Economics 331: Industrial Organization
By: SMRITY SHAH
BBA sec B
Topic: Mergers and Acquisitions
Mergers and Acquisitions is referred to the aspect of corporate strategy, Finance and Management dealing with the purchase, sale, isolating and combining of different firms and similar entities that can help the enterprise grow rapidly in its sector or location of its origin or in a different sector or at a entirely new location without creating a subsidiary, a child entity or creation of a joint venture. Mergers and acquisitions are big part of the corporate finance world. Particularly in terms of the ultimate economic terms, the peculiarity between a “Merger” and “Acquisition” has become hazy in numerous respects. Some of the motives been used in a Merger or Acquisition are:
1. Economies of Scale: with the help of economic of scale, the combined company can try to reduce its fixed cost by removing the duplicate operations, activities and lowering the cost of the company in relative to the same revenue stream and therefore increasing the net profit margins. Therefore, when a company receives economic of scale it lowers the average cost per unit through increased production since fixed cost are shared over an increased number of goods.
2. Economy of scope: the cost advantage that a company gets when firm provides a variety of products rather than specializing in producing of products. This also refers to the efficiencies primarily associated with the demand side changes such as the increase or decrease the scope of marketing and distribution of different categories of products.
3. Increased revenue or market share: There is an assumption that the buyer will be fascinating a major contender and thus increase its market power to set prices.
4. Cross-selling: cross-selling is significant profit for stockbrokers, insurance agent and financial planner. For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. 5. Synergy: when two or more things functions together to produce a result which is not independently obtainable are synergy. For example, managerial economies such as the increased opportunity of managerial specialization. Another example is purchasing economies due to increased order size and associated bulk-buying discounts. 6. Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. 7. Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company 8. Resource transfer: inside a firm resources are unevenly distributed and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. The term used to describe in macroeconomics and strategic management for horizontal mergers is ownership and control. It is a kind of strategy that has been used to seeks to sell a type of product in a various markets. When a firm that is in the same industry or produces similar products, is been taken over by or has merged with another firm at same stage of production is termed as the merged firm. For an example, Kingfisher took over Deccan Airlines. In this case Deccan airlines was at a stage of failure and Kingfisher was a new player and with a good financial and customer satisfaction level. This process is also known as “buy out” or “takeover”. The main objective of the horizontal integration is to combine similar companies and monopolize the industry. The monopoly created in this process is known as a horizontal monopoly.
ARTICLE 1: two Scottish...
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