With the new year just weeks old, there has already been a veritable stampede of mega-mergers. It was, apparently, not grandiose enough for Time Warner to have been acquired by AOL in the biggest deal in history.

Even before the dust had settled on that deal, the group's subsidiary, Warner Music, announced a "merger" with EMI. January 2000 has also given us the Glaxo Wellcome/Smith Kline Beecham merger and our own relatively modest Esat takeover by British Telecom.

It appears to be a matter of time before Vodafone Airtouch or a "white knight" succeeds in vanquishing Mannesmann, and Pfizer gets its hands on Warner Lambert.

So what is driving these huge acquisitions, apart from the obvious frisson of excitement enjoyed by the chief protagonists? Invariably, the takeover announcements are accompanied by expositions about their strategic logic. The usual argument is that the "merger" - always really a takeover, even if couched as a merger of equals - will create value that would not have occurred otherwise. But how much sense do these arguments make? And do the benefits really materialise?

The most prevalent justification cites a bonus in profitability. Somehow, the merged entity will enjoy higher total revenues and/or lower total costs - thus higher profit - than the unmerged entities on their own. In other words, the whole will be greater than the sum of the parts.

On the revenue side, sundry premiums can accrue from acquisitions. The marketing function can be enhanced in various ways. One is the appropriation of marketing resources. For example, AOL's acquisition of Time Warner gives it access to advertising channels, such as cable television and print media used by Internet companies to promote their wares, but owned by "old media" companies like Time Warner.

In addition, mergers and acquisitions provide the opportunity to combine powerful brands and marketing muscle, producing a multiplicative effect - although in cases such as Grand Met's takeover of Diageo, anti-monopoly rules limited the gains.

Assets and resources owned by the acquired company can be seen as invaluable when used in the service of the acquiring company. It is said that Time Warner's extensive cable system provides AOL with a vital broadband network for fast Internet access.

Another resource Time Warner offers AOL is a huge array of electronic and print media content, the creative end of the value chain.

However, there are limits to potential benefits. In the AOL case, the skills of managing a distribution system are vastly different to managing a creative empire. The quintessential creativity of the content-supplying entity could be destroyed by the forced liaison.

Moreover, AOL had a network of alliances with a number of content suppliers. This gave AOL users a selection of media and entertainment. Some of AOL's partners include Bertelsmann of Germany, Canal Plus of France, and MTV. Now that the merged group is going to compete directly with AOL's alliance partners, these contracts are jeopardised, possibly curtailing choice for AOL's customers. It is generally accepted that a company does not actually have to own and manage all the resources it uses. It should outsource activities where it has no distinctive core competencies, in order to retain flexibility and better customer service, whilst avoiding the internal management and co-ordination costs of vertical merger integration.

An increased capacity for product or service innovation is another revenue-enhancing rationale for mergers, extremely significant in the pharmaceutical industry for the likes of Glaxo Smith Kline.

However, lavish spending does not necessarily guarantee effectiveness. First there is the task of integrating the R&D teams and hoping that they will create more knowledge than either team would on its own.

Unfortunately, historical precedent in the pharmaceutical industry is not on the side of merged companies. Extensive research has shown that when firms with ineffectual new product pipelines merge, it only compounds their inadequacies - the merger of Glaxo and Wellcome in 1995 could be seen as a case in point.

Acquisitions can increase revenues through complementary products or services offered by the merged companies. Some "big five" accountancy firms are buying law firms, hoping for the opportunity to cross-sell services to the same clients.

However, clients might want to make their own choices. In addition, other law firms that might have referred work in the past might be irked to find themselves in competition with the accountancy firm.

On the cost front, mergers and acquisitions are supposed to lead to savings when merged firms cut out duplication and rationalise their operations. This usually means redundancies and closures.

Cost reduction after a merger can come from economies of scale in production, distribution and technology. It made strategic sense for tobacco company Philip Morris to buy Kraft Foods as a base to build a food business with further acquisitions. Food and tobacco products share the same distribution channels.

Moreover, the horizontal merger that led to Diageo, two companies with similar types of products and markets should have led to extensive cost savings from economies of scale globally.

Economies can also accrue because the enlarged company has more clout with suppliers such as advertising agencies. Philip Morris and Diageo are both examples of this.

Unfortunately, mergers can incur extra costs by way of integration expenses and diseconomies of scale, as evidenced in the combination of Price Waterhouse with Coopers & Lybrand to form Pricewaterhouse Coopers in 1998.

According to a report in the Financial Times, integration costs between the two firms proved higher than expected. Apparently, size has led to a shortfall in working capital. To add insult to injury, its huge size now means that PwC audits about a third of the companies in the US Fortune 100, resulting in alleged conflicts of interest by partners and staff on the basis of their investments in client companies.

Unfortunately, the pressure for cost savings to justify a merger can compromise the future potential of the merged company. When Glaxo Wellcome failed to achieve its promised productivity improvements two years after its merger, it resorted to cuts in R&D expenditure to stabilise its profits.

So, there are a number of ways whereby mergers/acquisitions can produce value through increased profits. The problem is converting theory into practice. This requires achieving synergy - elusive but critical. The "ordinary" people in the combined entity have to work together and co-operate. As the deal brokers bask in the limelight, they would do well to remember that the people who have it in their power to deliver on the deal might not be quite so elated when they get the news, no matter what the media hype.

Dr Eleanor O'Higgins is a lecturer in strategic management and business ethics at UCD Graduate Business School.