GR/FM/10. Do mergers generate net benefit?

Conclusion The reasons why companies should merge have been discussed and they include monopolising industry, reorganising production systems and decrease in the cost of capital. The economic motives, personal benefits, strategic benefits and pursing market power improve competitive success through securing stronger competitive positions within the market place. The fact that merged firms may become more efficient does not necessarily mean that the efficiency gains are passed on to consumers with low prices. Consolidation mat increase market power, thus leading to higher prices and lower level of activity. The direction of the changes in market prices induced by consolidation is therefore ambiguous, as it will depend on which prevails the market power effect or the efficiency effect. We find that deposit rates increase only for banks that are successful in reducing costs. In contrast, the rate changes are not explained by modifications in the quality of services. In the long run the efficiency gains that result from mergers prevail over the market power effects, leading to more favourable prices for consumers. The object of merging is to replace management or to force changes in investment or financing policies. The merger should therefore go ahead if the gain exceeds the cost. There exists many different tools for analysing mergers and it is not possible to choose the best. Recent studies of merger activity suggest that mergers do improve real productivity. I therefore consider market power and efficient management as the major benefits from mergers.