Do mergers create value for the acquirer and the target? If yes, what does research show...

Do mergers create value for the acquirer and the target? If yes, what does research show about the value created? If no, why are firms interested in M&A?

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Expert Solution

What is Mergers and Acquisition:

Mergers and Acquisitions is a way by which two or more firms can integrate their resources to accomplish an specified objective.

Do Merger create value for acquirer and target:

Yes, the value created from merger denotes as "Synergy".

Reasons:

Decision of Mergers and Acquisition makes sense only if it generates some operational and/or financial benefits for target and acquirer firm. Hence, Synergy (i.e. value creation) plays an important role while mergers and acquisition.

Reason behind synergy is that, 1+1 is not equal to 2 but 1+1 is equal to 11.

i.e. when two firms merged and doing business together then it creates value addition in financial as well as operational terms.

Financial Perspective: For example, if acquirer firm's PE ratio is higher then target firms PE ratio and post merger PE ratio of acquirer is maintained then it leads to overall increase in market value of merged entity.

Note: "If you have any Query/Suggestions, feel free to ask me in the comment box."

jeff jeffy answered 10 months ago

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