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the motives behind Mergers and Acquisitions

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Based on the academic literature, critically explain the motives behind Mergers and

Acquisitions and why Mergers & Acquisitions do not always have a successful outcome.

 

A merger is an agreement between two existing similar-sized companies to combine and

make one legal company. Both companies bring together their assets, human resource and they

are equal partners in the running of the day to day activities of the new entity. The merger is

initiated by the board of directors with approval from their majority shareholders.

 

Mergers are categorized into five main categories.

 

– Horizontal merger. This is a merger of two firms who are direct competitors operating in the

same jurisdiction, with similar goods and services.

 

– Vertical merger. A merger of two or more companies in the same supply chain.

 

– Congromelete merger. A Merger of companies that produce different products and services.

 

– Market extension merger. A merger of two companies that deals with production of similar

goods and services but operating in different markets and locations.

 

– Product extension merger. Merging of firms that produce goods and services that complement

each other in the market.

 

An acquisition is a takeover of one company by another company. Normally a larger

company takes over a smaller company and the acquired firm ceases to exist. A new company, in

this case, does not emerge from an acquisition.

 

They are different motives that lead to mergers and acquisitions of companies. These motives

include:

 

Increase market share, power, and control. A merger increases market share, control, and

power for the merged firm. This led to an increase in profits and service delivery efficiency due

to economies of scale. Market power enables a firm to have an advantage and bargaining power

for both suppliers and labor.

 

Diversification. Mergers and acquisitions enable a firm to enjoy risk reduction in production and

return to maximize profit by investing in diverse areas of operations. Diversification into new

markets, services delivery, and new product production also led companies to merge to achieve

the desired target.

 

Acquisition of assets. To acquire more assets a merger and acquisition is a way out. This move

may be inspired by a desire to gain access to assets that are unique or assets that may take a long

time to develop internally by a firm.

 

Increase financial capacity. Small firms merge to make one big firm to increase their financial

capacity. With increased financial ability it makes it ease production, gain access to loans from

banks, and acquire more assets.

 

Value creation. Businesses merge in order to increase more wealth for the shareholders. This is

based on the fact that there will be increased production and caters to a larger market.

 

Some situations make mergers and acquisitions of firms and companies fail to live up to

expectations, production and business profitability. These situations include:

 

Mis-valuation. The number, assets, human resources may look good on paper and fail to execute

on the ground. After the merger, the assets fail to generate revenue.

 

Poor integration process. Post Merger execution may lead to the disintegration of factors of

production. This may affect key labor force, different units, key projects, and policies.

 

External factors. External factors such as Inflation, economic downfall, or natural calamities

may affect the final performance of the merger. External factors are not fully controllable and the

business can only make decisions to avoid further losses.

 

Negotiation error. One firm might overpay as the acquisition fees leading to financial losses

and failures in production in the future.

 

Limited Business owner involvement. Minimal supervision and follow up from the business

owners right from business merger. Owner should take up a supervision role to ensure

everything runs smoothly and advisors should take on an assistance role.

 

Most mergers and acquisition firms and deals failure are a result of the above factors among

others. Business Owners, the board of directors, business owners, and advisors should be vigilant

about possible pitfalls and failures of a merger.

  Remember! This is just a sample.

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