Mergers of big companies many times are depicted on TV as a positive thing, a way for both companies to move up in the world and prosper. Other times they are shown as a strategic play when one company is floundering and another swoops in to save them. In this case the company that is bought may do better but the buyer rarely thrives. Mergers and Acquisitions are a huge part of the corporate world with entire departments of companies and entire consulting agencies dedicated to these actions. At first glance mergers may seem like a good idea but they do not always work out favorably for the companies and their stockholders. Actually, many of them are profit losing for both companies. More than half of major corporate mergers end in failure or at least decrease the overall value of the companies. It is important that interests between shareholders and the owners of separate companies align.
A common misconceptions of why and when a merger may work? The theory of economies of scale guarantees success. Economies of scale explain how mergers would work if all other parts of the situation are handled correctly or there are certain aspects that can be explained directly through this notion. For example, when advertising is a large share of the costs for both companies then maybe a merger can be good to cut the advertising costs in half and have sales go up. The idea of merging to gain market power? Usually results in the opposite.
So when might a merger be good? One idea is when you are merging upstream or downstream in an industry. Additionally, mergers are more likely to succeed when companies buy businesses they know something about and will be invested in the product. Undoubtedly it is important to be clear about the logic of the deal. When a merger is done out of fear of say, contracting markets or uncertainties of technological change, there lies the problem. There is also the issue of copycat mergers. Disney and Pixar is often lauded as one of the more successful mergers in recent history. In 2006 Disney bought Pixar for $7.4 billion. While both companies may have had to deal with strained relations at first they were all working for the same set of shareholders and have both prospered under their new structure. Overall this merger made sense as their outlooks aligned well and their strengths complemented each other. However, Disney and Pixar are the exception not the rule.