Company Mergers and Acquisitions - Research Paper Example

According to Jensen & Ruback (1983), mergers and acquisitions benefit companies as it provides synergy, tax saving, shareholder wealth maximization, and signaling. Draper & Paudyal (2008) state mergers and acquisitions have been beneficial to economies as the production achieves higher efficiency and has improved output. The economies achieved the ability to have improved bargaining power with the supplier and customer due to mergers and acquisitions. Mergers provide the companies to get tax savings.

Mergers and Acquisitions

According to Elebourne & Rambarran (2004), the process of merger refers to the process where one company is merged with another, and acquisition refers to the process when the company acquires another company. The merger process can be horizontal, vertical, or conglomerate. As per Stigler (1950), horizontal mergers are achieved by merging the products and services. A horizontal merger is used in the way that the share of the company increases in the market and it was common during the onset of World War I when the stock market crashed in 1903-1904. Two firms are merged in a vertical manner when they are merged through the value chain. Sudarsanam (2003) defines a conglomerate merger as a common M & A method where the companies from different industries come together. All the three types of merger systems require the companies to merge in three ways:

1. The revenues of the companies should be merged to achieve a high revenue-generating company.
2. The expenses of the two companies should merge to achieve a low expense operation.
3. The cost of capital of the two companies should be combined which will reduce the overall cost of capital.

The cost saving is archived through the removal of repetitive processes in the two companies for which the merger is required at various levels.

Integration can happen in the full functional areas of the companies; for example - human resources, accounting, information technology, marketing, finance, and operations. The new company will be working on the best practices of the two companies and certain key factors will be merged together to have a modern age merger and acquisition. Minimal merge will be adopted by personnel and it will involve reducing redundancies.

The best ways of mergers are when the two companies come together to exploit the best of others. This method is called positioning and it happens when the two companies position by taking advantage of the trends in the market. Gap filing refers to the condition when the two companies have major weaknesses, which are reduced due to the merger. The company having strength becomes an advantage for the other company and both the companies are benefited.

Mergers can happen for business reasons; for example in bargain purchases where the company can be acquired at a low cost and this helps both the companies. Mergers can also provide the method of diversification which is needed for improving the earnings and to achieve higher opportunities and growth in business. The companies can get further growth through mergers and there are certain mergers that can provide short-term growth to the company.

The acquisition of two companies should be optimistic and bad decisions should be eliminated from the processes of merger and acquisition.