Implications for Firms Entering a Merger


“Entering a Merger and Organizational Form” Please respond to the following:

  • Examine the major implications for firms entering into a merger. Explain the criteria the U.S. Department of Justice and the Federal Trade Commission would follow when deciding on whether or not to approve a proposed merger.

Sample paper

Implications for Firms Entering a Merger

A merger involves two firms coming together for form a larger firm. A merger may occur following a takeover of one firm by another or through mutual agreement of firms. By engaging in a merger, the firms involved increase in size as well as scale of production. A merger may be advantageous for various reasons that will be discussed in the next section. On the other hand, mergers may bear certain drawbacks for firms. This paper is an evaluation of the major implications for firms entering into a merger and the criteria for firms entering into a merger.

There are various positive implications for firms entering into a merger. Through a merger, firms can be able to leverage on their new strengths and enjoy increased economies of scale (Bruner, 2004). . This is because a merger creates a bigger firm that is more efficient. A bigger firm can be able to invest more in research and development thus leading to new and improved products in the market. This increases profitability due to higher sales. In addition, customer loyalty is likely to develop. Through mergers, small firms benefit from improved managerial competencies present in the larger firms (Bruner, 2004). Smaller firms may not be able to attract and retain highly trained and qualified managers unlike the larger firms. Through a merger, the small firms benefits in terms of management.

On the other hand, firms entering into a merger may face various challenges. Firms entering into a merger can gain an increased market share leading to development of monopoly powers (Schlossberg, 2008). For instance, two large firms may merge significantly gaining a larger market share. In such a situation, consumers may face higher prices for the products since such firms are price makers. Development of monopolies reduces competition in the market leading to low product innovativeness and reduced regard for quality. Closely related to development of monopoly powers is less choice available to consumers (Schlossberg, 2008). Through mergers, consumers have fewer alternatives since the firms combine to form one. Another implication for firms entering into a merger is the possibility of experiencing diseconomies of scale. As the firm increases in size and productivity, it becomes more difficult to ensure effective communication and coordination. This results to diseconomies of large-scale production.

Mergers have serious implications among employees, which also affects the firms. One of the key implications is job losses among employees. Following mergers, various positions are consolidated to avoid duplication of work (Schlossberg, 2008). This leads to layoffs among employees. The process of forming mergers often takes a lengthy period. During this period, employee performance usually goes down due to the uncertainties involving possible job loss. Another implication is the clash of cultures between the employees from the two organizations. If the two organizations had very distinct cultures, it may be difficult to merge the cultures through employee development and training. This may create rifts among employees from both organizations. Conflicts among employees lead to poor job performance as well as poor overall performance of the organization.

Related: Predicting Price-Setting Strategies

The U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) outlines guidelines for the formation of mergers. One of the major criteria when deciding on whether or not to approve a merge is the effect of the merger on competition in the market. Clayton Act prohibits the formation of mergers that may substantially weaken competition or lead to development of monopolies (DOJ & FTC, 2010). The DOJ and FTC’s greatest concern is horizontal mergers, which refers to mergers between two direct competitors. Such a merger has the potential to lead to the development of a monopoly in the market. The FTC prohibits any forms of mergers that may unreasonably curtail trade. The FTC applies two standards in evaluating whether a merger may curtail trade: the rule of reason and per se illegality.

Generally, merger law under the DOJ and FTC (2010) prohibits any form of mergers that may have negative or harmful effects in the market. Any merger that may encourage the development of anticompetitive practices is prohibited. Firms should not engage in mergers to enhance their market power since this would have negative consequences upon the consumers. A merger may enhance the market power of firms in upon its formation, the new firm holds the potential to raise price, reduce innovation, reduce output, or engage in other practices that are harmful to the consumers (DOJ & FTC, 2010). This also relates to the issue of competition. A merger cannot be allowed if it significantly erodes competitiveness from the market since this will lead to the development of monopolies.

In summary, a merger involves the combination of two firms to form a larger firm. A key implication of mergers is increased economies of scale for the new firm. Mergers also increase the capacity of the new firm to conduct research and development. Another effect is the ability to attract high skills. On the downside, mergers may lead to the formation of monopolies. This also leads to less choice among consumers. Another implication is diseconomies of scale. Lastly, mergers may lead to job losses and disillusionment among employees. The DOJ and FTC prohibit the formation of mergers that may enhance the market power of the new firm.


Bruner, R. F. (2004). Applied mergers and acquisitions. Hoboken, N.J: John Wiley & Sons.

Schlossberg, R. S. (2008). Mergers and acquisitions: Understanding the antitrust issues. Chicago, Ill: ABA, Section of Antitrust Law.

U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC). (2010). Horizontal merger guidelines. Retrieved from

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