What are the main benefits assumed to flow from a merger or takeover? Why do so many mergers and takeover fails to deliver improved financial performance? Illustrate your answer with relevant financial case study?
A takeover is when one company takes over another and clearly establishes itself as the new owner. This purchase is known as an acquisition, the target company ceases to exist and the buyers stock continues to be traded from a legal point of view. Now a merger is when two companies (they are often about the same size and have factors in common in terms of product) agree to go on forward as a new company rather than remaining separately owned and operated. Both the company stocks are surrendered and a new company stock is issued in its place. For example Daimler-Benz and Chrysler no longer exist when they merged but now a new company “DaimlerChrysler” was created ,(McClure in investopidia) A purchased deal can also be called a merger when both CEO's agree that joining together will be the interest of both company ,as Vos & Kellerher.,2000 stated that theoretically a company will enter an acquisition or merger if they believed that the Net Present Value combined is greater than when separated, and also the economic value combined is greater than when the firm is separated, but if the deal is unfriendly that is if the target company does not want to be purchased it is referred to as an acquisition. Firms are acquired for a number of reasons. In the 1960s and 1970s, firms such as Gulf and Western and ITT built themselves into conglomerates by acquiring firms in other lines of business. The main reasons why merger and takeover occur are to create shareholder value over and above that of the sum of the two companies. The reasoning behind this idea is that two companies together are more valuable than two separate companies. This idea is especially appealing to companies when times are tough. Strong companies will buy other companies to create a more competitive, more efficient market. They will come together hoping to gain greater market share and to achieve higher efficiency and because of these potential benefits smaller companies will often agree to be purchased when they know they cannot survive alone. From the perspective of business structures different mergers exist such as: Horizontal merger, vertical merger, Market-extension merger and Product-extension merger. ,(McClure in investopidia). According to Haslam(20074/8) mergers will generate synergies since one firm is weak the other that is stronger will provide strength. Synergy is the magic force that allows for enhanced cost efficiencies of the new business. It takes the form of revenue enhancement and cost savings Synergy is a stated motive in many mergers and acquisitions. Bhide (1993) examined the motives behind 77 acquisitions in 1985 and 1986, and reported that operating synergy was the primary motive in one-third of these takeovers.
More benefits of mergers are economies of scale, a bigger company placing the orders can save more on cost. The company’s purchasing power will be increased, buying in bulk (such as equipment or office supplies or raw materials can help the company have greater ability to negotiate prices and getting bulk discounts). There will be staff reductions as every employee knows that mergers tend to mean job losses but the company will save more cash reducing the number of staff. Merging companies may acquire new technologies because to stay competitive they need to be on top of technological developments and their business application. By buying a smaller company with certain unique technology the bigger company may maintain or develop a competitive advantage. Haslam(2007/8) further explained that mergers will increase the market dominance of the firm meaning it will improve their market reach and industry visibility, a merge may expand two companies marketing and distributions, giving them new sales opportunities, it...
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