Merger and Acquisition
Merger is the agreement of combining of two existing firms into a new firm. The prime objective of merging of two firms is to increase the market share as well as for expanding the existing businesses into the new segment. Consequently, by gaining of market share the combined firms would be able to maximise its economies of scale in the business. This essay would shed the lights on the business of Sainsbury and Asda after their merger. Since, both the organisations are belonging from British retailing industry, therefore, it can be stated that horizontal merger among these firms has occurred.
Analysis of the chosen article
According to Hosken, Olson and Smith (2016), horizontal merger occurs when two companies operate in the similar industry. In order to minimise the adverse effect of excessive competition and to maximise the potential gain in the market, both the firms have merged. However, Kollewe and Jolly (2019) argued that both the British conglomerate, Sainsbury and Asda are in doubt after their merger. As per the chosen article, it can be observed that the market share of Sainsbury was declined by 15% after merging with Asda. Since, Sainsbury and Asda was at the second and third position in the British retailing industry, therefore, it was expected that the merger firms would be capable to increase their market share by 31% jointly. This joint market share could hit the largest market share of Tesco (Buchanan, 2018). In this context, Parikh (2015) argued that after merging the firms, Sainsbury and Asda were playing the role of monopolist and with the help of their monopoly power, the organisations tend to exploit their customers by charging of higher prices compared to the rival firms. In addition, it has the power of dominating the suppliers. As a result, it directly affected the sales percentage of the merger firms though it has been playing the role of market giant. Consequently, the customers have started to suffer. Furthermore, in order to maintain the sales percentage of the combined firms, Sainsbury and Asda had decided to cut down the price of the most selling and popular foods by 10%. It helps to maintain the revenue earnings by maximising the sales percentage.
As opined by Gao, Peng andStrong (2017), Brexit has adverse effect on the business of these merged firms. More specifically, after Brexit, the foreign investors would not like to invest so far in the British businesses. As a result, it directly affected the funding and the share of capital of the merged companies. It is known that for successfully expanding a business more compared to the previous, an organisation requires to have efficient capital. Apart from this, by maximising the size of the firms, both the firms might suffer from the adverse effect of dis-economies of scale. As a result, the organisations would not have the power of controlling, so that they could motivate the employees. Consequently, the performance of the organisations would be declined. The merger between Sainsbury and Asda is one of the popular examples of experiencing diseconomies of scale in the business for losing the control in business. Consequently, it would lead to maximise the price level of the basic necessities. This was the other reason of not getting financing from the foreign investors apart from the reason of Brexit. It directly hit the asset of the firms after merging and hence, the firms would shrink its business to expand in the British retailing industry. Conversely, internal organisational collision would lead to misbalance the work place balance as well as the business environment. This is the reflection of the failure of merger entity.
The process of resolving the paradox of horizontal paradox
In order to maximise the valuation of the businesses after merging the firms, it can be stated that Sainsbury and Asda can implement the strategy of cost synergies. According to Bernile and Lyandres (2018), cost synergies would be capable to improve the operational efficiencies and the revenue earnings by the businesses. Consequently, the sharing of assets can be increased. In order to successfully implement the cost savings synergies for reducing the operational cost as well as to increase the net profitability earnings, the merging firms of the UK can focus on the concept of shared information technology.
Similar to the shared information technology, the cost synergies would increase supply chain efficiencies and it would help the firms in the product delivery services. From this point, it can be inferred that the organisations would get an edge in the business to increase its sales percentage by maximising the customer satisfaction level by improving the organisational operations. More specifically, cost synergies would be capable to improve the sales and the marketing channel of the businesses. Hong, Zhonggao and Chen (2015) cited that cost synergy of horizontal merger would lead to eliminate the additional operational expenses from the business for improving the net profitability percentage and hence, Sainsbury can boost up its financial performance from incurring the loss in business. It is noted, under horizontal merger among the firms of Sainsbury and Asda, both the merged firms would not require to bear the excessive tax burden.
As per the concept of Stackelberg mergers, if the firms after merging would run their business in the homogeneous market, then the leader firms or the giant supply chain firm would have the opportunity in getting of better brand equity. As per the discussion of the article, it can be observed that since both Sainsbury and Asda have been playing the role of monopolist and charge the higher prices of the products, therefore, the customers would not like to purchase the products. Consequently, it would affect the sales percentage of the business over the competitors. From this point, it can be said that Stackelberg merger would be effective to play the role of business giant in the British retailing industry. Since, the firms in the retailing industry would sell the homogeneous items; therefore, the leader firms would experience the larger brand equity. However, for sustaining the profitability in the business, the market giant would require to maintain commitment towards the customers (Neumann, 2016). It would lead the organisation to have greater control in the business, which would lead the firms to increase the economies of scale in the British retailing industry. More specifically, Stackelberg merger helps the firm to determine the quantity of producing and selling of products as a market leader in the homogeneous type of market structure. Based on the production, the giant firms would set the price level, even though the power of setting the price of the products. It would fetch the opportunity of experiencing higher brand equity by the firms after the horizontal merger. For instance, as per the expectation, both the merger of Sainsbury and Asda would be able to experience 31% of rising profitability percentage instead of incurring loss.
Bertrand competition with differentiated goods:
In the opinion of Neumann (2016), Bartrand competition increases the collaboration among the price setters (that is the seller) and the buyers (who are choosing the quantities of the products in terms of the given price level). Similar to the Stackelberg mergers, the Bertrand competition is also working in the homogeneous marketplace. Though, different to the Stackelberg model, here, the market giant firm would not net the power of setting the price of the products, demanded by the customers. Under the Bertrand competition, both the homogeneous firms would set the price level of the goods individually. On the other hand, the customers would purchase the products from the organisation, which set the lowest price. Eventually, if both the firms would set the equivalent price level of the products, then the customers would split their choice among them and it would be aligned with the quality and the services of the company. As per the analysis of the chosen article, it can be inferred that cutting down the price level of the basic necessities of Sainsbury and Asda by 10% would be significant to attract more customers and purchase of more quantities in the homogeneous market (Hosken, Olson & Smith, 2016). It would successfully increase the sales percentage of the firms after conducting horizontal merger, which would in turn lead to maintain the profitability percentage in the business.
The aim of horizontal merger is to gain profitability percentage over the competitors, so that the combined firms can achieve larger economies of scale. However, it can be observed that after the horizontal merger, both the giant British retailing company Sainsbury and Asda had incurred loss, and they had not worked as per the expectation. As a result, it directly hit the sales of the business and consequently, the organisations would experience dis-economies of scale. In order to improve the outcome of horizontal merger and to resolve the challenges, it can be recommended that the organisation would implement and follow the concept of cost synergies, Stackelberg mergers and the Bertrand competition in the operational process of the business.
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