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 companies merge, it is more than just the coming together of names or brands -- it is the joining of two groups of people who bring along their own specific corporate cultures. If two firms have very different 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 organization, the employees in the new organization would be likely to have difficulties working together.
Cultural clashes can be exacerbated by discontent over leadership. Someone has to be in charge of the new company. If an executive from "Company A" takes the helm, and does so with a leadership team made up of Company A people, that may leave people from "Company B" feeling as if their company has been taken over rather than merged as an equal partner. That could lead to corporate infighting, a talent drain as people leave the company, or other negative effects.
Diseconomies of Scale
When businesses merge, it is often to achieve economies of scale. Larger organizations 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. For example, say two smaller manufacturers merge into a single large company. Economies of scale may arise from consolidating all manufacturing at one plant, eliminating the need for redundant workers and administrators and therefore reducing labor costs. But now that one plant must distribute to a larger area, significantly increasing transportation costs -- a diseconomy of scale.
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 labor force of the two organizations. 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 organization. This can decrease employee motivation and reduce productivity.