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Mergers and takeovers Free essay! Download now

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Mergers and takeovers

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Mergers and takeovers have been in the system for a very long time but their rate has been on the increase in recent time resulting in numerous regulatory changes. In today’s world, mergers are taking place even in unrelated businesses and organizations such as the pharmaceutical, banking, financial and communication industries. These organizations normally merge by outright purchase using cash, stocks or a combination or through pooling of resources or merger of equals (Arnold, 1998). The compelling factor behind this is said to be both regulatory and business environmental (Spiegal and Gert, 1996).


1.2 Statement of the problem

The increasing trend in mergers and takeovers has impacted on the bidding price. There has been a record of huge premium prices for M&A’s and that raises the question as to why such bidding premiums? The argument has mainly been based on its synestical effects as (Arnold, 1998) puts it. However many writers and analysts have questioned whether there are other reasons for the overestimation in potential synergies. This essay therefore seeks to analyze the theories of mergers and takeovers or acquisitions (M&A) and relate it to some events and how those events were perceived by investors and commentators.

1.3 Literature Review

Mergers and Takovers as mentioned earlier have been increasing significantly and the considered value has been a controversial issue. Whilst some researches have argued that M&A creates value through economies of scale (Baumol 1982; Ross 1980) others have argued that these transactions are forged by managers who are either self-serving (Fower and Schmidt 1990) or overconfident (Arnold, 1998; Hayward and Hambrick 1997) and it often results in loss of vale for the acquirers. Despite this controversy, M&A continues to be an important way by which wealth can be maximised. In order to account for the view s of investors and commentators the presentation that follows will be in the following stages: (a) definition of M&A and the types; (b) motives behind mergers and (c) theories of M&A and related events.

1.4 Definitions of mergers and takeovers.

Glen (1998) defines merger as the combining of two business entities under common ownership. Hill and Grant (2007) defines acquisition as when a company uses it capital resources such stock, debt, or cash to purchase another company but also emphasized that cash is the most common method of payment except that at the peak of the cycles shares are the most popular form of consideration. Lubatkin and Shrieves (1986, p.497) had these to say on mergers and acquisitions they "are used interchangeably to mean any transition that forms one economic unit from two or more previous ones" They also described a merger as an agreement between equals to pool their operations and create a new entity. Undoubtedly there have been a continues increases in mergers and takeovers over the years and in the most recent wave which peaked in 2000, US firms spent about 1.6 trillion on 11,000 mergers and acquisitions up from $300 billion in 1991 (Hill and Grant, 2007). UK has also had a merger wave in which it peaked in early 1970s late 80s and 90s. In 2000 for example it recorded 106,916 million M&A (Financial Statistics

UK, 2000). There are basically three types of mergers and they will be discussed in the following paragraphs.
1.5 Types of Mergers
In general mergers have been classified into three categories namely: horizontal, vertical, or conglomerate.
 Horizontal merger takes place between two firms in the same line of business. In a horizontal merger two companies which are engaged in same line or similar lines of activity are combined. Recent examples include the merger of Royal Bank of Scotland and Nat West, Morrison and Safeway, Glaxo Wellcome with Smithkline Beecham, also BP with Amoco Arco and Boeing with McDonald Douglas etc.
 Vertical merger occurs when firms from different stages of production amalgamate with the belief that some amount of competition is necessary since it ensures customer value (Arnold, 1998). There are downstream or backward vertical merger and upstream or forward vertical merge. A vertical merger entails expanding forward or backward in the chain of distribution, toward the source of raw materials or toward the ultimate consumer. For example, an auto parts manufacturer might purchase a retail auto parts store.
 Conglomerate merger is formed through the combination of unrelated businesses or can be described as the combining of two firms which operates in unrelated business areas. Example, in 1996 Tomkins bought The gates Corporation (a manufacturer of power transmission belts, wellington boots and carpet underlay) for US$ 1,160m and added it to Hovis Bread and the others (Arnold, 1998)

1.6 Methods of Financing, their Advantages and Disadvantages

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