The marketplace, regardless of the products being traded is changing on a daily basis. One of the major steps that organizations are considering is merger with other organization in the same trade. The following paper will critically analyze the proposed merger of the Dubai Financial Market and the Abu Dhabi Securities Exchange. It will show the advantages of the merger and the potential benefits to the shareholders, the government, and other stack holders. It will also show the likely disadvantages of the merger. The paper will show how various departments in the merging organizations will be affected.
When the merger happens, it will provide the United Arab Emirates with a phenomenal chance to have one of the strongest securities exchange company with the world. Coming on the heels of the Dubai financial crisis of 2009-2010, it saw the Dubai World ask for a ‘standstill’ in its debt payment program. The announcement made bonds and equity markets come down crashing as market observers made the investors have doubts about how creditworthy Dubai was. As a result of the crisis Dubai credit default swaps went up astronomically and put it close to the same levels as countries such as Greece. The merger is coming after a crisis.
Five years after the financial crisis, some institutions still are anxious about the prospects of going to Dubai. For ADX to have the courage to merge with DFM, given the healthy financial position it is in is a commendable show of trust in the financial management in Dubai. The merger will help show the ability of Dubai and the UAE at large as having been able to pull through the financial crisis (Al Sadik & Elbadawi, 2012). The two merging companies will enjoy other advantages, as will the United Arab Emirates as a whole. However, as is often the case, there will be disadvantages of the merger too.
One of the advantages that the companies will enjoy is the network economies. These are two companies that are working in the same country. They spend a lot of their resources competing against each other in an attempt to attract as many companies to list with them as possible. However, with the merger this problem will be solved. They will be able to bring their experience together and attract customers under the same strategies. The companies will also be able to channel the time and other resources that were used to develop better ways of serving their customers. Another advantage that the companies stand to enjoy after the merger is the economies of scale. The two companies have a lot of their activities overlap. One department will handle the activities handled by two departments when the companies operate individually. The merger will result in fewer workers. A smaller workforce will mean cost savings.
The stock exchange market is one of the most controlled markets in the entire finance industry. The governments spend a lot of money trying to ensure that these companies operate within the set boundaries. Merging the two companies will mean that the government will have lesser work regulating one company instead of two companies. The government will be able to save the taxpayers’ money and use it for other projects that are beneficial to the people. The companies will be able to enjoy answering to the regulating authority as one entity and not as two entities. Governments most often than not tend to be understaffed in areas of regulation. It, therefore, is a common case that authorities will not evaluate two major companies at the same time. The government will first evaluate one company then proceed to the other one. In case the evaluation is on the way, the company cannot undertake a given activity until the evaluation is over, then having to wait for long will impact the company in the wrong way. The merger will mean that the government will send its agents to one company. Neither company will have to wait for long for the government to complete the evaluation process. The merger is the best way to beat the problem of meeting the bureaucracy in the governments (Berger, 1999).
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One of the major advantages of a merger regardless of what industry is the increase in the customer base. In the case of the stock exchange, each of the two merging companies will have access to larger investor base than they would have without a merger. The access will provide the company with more sources of revenue. A larger customer base also helps create investor loyalty. A lot of people depend on the advice from people they trust like family or friends. In the situation with less competition, a friend or family will most likely invest in the company formed by the merger between ADX and DFM. If he/she have a good experience with the company, they are most likely going to recommend the company to their friends and family. The case would be different if one friend invested in ADX and another in DFM. The two people are likely to offer conflicting advice on which of the two companies is the best to invest in. As a result, the investor is likely to be confused and may opt not to invest in either if he/she considers the disadvantages given of each company. This is especially likely to happen to retail investors who may not have access to professional advice.
The United Arab Emirates is building itself as one of the major economies in the Arab world and the entire Asia at large. There have been talks of a lot of competition amongst the individual emirates especially Abu Dhabi. While there is still competition amongst the companies owned by the two Emirates, notably in the aviation industry, the merger will help portray an image of a more united government. It will also show that the Emirates government focuses more on having strong and large institution that are likely to match the world best in terms of capitalization and influence. Presence of large companies is a major indicator of the size of a countries economy and it usually results in increased respect to the country from the international community. If the UAE goes the route of large companies’ merger like ADX and DFM, then they can be assured of increased influence in the decision-making activities across the globe.
Another advantage that merging companies usually enjoy is free marketing. Marketing is one of the most expensive activities undertaken by any organization. Getting even a second of coverage in the mainstream media is a very expensive thing. However, when companies merge, especially companies of the size of ADX and DFM there tends to be a lot of media attention to the companies. While there may be instances where the companies are reflected in a bad light, most often than not they get favorable coverage. The ability of the management to take full advantage of the media interest will often see the companies benefit from exposure that they would otherwise pay a lot of money to enjoy (Seditio, 2013).
Even with all the stated advantages, there still exist some quarters that will be affected by the proposed merger negatively. One of the genuine fears among many observers is that the focus on quality services will go down. When these two companies are competing, there is some sense of trying to outdo each other. Given that these two are service companies they try to attract as many investors as possible. In doing so, they can increase the demand for the stocks that are listed on them. Increase in demand will see more investors want to invest in that company. However, with the merger there is fear that with competition gone, the urge to do well will also go. The company formed would be under less pressure to perform as they would control a large market share (Berger, 1999).
A crowded market with many sellers give the buyer one very important thing: choice. With the merger, the customer will lose the choice to decide which company to invest in. The investors want to have a situation where they can analyze the choices available to them and choose the one that they feel serves their interests. The case of investors’ choice is very important in the stock market as small margins per share usually translate into large amounts of money when the investments are large. An investor needs to be provided with as many stock exchange companies as possible so he/she can choose the one that provides the biggest profit. The investors in the UAE are being robbed of that by the merger.
When the merger is confirmed and the two companies join, one major thing is obvious. Some duties that were being performed by some people in one company were also being performed by another group of people in the other company. The new company will not need two CEOs. Therefore, one of the CEOs will have to let go of the title. The job loss will go down the new company’s chain of command to the lowest rank employee. There will be massive job loss. A lot of lives will change and to those who will lose their jobs, the change will not be positive. The employees who will lose their jobs have given almost everything they have to ensure that the two companies are successful. There is no amount of compensation that will make for what they will be going through. There will be a lot of anxiety among the employees as none will be sure whether he will keep his job. The anxiety will negatively affect the performance of the companies in the time before the merger (Seditio, 2013).
The merger may result in diseconomies of scale. The new company will be large, and the management may fail to have the same control as they had over the small mother companies. As a result, there will be inefficiencies in the work of the new company. The employees may feel less motivated and feel they are just a part of a very large company that does not appreciate them.
For the merger to be a success, various departments in the organizations will have clearly cut out duties to overseas. They will think that they give life to the merger proposal and make it a success.
The major role of the finance division in any organization is to help maximize the company owners’ value. It does this either in the long term or the short term. Also, the finance division of the newly formed company after the merger will, therefore, be charged with the responsibility of growing the wealth of the shareholders. In addition, they have a duty to ensure that after the merger, the shareholders are better off than they used to be. The finance division will ensure that the company allocates all of its resources so that the company achieves the major stated goal. The goal is achieved by ensuring that assets are in the right place and at the right time. Finally, the division will oversee the control of the company’s liabilities. Once the merger is operational, the company may decide to finance some of their activities through debt. It is the responsibility of the finance division to ensure that the debt does not have too much risk (Brealey, Myers, & Marcus, 2004).
The senior marketing department managers of the formed company will be responsible for developing a new marketing strategy. The strategy will help the company achieve the set targets. For example, if the new company targets international investors, the marketing department will develop a strategy that will ensure that the targeted investors are reached. They will also understand that the company convinces them that it is the best to invest in. Before the implementation of the plan, the marketing department will first explain their strategy to the senior managers in the company to find their approval.
The marketing department will also oversee the new market research. The research will help the company understand the need for new investors that they target. It will also help them analyze the factors that would contribute positively to the company’s move to attract as many companies to list with them as possible. The competitors will react to the merger. It is, therefore, the responsibility of the department to analyze the strengths and weaknesses of the competitors. After the analysis, the company will be able to make decisions on the actions to take to protect its business from the strong competition and take away business from the weaker competition. The marketing department can conduct the research itself or contract a market research firm to do it for them (Balmer, Illia, & González, 2013).
The operations department has the responsibility to ensure that the company runs smoothly, effectively, and professionally. The operations people will work to ensure that the work of the new company is efficient. They will range from the people on the trading floor to the lawyers ensuring that the company follows the rules. Under the leadership of the Chief Operating Officer, the Operations department will ensure the implementation of recommendations of the marketing and finance department.
As shown in the paper, the merger is a tricky undertaking. There is a host of advantages but also some challenges that can leave the merging companies worse off or at worst see the merger result in a collapse of the formed company. It is also worth noting the major tasks that the various departments will be charged with and ensure that they are up to it. In general the merger is desirable if it reduces competition reasonably, if the market has considerable economies of scale or if, after the merger, there are enough entry barriers to ensure that no new competitors appear (Aljifri & Hussainey, 2007).
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