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Module 5 SLP - Assignment Example

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In business environment, firms/organizations, or companies cease to exist as separate entities and register as single entity where they both share a common stake. Other companies combine resources to run as a single company. The paper looks into detail the factors that…
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Finance and accounting In business environment, firms/organizations, or companies cease to exist as separate entities and register as single entity where they both share a common stake. Other companies combine resources to run as a single company. The paper looks into detail the factors that contribute to successful mergers and acquisitions, the analysis of investment whether an investment is feasible or not by use of net present value for capital budgeting decisions.
I will pick KONZA Company because it is a small company. This company being small means that the cost of acquiring it are a bit low therefore Hershey Company will incur low costs of acquiring (Gaughan, 2010). The merger of the two companies will lead to the growth of this small company by increasing the economic demand. Hershey Company will benefit from diversification. The risks of investments spread by adding other sectors. Secondly, KONZA Company has a high liquidity. As the liquidity hypothesis stipulates, an increase in liquidity leads to an increase in in merger this is because it makes it possible for Hershey Company to acquire and finance the acquisition by use of resources (McDonald et al., 2006). KONZA Company faces a major threat of mismanagement of firm’s resources by managers to maximize the shareholders wealth. Therefore, if the two companies merge, the resources would effectively managed to maximize on the shareholders wealth as well as profit maximization of the company.
The company again has its assets undervalued as compared to its market value. The merge would see to it that the assets not undervalued when compared to market value.
I would finance the takeover by selling the company shares. This is by public invitation to buy the shares at premium from the shareholders of the company. This will enable the company to raise enough funds for growth and investments.
My second choice would have been Texas Company because the company has a high debt that is attractive and not used. This will is an avenue to merge as low leverage reduces the default risk and increases the debt volume for the joint company (Vachon, 2007). The company investments have a positive net present value (NPV) meaning that it can invest in and gain profits.
The two companies therefore can merge and invest in projects that yield profits, as it is a major goal of the company. This company could not be the first choice because it is a bit stable and does not suffer from liquidity and mismanagement of firms resources.
My third company would be INOVA Company that is a stable company, operating under ongoing concern and is of large size. The company would merge with Hershey to benefit from synergies. The financial mathematics shows that the combination of companies can yield more value than when they operate independently (McClure, 2012). Value (A) + Value (C) = Value (D) which is Value (3) +Value (4) =Values (8). Note that it is more than when evaluated separately as Value (3) + (4) = 7. The two companies would benefit from economies of scales than in turn leads to low cost per unit hence reducing the costs of productions. This would not have been my first nor second choice because the company has no major goal to merge unlike the two companies that really need to improve on their stability and future existence.
In conclusion, for the companies to merge them must meet the following criteria: a company must have positive net present value as that of a negative present value leads to a loss. At least one company should have an increase in liquidity than other. A company should be in a position to mismanage the resources of its firm. One of the companies should have a high-unused debt and finally one firm should have an asset undervaluation.
References
Gaughan, P.A. (2010). Mergers, Acquisitions, and Corporate Restructurings (5th Edition). Wiley, Hoboken, NJ, USA.
McClure, B. (2012). Mergers and acquisitions. Investopedia
McDonald, J., Coulthard, M. and De Lange, P. (2006). Planning for a successful merger or acquisition: lessons from an Australian study
Vachon, D. (2007). Mergers & acquisitions. New York: Riverhead Books. Read More
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