Do Mergers Create Value?
Do Mergers and Acquisitions create Value?
This essay will focus on the motives of mergers and acquisitions and the benefits. The motives and benefits will be critically accessed. Empirical evidence will be covered and viewed in the hope of drawing a conclusion and to whether mergers and acquisitions create value or not. A real life example will be taken and accessed against the empirical evidence and merger motives in order to demonstrate the effects a merger has on both the Offeree and Offeror Company. A conclusion will then be drawn.
In theory, merging can bring about Synergy. The value of both the offeror’s company and the offeree’s together are of higher value compared to each of the two companies individually. Benefits may arise as achieving synergy enables companies (offeror) to increase in terms of market power, therefore enabling the newly merged company to have various influences in the market such as pricing. The offeror company also aims to benefit from reduction of the work force, duplicate staff may no longer be needed therefore reducing costs of running the company. Economics of scales is also an advantage and motive to mergers and acquisitions, increasing the scale of operations as well as products enables low cost in terms of per unit. This makes the company more cost effective.
Mergers also increase the customer base of the offeror and offeree company as they can now share the same customer base and market their products to both sets of customers. Size also matters, another motive for merging is that bigger companies are more likely to raise capital faster and better that smaller companies. The offeree’s company may also be unique in the sense that the technology it uses or the accounting system is better than that of the offeror’s so therefore the offeror may benefit from the technology and a more efficient system. Another major motive of Acquisitions and Mergers is that the offeror may want to enter a new market where the offeree’s company
This essay will focus on the motives of mergers and acquisitions and the benefits. The motives and benefits will be critically accessed. Empirical evidence will be covered and viewed in the hope of drawing a conclusion and to whether mergers and acquisitions create value or not. A real life example will be taken and accessed against the empirical evidence and merger motives in order to demonstrate the effects a merger has on both the Offeree and Offeror Company. A conclusion will then be drawn.
In theory, merging can bring about Synergy. The value of both the offeror’s company and the offeree’s together are of higher value compared to each of the two companies individually. Benefits may arise as achieving synergy enables companies (offeror) to increase in terms of market power, therefore enabling the newly merged company to have various influences in the market such as pricing. The offeror company also aims to benefit from reduction of the work force, duplicate staff may no longer be needed therefore reducing costs of running the company. Economics of scales is also an advantage and motive to mergers and acquisitions, increasing the scale of operations as well as products enables low cost in terms of per unit. This makes the company more cost effective.
Mergers also increase the customer base of the offeror and offeree company as they can now share the same customer base and market their products to both sets of customers. Size also matters, another motive for merging is that bigger companies are more likely to raise capital faster and better that smaller companies. The offeree’s company may also be unique in the sense that the technology it uses or the accounting system is better than that of the offeror’s so therefore the offeror may benefit from the technology and a more efficient system. Another major motive of Acquisitions and Mergers is that the offeror may want to enter a new market where the offeree’s company
References: Yahoo. (2011). Google Cash flow. Available: http://finance.yahoo.com/q/cf?s=GOOG+Cash+Flow&annual. Arnold Glen. (2005). Mergers. Available: http://www.library.mmu.ac.uk/secure/intranet/openfile.php?sid=fdde45e2c1a10bf4c2e2d9acb258ec80&cat_path=&filename=a_5c3220_arnold_mergers.pdf. Andy Cosh Last accessed 08th Glen Arnold (2005). Corporate Financial Management