◦Why Do Firms Purchase Other Corporations

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Discussion Board 4
American Intercontinental University
Why do firms purchase other corporations?
Many firms purchase other companies to make their company larger. The growth of a company is achieved through expansion of purchasing already built companies and expanding their business into empty building. Merging with other companies is sometimes easier since the business is already setup. They can gain good managers and employee as well as formidable contracts that they were not using before. Do firms pay too much for the acquired corporation?

Companies often pay too much for their recently acquired businesses. Mergers are generally a little less on the pocket book. Many companies also buyout the majority of stock and purchase the company that way. However when buying a company through stock they also inherit the mishaps of the company and will have to fix them. But while they may spend to much for what the business currently is, it may not be too much money for what the company could become. Why do so many acquisitions result in shareholder losses?

The reason the company was bought out can result in shareholder losses. For a company to be bought out there is a reason. The company could have had bad management, bad owners, or just a failing product. This needs to be taken into consideration when someone chooses to buy the company and how they are going to fix it. Many results do not end well.

References:
Do Acquiring Firms Knowingly Pay Too Much for Target Firms? Evidence from Earnings Management in Member-Firm Mergers in Korean Business Groups Jae Wook Jeong* and Gil S. Bae** This version, January 2011

Too Much Cash, Too Little Innovation http://www.businessweek.com/magazine/content/05_29/b3943092_mz063.htm
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