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F1.

Mergers: Necessitating factors and benefits

Business newspapers and journals often report the news of mergers and acquisitions (M&A)
happening in some of other part of the world. It has emerged during the past decade, as one of
the most dominant activities in the field of corporate finance and strategy.

The contextual factors of business have undergone a sea change in view of the following two
developments world over.

 The emergence of buyers’ driven market that is putting pressures on the bottom line of
the companies, particularly in the wake of the increased competition.
 The increased competition caused, inter alia, by deregulation and liberalization especially
in the developing economies of Asia, Latin America, and Eastern Europe.

Due to the aforesaid developments, companies are finding it difficult to retain their market share.
The problem before the firms world over is two-fold: enhancing or at least retaining their
volumes and maintaining, if not increasing, their margins. The problem gets further compounded
by the increasing assertiveness on part of the shareholders who expect increasing returns on
equity, eroding margins and shrinking market share notwithstanding, Firms, in response to the
challenge of enhancing shareholder’s value amidst downward pressure on their margins and
volumes, are adopting strategies of diversification, corporate restructuring and consolidation, etc.

Mergers and acquisitions have emerged as one of the most potent tools of corporate
consolidation and restructuring. Using the M&A option, firms are combining with one or more
firms in related/unrelated lines of business. Such combinations are benefiting the combining
firms either by bringing down their operating costs or by increasing their market base or product
line. Sometimes such combinations benefit by increasing the bargaining power of the combined
entity while in some other cases they may facilitate in risk mitigation through diversification. For
the firms that have entered moderate growth phase, M&A offers a mechanism to bolster their top
and bottom line. M&A is also looked at as a long-term investing decision from the view of
acquiring/merged firm as it provides such firms with productive investment avenues(s) to park
their surpluses enhancing their expected future income. It is for this reason that the evaluation of
merger is done like a capital budgeting decision.

Concept Questions:
1. What factors have necessitated the mergers and acquisitions? (5 marks)
2. What benefits do firms accrue as a result of mergers and acquisitions? (5 marks)