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Differential Efficiency theory Inefficient Management theory Synergy Pure diversification Strategic realignment to changing environment

Acc. to the theory, if the management of firm A is more efficient than the management of firm B and if firm A acquire firm B, the efficiency of firm B is likely to be brought up to the level of firm A. The theory implies that some firms operate below their potential and as a result have below average efficiency. However, a difficulty may arise when the acquiring firm is over-optimistic.


Inefficient Management theory

Management of one company is not performing up to its potential. Another control group is in a position to manage the assets of the firm more effectively.

Type of reaction that occur when two substances or factors combine to produce a greater effect together than that which the sum of the two operating independently could account for. Ability of a combination of two firms to be more profitable than the two firms individually. Should have positive NAV( Net Acquisition Value). NAV = (Vab (Va+Vb)) (P+E) Operating Synergy related to economies of scale and economies of scope Financial Synergy result of lower cost of financing

Timing of diversification is an imp. issue. Benefits of diversification
To employees Owner Firm: If the firm diversifies their teams can be shifted from unproductive activities to productive ones leading to improved profitability, continuity and growth of the firm. Goodwill Financial and tax benefits

Strategic realignment to changing environment

Theory suggests that firms use the strategy of M&As as ways to rapidly adjust to changes in their external environment.
Regulatory change: M&As has more been happening in the industries like financial services, telecommunications, etc. that have been subject to major deregulation Technological change: Increased use of inf. Tech., short product life cycles, etc.

Motives for Merger

Economy of scale Economy of scope Increased revenue or market share Cross-selling Synergy Taxation Geographical or other diversification Resource transfer Vertical integration

Participants in M&A process

Investment bankers
Fee based advisory dept. in M&A Gives consultancy services on strategy for hostile takeovers. Forefront player in the actual process Do search, advise, negotiation, valuation, integration The investment bakers provide the following services:
Identifying the areas for restructuring Buyer/seller identification Structuring and valuation Negotiation Legal complaince

Many of the legal formalities are to be dealt with So legal advisor (an expert) helps in the process

Optimal tax structure advice, financial structuring and on performing financial due diligence. Also perform the role of auditors

Valuation Experts
To determine the value of the target firm

They place themselves in a position to influence the outcome of a takeover attempt.