Mergers & Acquisitions - Essay Example

The activity of merger & acquisition is predominantly undertaken by the acquired firms to improve the financial performance. The following factors are considered to improve the financial status of the organisation: The combined company oftenly reduces its fixed costs by extracting extra departments, lowering the costs of the company and to increase the revenue of the organisation, thus increasing the profit margins. A profitable company can buy a company who are at loss so as to make use of the targets loss as their merit by decreasing the tax liability.

In the United States and other countries, rules are that of profitable companies buys those companies who suffer from loss, which limits the tax motive of acquiring a company. Geographical diversification is for earning easily from a company, which in the long term helps in the trends of the stock market of a company to rise, giving investors’ confidence while investing in the company. Vertical integration occurs when the upstream and downstream companies are combined. There are various reasons for vertical integration to occur.

One reason is a relationship of internal with an external problem. A common example one of an external problem is that of double margins. Double margins occur when the upstream and downstream companies are the monopolies in power, every company decreases output from the competition to the monopoly level, which results to two losses. By merging the firm can burden one loss by putting the downstream company’s output in the competition. This result to increase in the profit. A merger that introduces a vertically integrated firm can be profitable.

The Saudi Arabian Oil Company (Saudi Aramco), owned by the Saudi Arabian Government, is a collective, global petroleum initiative, and a world leader in discovering and producing, refining, distribution, and etc. The company operates and reserves of 260 billion bpd oil , the largest than any other company in the world, and is the fourth