodell, J.W. and Zhang, H., 2019. Pre-merger management in developing markets: The role of earnings glamor. International Review of Financial Analysis65, p.101375.

Joash, G.O. and Njangiru, M.J., 2015. The effect of mergers and acquisitions on financial performance of banks (a survey of commercial banks in Kenya). International Journal of Innovative research and development4(8), pp.101-113.

Marquardt, C. and Zur, E., 2015. The role of accounting quality in the M&A market. Management Science61(3), pp.604-623.