Mergers occur where two firms agree mutually to joint their operations together. While an acquisition occurs when a firm called a predator decides to take over another firm referred to as a prey either forcefully of willings. Mergers and acquisitions are driven by
different motives. The following are major types of mergers and acquisitions.
- Vertical integration occurs when merger takes place between firms engaged in different stages of the production process. Thus for example, a tyre manufacturer can acquire rubber plantations. Backward integration is said to take place when the movement is towards the market outlets as, for example in the case of large oil companies taking control of petrol stations.
- Horizontal integration occurs when firms engage in the production of the same kind of good or service brought under unified control. An example would be an amalgamation of several motor manufacturers.
- Diversification occurs when firms that produce goods that are not directly related to each other combine. An example would be the merger of a firm producing fertilizers with a manufacturer of paint. The main aim of diversification or conglomerates is to reduce the risk of trading.
The survival of small firms
Small firms continue to survive for the following reasons:
- Demand for variety that cannot be met by mass production especially in industries like clothing and footwear.
- Many owners of small firms have no ambition to grow large because they do not want to sacrifice their independence and control.
- A personal contact with customers is important in many industries like accountancy and architecture.
- The size of the firm may be limited by the extend of the market since a firm can only grow in size if this is permitted by the market. The market for luxury items for example is limited by income and wealth.
- Firms may want to avoid the rising costs that arise from diseconomies of scale
- There is a tendency for mass production industries to disintegrate into a large number of specialist firms.