A merger can be seen as the coming together of two or more firms of fairly the same size following a joint decision to form an entirely new firm, sharing power equally. (Gustafsson and Hukkanen, 2002; Randeniya and Roivas, 2004). Three types of mergers can be identified: vertical integration where two firm engaged in different stages of production of the same good/service come together, horizontal mergers where two firms at the same stage of production come together and conglomerates where two firms producing unrelated goods/services come together (Gustafsson and Hukkanen, 2002; Randeniya and Roivas, 2004). Vertical can further be split into forward vertical and backward vertical mergers.(Gustafsson and Hukkanen, 2002). A merger may occur to achieve the following results.
An acquisition on the other hand is a union of two firms in one of them survives while the other goes out of existence. (Gustafsson and Hukkanen, 2002). In certain occasions, the absorbed company may retain its individual identity if it is an important strategic element, for example, when Ford acquired Volvo, Volvo was still allowed to keep its brand name.(Randeniya and Roivas, 2004). ...
(Gustafsson and Hukkanen, 2002; Karin and Elisabet, 2006).
The distinction between mergers and acquisitions can viewed from three angles, viz:
The strategic reason or purpose underlying the decision;
Whether it is a friendly or hostile consolidation;
The degree of integration between the firms. (Gustafsson and Hukkanen, 2002)
Generally speaking, the motives for mergers and acquisitions can be broadly divided into two, viz, the financial and non-value maximizing reasons.
The financial reason: This deals with the financial value of the firm as a whole and looks at aspects such as increasing overall performance and creating shareholder value. (Risberg, 2006). This is due to the gains of synergy and overcoming of information asymmetry which might have been existing in the stand alone firms. (Risberg, 2006). Also, the firm's inability to fund certain marginally profitable projects as stand alone institutions is a motivating financial factor behind mergers.
There is also the non-value-maximising marginally based motive behind mergers. This arises mainly due to the manager's desires to increase power, sales or growth. This reason is also known as personal or strategic reasons. (Risberg, 2006).
In a merger, the newly formed firm has a completely new name while in an acquisition, the absorbed firm may retain its name, though management is handled by the acquiring firm. (Randeniya and Roivas, 2004).
Other remote reasons for mergers of acquisitions are psychological motives which is mainly fear. Thus, we find a situation where firms come together or acquire others or due to the fear of being acquired by other larger more efficient firms. (Risberg, 2006). Again, as firms grow old, they become rigid and more