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Mergers. Essay

2613 words - 10 pages

MERGER: A+B=CACQUISITION: A+B=AMergers - defined as an amalgamation of two or more firms to form one new companyRECENT MERGERS:Norwich Union+ CGUWalmart+AsdaNatwest+Bank of ScotlandAOL+Time WarnerWellcome+ BeechamKlineTRENDS:Controlled in the UK since 1965 Monopolies and Merger Act, subsequently repaled by the Fair Traiding ActOccurs in waves:1.wave 19202.wave 19603.wave 19704.wave 1980REASONS FOR MERGERS:1.growth2.economies of scale3.power4.better management5.accumulated knowledge6.stability7.diversification8.incerease market share and eliminate competitionTYPES OF MERGERS:CONCETRIC MERGERS: the organisations acquired is in an unfamiliar but related fields into which the acquiring company wished to expandHORIZONTAL MERGERS: firms producing the same product mergeVERTICAL MERGERS: firms at various stages in the production process mergeCONGLOMERATE MERGERS: firms poducing intirely different products mergeASSESSING MERGER GAINS:* Motive for M&A is to make 2+2=5, 'synergy effect'(Cartwright and Cooper, 1992)* Expectation:combination will result in increased ifficiency, economies of scale, widening of markets, greater purchasing power, and in consiquence, increased profitability*Managerial assessment*Earning performance*Fluctuation in share prices(Newbould, 1970; Hovers, 1973; Meek, 1977)EFFECT ON EFFICIENCY:*A change in profitability could arise from a change in efficiency*Impact on efficiency is drawn from impact on profitability e.g., if profit declines, ifficiency has declined too*'efficiency gains from mergers in general are mot found'*(Cowling et al: 1980)* Similar results also found by Newbould (1970)HIGH RATE OF MERGER FAILURE:*Mergers have an unfavourable impact on profitability*Associated with :1.lowered productivity2.worse strike records3.absenteeism4.poorer accident rates*rather than greater profitability (Meek, 1977)" In long-term, 50-80% of all mergers and takeovers is financially unsuccessful" (Ellis and Perker, 1987)ADVANTAGES:1.Economy in cap tal expenditure2.Economy in the use of current assets3.Ease of access to the capital market4.Saving in overhead expenses5.Research expenditure6.Diversification of industryDISADVANTAGES:1.Elimanation of the personal touch2.Loss of trade name3.Inconvenience and expense4.Monopoly powers5.Personality problemsAN INTRODUCTION TO INDUSTRIAL ECONOMICS, P J DEVINE ET AL, 1985, GEORGE ALLEN & UNWIN LTD.THE HISTORICAL RECORD OF MERGER ACTIVITYMerger activity has been measured in several ways: by the number of mergers occurring per year; by the price paid by the acquiring firm. By merger is usually intended the amalgamerion of two or more firms , whether by consolidation into a new legal intity or by the acqusition s the largest firm involved in a consolidation is normally consedered to be the acqurer.A striking indication of the importance of merger activity is the fact that ocer the period 1964- 71 the average continuing quoted company grew mwre by merger than by net investment in fixed asets.Types...

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