Merger define as “where two companies have agreed to integrated operations and as emerged to a new company together”.
A company A and company B merger and create as a new entity of company C. in the same time company A and B also Exiting their businesses.
The acquisition is where to define as “this is where a company[X] purchases another company[Y] and be identical as same as before[X]”.
When company X Purchases the company Y and be company X. after the Acquisition there is no company Y to be Exiting.
Reasons for Acquisitions and merger
- The synergy effect
Combination is creating greater value than individual.
- Economies of scale
The combination will lead to reduction of cost through the rationalization of functions.
- To increase market share
Combination leads to lager customer base, and reduce of competition due to synergic effects.
- Tax benefits
The firm can claims tax reliefs for a group. [When the acquiring company is in loss position its help the acquirer to claim as tax benefits for short time]
- To take advantages of other firm
Its help to improve the technical, management expertise is combining to build a more efficient and competitive advantage.
- Utilization of surplus cash
Its help the merger or acquisition to use the surplus cash to the investment opportunity.
Problems with merger and Acquisition
- Lack of goal congruence
The merged organizations might not have a clear direction with regards to their strategies.
- Over Valuation or Under Valuation of new company
Some cases paying over value and acquire the company may not getting their expected value for their investment.
- Purchase of cheap company
Buying a company when it’s available to cheaper rate, but sometimes the company brought may not related to the company’s operations.
- Purchase made diversified risks
To been diversified in to too many businesses may lead lost the brand name or the total value of the company.
- Improper management of post acquisition or post merger,
After the merger or acquisition the companies may feel it’s not run properly or as their expectations.
Financial options of Acquisition or merger
Payment through cash
The payment through the cash is not practically follows because of shortage of cash [liquidity]. But only benefit of payment method is to getting maximum benefits of acquisition or merger.
A Share exchange
This is where the exchanging the acquirer company shares instead of acquire company shares. This approach is dealing without any cash transaction. But while the time existing shareholders of acquire company enjoy the ownership undisrupted.
In practical situation of the merger and acquisition are fail of 95%. Because the mergers or acquisitions are may not according with the organizational mission and vision statements. When the understandability and sharing the information’s within the merger or acquired companies not efficient the chance of failure is high.
In practical the financing options are not purely cash or shares. It’s happen with mixing percentages such as 50:50, 40:60 or 60:40.
Therefore the merger and acquisition companies should understand “their purpose of the business and what business are they in?”