Reasons For a Merger

6 Key excerpts on "Reasons For a Merger"

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  eBook - PDF

  Introduction To Accounting And Managerial Finance, An: A Merger Of Equals

  A Merger of Equals

  • Harold Bierman, Jr(Authors)
  • 2010(Publication Date)
  • World Scientific

    (Publisher)

  Another reason for mergers is that retention of earnings 289 290 An Introduction to Accounting and Managerial Finance saves investor taxes; thus, it is a sensible strategy compared to a cash dividend and may be the best internal use of resources from the viewpoint of stockholders. There are many reasons for mergers and acquisitions. Among them are: 1. Synergy (real and imaginary), the process whereby it is hoped that 2 plus 2 equals 5, but sometimes it equals 3. 2. Financial considerations (including tax effects). 3. Bargain prices and availability of capital. 4. Psychological reasons (empire building by managers and raiders). 5. The P/E effect. 6. The reduction of risk (diversification). One of the more important Reasons For a Merger is that it will lead to the acquisition of resources such as: 1. Management talent. 2. Markets. 3. Products. 4. Cash or debt capacity. 5. Plant and equipment (replacement cost is less than the price). 6. Raw material. 7. Patents. 8. Know-how (processes or the management team). Diversification Another reason for mergers and acquisitions is diversification (risk reduction). Risk diversification is a difficult objective to evaluate. Individual investors can diversify for themselves. A corporation does not have to diversify for its investors. Mergers and acquisitions are generally assumed to reduce risk for the acquiring firm, but this is not necessarily so. If the risk of the acquired firm is sufficiently large, it tends to contaminate the financial position of the firm acquiring it. Paying too much for an acquisition can also adversely affect the acquirer’s risk. Despite this, certain types of mergers tend to reduce risk. Assume two firms have operations that are perfectly independent of each other, both in an economic and statistical sense. In this situation, investors who keep their investment size the same in a merger will reduce their risk.

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  Mergers & Acquisitions

  A Critical Reader

  • Annette Risberg(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  SECTION ONE

  Why do firms engage in mergers and acquisitions?

  INTRODUCTION TO SECTION ONE

  As the book aims to examine the merger and acquisition process from various perspectives, we shall start from the beginning, discussing the motives for firms merging with or acquiring another company. Merger and acquisition motives have traditionally been studied in financial literature1 but today they are frequently linked to the whole acquisition process. A literature review reveals two main types of motives for mergers and acquisitions. The first are financial reasons, such as increasing the overall performance and creating shareholder value. Fowler and Schmidt (1988) mentioned the financial motive of gaining synergistic effects, information asymmetries or control over the acquired firm. Another financial motive was brought up by Fluck and Lynch (1999). In their endeavour to answer the question why merged firms divest they found that the motive for mergers stems from the inability of firms to finance marginally profitable projects as stand-alone entities due to agency problems between managers and potential claim holders. A merger, according to them, is thus a short-term solution to finance problems. The second type of motives mentioned in the literature are non-value-maximizing managerially based motives: for example, managers' desire to increase power, sales or growth (e.g. Levinson, 1970; Fowler and Schmidt, 1988; Napier, Simmons and Stratton, 1989). Brouthers, van Hastenburg and van den Ven (1998) make a slightly different categorization. They distinguish between economic, personal and strategic motives. However, the most commonly cited motive for mergers and acquisitions is to achieve synergy effects (see e.g. Lubatkin, 1983).

  Management literature can leave the impression that decisions to merge and acquire are very rational. As we can see from the types mentioned above, and as you will read in, for example, Trautwein in the next chapter, that is not the case. The motives can be quite personal, aiming to improve the managers' posiion. It has been further pointed out that there is most often more than one motive involved in the decision (Brouthers, van Hastenburg and van den Ven, 1998). Angwin (2001) discusses public rational motives and other motives, and how these motives are complex and interact. The public motives are aimed at achieving the rational outcomes of improved performance and increased shareholder value. The nonpublic motives may be less rational, yet, Angwin writes, the business press and investors alike tend to concentrate upon the publicly stated rational motives. Another reason merger and acquisition motives are described as rational and efficient could be because they are retrospective interpretations. Litz (1999) writes that merger and acquisition decisions are often framed in post hoc rationales that bear limited relation to the actual motive for the decision. One can understand if managers do not admit that they acquired another company in order to boost their own power, increase their own bonus or add another achievement to their CV.

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  Mergers and Acquisitions in European Banking

  • F. Fiordelisi(Author)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  48 3 Why Do Banks Merge? 3.1 Introduction The most successful European banks responded to the changing competitive environment by expanding through internally gen- erated growth or M&As. All largest European banks have actively taken part in the consolidation process over the last decade and the number and value of big M&A deals constantly increased. Mergers and Acquisitions (M&As) deals are usually based on the belief that gains can accrue via reduction in expenses and earning volatility and increases in market power and scale and scope of economies (Kiymaz 2004). The M&A causes have been usually classified accord- ing to various criteria. Thu Nguyen and Yung (2007) noted that M&A deals may be jus- tified by: market timing: M&A deals occur since the acquirer bank’s manag- 1. ers intend to take advantage of market mispricing. industry-shock responding (neo-classical hypothesis): M&A trans- 2. actions occur because firms are prompted to merge in order to reap the benefits of some common shocks. the agency hypothesis: M&A operations would occur because they 3. enhance the acquirer management’s welfare at the expense of the acquirer shareholders. the hubris hypothesis: M&A deals occur since managers make 4. mistakes in evaluating target firms, and engage in mergers even when there is no synergy. Why Do Banks Merge? 49 synergy motives: M&A deals occur because of economic gains 5. obtained by merging the resources of the two firms. According to this classification, some of these motives are to the benefit of shareholders, some against. A corporate decision is usually derived from more than one motive, which either add or destroy shareholder value, Berger et al., (1999a) discuss M&A motives by distinguishing between value maximization and non-value maxi- mization motives. These classification criteria reflect our approach on the basis of which, in Chapter 2, we illustrated M&A deals as an exogenous channel of value creation.

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  Mergers and Acquisitions as the Pillar of Foreign Direct Investment

  • A. Bitzenis, V. A. Vlachos, P. Papadimitriou, A. Bitzenis, V. A. Vlachos, P. Papadimitriou(Authors)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The intensified competition caused by globalization, along with the easing of regulatory restrictions and the expansion of information technology, forced a significant number of mergers and acquisitions in the entire business sector from the end of 1990s up to 2008, when the finan- cial crisis of 2008 took place (Liargovas and Repousis, 2011). In general, the hypothesis of sudden occurrences on the social-economic level consti- tutes the theoretical framework of merger waves, leading to periods with an increased number and volume of mergers and acquisitions, followed by a time of fewer transactions and lower total value. Motives for International Mergers and Acquisitions The need for each company to survive and increase its competitiveness in the globalized business environment results in mergers and acquisitions 150 ● Tampakoudis, Subeniotis, and Eleftheriadis beyond the firm’s national borders. Thus, apart from business consolida- tions within the domestic business environment, many companies seek to expand internationally, making mergers and acquisitions with companies from other countries. In addition to the above-analyzed motives, in what follows we present further motives for cross-border business combinations. The primary motivation for international mergers and acquisitions is the presence in new markets of the chance to enlarge the number of poten- tial customers, especially in countries with rapidly developing economies. Nowadays, companies of any industry compete not only with domestic firms from the same industry, but with foreign companies as well. All the companies, therefore, should enhance their competitiveness and expand beyond national boundaries, a situation that is achieved mainly through mergers and acquisitions with foreign companies. Geographic diversification improves the risk-return trade-off, particularly when the economies where the dealing companies operate are uncorrelated.

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  Mergers and Acquisitions Security

  Corporate Restructuring and Security Management

  • Edward Halibozek, Gerald L. Kovacich(Authors)
  • 2005(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  They are a strategic option when a com-pany can’t develop new growth, revenue, or capabilities from within, or the cost of doing so is not practical. Mergers and acquisitions have the potential of adding value to companies, in many ways enabling them to accomplish strategic moves such as the following: ● Attain greater market-share and/or reach new markets. Reaching new markets may include expanding the business into international mar-kets thus adding new geographical capabilities What Are Mergers and Acquisitions? 15 ● Create new synergies such as enriching the existing company talent pool with new talent from the acquired or merged company ● Capitalize on efficiencies through economies of scale ● Diversify the existing product line by acquiring additional brands and/or complementary or competitive products It may also help realize improved company infrastructure: ● Through acquisition of new technology ● With the selection and implementation of best practices, business sys-tems, and processes ● Through the expansion of knowledge capital (Knowledge capital is the knowledge and experience possessed by employees.) ● By capturing and protecting existing intellectual property that includes patents, trademarks, copyrights, and proprietary processes and knowledge ● By expanding distribution channels that may provide a competitive edge, as established distribution capabilities and channels may assist a company in reaching new markets, growing its share within the cur-rent marketplace, and help drive down its cost. Use of an acquisition process allows for the immediate use of a capability that otherwise could take years to develop. ● Integrating management experience: This is particularly important to buyers who plan to leave the acquired company as a stand-alone oper-ating business unit. If there is no intention to integrate the acquired company into the acquiring company, having a skilled and experi-enced management team in place is critical.

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  Mergers

  What Can Go Wrong and How to Prevent It

  • Patrick A. Gaughan(Author)
  • 2005(Publication Date)
  • Wiley

    (Publisher)

  66 Merger Strategy: Why Do Firms Merge? Tax-Based Synergies. Sometimes a target may have certain unex- ploited tax benefits that can be utilized by a buyer. For example, a company may have net operating losses (NOLs), which can be trans- ferred to a buyer through an acquisition of the target. These NOLs may enable the target to offset profits it would otherwise have to pay taxes on. It may be possible for the NOLs to be carried forward and provide tax benefits for a certain defined time period. It is ironic, but losses that a target company may have sustained in the past may actu- ally be a source of value for it in an acquisition. Other sources of tax- based gains may be depreciation tax shields, which may come from a step-up in the basis of the target’s assets following an acquisition. Tax-based synergies can play a significant role in M&As. For exam- ple, Kmart had $3.8 billion in tax credits in 2004 based on prior losses this troubled retail giant had incurred. These tax benefits played a role in Kmart’s offer for Sears as the tax credits could shield some of the combined company’s profits following the merger. By having such credits, Kmart could help the combined company realize greater profits for Sears’ business than what Sears could derive on its own. It is ironic that Kmart’s prior financial difficulties could form the basis for a buying advantage when it made a bid for Sears. Financial Synergies. When a target company has certain growth opportunities that it would like to pursue but where it is hampered by an insufficient access to capital, one way this problem may be alle- viated is with a merger with a company that has better access to cap- ital but that may not have the same profit-making opportunities as the target. This is sometimes the basis for acquisitions of smaller companies by larger bidders. The key question here is if the target really has access to those opportunities, why does the market not rec- ognize this and provide the capital.

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