The Reasons for Mergers and Acquisitions - Essay Example

?Part A. Identify and explain the objectives, and general principles, of the panel of takeovers and mergers. The panel on Takeovers and Mergers wasincorporated in London in the year 1968. It acts as an independent body with primary objective towards issuing and administering the code of the city on Takeovers as well as Mergers. The panel acts as a supervising and regulating body for takeovers as well as other matters in the application of the code. The central objective of the Panel on Takeovers and Mergers remained to ensure that there is a fair and equal treatment for shareholders of companies in the takeover bids. The broad membership of the panel includes people from investor community, law practitioners in the city and people from business houses. The panel became a statuary body in May-06, thereby giving it the power to enforce its rules and lows in compliance of the code. The code of the panel is also included in the part 28 of the Companies Act 2006. It is the overall responsibility of the panel towards policy making, financing and administrating functions or the Panel and its code. The two committees of Panel include the Hearing Committee and the Code Committee. It also has a Panel Executive that carries out the daily work of the Panel and is creditworthy of general administration. The Panel operates with 6 general principles, 38 rules and 4 fundamental objectives which include equal and fair treatment for shareholders, availability of information to the shareholders in proper and timely manner, restoring fair markets and preventing frustration action against any of them. B. Identify and examine economic reasons for acquisitions and mergers and discuss why the expected economic benefits may not be achieved? The primary reason for acquisitions and mergers by a firm is its desire and effort to increase its market power. For increase the size and market capitalization of the firm, company’s go for horizontal, vertical and conglomerate mergers. Other economic reasons for acquisitions and mergers include overcoming of market barriers, increased speed to the market by increasing market capitalization and gaining access to new markets, overcoming the high risk and high costs of new product development, diversification into other activities/businesses, and reshaping the firm’s competitive scope. Some companies go for mergers and acquisitions to restructure their cost of capital by increasing/diluting equity and through leverage buyouts. More often cross border acquisitions offer the company with cheap access to resources like labour and raw materials, modern technology and sometimes benefits from legality. Sometimes the expected benefits out of a merger and acquisition may not be achieved by the firms. Many firms tend to increase their cost of capital post merger rather than decreasing it. Moreover, in case of leverage buyouts many companies fall in liquidity and solvency risks by increasing their debt equity ratio more than anticipated. For a successful merger and acquisition a firm needs to understand the culture of the organization it is aiming to acquire. The firm many not receive a good support from the employees and stakeholders of the organization acquired which reduces the economic benefits expected out of the acquisition. Another primary concern in the acquisitions is the valuation of company to be acquired. In case of high valuations where a company pays high price in excess of market value for acquiring other company, economic benefits tend to dry down over a period of time. Part 2 Identify the long term funding options available for unquoted small and medium business enterprises, and discuss the advantages and disadvantages of these funding options. Small and medium businesses (SME’s) include the companies that are not listed in stock exchange and wherein business is owned by a limited number of people. Moreover, there includes family partnerships in which individuals start-off with the purpose of achieving self employment. SME’s face problems in getting financing primarily due to unavailability of their credit history and successful track records where banks and other investors could rely on. This is because in many such businesses, compliance related to preparation of financial statements is not followed. These businesses carry greater credit risks as the failure rate is very high which further refrain from easily investing in them. Though these problems exist, there are number of sources from which SME’s can source their funds. These are: Funds from existing shareholders/partners: In the most SME’s sole proprietor or partners are the owners. So funding through equity would mean that the proprietor or partners would have to make contributions for funding the businesses. Though this is a safe way for raising the funds, but this will lead to high cost of capital as the cost of equity is higher than cost of debt under normal circumstances. The funds could have been invested elsewhere where they could have generated higher returns. The advantage of shareholders funds will be that, it will reduce actual paying liability of proprietors and partners if the business fails and liquidates. Banks: Though banks refrain from investing in such businesses, still this remains a major source of finance for SME’s. Banks sometimes offer schemes and concessional interest rates in case of well-set businesses and sometime charge a higher interest rate in case a major risk in involved. The funding through debt from banks gives an option of obtaining an achievable cost of capital through mix of debt and equity. The major disadvantage of funding through banks is that the business will have to comply with debt covenants failing which it might have to repay the entire debt in a short notice period. Venture Capital/Private Equity: This is another popular way of financial followed by SME’s and financing through private equity is catching trends in the recent past. Venture capital funds invest in the companies with a strong business models and high anticipated growth forecasts. The disadvantage of funding through PE is that these funds demand a high rate on return on their investment. Hire purchase and leasing: This is another way through which firms obtain funding thereby not owning the assets and paying partly for them. This is done by hire and lease purchase companies. The disadvantage of these in that ownership is transferred to the company only after the end of term. Merchant Banks/MB’s: Many merchant banks offer medium to long term loans to SME’s. The structuring of Merchant Bankers is same as other banks with the only factor being that they can also invest in risky businesses. Some of the other secondary sources where small and medium businesses can receive funding are through trade finance, by raising preferential capital and by business angel financing. Part 3 A. Discuss the arguments for and against the director’s proposal. The company has the option of investing in an asset which will pay certain rate of return and on the same time it has to pay dividend to its shareholders for the same amount. While the company has option of forgoing the debt by using the amount it intended to pay dividends for investing in the assets, by not paying dividends. Though the management and dividend theories form the base of dividend payout decisions, practical factors like companies internal and external environment also has an important role to play in deciding the appropriate dividend payout. Dividend forms a part of return for the shareholders which also increase the stock price of the company. Dividend payment is necessary for keeping shareholders happy and motivated. Even according to the Gordon model, the optimal payout ratio for a growth firm (r >k) is nil, the optimal payout ratio for a normal firm (r=k) is irrelevant and the optimal payout ratio for a declining firm (r Read More