Sony, Mgm Merger

Topics: Mergers and acquisitions Pages: 7 (2693 words) Published: July 11, 2010
Firms are aggressively engaging in merger and acquisitions as financial strategies in today’s business world. Merger and acquisitions are a process discussed between two firms each seeking to benefit from the decision of marrying the two companies’. Factors to be considered when combining the firms are their financial benefits and operation efficiency from the transaction. The objective is to reduce the rate of risk to increase value on the firm, thus bringing a higher return to its shareholders. In addition, combining firms with opposite beneficial phases in the business cycle will reduce their inconsistent performance. This has been more evident with international firms. As new countries have joined the global market force, there have been a substantial number of foreign companies penetrating the US industry. Most of these foreign firms have infiltrated the market using their influential power in the political and economic arena. Sony Corp. and Metro-Goldwyn-Mayer, (MGM) are two firms which consensually merged in early 2005. Both are considered to be a conglomerate. They are highly compatible and recognized to have a strong hold in the motion picture industry; however, Sony has other units including electronic, and games. Sony is a foreign firm originated and based out of Tokyo while MGM was based in the US. Before Sony and MGM considered the acquisition they analyzed the pros and cons of merging, the factors considered in the price to be paid, the anticipated benefits, the fluctuation of their stock, and the combined capital structure. Once the acquisition was completed other factors were examined, such as the overall outcome of the deal, and the international financial management issues, if any. Pros and Cons of Mergers and AcquisitionsIn order to make a well informed decision toward a merger or an acquisition, several factors must be taken into account, and possibilities explored. It is apparent immediately that in a merger or acquisition, certain function would not need to be replicated, so labor costs would immediately be reduced. Other overhead costs such as land and building costs would be reduced as well as a supposed reduction in competition for that particular area of the market. Another advantage to a merger/acquisition is the possibility of the working together of two or more people, organizations, or things, especially when the result is greater than the sum of their individual effects or capabilities that may have not been present previously. This may also be considered a con in that there may be resistance toward working together. Redundancy of employees resulting in large layoffs would most likely result in a merger/acquisition deal. The combining of corporate dealings is another hurdle to overcome such as logos, addresses, sales territories and so on. The buyout of one of the companies in a merger forces the company doing the buy-out to have to pay a premium on the shares. When a merger is announced, the stock will rise. On the other hand when companies combine, faster repayment of debt, cost savings, sharing the cost of new technologies among other things, make mergers and acquisitions enticing. There is always risk involved whether it is a merger or an acquisition. It is usually a strategic plan that fosters the concept of a merger/acquisition according to “Why Mergers Fail” (Tobak, 2007). It is important that the two halves are stronger, resulting in increased shareholder value. In order to be successful, corporate strategies must be sound and similar for each company, each company must be forthcoming with truthful status, there must be a strategy in place ahead of time for the integration of the two, care must be taken to facilitate the retention of key employees and each company must be in good standing financially and otherwise to avoid forming one large company that is not stable. Factors Used in Determining PriceIf a company is purchased by another company by cash, this is termed an acquisition...

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