Merging two companies can provide the firms with synergies and economies of scale that can lead to greater efficiency and profitability, but it is important to note that mergers can have a downside too. Managers of a firm considering a merger should consider these potential disadvantages before going forward.
When two firms merge, it is more than a coming together of two names or brands -- it is a real merger of people who bring along a specific corporate culture. If two firms have very different corporate cultures, conflicts can arise. For example, if an innovative, entrepreneurial company with a flat hierarchy were to merge with a highly hierarchical, conservative and traditional organisation, the employees in the new organisation would be likely to have difficulties working together.
Dis-economies of Scale
When businesses merge, it is often to achieve economies of scale. Larger organisations are typically able to produce goods and services more efficiently and at a lower per-unit cost than smaller businesses because fixed costs are spread out over a larger number of units. This is not always the case, however. Sometimes when two firms merge, being larger will actually create diseconomies of scale, where per unit production costs increase because of increased coordination costs.
When two companies merge, they need to consider how consumers view the two firms and whether or not they view them in a compatible way. For example, if an environmentally friendly soap company were to merge with an industrial detergent manufacturer with a poor environmental track record, it may alienate the customers of the environmentally friendly soap company who don't want to support a company that is not environmentally responsible.
Merging two businesses is often a good method for reducing the labour force of the two organisations. For instance, a company may combine its two offices into one and reduce the number of staff performing the same duties. While this can provide cost savings for the company, it can also have a negative effect on employees. Employees may become fearful of losing their job and may lose their trust in the organisation. This can decrease employee motivation and reduce productivity.