Corporate Governance - Essay Example

Task Corporate Governance Introduction For quite some time, businesses or firms have been practicing merging or simply acquiring other businesses. This is achieved by having the acquiring company maintain its name while the other company’s name is eliminated. Likewise, the two companies have to set rules of engagement that will ensure that they both operate in a manner that serves both of them well without any unfairness. The rules may be touching on both the firms themselves or their customers. This may be because of taking over of one company by another, buying out of one company by another or simply taking over another company. This is done with the main of financial gains or even avoiding making losses. Therefore, the work below looks at what merging is its disadvantages or problems and its benefits from a perspective of corporate governance. Definition Corporate governance is a broad term that encompasses many aspects as concerns the business. It may be said to be the way in which any business that exists is run and conducted and includes the rules and laws by which the partners of the firms must abide which are not a choice but an obligation. Any firm constitutes stakeholders who may be the management, directors and shareholders. Within them, a relationship is simply corporate governance. It also may mean the structuring of the objectives and goals of the firm and how to achieve them. All these are aimed at creating business merger or simply a takeover. A merger occurs one firm presupposes all the liabilities and all the assets of another company. This is usually aimed at a financial gain to the acquisition firm. Usually the acquiring firm retains its name while the acquired firm is eliminated and thus no longer exists as a firm or an entity. Advantages There exist many advantages of making a merger in the business world. These advantages are all directed at making financial gains. This has been prompted by the high competition that exists in the market. Therefore, firms seek to have a bigger market shares that will definitely translate to higher profits and hence financial gains. The following are the advantages of forming mergers as research work has found. There is the aspect of achieving the economies of scale. This is whereby the firm is able to bargain and receive discounts on the account that it is able to buy more at once. Since the firm has the capability of buying large stocks at a go those involved are able to negotiate easily in terms of buying price. The firm will later sell at a higher price that will result in the making of profits within it. There is combining of complementary resources. For instance, these two firms were complementing each other in terms of resources and in exchange both get money, that will now be over and the acquiring company will not pay any individual. If Frankfurt stock exchange took over the London stock exchange, this simply means that it will not be incurring the expenses for the complementary services it used to receive from the London counterpart. Another advantage is garnering tax advantages. In this context the, only the acquisition firm will pay tax. Conversely, the acquired firm will not pay any tax. Therefore, this means that expenses towards taxes will reduce and hence more money is left that will be counted as profit for the firm. There is also the advantage of elimination of inefficiency within the firms. Merging may mean acquiring the best employees who would carry out their duties efficiently and this may eliminate ineffectiveness that is associated with losses. This will result into more profits being made by the firm. Merging may also lead to purchasing customers and therefore increasing market share. This will directly translate to increased sales and hence more profits since the completion has been eliminated and activities are being done jointly. Subsequently, merging may enable the firm to obtain any proprietary rights that are associated with goods and services of another company. For instance if the London based company takes over the Germany based company, that would simply mean that it will have all the rights to operate its business in Germany without any restrictions on it as a foreign company. Merging is a way of penetrating the new markets in exceptionally new places or geographical areas in an easy way. This expands the market share and exposes the mangers and all those involved with new challenge that need tackling. They thus may serve as opportunities to be exploited in the new environment. This may also serve another purpose altogether. It may be a chance for a firm to develop its career. Finally, merging may serve to shore up areas of inefficiency or weakness within the business or the firm. This will enable the firm to attain efficiency. For instance if the Germany based firm is acquired by the London based one and it has advanced technology, then the London based firm will gain from that technology. It will hence be in a position to carry out its activities resourcefully with minimal costs and appreciably make profits. (McLaughlin, 2010, 78) Disadvantages In as much as the merging process looks and in that matter seems profitable, it has gotten disadvantages that represent the negative part of it. Therefore, such issues though few, they may never be ignored. Among them is that there may be overestimation associated with the valuation progression. This would be associated with the acquired firm that would want to gain secretly from the acquiring firm. Such an issue would jeopardize the activities of the acquiring firm especially activities that require financing. Here, fewer funds may be allocated to the firm while having in mind that such a firm did not require much, and when such is confirmed, it becomes a problem. Inefficient management may also be a disadvantage of a merger. Usually there occur a problem in terms of managing the already acquired firm and its staff members. There may arise issues of mismanagement if facilities and resource in terms of labor is not increased. It may also be because of not having capable individuals who can lead others. There is also the issue of failing to incorporate or even consider the acquired company in terms of management and other activities within the new setting. The staff from such a firm may thus feel inferior and may thus underperform that will lead to the overall failure of the whole company. Finally, there may be wrong basis on setting up the leadership of the company. If this occurs, this will lead to failure that is a disadvantage. This in most cases would not occur in the individual companies. (McLaughlin, 2010, 78 ) Conclusion Merging is aimed at making financial gain to the parties involved. Thus, careful consideration should be taken when making such a move. If merging is done in the right manner with consideration of both companies and having the right valuation, then the process will succeed. This would be the joy of the objective and goal setters of the firms. It will directly lead to efficiency and customer satisfaction. Again, this will only be achieved if guidelines and processes are set which will enforce and ensure corporate governance. References McLaughlin, A, (2010), Non Profit Mergers and Alliances, New Jersey, Hoboken. Read More