Mergers and acquisitions are part of overall strategy of the firm. The firms go for such mergers and acquisitions for following benefits
Sales enhancement and operating economies
The most important reason for such a decision is to enhance the revenue of the firm. By acquiring firms in same line of business or with improved technology the company can increase its production level which would enable it to reduce its cost and gain economies of scale. A reduced cost level and higher sales would end up in increased profits and overall enhanced performance of the firm with greater shareholder value. Such decisions not only increases sale but also eliminates redundant resources which are a burden on the company. It enables the companies to create new competitive edge to beat their competitors by combining strengths of both companies.
Due to presence of asymmetry of information between the management and shareholders M&A benefits the company through information effect. The information of merger or acquisition imposes positive impact on the investors and share price increases. If the share price of the company is undervalued, then the news of merger would reflect a positive impact on it by appreciating it.
Profitability of some companies decline due to inefficient management. If the acquiring company replaces the management of the target firm with the efficient, experienced and talented management then the profitability of the target firm increases resulting into enhanced shareholder wealth.
As the losses can be carry backward and carry forward to profits of other years to reduce taxes, mergers and acquisitions play an important role for the firms to reduce their taxes by acquiring a firm that is currently suffering loss and has the potential to produce profits in future.
Mergers and acquisitions are also a way to diversify risk by acquiring firms in different line of business or unrelated business. By such acquisitions a company is able to avoid cyclical instabilities of income.
According to this hypothesis, there are certain investors in the market who are in habit of acquiring other firms. Although such acquisitions do not add value to their own firm and benefit is only provided to the weaker firm. Although this is not a rational behaviour, but by doing so wealth is transferred to the shareholders of the weaker firm. Here the decrease in the value of the acquiring firm is less as compare to the gain received by the target firm.
Acquisition & Strategies
Usually the acquirer company makes tender offer to the target firm. The bid is firstly given to the management of the firm. The bid comprises of premium value which automatically eliminates other bidders. As being under fiduciary duty BODs should consider all the offers in the best interest of shareholders. Such an overwhelming offer by the acquirer to the target firm is known as Bear Hug.
If the management do not consider the offer and rejects it then the acquirer company approaches the shareholder of the target firm. They offer the shareholders to sell their shares at a premium price. To accomplish this, it is necessary that majority of the shareholders sell their shares to the acquiring firm. The reason behind their sale could be unsatisfactory performance of the management. Such a strategy is known as Tender offer.
Proxy fights is another remedy available to the acquiring firm to take over the other. It involves acquiring the voting rights on behalf of other shareholders i.e. proxy. Proxy is an agent legally authorized by the shareholder to vote in meetings on important issues on his behalf. If the acquirer succeeds to attain enough proxies, it can turn the tables in its own favour by voting in favour of resolution of take over.
March 26, 2019