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Finance allah shmoop what are the economics of ah good

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merger Well you have a baby and they cost a

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fortune You know food clothing diapers school await a different

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kind of merger Sorry moving on In a purely financial

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sense a merger is the coming together of two companies

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such that in theory at least the sum of the

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one plus thie Other one will be more than two

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And there are a few perspectives that outlined the strategy

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behind a good merger Let's start with market share or

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market leadership to home coffee roaster making companies combine each

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owned about twenty percent of the market before the merger

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And together we'll now together Yeah together they own forty

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percent instead of rivalrous lee competing against each other for

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shelf space and marketing keywords on google in suppliers of

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boilers Now the two companies air now the undeniable leader

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and that vaunted position gets them a bunch of quote

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freebies unquote freebies free They're free and they're not competing

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against each other anymore They're a team like they don't

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undercut each other on price right So immediately they could

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raise prices Yeah so think super friends in this and

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how good the coffee must be at the hall of

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justice So what are these freebies they get just by

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being big Aii the market leader in revenues and our

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units sold Well what do they get for being the

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big kid on the block Well one freebie is that

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whenever a journalist writes a story about a coffee roaster

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for home use often in the starbucks haters gazette that

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journalist almost has to get a quote from mega brew

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inc You know or that journalist story really isn't validated

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It would be like writing a story on internet search

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and not getting a quote from google So lots of

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free press comes their way like you know free marketing

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and as part of the process in being vey brand

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While the company likely raises the ceiling on pricing Before

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the merger one product was six hundred ninety nine ninety

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five and the other was maybe six hundred forty nine

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ninety five and claimed we do what there's does for

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five pounds of raw coffee les or something like that

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Yeah we didn't write this loving but now instead of

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competing against each other on price or why not just

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raze overall prices of everything to seven hundred forty nine

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ninety five Who's going to stop Yeah you're the market

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leader the big dog So now with the exact same

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cost structure the company has fifty to one hundred bucks

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more per unit in a pretty much immediate profit And

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if before the unit profit was something like seventy eighty

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ninety hundred bucks while profits just gone up dramatically So

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that's the story on the revenues side What about on

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the expensive side Well a couple of biggie stand out

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immediately Kwan is the cost of supplies like if combined

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they were each ordering one hundred thousand five hundred fifty

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degree blowing many easy bake oven units and paying the

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maker of those units one hundred fifteen dollars a unit

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now under the scale of an order of two hundred

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thousand units Well taken likely get a price break of

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ten maybe twenty bucks a unit and those savings happen

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all the way down the whole building Materials from the

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power cord to the glass shields to the plastic form

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factors to the little rotating spinny wheel thing that has

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the beings going round and round So in a set

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of unit costs of say two hundred fifty bucks a

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unit for the hardware A new home coffee roaster might

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under the combined company's cost them more like two hundred

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bucks Then there's the cost of shelf space or distribution

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Or if you want to think about it kind of

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marketing When the two twenty percenters were competing against each

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other well they'd negotiate for the prime shelf space at

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upscale coffee bars gourmet kitchen retailers and amazon for that

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physical or virtual shelf space Right And they'd negotiate on

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how much of their revenues they were willing to give

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up in order to get that premiere shelf space Well

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that was with the two of them living in a

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world where switching from one brand to the other was

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pushed there about equal But now there's only one dominant

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brand and it's the one everyone who roasts at home

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wants So instead of giving up fifty percent of revenues

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for distribution well now they only have to give up

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forty percent So think about the cascade effect here The

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average retail price used to be say six hundred eighty

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bucks a unit How'd we get that number And we

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what kind of an average of that Six forty nine

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six ninety nine Numbers so on that 6:80 the company

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kept in half or three hundred forty and that three

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forty was enough to cover their costs but not leave

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a whole lot of cash left over By the time

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everything i'ii operating cost marketing lawyers insurance rent lawyers was

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done and paid for But now average retail prices have

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gone to seven hundred fifty dollars And instead of keeping

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half the combined company now keep sixty percent of the

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retail price or four hundred fifty bucks Huge swing here

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That's an incremental keep or take or profit set of

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one hundred ten dollars in the form of higher prices

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and splits and then another fifty bucks in cost savings

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per unit for an incremental total contribution of another hundred

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sixty dollars a unit And in a world where each

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unit contributed maybe forty bucks in the past this is

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a massive game for shareholders of mega brew and just

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like their commercial says But wait there's more In addition

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to these units savings and values added the company should

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they need it can probably get debt cheaper All else

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being equal as a market leader They in theory at

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least carry less risk They certainly have more have to

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be able to borrow money And a bigger scale in

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a borrowing of say twenty five million dollars would mean

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less to them is a combined company than would a

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borrow of twenty five million work if each company were

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separate and still competing against each other and the same

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scale benefits happened for duplicate jobs were taken likely fire

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a third or more of their workforce and negotiate for

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better per square foot prices from their landlords and better

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insurance and better lawyer rates And so on Well it

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all adds up to make this merger a you know 00:05:36.102 --> [endTime] special kind of blend

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