Mergers and Acquisition Essay

Why are there mergers and acquisitions? Mergers and acquisitions take place for a number of reasons, such as refinancing for a better price, amplifying expansion, and submerging risk through diversification. New entities may drag behind after a merger takes place due to the higher cost of matching different and unconnected economic activities. Diversification by business groups may also reduce technical effectiveness. When a merger takes place, a bigger business groups emerges from the two which usually will have more economic and political influence In this paper, we will assess the impact of mergers and acquisitions on firms, including sensible† and dubious reasons for, and benefits and costs of, cash and stock transactions. We will also be sure to examine the financial risks of merging with or acquiring an organization in another country and how those risks could be mitigated. First we will we will assess the impact of mergers and acquisitions on firms while also touching on the benefits and costs of, cash and stock transactions. Who gains from mergers? Typically, the selling firm tends to be impacted favorably by the merge and/or acquisition rather than the firm acquiring the selling firm. Studies demonstrate that most of the benefits from mergers and acquisitions were earned by the selling firm, not the acquiring company. For example, recent research found that holders in the acquiring firm earned an estimated 4% return on their investment with the completed acquisition in contrast to the holders of the target firm whom typically received a 30% return on their investment. So, to imply that mergers and acquisitions do not create benefits would not be correct because the acquiring firms are paying too much money for their acquisitions. There are many sensible and dubious reasons for mergers and acquisitions. Many times the reason for acquisitions is for expansion. Expansion that is not limited by internal resources means there is no reduction of working capital which crates many benefits such as; stocks can be exchanged faster, assets can be purchased more quickly rather than building, better technology can be gained as well as resources and skills, and the tax benefits can sometimes give the new company better operating leverage in their particular market. Smaller firms will usually always gain from merging with larger firms because larger firms have better equipment, resources, and technology. The aforementioned reasons make the merged firms more effective in daily operations, which in turn, make the merged firms more alluring to their current and potential clients. Mergers and acquisitions also help reduce the merged firm’s risk by diffusing their debt and risk among the various companies with the firm. Oftentimes firms will merge in order to gain a larger market share within their perspective fields. For example, AT&T recently merged with Cingular Wireless to become the nation’s largest telephone network and gain the highest market share of customers in telecommunications, thus trying to eliminate competition. Now, we will discuss the financial risks of merging with or acquiring companies in another country. There are many financial risks of merging or acquiring companies in another country. One, oftentimes there are culture clashes between the foreign firm and the home firm. These cultural clashes sometimes lead to losing valuable managers and workers to other firms because they do not desire to live in another country. Two, there may be a conflict of intentions in two different countries which could spell disaster for all firms involved. Other financial risks can include; foreign exchange rates, lawyer, banker, and brokers fees. Firms must know foreign banking and business laws such as the proper filings they must report with the SEC and foreign officials. Many consideration must be taken when considering merging /and or acquiring a foreign firm. In this paper, we assessed the impact of mergers and acquisitions on firms which we found to be more beneficial to the smaller of the merging firms due to their gaining of better equipment and resources. We found that there are indeed many sensible and dubious reasons for, and benefits and costs of, cash and stock transactions which include risk diversification among the merged firms. We examined the financial risks of merging with or acquiring an organization in another country and conclude that mitigation can be done by ensuring that the proper laws and culture differences are overcome before merging. References Brealey, R., Myers, S., Marcus, A. (2004). Fundamentals of Corporate Finance. Chapter 22: Mergers, Acquisitions, and Corporate Control. Retrieved from the internet on April 22, 2007 from https://ecampus.phoenix.edu/content/eBookLibrary/content/eReader.h#Investopedia.com.(2007). Retrieved from the internet on April 22, 2007 from www.investopedia.com/university/mergers/mergers4.asp – 36k –