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Mergers And Acquisitions Essay

2032 words - 8 pages

Nowadays mergers and acquisitions are regarded as a key strategic option for the organisations all over the world. According to Huang and Kleiner (2004) mergers and acquisitions have become the principal means by which companies have the opportunity to grow revenues due to factors such as gloabalisation, rapid technological changes, a long-term bull market and strategic barriers to growth. Porter and Singh (2010) admit that mergers and acquisitions play an important role in reallocation of resources in an economy. Despite the huge increase of corporate mergers and acquisitions during the last decades many surveys show that the majority of them fail (Nguyen and Kleiner 2003).The purpose of this essay is to give a brief overview of mergers and acquisitions by providing the main key drivers behind this trend, the basic reasons why they fail and some recommendations for better results at the future.
Firstly it must be mentioned that despite the fact that mergers and acquisitions are regarded as the same process, they are not exactly the same. Shcraeder and Self (2003) argue that mergers are the consolidation of two organisations into one; while acquisitions are the purchase of one organization from another where the acquirer maintains control. Porter and Singh (2010) state that synergy, agency and hubris are the main motives of mergers and acquisitions. Seth et al (2000) argue that the synergy motive suggests that the object of the acquisition is to create a firm greater than the sum of the value of the individual firms. Both the managers of target and acquirer firms act in the best interest of their respective shareholders, with the basic principle to maximize their wealth via economic gains. The agency motive proposes that the managers of the acquiring firms embark on takeovers to satisfy their own personal targets instead of maximizing their shareholders’ value (Porter and Singh 2010). Roll (1986) states that the hubris model indicates that over confident managers make wrong estimations about the value of the potential targets and as a consequence they decrease the value of their shareholders’ wealth when the acquisition is completed.
The main objective of mergers and acquisitions is to increase market share and shareholder value by decreasing costs and implementing improved services (Nguyen and Kleiner 2003). Each organisation in this process targets the strengths and the capabilities of the other in order to improve its position in the market. Stallworthy and Kharbanda (1988) argue that one of the main objectives of mergers and acquisitions is the acquirer’s diversification with minimum cost in order to be protected and be restructured in a possible crisis. Keenan and White (1982) mention that firms seek for synergies in order to diversify and reduce the possibility of bankruptcy, achieve a better fit between the talents of corporate managers and the resources at their disposals and simultaneously acquire a bigger market share. Moreover Moon...

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