Professional Documents
Culture Documents
CORPORATE EXPANSION
Merger:
A merger is said to occur when two or more companies
combine into one company. One or more companies may
merge with an existing or they may merge to form a new
company.
Motives of Mergers:
• Limit competition.
• Utilize under-utilized market power.
• Overcome the problem of slow growth and profitability in
one’s own industry.
• Achieve diversification.
• Gain economies of scale and increase income with
proportionately less investment.
• Utilize under-utilized resources such as human, physical
and managerial skills.
Types of Mergers:
Acquisition:
The term acquisition means an attempt by one firm,
called the acquiring firm, to gain a majority interest in another
firm, called the target firm. An acquisition may be defined as
an act of acquiring effective control by one company over
assets or management of another company without any
combination of companies. Thus, in an acquisition two or more
companies may remain independent, separate legal entity, but
there may be a change in control of companies. There are
broadly two kinds of strategies that can be employed in
corporate acquisitions. These include
• Friendly Takeover: The acquiring firm makes a financial
proposal to target firm’s management and board. This
proposal might involve the merger of the two firms, the
consolidation of the two firms or the creation of
parent/subsidiary relationship.
• Hostile Takeover: A hostile takeover may not follow a
preliminary attempt like a friendly takeover. A hostile takeover
is a takeover that is restricted by the management of the
target company.
Accelerated Growth
Mergers and Acquisitions help to accelerate the pace of a
company’s growth in a convenient and inexpensive manner.
The company can acquire production facilities as well as other
resources from outside through mergers and acquisitions. To
launch a new product the company may lack technical skills
and may require special marketing skills and/or a wide
distribution network to access different segments of markets.
The company can acquire existing company with requisite
infrastructure and skills and grow quickly.
Diversification of Risk
By acquiring a firm in a different line of business, a
company may be able to reduce cyclical instability in earnings.
Since investors in a company’s stock are averse to risk and are
concerned only with the total risk of the firm, a reduction in
earnings instability would have a favorable impact on share
price. For example an investor who holds one percent of
shares of company X and one percent of shares of company Y,
could achieve the same share of earnings and assets if
companies X and Y merged and he held one percent of shares
of the merged company. The risk from his point of view has
been diversified by his acquiring shares of the two companies.
Managerial Effectiveness
One of the potential gains of merger is an increase in
managerial effectiveness. This may occur if the existing
management team, which is performing poorly, is replaced by
a more effective management team. Often a firm plagued with
managerial inadequacies, can gain immensely from the
superior management that is likely to emerge as a sequel to
the merger.
Tax Shields
When a firm with accumulated losses merges with a profit
making firm, tax shields are utilized better. The firm with
accumulated losses may not be able to derive tax advantages
for a very long time. However, when it merges with profit-
making firm, its accumulated losses can be set off against the
profits of the profit making firm and tax benefits can be quickly
realized.
Utilization of Surplus Funds
A firm in a mature industry may generate a lot of cash
but may not have opportunities for profitable investment. Such
a firm ought to distribute generous dividends and even buy
back its shares. However, most management has a tendency
to make further investments even though they may not be
profitable. In such a situation, a merger with another firm
involving cash compensation often represents a more efficient
utilization of surplus funds.
Strategic Benefit
If a firm has decided to enter or expand in a particular
industry, acquisition of a firm engaged in that industry, rather
than dependence on internal expansion, may offer several
strategic advantages
i. It can prevent a competitor from establishing a
similar position in that industry.
ii. It enables a firm to ‘leap frog’ several stages in the
process of expansion.
iii. It may entail less risk and even less cost.
iv. In a saturated market, simultaneous expansion and
replacement makes more sense than creation of additional
capacity through internal expansion.
Complementary Resources
Corporate Failure
Meaning
It can be defined in several different ways –financially if a
company owes more than it earns over significant periods of
time and can no longer trade this is the serious example of
corporate failure.It can also means institutional failure where
a group of key managers fail to address key policy issues.Eg
Banks lending to those with a poor credit history as in our
present credit crunch.
Symptoms of Bankruptcy
Unstable earnings
Newness of company
Declining industry
Poor management
Fraudulent actions