considerably on account of sharing of their resources and thus avoidingduplication of facilities available.2.
Greater pricing power
from reduced competition and higher market share,which should result in higher margins and operating income. This synergy isalso more likely to show up in mergers of firms which are in the same line of business and should be more likely to yield benefits when there are relatively few firms in the business. When there are more firms in the industry ability of firms to exercise relatively higher price reduces and in such a situation thesynergy does not seem to work as desired.
of limiting competitionto increase pricing power is the acquisition of universal luggage by Blow Plast. The two companies were in the same line of business and were in directcompetition with each other leading to a severe price war and increasedmarketing costs. After the acquisition blow past acquired a strong hold on themarket and operated under near monopoly situation. Another example is theacquisition of Tomco by Hindustan Lever.3.
Combination of different functional strengths
, combination of differentfunctional strengths may enhance the revenues of each merger partner thereby enabling each company to expand its revenues. The phenomenon can beunderstood in cases where one company with an established brand name lendsits reputation to a company with upcoming product line or a company. Acompany with strong distribution network merges with a firm that hasproducts of great potential but is unable to reach the market before itscompetitors can do so. In other words the two companies should get theadvantage of the combination of their complimentary functional strengths.4.
in new or existing markets, arising from the combination of the two firms. This would be case when a US consumer products firm acquiresan emerging market firm, with an established distribution network and brandname recognition, and uses these strengths to increase sales of itsproducts.Operating synergies can affect margins and growth, and throughthese the value of the firms involved in the merger or acquisition.Synergy results from complementary activities. This can be understood with thefollowing example
Consider a situation where there are two firms Aand B. Firm A is having substantial amount of financial resources (havingenough surplus cash that can be invested somewhere) while firm B is havingprofitable investment opportunities ( but is lacking surplus cash). If A and Bcombine with each other both can utilize each other strengths, for examplehere A can invest its resource in the opportunities available to B. note that thiscan happen only when the two firms are combined with each other or in otherwords they must act in a way as if they are one.
Q.3 Explain the process of a leveraged buyout.