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Mergers And Acquisitions Fin 325

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Mergers and Acquisitions

Mergers and acquisitions are a big part of the finance world and occur when companies must expand their production and operations. A merger is defined as "combination of two firms into one, with the acquirer assuming assets and liabilities of the target firm" (Brealey, Myers & Marcus, 2003). An acquisition is "takeover of a firm by purchase of that firm's common stock or asset" (Brealey, Myers & Marcus, 2003). Mergers and acquisition tend to happen in order to bring more efficiency into an organization. This generally helps to reduce costs and lower prices fro the consumers. In order for the implementation of the deal to be effective a good amount of research must be done to ensure success. Solid decisions must be made in order for one concrete management team to emerge in leading the new organization.

It is very important to understand the term's acquisition and mergers because they are slightly different. An acquisition is when a target company is purchased and it no longer exists and the company purchasing the target company continues to sell its stocks. Merging is when two companies of about the same size decide to merge as one and surrender both companies stock and issue new stock (Investopedia, 2007). The point of merging or acquiring is to make two companies more valuable than two separate companies. Merging or acquiring another company can be extremely beneficial as well as create a vast amount of inevitable surprises. Companies must weigh both the pros and the cons before actually acquiring or merging with another company. By merging it creates the potential for a company to become stronger and more diverse within the market(s). Some of the potential benefits of merging or acquiring with another company are the wider range of visions, with regards to creativity, the growth of shareholders and resources, becoming more valuable than competitors, and the opportunity to leverage profit (Investopedia, 2007). The advantages bigger companies have when merging with smaller companies who can not survive alone can create a more competitive, cost-effective company. When an acquisition or merge takes place the newly formed company has adopted technology and software that can help contain costs (Investopedia, 2007). The company has allowed for future growth across markets and industries, allowing them to become more versatile to shareholders.

Some potential cons in merger and acquisition companies can be the stresses of turnover. Cultural differences can increase the tension and lack of interest between the organizations. Qualities such as, poor leadership, bad planning and unrealistic expectations can cause a failure in merging (Investopedia, 2007). The time and money it takes to merge or acquire another company can, alone, make it a waste of time for a company. An acquiring company must spend a lot of time before ever buying or merging with a target company. Some of the biggest problems companies may face when merging or acquiring are to lay off employees to help mange cost containment. When two companies are merged together employers are faced with down sizing and getting rid of positions that are duplicated or over staffed. Although this will help the company, it can cause low moral and high turnover.

For an acquisition or merge to take place, identifying the company's value is the most important step in determining the price cut. There are several factors that can affect a company's value and all must be considered. Understanding the impact the purchased company will have is something that must be carefully looked at. A successful merge or acquisition is one that increases company value. Some of the factors used to determine a company's value are their usual tax, cash flow, legal issues, budgeting reports, operational success, fixed assets and debts, economic situation, and cost of capital (Investopedia, 2007). These factors can affect the price a company will pay to merge or acquire with another company. A company's value can vary significantly depending on what the reason for merging is.

By analyzing the financial results, one can determine whether or not the anticipated benefits were realized. In doing so, one is able to determine if the market share increased, the stock price increased, and the cost or expenses were reduced.

A person can determine if the merger and acquisition will provide the anticipated benefits to a company by looking at the financial results. The sales of a company's products of the business should increase due to the increase source of products for the acquired company. If the sales and profits for the said company increases as a result of additional products and reduction of expenses, then the stock price of the company will gradually increase from the market price after the deal is completed, and as investors realized that the purchase, if realized, was not likely going to boost the company's earnings much in the near term.

A company may also find it valuable to merge because it will increase shareholder wealth and a company's worth. There is an important rapport between merger activity and circumstances on the stock exchange. When a company merges and the deal is announced, the share price of the objective, along with the share price of the acquiring company will rise. This was evident with the announcement by Johnson Controls to purchase York International in late 2005, both companies stock rose overnight (Shliefer and Vishney, 2003). This type of merger can provide numerous benefits, including increased profits in a larger market share, and a reduction of production costs.

Mergers may also prove to be beneficial because of the improved operating efficiency in a company, increased knowledge of technology, protection against takeovers, and the ability to acquire more funding. Quality can also be improved along with the short-term increase of profitability. An example of this benefit occurred between the oil companies Chevron and Texaco, the merger permitted a decrease in costs related to production and refinery (The Associated Press, 2007).

A merger or acquisition may impact an organizations capital structure in many ways. It will immediately impact a company's change in ownership, in principles, and in practice. There are various reasons, fiscal forces and institutional factors that can influence business decisions to engage in mergers or acquisitions. An organization is impacted with its finances and assets. This can be a positive or negative impact if not researched properly and thoroughly. There are three ways that an organization can be acquired: by a merge of all the assets and liabilities from the intended company into the acquiring company, purchase of stock of the acquired company, the purchase of individual



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