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In: Finance

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.

Solutions

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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