Appendix 5 - Mergers and Acquisition's, is it all beneficial for the acquiring company?

In my previous blog entry titled 'Methods of valuing companies' I discussed 3 methods a company may use to value shares and the companies as a whole. It is important to get the value of the target company for takeover correct as the target company will refuse the bid if undervalued. In this blog entry we will concentrate on the benefits and drawbacks of mergers and acquisition.

Reasons for merger and acquisition
Looking to acquire another company the acquiring company may see such advantages as increase efficiency and value. Efficiency can be improved as assets can be shared across the companies to fully utilize the available assets. Value can be increased as acquiring a new company can strengthen the company's brand along with purchasing power. Another advantage is Synergy that is the magic power that allow for increased value efficiency of the new entity and it takes the shape of returns enrichment and cost savings.If in the same industry economies of scale can be used to purchase assets but from bulking buying can look to reduce the unit costs. The acquiring company may recognize that the target company is poorly managed and so from a takeover a new management team can be implemented to hopefully achieve better success fort hat company. The biggest advantage is tax benefits. Financial advantages might instigate mergers and corporations will fully build use of tax- shields, increase monetary leverage and utilize alternative tax benefits (Hayn, 1989). Accounting studies show that the acquisition of a company does not always create value and sometimes can lose value.

Reasons against merger and acquisition

Company will face major difficulties thanks to frictions and internal competition that may occur among the staff of the united companies. There is conjointly risk of getting surplus employees in some departments. Many people may lose jobs and require redundancy packages which are costly and can give negative company image.A consumer will see a disadvantage in that less choice of businesses for consumers. Another disadvantage may be conflict of objectives between both companies. Acquisition is a very expensive long planning process and will often lead to increased debt for the acquiring company to fund the deal. 

Different types of mergers

Horizontal mergers are between firms in the same industry, Vertical mergers are combinations between firms at different stages and conglomerate mergers are firms in unrelated business activities. Horizontal mergers is less risk taking than the others as the acquiring company will have knowledge of the market and will have assets which can be shared between the companies to strengthen market performance.

Different takeover strategies

Friendly takeover is when the target company board of directors supports a merger, negotiates with potential acquirers and agrees on the price that is ultimately agreed by shareholders after vote. Hostile takeover is where an individual or acquiring company purchases a very large amount of the target company's stock and in doing so will get enough votes to overpower the board of directors and CEO. Friendly takeover is often seen as the best choice for both companies to agree value and terms while coming off as ethical in the media spotlight giving both companies positive image. Hostile takeover often seen as desperate measures a company will go and normally a last choice by companies.

Slowdown in M&A activity

Due to the recent recession market confidence fell reducing corporate activity. Some companies were unable to fund possible mergers and acquisitions due to bank's not lending. Many companies just refocused on their core business areas instead of diversifying through M&A activity. Market confidence has however has improved over the last year and people have regained confidence in the banking industry.

Conclusion

From the above points and displayed information, Merger's and acquisition is not all beneficial for the acquiring company due to friction and internal competition causing difficulties among workforce. Also much of the workforce may lose their jobs giving the acquiring company a negative public image and also increased debt to fund the acquisition. Accounting studies show that the acquisition of a company does not always create value and sometimes can lose value which would go against a business target of maximising shareholder wealth. Planning process to takeover a company is a long process as there is high amounts of risk involved, Shareholders may need to ask themselves the following questions when looking to acquire another company to improve shareholder wealth"Is it worth it considering the high amounts of risk involved?" and "How long will it be until we see the benefits?".