Question

Question: Why do firms merge with or acquire other firms? What are the consequences?

Required:

1. Select scope of research such as years, industries, firms, or countries etc.

2. Collect data

3. Conduct data analysis.

Answer 1

Reasons why companies merge with or acquire other firms :-

1. Synergy :- It is the idea that by combining business activities, performance will increase and cost will decrease..

2. Diversification/ Sharpenning business focus :- These two conflicting goals have been used to describe thousands of M&A transactions. A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry's performance on its profitability. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations.

3. Growth :- Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves - instead, they buy a competitor's business for a price. Usually, these are called horizontal mergers. For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller company to make more beer and sell more to its brand-loyal customers.

4. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost.

5. Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product's market. The downside of this is that a large premium is usually required to convince the target company's shareholders to accept the offer. It is not uncommon for the acquiring company's shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.

Consequences of merging :-

A corporate merger or acquisition can have a profound effect on a company’s growth prospects and long-term outlook. But while an acquisition can transform the acquiring company literally overnight, there is a significant degree of risk involved, as mergers and acquisitions (M&A) transactions overall are estimated to only have a 50% chance of success.

Scope & data:-

There is a website called mca.gov.in where one can find all the information regauarding any company..

A company should look and collect data regarding the following about the company where it wants acquisition and merge --

• A reasonable purchase price. A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires a synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests.
• Cash transactions. Companies that pay in cash tend to be more careful when calculating bids and valuations come closer to target. When stock or equity is used as the currency for acquisition, discipline can go by the wayside.
• Sensible appetite. An acquiring company should be targeting a company that is smaller and in businesses that the acquiring company knows intimately. Synergy is hard to create from companies in disparate business areas. Sadly, companies have a bad habit of biting off more than they can chew in mergers. Mergers are awfully hard to get right, so investors should look for acquiring companies with a healthy grasp of reality.

Some of the recent merger & acquisitions whose data anyone can collect from the site said above or from the official website of the said company...

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