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The causes and effects of mergers and acquisitions

Some of the most common reasons for companies to engage in mergers and acquisitions include: The urge to snap up a company with an attractive portfolio of assets before a rival does so generally results in a feeding frenzy in hot markets.

To create synergies and economies of scale. Companies also merge to take advantage of synergies and economies of scale.

  1. Companies also merge to take advantage of synergies and economies of scale.
  2. There are situations in which the target company may trade below the announced offer price.
  3. This study aims to explore the effect of Mergers and Acquisitions on stock price behavior of banking sector in Pakistan by using event study analysis for the period of 2002—2012. Previous article in issue.
  4. To create synergies and economies of scale. In many cases, integrating the operations of two companies proves to be a much more difficult task in practice than it seemed in theory.

Synergies occur when two companies with similar businesses combine, as they can then consolidate or eliminate duplicate resources like branch and regional offices, manufacturing facilities, research projects, etc. However, a combination of two behemoths would result in a potential monopolyand such a transaction would have to run the gauntlet of intense scrutiny from anti-competition watchdogs and regulatory authorities.

For instance, since until recently the U. Why do mergers and acquisitions fail? In many cases, integrating the operations of two companies proves to be a much more difficult task in practice than it seemed in theory.

This may result in the combined company being unable to reach the desired targets in terms of cost savings from synergies and economies of scale.

A potentially accretive transaction could therefore well turn out to be dilutive. Once it has acquired company B, the best-case scenario that A had anticipated may fail to materialize.

How mergers and acquisitions can affect a company

For instance, a key drug being developed by B may turn out to have unexpectedly severe side-effects, significantly curtailing its market potential. Such overpayment can be a major drag on future financial performance. Think of a staid technology stalwart acquiring a hot social media start-up and you may get the picture. The larger the potential target, the bigger the risk to the acquirer.

  1. This may result in the combined company being unable to reach the desired targets in terms of cost savings from synergies and economies of scale. But as many companies seldom have the cash hoard available to make full payment for a target firm outright, all-cash deals are often financed through debt.
  2. Previous article in issue.
  3. There are situations in which the target company may trade below the announced offer price.

A company may be able to withstand the failure of a small-sized acquisition, but the failure of a huge purchase may severely jeopardize its long-term success. But as many companies seldom have the cash hoard available to make full payment for a target firm outright, all-cash deals are often financed through debt.

Why do mergers and acquisitions fail?

For an acquirer to use its stock as currency for an acquisition, its shares must often be premium-priced to begin with, else making purchases would be needlessly dilutive. There are situations in which the target company may trade below the announced offer price. Perhaps market participants think that the price tag for the purchase is too steep. Or the deal is perceived as not being accretive to EPS earnings per share.

Or perhaps investors believe that the acquirer is taking on too much debt to finance the acquisition.

But such rejection of an unsolicited offer can sometimes backfire, as demonstrated by the famous Yahoo-Microsoft case. On February 1, 2008, Microsoft unveiled a hostile offer for Yahoo Inc. But few corporate gambles have paid off as spectacularly as this one did. Fortis was also nationalized by the Dutch government in 2008 after it was on the brink of bankruptcy. The author owned shares of Yahoo at the time of publication.

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