Does Mergers and Acquisition Create Value - Coursework Example

"Does Mergers and acquisitions create value" for shareholders depends on the causal motivation of the transaction? Perfect market finance theory demonstrates that the risks of both public companies and their stockholders are well diversified since any single company is alleged by a large group of shareholders and every shareholder grips a market portfolio in the economy. Proviso the value of a firm is resolute by its future cash flows; shareholders would be apathetic to receiving cash flows from two separate firms than from a merged firm.

The aim of this dissertation proposal is to explore the implications of Mergers and acquisitions within the firms setting and develop a business case for service development. As part of the Author’s role as a Lead in Financial Management Team/ Advanced Practitioner in training in finance, is responsible for exploring and developing new ways of working to ensure the M&A service remains management focused and in doing so addresses the needs of the managers and stakeholders.

Andrade, G. & Stafford, E. (2004) argued that mergers take part in both contraction and expansionary characters in the industry reformation. If an industry is experienced excessive capacity, mergers often play a contraction role consequential in the consolidation of the industry. On the other hand, if an industry features strong growth opportunities with high profitability, mergers play an expansionary role to elevate new capital. Acquisitions can also create value while they bring X-efficiency to firms. Shleifer, A. & Vishny, R. W. (1989) mentioned that a merger can progress the performance of the target by replacing inefficient management teams. Moreover establishing new technology and know-how to reform corporate assets to meet the prerequisite of new market conditions where managers of acquiring firms are more for the new management teams to perform the required reform.

Myers, S. C., and Majluf, N. S. (1984) take into account that releasing the perfect market assumptions should give an additional rationale for acquisitions. Foremost firms often face financial constraints reasoning information unevenness between the firms and outside investors. The firm’s competence to increase money supply from exterior financial markets is restricted by limiting its ability to invest in a new profitable project. By mergers and acquisitions, slack-rich firms and slack-poor firms find an efficient way to overcome such constraints. Secondly, firms featured with financial distress costs in practice may lose their smooth relationships with customers, investors, suppliers, and stakeholders.