Economically, What does a merger do to help failing companies? (such as delta and northwest.)?

Question

Ok, i understand that mergers increase the market share of a company, and leave the consumer with less choice.

How else do mergers help companies facing a loss?

Please explain it economically, (im doing an essay on the Delta-Northwest merger for my microeconomics class.)

Answer 1

well, there are several reasons why companies merge... the most common is due to financial reasons.  I believe in the case of delta and northwest, it was more on issues on rising fuel costs.  Also, they are looking at being the biggest airline company in the world.

Answer 2

In theory, two small companies can combine and reduce their overheads (personnel and equipment for IT, back office, sales, marketing, etc.).  They also may be able to increase leverage for signing contracts for larger volumes of materials, i.e. in the case of the airlines, aircraft, fuel, cabin service supplies, paper, computers, software, etc.  In other words one company using a million gallons of fuel a year will pay less per gallon for fuel than either of two companies each using on 500,000 gallons of fuel per year.

In practice, the turmoil resulting from the merger rarely results in the kind of savings the executives use to sell it to investors.

Answer 3

Economically it gets rid of one group of shareholders.(The ones from the acquired company and folds the remainder into a larger dud company).It also rewards the management of the acquired company by virtue of the mgmt. contracts that they have in place.it also places a heavier debt load onto the acquirer as they would have to incur debt to make the deal work.Lets not forget the investment bankers who are part of thedeal.They need to get paid as well.The only people who lose in this situation are the shareholders of the new company as the new company will be so burdened with debt that the chances for turning a profit are miniscule and therefore the stock price will either stagnate or go down.