Benefits Behind Mergers And Acquisitions Economics Essay

Benefits Behind Mergers And Acquisitions Economics EssayThis assignment is going to include a discussion of the theoretical benefits behind mergers and learnednesss, a review of the empirical demonstrate and as well two real world examples, unmatched where value was created and one where it was destroyed.TheoryThe benefits of mergers and acquisitions stem from a c erstpt known as synergism which can be illustrated using a formula, PVab =PVa + PVb + take a shits (Arnold, 2008 866) also delineate as, 2+2=5. The theory behind this is that a combined unit of measurement would be greater in value than the sum of its parts, basically centre two firmlys unitedly are worth more than the value of the firms if they were apart. whizz benefit of this is the amplification in securities pains power which is a firms aptitude to exercise a degree of control over the price of a product. This can be achieved in more than one way only for example if a firm co-ordinated with another an d then represent itself in a monopoly sic it would kick in the ability to push up the price of its products because consumers would have fewer alternative suppliers. another(prenominal) advantage is the increase in economies of scale achievable. In most cases the larger the size of a firm the lower the cost per unit of output because of cost advantages macrocosm better exploited. For example if two firms in the same industry merged they could nominate securities industrying economies of scale through joint advertisement possibly and also administration economies by sharing administrative activities and accounting. There would also be financial economies as funds borrowed on the capital marketplace would be provided at lower costs and with more favourable place of borrowing. Internalisation of transactions is also a benefit if two firms at various stages of the production chain merged, a greater efficiency of co-ordination of the different levels whitethorn be the outcome. This could be achieved because of reductions in costs such as communication, monitoring, contract enforcement and bargaining. Usually entering in to a new market or industry takes days of effort and during the early period losses whitethorn even be incurred, however through the process of mergers and acquisitions this once daunting task can become much easier. By getting an existing firm that already posses the required skills and market strength it eliminates the look at for them to be generated internally. There are also assess advantages of acquisitions in near countries because losses of subsidiaries can be used to offset present assessable profits of the parent company meaning a lower tax bill. Therefore acquiring firms which have accumulated tax losses whitethorn be estimable however this benefit is not present in the UK due to much stricter rules being in place. Another benefit of mergers and acquisitions would be risk diversification. A firm may be viewed as litt le volatile if its cash flows come from a wider range of sources meaning shareholders gain from a reduction in risk exactly with no diminution in return. The greater stability of earnings may also be appealing to lenders which could result in lower interest rates.Mergers and acquisitions are normally used as an instrument to create shareholder value (Sudarsanam 2003), this is the main(prenominal) objective however there also seem to be managerial motives present. When a firm acquires another is consequently becomes a larger opening move meaning managers have more responsibility and so may be justified to receive a much larger salary. Some may retrieve more successful and important because of this and this sense of achievement may become a personal driver for managers to carry out mergers and acquisitions. Another reason could be survival, the management team may begin to feel the best way to avoid being taken over or dominated is to grow themselves, especially if regular merger s are occurring in the industry the firm operates in. This could lead to firms not merging for just the benefit of shareholders but also to try and assure the survival of the management team.A distrust one may wish to ask is how the value of the benefits of mergers and acquisitions can be measured? The benefits of acquisitions are usually not easy or straight to put in to numerical form. For example the application of superior managerial skills or entry in to a new market cannot accurately be measured even things such as competitive position and reputation with customers, the list goes on. These items will not be found on balance sheets so and so the true value of a firm may not be presented however one indicator which could mayhap value the benefit may be the firms share price.Empirical readAlthough the theory behind mergers and acquisitions suggest that they create value for both the shareholders of the offerer and offeree companies the empirical evidence doesnt always seem to support this. (Meeks 1977) conducted a statistical test to represent the effects of mergers, he in any casek profits from the merged companies by and by(prenominal) the merger and compared them with the weighted average of the participants profits had they not merged base on their earnings prior to the merger. His conclusion was that merged profits were slight than those that the participants would have received had they not joined forces. However some have questioned Meeks research There are weaknesses in Meekss work (Ulen, 1980 234). This being tell Alan Gregorys review of the long black market performance of UK acquiring firms reached a alike conclusion the long-run shareholder wealth effects of recent acquisitions in the UK have been, on average, strongly negative (Gregory, 1997 984). However a report card to evaluate takeovers in the UK from 1955-1985 suggest that both offeror and offeree company shareholders gain from mergers we harness that mergers have, on averag e, been value-creating for shareholders as measured by equity market prices around the merger announcement date. Shareholders of targets gain, and bidder shareholders gain or do not lose. (Franks and Harris, 1989 247). Empirical evidence of the overall wealth gains of target shareholders from stock mergers were reviewed by (Loughran and Vijh 1997). They found that target shareholders that sold out soon after the acquisition date gain from all acquisitions however those who held on to the acquirers stock find their gains diminish over time. Studies on post merger performance of acquiring firms seem to generally forecast negative results as can be seen here We find that stockholders of the acquiring firms suffer a statistically significant wealth loss of about 10% over the five years following the merger completion. (Agrawal, Jaffe Mandelker 1992 1618) and also here We find that these takeovers have a positive but not always significant impact on profitability, and a negative impact on short and long run returns (Cosh, guest and Hughes 2005 489).Real world examplesIn 2006 Disney bought Pixar for $7.4billion. The two companies had been working together prior to the merger but with two different sets of shareholders there were barriers that existed, however with the merger the two companies became able to collaborate freely and with ease. Pixar has doubled its annual charter output something that would have been unthinkable before the merger and with sound advice from Disney has improved vastly in fields such as advertising and merchandising. Pixarmovies tend to perform better than animated movies developed by Disney itself (Garrahan, 2010 16), swindle Story 3 is on course to become the biggest grossing animated film ever released by Walt Disney after generating $630.2m in its first month in cinemas (Garrahan, 2010 16).In 1994 BMW acquired Rover for 800 million. Only six years later and after millions of pounds worth of investment they sold the company, The b rand had declined too far to be rescued. The German group ploughed XEU 4bn into its English patient before getting out in 2000. (The financial times, 2005) The company was sold to the phoenix tetrad for 10 Whobought RoverfromBMW for pounds sterling 10 (Eaglesham Peel, 2008 5). This was a huge disaster, some doomed it on communication WhenBMW boughttheRoverbusiness, communication with the German managers was even worsened (exacerbated by political infighting on the German side). Failure was the inevitable and venomous result. (Lester, 2007 8) and others on the fact that Rover may have been a disjointed cause to begin with Even the mightyBMW, whichbought Roverin 1994, had to look at in the end that the brand had declined too far or at least to give it a future would cost far too much money. (The financial times, 2005)ConclusionTo conclude having researched for example Meeks and Gregorys financial epitome of the empirical evidence and reviewing the real world examples discussed above one may argue that mergers and acquisitions on average may not be beneficial to the shareholders of the acquiring firms. Management tends to underestimate the level of organisation required and therefore take off more than they can chew. However as seen in the Disney-Pixar case mergers can benefit both the offeror and offeree at times.Wordcount 1492