The first two are discussed in detail in the next section.
Absorption involves merging the acquired company completely with the acquiring company. This results in the highest synergy; it enhances synergies owing to economies of scale and bargaining power. The firms can combine several supporting functions like administration, accounting, information technology, etc. to obtain reduction in overhead costs. Its large size would enable it to negotiate better deals with its customers and suppliers. If the two firms are vertically integrated, the transactions costs could be reduced and the upstream firm could avoid or reduce the sales and distribution costs. However, having a captive downstream customer could sometimes introduce inefficiencies into the system. If the acquired company is a loss making firm, and the acquiring company is a profit making firm, the acquisition could also result in tax benefits. Many countries' tax laws allow adjustment of accumulated losses from the profits of the acquiring company thus proving valuable tax cover. Amalgamation of two firms with different businesses allows diversification of risk. This, however, does not offer a strong argument as shareholders could get the same effect by simply diversifying their portfolio. ...Show more