When business merge

Business firms expand in one of two ways – internally or externally. Firms that grow internally expand their activities by adding facilities, equipment, and personnel based on current or predicted demand. Those that grow externally acquire other companies through “mergers”.

A merger results when one business buys another. Following the merger, the acquired firm is either dissolved or becomes a division of the new firm.

Mergers take place for various reasons. Some companies buy others to add new products, to gain access to established markets, and/or to diversify their business, thereby “spreading the risk”. Some want the benefits of increased size. Some merge to eliminate a competitor. Others think they can manage the absorbed company more efficiently, and still others wish to reduce costs by acquiring assets like marketing or transportation facilities. In 1995, for example, Walt Disney Company bought Capital Cities/ABC, a television network, because it wanted to own a broadcasting system to distribute its films and other forms of entertainment. In January 2000, America Online (AOL) bought Time Warner to increase its multimedia market share.

Mergers fall into three categories: vertical, horizontal, or conglomerate.

Vertical Mergers

Disney’s merger with Capital Cities/ABC illustrates a vertical merger. This is a combination of two or more companies involved in different steps of a production process. Disney was a producer of entertainment content, while Capital Cities/ABC was a distributor.

Horizontal Mergers

The combination of two or more companies engaged in the same business is a horizontal merger. In 1999, for example, Wells Fargo and Norwest Banks announced a merger. Horizontal mergers can increase an industry’s concentration ratio by eliminating a competitor.

Conglomerate Mergers

A conglomerate merger combines two or more unrelated businesses under single management. Examples of conglomerate mergers include Liggett & Meyers, a cigarette manufacture, merging with Alpo, the dog food company. General Mills, which markets breakfast cereals and other food products, also owns Izod Lacoste clothing, Lark Luggage, and Parker Brothers.

Some companies also establish joint ventures with other companies. In a joint venture two companies keep their independence while cooperating on a particular project. Toyota and general motors, for example, teamed up to produce the Geo. Joint ventures allow companies to combine resources without experiencing many of the problems of mergers.

ACTIVITY 4

Scan the next article for the answers to the following questions.

1. Why is the government involved in economic affairs?

2. What are two ways to maintain competitive markets?

3. Why do governments regulate monopolistic cable companies and not prohibit them?

4. What two economic failures that interfere with competitive markets does the government correct?

5. Why is the USA considered to have a modified free enterprise economy?