Motivation for Merger or Consolidation Finance Essay

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The most used word in MA is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses. 2. Diversification / Sharpening Business Focus: These two conflicting goals have been used to describe thousands of M&A transactions. A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry’s performance on its profitability. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations. 3. Growth: Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves – instead, they buy a competitor’s business for a price. Usually, these are called horizontal mergers. For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller company to make more beer and sell more to its brand-loyal customers. 4. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost. 5. Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product’s market. The downside of this is that a large premium is usually required to convince the target company’s shareholders to accept the offer. It is not uncommon for the acquiring company’s shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.

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2. Types of merge and acquisition

a. Statutory merger:

A merger in which one of the merging companies continues to exist as a legal entity, rather than being replaced by the new entity.opposite of statutory consolidation.

b. Statutory consolidation:

A merger in which a new corporate entity is created from the two merging companies, which cease to exist.opposite of a statutory merger.

c. Stock acquisition

An acquisition by one company of another in which the acquiring company buys the target company’s stock. That is, rather than paying with debt or some other means, an acquisition of stock occurs when the acquiring company buys a majority of the target company’s shares outstanding. This may be associated with a hostile takeover, where the acquiring company buys shares directly from stockholders, but this is not always the case. See also: Leveraged buyout.

d. Asset acquisition:

A buyout strategy in which key assets of the target company are purchased, rather than its shares. This is particularly popular in the case of bankrupt companies, who might otherwise have valuable assets which could be of use to other companies, but whose financing situation makes the company unattractive for buyers (an asset acquisition strategy may be pursued in almost any case where the potential target company has an unattractive financing structure). Further, the asset acquisition strategy might be pursued if the acquirer is interested in certain specific assets, and not all the possible target assets.

3. Benefits of Mergers and Acquisitions

The benefits are the main reasons for which the companies enter into these deals. Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital. The main benefits of Mergers and Acquisitions are the following:

Greater Value Generation

Mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale.

Merger & Acquisition

also leads to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms. When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies.

Mergers and Acquisitions

It can prove to be really beneficial to the companies when they are weathering through the tough times. If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated. Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm, the joint company accumulates larger market share. This is because of these benefits that the small and less powerful firms agree to be acquired by the large firms.

Gaining Cost Efficiency

When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced. An increase in cost efficiency is affected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down

4. Difference Between Merger and Acquisition

Although merger and acquisition are often used as synonymous terms, there is a subtle difference between the two concepts. In the case of a merger, two firms together form a new company. After the merger, the separately owned companies become jointly owned and obtain a new single identity. When two firms merge, stocks of both are surrendered and new stocks in the name of new company are issued. Generally, mergers take place between two companies of more or less same size. In these cases, the process is called Merger of Equals. However, with acquisition, one firm takes over another and establishes its power as the single owner. Generally, the firm which takes over is the bigger and stronger one. The relatively less powerful, smaller firm loses its existence, and the firm taking over, runs the whole business with its own identity. Unlike the merger, stocks of the acquired firm are not surrendered, but bought by the public prior to the acquisition, and continue to be traded in the stock market. Another difference is, when a deal is made between two companies in friendly terms, it is typically proclaimed as a merger, regardless of whether it is a buy out. In an unfriendly deal, where the stronger firm swallows the target firm, even when the target company is not willing to be purchased, then the process is labeled as acquisition. Often mergers and acquisitions become synonymous, because, in many cases, a bigger firm may buy out a relatively less powerful one and compel it to announce the process as a merger. Although, in reality an acquisition takes place, the firms declare it as a merger to avoid any negative impression.

Statutory merger, statutory consolidation, stock acquisition & Asset acquisition

GongCheng

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Motivation For Merger Or Consolidation Finance Essay. (2017, Jun 26). Retrieved November 26, 2022 , from
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