Mergers and Acquisitions are expensive for corporate growth

There has been a rise in the amount of mergers and acquisitions across all sectors. In the wake of the global economic slowdown, it has helped in consolidation. A merger is the convergence of two firms, in the same or allied sectors, that see synergy in them working together. An acquisition is a purchase of a firm by another firm as a part of its strategy to either expand or consolidate. But mergers and acquisitions come at a cost to both the corporate and the customers.

Consolidation, as a result of M&As, leads to reduced competition. As the number of companies in the sector gets reduced, it is easier for the new firm to increase prices. We saw such increase in the aviation sector after the acquisition of Deccan air by Kingfisher and that of Sahara by Jet airways. There is also a chance of cartel formation when the industry has just 3-4 major players.

M&As are good for bringing stability but are bad for innovations. When two firms merge to form a bigger unit, they are more concerned about consolidation than innovation. Companies like Pepsi and Coke in the beverages industry and Google and Microsoft in the software industry have prevented the growth of smaller, more innovative firms by acquiring them. Microsoft has ensured its monopoly in the OS software through such strategies and has also been convicted in courts for these charges.

Acquisitions of bigger firms by firms much smaller than them have often resulted in big failures. These aggressive acquisitions lead to instability. Tata Steel's acquisition of Corus, a company six times its size, is one such example. Tata Steel's management is finding it hard to manage a company of this scale. Over the world M&As have also resulted in job losses for the employees.

Although consolidation and M&As are a necessity in these times of economic slowdown, but the companies must remain ethical in their conduct. When the companies become "too big to fail", they become a huge liability. They must always keep in mind that innovativeness, not size, is the answer in times of adversity.