To what extent is a merger between two big firms beneficial to consumers?

A merger is a business integration process in which two or sometimes more companies join in order to form one larger company. These are extremely prevalent when we take a look at today’s business landscape, consisting of some of the biggest companies in the world acquiring and merging with others, such as Disney and Fox; Amazon and Whole Foods; Meta and WhatsApp; and Microsoft and LinkedIn. The purpose of my following essay is to explore the effects of events like these, and to examine how the process of two big firms merging affects both of their current, past and future customers, whether this is positive or negative.

Firstly, we have to differentiate between the types of merger. There are three main categories: horizontal, vertical and conglomerate. Horizontal mergers consist of “A merger involving two or more firms in the same industry that are both at the same stage in the production cycle; that is, two or more competitors.”¹ This will have different effects on its consumers to a vertical merger, which is a merger consisting of two or more firms merging that operate in different stages in the production cycle, for example, a farm and a shop. Perhaps the best-known example of this kind of integration today is Apple, which controls much of its supply chain, from chip design through to its own retail stores.

These mergers will impact the consumers in different ways. A merger will mean that the new, larger firm is able to reduce its costs and therefore provide customers with more competitive prices. This is a result of economies of scale which allow this new firm to operate more efficiently and thus save costs. This benefits consumers more when horizontal mergers occur as this creates a larger firm within the same industry, whereas for vertical mergers, though prices would still fall, the drop may not be as drastic because the merging firms operate at different stages of production rather than combining the same activity. Furthermore, another advantage is that if a company merges horizontally then it will lead to them having increased market share in the industry that they reside within which allows the company to negotiate better deals with the suppliers, and therefore pass on the benefits that they receive on to consumers. Once again, this is an effect and a benefit to consumers that will be more prevalent for the firms that are merging horizontally. Finally, another benefit to the consumers is the fact that the larger firm can now dedicate more of its resources to research and development. This means that their products will be better and most likely more affordable, both of which will lead to positive effects for consumers, and this is a benefit that can be seen in both vertical and horizontal mergers.

However, whenever two big firms merge there will always be some downsides for consumers. One example of this can be seen when there is a reduction of competition in markets when a horizontal merger occurs. This is because there is now one less firm competing within the market and therefore the new larger firm not only has fewer competitors but its increased size and market share mean that it will also be able to dictate the prices more in its own favour which might lead to higher prices for consumers, along with a reduction in the drive that the firms previously had to improve their product in order to beat others, perhaps leading to lower-quality products. Another example of this is the creation of a monopoly which happens when two or more firms within an industry merge and own a very large proportion of the market, leading to them being able to completely control the market and make it difficult for new firms to compete with them. Additionally, when it comes to vertical mergers, though they may avoid the problem of reduced competition, they create a new dilemma. When a firm expands into a new section of the supply chain, it has to learn new things and dedicate new resources that it previously did not have into this new area. Therefore, whenever a firm enters a realm in which it is not well versed, it can lead to a reduction in efficiency and it will need a large input of capital which will drive up the firm’s cost of production and also therefore the prices that the consumers have to pay.

An example of a merger that benefitted the consumers is Disney’s acquisition of Pixar in 2006. This brought together Disney’s strength in distribution and Pixar’s strength in animated storytelling, and produced hits such as ‘Toy Story 3’ and ‘Inside Out’. This shows that mergers between two firms in the same industry (a horizontal merger) can let the two companies combine their expertise, leading to an overall benefit to the consumers.² Another example of this can be seen with Google’s acquisition of Android in 2005, which combined Google’s expertise in the tech world along with the capabilities of Android and created an operating system that is now the most commonly used operating system worldwide, which led to a significant expansion for Google in the mobile technology market.³ However, there are also many failed mergers. Microsoft acquired Nokia’s phone business in 2014 to compete with Apple and Samsung, but due to internal conflicts and culture clashes they struggled to work together, eventually leading to the cutting of 18,000 jobs and billions of dollars of financial losses.⁴

Overall, I believe that a merger between two big firms is beneficial to consumers, but only to a certain extent. On the surface it may seem that two large firms joining will surely give consumers better products and service, but the potential downsides above show this is not guaranteed. In addition, though the increase in efficiency will lead to a cut in costs, the firm may choose not to pass this on and keep the savings as profit instead, which is not beneficial to consumers. Therefore, a merger between two big firms is not always beneficial to consumers.

Notes

1. Horizontal merger financial definition of horizontal merger (thefreedictionary.com)
2. https://hbr.org/2016/11/mergers-may-be-profitable-but-are-they-good-for-the-economy
3. https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/managing-and-supporting-employees-through-cultural-change-in-mergers
4. The Worst Failed Mergers in Business History: 10 Examples (mnacommunity.com)