Question

What are some valid economic justifications for mergers? please elaborate in this topic deeply and do not copy and paste fro internet sources. also no handwriting please, thank you so much!!

Answer 1

There can be various valid economic justifications for mergers, these can be discussed as follows:

• Synergies or economies of scale: It is a commonly understood fact that when two companies merge together to make a new and bigger company, the value of that one company is going to be bigger and higher than of two companies separately. As it is said, that whole is more than sum of its parts.
• Cost reduction: Through merger, various economic resources of the company are pooled together which reduces the overall cost for various divisions of the company like production,R&D,sales and marketing etc. for company in the longer run.
• Revenue Synergies: After merger, the new company have expanded markets, pricing power over its products and services along with product cross selling etc. which is not possible for companies separately, had the merger has not taken place.
• Higher growth: It is always not possible to grow organically in a particular market or segment and thus external growth is the only option for the company which can be achieved through merger and acquisition.
• Bootstrapping EPS: If the acquiring company is having higher PE in the market and the target company is having a lower PE, than after the merger the company's current EPS will become higher, however it will lower down in the long run and this will also generate higher PE for the company overall.
• International Goals: Through merger with international subsidiaries various advantages can be achieved in the longer run, these includes exploiting new markets, better and effective knowledge sharing etc.

Therefore, due to above economic benefits, mergers can be justified in the longer run and this is the reason that the same is being used by companies and businesses around the world.