Question

Is “too big to fail” the reality of decade of mergers and acquisitions? Who benefited—shareholders, managers, the economy, workers of America or worldwide for that matter, from the merger activity?

Answer 1

The most common reasons for Mergers and Acquisition (M&A) are:

Synergistic operating economics: Synergy May be defined as follows:

V (AB) >V(A) + V (B).

In other words, the combined value of two firms or companies shall be more than their individual value Synergy is the increase in performance of the combined firm over what the two firms are already expected or required to accomplish as independent firms (Mark L Sirower of Boston Consulting Group, in his book "The Synergy Trap"). This may be a result of complementary services economics of scale or both.

A good example of complementary activities can a company may have a good networking of branches and other company may have efficient production system. Thus the merged companies will be more efficient than individual companies. On similar lines, economies of large scale are also one of the reasons for synergy benefits.

The main reason is that, the large scale production results in a lower average cost of production eg reduction in overhead costs on account of sharing of central services such as accounting and finance, office executives, top-level management legal. sales promotion and advertisement etc

These economies can be "real" arising out of a reduction in factor input per unit of output, whereas pecuniary economics are realized from paying lower prices for factor inputs for bulk transactions.

Other factors for Synergies are as follows:

Diversification: In case of a merger between two unrelated companies would lead to a reduction in business risk, which in turn will increase the market value consequent upon the reduction in discount rate required rate of return. Normally, greater the combination of statistically independent or negatively correlated income streams of merged companies there will be a higher reduction in the business risk in comparison to companies having income streams which are positively correlated to each other.

Taxation: The provisions of set-off and carry forward of losses as per Income Tax Act may be another strong season for the merger and acquisition Thus, there will be Tax saving or deduction in a tax liability of the merged firm Similarly, in the case of acquisition the losses of the target company will be allowed to be set off against the profits of the acquiring company

Growth: Merger and acquisition mode enables the firm to grow at a rate faster than the other mode viz organic growth. The reason being the shortening of Time to Market The acquiring company avoid delays associated with purchasing of building, site, setting up of the plant and hiring personnel etc.

Consolidation of Production Capacities and increasing market power: Due to reduced competition, marketing power increases Further, production capacity is increased by the combination of two or more plants.

Objectives for which amalgamation may be resorted to are:

Horizontal growth to achieve optimum size, to enlarge the market share, to curb competition or to use unutilised capacity

Vertical combination with a view to economising costs and eliminating avoidable sales-tax

and/or excise duty:

Diversification of business

Mobilising financial resources by utilising the idle funds lying with another company for the expansion of business. (For example, nationalisation of banks provided this opportunity and the erstwhile broking companies merged with industrial companies); Merger of an export, investment or trading company with an industrial company or vice versa with a view to increasing cash flow

Merging subsidiary company with the holding company with a view to improving cash flow.

Taking over a 'shell' company which may have the necessary industrial licences etc. but whose promoters do not wish to proceed with the project

An amalgamation may also be resorted to for the purpose of nourishing a sick unit in the group and this is normally a merger for keeping up the image of the group.

Points to be addressed.

All the shareholders of the company, Managers of both the companies, the economy and workers of world are getting benefited through merger activity.

Shareholders benefited by increased synergy income.

Managers will be benefited by new corporate experience and increased salary.

Economy will get benefit by paying increased taxes.

Increasing in employment to the world.