What is a merger? How does a merger differ from other
forms of acquisition? From the...
What is a merger? How does a merger differ from other
forms of acquisition? From the standpoint of stockholder’s wealth,
which one of the reasons may be a justifiable reason for merger or
acquisition? Explain.
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Expert Solution
A merger occurs when two separate entities combine forces to
create a new, joint organization. Meanwhile, an acquisition refers
to the takeover of one entity by another.
The merger is the process by which two or more companies take a
strategic decision to come together and merge together as one
company with a new name. Merger helps the company to share
information, technology, resources etc. thereby increasing the
overall strengths of the company. The merger also helps in reducing
the weakness and gain a competitive edge in the market. Merger
always happens on friendly terms as the information is already been
passed to the directors, employees etc. and proper planning is done
on the structuring of the new company.
The acquisition is the process by which one company acquires
another company. The financially strong company acquires more than
50% of shares to take over another company.
Merger leads to new stocks being issued whereas in case of
acquisition there are no new stocks issued.
The merger of two companies causes significant volatility in
the stock price of the acquiring firm and that of the target firm.
Shareholders of the acquiring firm usually experience a temporary
drop in share value in the days preceding the merger, while
shareholders of the target firm see a rise in share value during
the period.
The stock price of the newly merged company is expected to be
higher than that of both the acquiring and target firms, and it is
usually profitable for the target firm's shareholders, who benefit
from the resulting stock price arbitrage. In the absence of
unfavorable economic conditions, shareholders of the merged company
usually experience greatly improved long-term performance and
dividends.
When we compare mergers vs acquisitions, we may come to a
decision that merger is always better than acquisition. But just
like how each coin has two sides, both mergers vs acquisitions have
their own strengths and weaknesses. So, it is wise for companies to
carefully analyze the situation that they are in and take the
strategic decision that better suits the scenario and demands.
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