Motives of Mergers
Merger Strategy-Growth, Synergy, Operating Synergy, Financial Synergy, Diversification, Other Economic Motives, Hubris Hypothesis of Takeovers, Other Motives, Tax Motives
Growth – This is one of the most common motives for mergers. It may be cheaper and less risky for the acquiring company to merge with another provider in a similar line of business than to expand operations internally. It is also much faster to grow by acquisition than internally.
Sometimes an organization may have a window of opportunity that will be closing fast and the only way the organization can take advantage of the window of opportunity is by acquiring a company with competencies and resources necessary and, most likely, complementarities to the acquiring company to take advantage of the opportunity. Additional benefits of growth motivated mergers are that a competitor or potentially future competitor is eliminated.
Synergistic benefits – Synergy occurs when the whole is greater than sum of its parts. For example, in terms of math it could be represented as “1+1=3” or as “2+2=5”. Within the context of mergers, synergy means the performance of firms after a merger (in certain areas and overall) will be better than the sum of their performances before the merger. For example, a larger merged company may be able to order larger quantities from suppliers and obtain greater discounts due to the size of the order.
In the context of mergers, there can be two types of synergy. The first type of synergy results in economies of scale, which refers to decreased costs. Another type of synergy results in increased revenues such as cross-selling.
Synergy allows the combined firm to have a positive net Acquisition Value (NAV)
NAV = VAB – (VA + VB) – P – E
WHERE,
Vab = the combined value of the two firms
VB = market value of the shares of B
VA = A’s measure of its own value
P = premium paid for B
E = expenses of the acquisition process
Financial Synergy
Financial synergy gained
Growth – This is one of the most common motives for mergers. It may be cheaper and less risky for the acquiring company to merge with another provider in a similar line of business than to expand operations internally. It is also much faster to grow by acquisition than internally.
Sometimes an organization may have a window of opportunity that will be closing fast and the only way the organization can take advantage of the window of opportunity is by acquiring a company with competencies and resources necessary and, most likely, complementarities to the acquiring company to take advantage of the opportunity. Additional benefits of growth motivated mergers are that a competitor or potentially future competitor is eliminated.
Synergistic benefits – Synergy occurs when the whole is greater than sum of its parts. For example, in terms of math it could be represented as “1+1=3” or as “2+2=5”. Within the context of mergers, synergy means the performance of firms after a merger (in certain areas and overall) will be better than the sum of their performances before the merger. For example, a larger merged company may be able to order larger quantities from suppliers and obtain greater discounts due to the size of the order.
In the context of mergers, there can be two types of synergy. The first type of synergy results in economies of scale, which refers to decreased costs. Another type of synergy results in increased revenues such as cross-selling.
Synergy allows the combined firm to have a positive net Acquisition Value (NAV)
NAV = VAB – (VA + VB) – P – E
WHERE,
Vab = the combined value of the two firms
VB = market value of the shares of B
VA = A’s measure of its own value
P = premium paid for B
E = expenses of the acquisition process
Financial Synergy
Financial synergy gained