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Economic sense of Mergers and Acquisitions: Case of BAE Systems and EADS - Essay Example

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Economic sense of Mergers and Acquisitions: Case of BAE Systems and EADS

The management of any given firm should employ a method of integration which offers the specific company technological efficiency. A firm is said to be technologically efficient if it produces a certain quantity of output by employing the lowest amount of production factors and / or inputs. Integration method employed should also offer a given firm economic efficiency. Economic efficiency is the ability of a given company to produce a specific output level using the lowest possible costs. Production can be organized in three different ways (Craig and Campbell 114). Firms diversify in various means. They integrate vertically, horizontally or agglomerate. Vertical integration involves mergers of firms in the vertical; line of production. A firm can merge with other firms up or down the line of production. Mergers up the line of production are called forward vertical integration while mergers down the line of production, the backward vertical integration. Horizontal integration involves mergers between firms at the same level of production. Conglomerate integration involves the merging of companies in different line of production. The benefits of the above diversification methods are that firms are able to improve their performance hence growth and increase in capacity. They increase their market shares, synergies, and due to large-scale production, they realize economies of scope and economies of scope. Low production costs lead to maximized profits. This study examines the impact of mergers and acquisition on the performance of BAE systems. Mergers and Acquisition Diversification is the process through which an organization enters new processes of business in the market with the possibility of manufacturing new products. Mergers and acquisitions are a form of entry that a firm may use to enter a market. Many firms in the financial industry have utilized this means to enter new markets. Mergers and acquisitions can take the form of vertical integration, horizontal integration or conglomerates. Horizontal integration is a form of integration in which firms combine at the same stage of production. Ison and Griffiths (75) note that horizontal integration may help a certain company to increase their share value. Firms that undertake horizontal integration do benefit from economies of scale that result from capacity expansion, technical economies of scale, social economies of scale, financial economies of scale, marketing and managerial economies of scale. Vertical integration is the ability of the firm to own subsidiaries downstream and upstream it line of production. Vertical mergers involve backward and forward linkages in an industry. Backward vertical integration occurs when firms merge or acquire subsidiaries that supply it inputs. Firms that undertake vertical integration realize reduced transaction costs hence increased profitability. Conglomerate integration occurs when an enterprise combines with other companies, which operate in different line of production. Companies Conglomerate to diversify their portfolio and hence spread the risk. These types of diversification are not common in the firming and financial industry. The most common types of mergers and acquisition in the firming industry are horizontal diversification where firms merge with other firms in other countries. Financial institutions such as firms do diversify through mergers and acquisitions because of many reasons. Firms can diversify with the aim of increasing their financial performance, exploiting the available business opportunities or other reasons. According to Shimizu et al. (341), financial institutions may be influenced by the profit that their competitors are making in the global industry to engage in mergers and acqui ...Show more
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Integration in a given firm and/or industry refers to the process of organizing production based on organizational unification as well as technology of different production processes…
Economic sense of Mergers and Acquisitions: Case of BAE Systems and EADS
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