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Merging Companies - Essay Example

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Merging Companies

It lasted till 1929. 1940 saw the mergers due to tax relief. The next wave came in the wake of booming economy and rising stock prices and lasted as conglomerate merger from 1965 to 1969. The fourth merger wave was of mega merges from 1981 to 1989 due to expanding economy, technical developments and international competitions. The strategic restructuring wave lasted from 1992 to 2000. It was again due to the expanding economy, rising stock prices, technical developments and globalization.
An understanding of the market structure and the consumer behavior along with the motives for merger, the issues involved, valuation matters, the human resource angle and other related subjects will dictate the correct path to mergers and acquisitions.
Both mergers and acquisitions are synonymous, however they have different implications. An acquisition takes place when one company takes over another company and becomes the new owner. The target company does not exist thereafter. The buyer runs the business, whose stocks continue to be traded. In a merger, two firms often of the same size decide to become one single new company; it is a merger of equals. In a merger the stocks of both the companies are surrendered and a new company stock is issued. A purchase deal will also be called a merger. If a purchase is hostile and the target company does not want to be purchased, it becomes an acquisition. The various types of mergers are given below.

Horizontal mergers.
Vertical mergers.
Conglomerate mergers.
Reverse mergers.
Accretive mergers.
Dilutive mergers.

Why Mergers Happen
Mergers take place due to variety of reasons. However it is primarily the growth, which dictates further strategy. A company can grow internally, but it is a slow and ineffective method. A faster method is to merge or acquire. The decisions are taken with the object of maximizing the wealth of the firm's shareholders. The motives for mergers are as given below.

Growth
Synergy
Diversification
Eliminate competition.
Economies of scale.
Acquisition of new technology.
Improved market reach and industry visibility.
Cutting costs
Reducing taxes.
Empire building.
Oligopolies.
Monopoly.


Valuation Matters
A company aiming to take over a target company must determine the worth of the company being acquired. Both sides will have a different prospect of the worth of the company. Target company will value at higher price. Purchasing company will value at lower price. The following seven steps will help in evaluation.

Step 1. Analyze historical performance.
Step 2. Forecast performance.
Step 3. Estimate the cost of capital.
Step 4. Estimate the cost of equity financing.
Step 5. Arbitrage pricing model.
Step 6. Estimating the continuing value.
Step 7. Calculating and interpreting results, calculating and testing results and interpreting
the results with in the decision context.

Some of the methods that can be used to evaluate the company are as given below.

Comparative Ratio.
Price/Earning Ratio (P/E Ratio).
Enterprise Value to Sales ...Show more

Summary

Mergers and acquisitions are one of the popular topics in business today, since they characterize the new economy, pressure of global competition, development of technology and disappearance of country boundaries. Companies are merging not only to cut costs but also to gain access to new technology, new markets and new skills in order to survive in globally competitive environment…
Author : lpacocha
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