Question

Dear,

Could you please answer below question.

"Discuss the main theories that have proposed over the years that formulate why firms merge and takeovers happen"

Thank you!

Answer 1

Main theories that have proposed over the years that formulate, why firms mergers and takeover happens are-

A. Differential efficiency theory-this theory advocates that if management of one company is more efficient than other company and if it merges with the less efficient company then management of both company would be highly efficient.

B. Inefficient Management theory-this theory advocates that company which were earlier not able to be successful because of their incompetent and inefficient managers and when there would be a merger and the management would be changed of the merged company, then it will lead to competent management taking over incompetent management.

C. Synergy theory-this theory advocates that when two companies are combining up with in one another, it will lead to increase in the efficiency of both the company as a primary tagline for efficiency in sceneries that 1 + 1 is not 2, it is in fact 11.

D. Undervaluation theory-when the the management of the acquired company believes that they are buying out the target company at valuation which is less than the actual valuation then they would be potentially capitalising onto their acquisition in the long run as they are getting underpriced deal.

E. Theory of maximization of shareholders value of the both companies as it is believed that merger would lead to a larger market share and a larger expansion benefit through more resources of both the firm which are combined to maximize the overall value of shareholders.