What are the advantages of mergers and acquisitions?
The major advantages of mergers and acquisitions are mentioned below:
The operating cost advantage in terms of economies of scale is considered to be the primary objective of mergers. These economies arise because of more intensive utilization of production capacities, distribution networks, engineering services, research and development facilities, data processing systems, etc. Economies of scale are the most prominent in the case of horizontal mergers. In a vertical merger, the principal sources of benefits are improved coordination of activities, lower inventory levels.
It results from complementary activities. What is Synergy? The interaction or co-operation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects. For example, one firm may have financial resources while the other has profitable investment opportunities. In the same manner, one firm may have strong research and development facilities. The merged concern in all these cases will be more effective than the individual firms combined value of merged firms is likely to be greater than the sum of the individual entities.
If a company has decided to enter or expand in a particular industry through the acquisition of a firm engaged in that industry, rather than dependence on internal expansion, may offer several strategic advantages: (i) it can prevent a competitor from establishing a similar position in that industry; (ii) it offers special timing advantages, (iii) it may entail less risk and even less cost.
Under certain conditions, tax benefits may turn out to be the underlying motive for a merger. Suppose when a firm with accumulated losses and unabsorbed depreciation mergers with a profitmaking firm, tax benefits are utilized better. Because its accumulated losses/unabsorbed depreciation can be set off against the profits of the profit-making firm.
A firm in a mature industry may generate a lot of cash but may not have opportunities for profitable investment. In such a situation, a merger with another firm involving cash compensation often represents a more effective utilization of surplus funds.
Diversification is yet another major advantage, especially in the conglomerate merger. The merger between two unrelated firms would tend to reduce business risk, which, in turn, reduces the cost of capital (K0) of the firm’s earnings which enhances the market value of the firm.
Economies of Scale:
The operating cost advantage in terms of economies of scale is considered to be the primary objective of mergers. These economies arise because of more intensive utilization of production capacities, distribution networks, engineering services, research and development facilities, data processing systems, etc. Economies of scale are the most prominent in the case of horizontal mergers. In a vertical merger, the principal sources of benefits are improved coordination of activities, lower inventory levels.
Synergy:
It results from complementary activities. What is Synergy? The interaction or co-operation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects. For example, one firm may have financial resources while the other has profitable investment opportunities. In the same manner, one firm may have strong research and development facilities. The merged concern in all these cases will be more effective than the individual firms combined value of merged firms is likely to be greater than the sum of the individual entities.
Strategic benefits:
If a company has decided to enter or expand in a particular industry through the acquisition of a firm engaged in that industry, rather than dependence on internal expansion, may offer several strategic advantages: (i) it can prevent a competitor from establishing a similar position in that industry; (ii) it offers special timing advantages, (iii) it may entail less risk and even less cost.
Tax benefits:
Under certain conditions, tax benefits may turn out to be the underlying motive for a merger. Suppose when a firm with accumulated losses and unabsorbed depreciation mergers with a profitmaking firm, tax benefits are utilized better. Because its accumulated losses/unabsorbed depreciation can be set off against the profits of the profit-making firm.
Utilization of surplus funds:
A firm in a mature industry may generate a lot of cash but may not have opportunities for profitable investment. In such a situation, a merger with another firm involving cash compensation often represents a more effective utilization of surplus funds.
Diversification:
Diversification is yet another major advantage, especially in the conglomerate merger. The merger between two unrelated firms would tend to reduce business risk, which, in turn, reduces the cost of capital (K0) of the firm’s earnings which enhances the market value of the firm.
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