Mergers, acquisitions and strategic alliance - Essay Example

However, industry and firm specific factors finally govern the reason and the purpose of the mergers and acquisitions and alliances taking place in the global market place. While much has been studied on the reasons of success and failures of M&A, the strategic reasons behind the mergers, acquisitions and alliances are being looked at in this paper. This paper will not focus on the post-merger success or failure but concentrate on the strategic reasons that prompt firms to enter into M&A and alliances.

Mergers and acquisitions (M&A) has been described as ‘among the most important strategic decisions companies ever make’ (cited by Duncan & Mtar, 2006). Acquisitions can be based on strategic decisions like market expansion, product diversification or domain expansion. Thus many use it as a mode of entry into a foreign market where it is difficult to start a wholly owned venture. Hence the decision of M&A depends upon the resource-based view or the transaction cost analysis. Agency theory has also been explained as an M&A strategy.

The agency theory contends that manager-controlled industrial firms pursue conglomerate diversification. Managers benefit from the increase in firm size and based on the belief that large firms will seldom fail and the executive compensation is linked to the firm size (Lin, Hung & Li, 2006). The resource-based view suggests that while firms have tangible and intangible resources, the resources do not create value unless they interact with other resources. If complimentary resources are not under the ownership control, the firms have difficulty in realizing the full potential of the resources.

This becomes an incentive to merge with other firms that have complementary resources. M&A strategy can provide external sources of innovative competencies to protect the core business. As the same time,