Mergers & Acquisitions Essay Example | Topics and Well Written Essays - 2000 words - 1

Mergers & Acquisitions - Essay Example Merger usually takes place when two companies join together as one company and both companies cease to exist as separate entities and a new entity is formed as a result. The example of DaimlerChrysler is most suitable here because this new business concern was formed by the merger of Daimler-Benz and Chrysler. It is also believed that mergers take place among or between equals. Practically however, the two or more companies are not always on equal grounds. Some times the companies undergoing a deal call the association as merger while in actuality it is an acquisition. The deal is a merger or an acquisition also depends on the circumstances. Friendly or hostile nature of the deal also becomes important. Irrespective of its nature the business deals of this kind greatly affect the board of directors, employees and shareholders. Apart from the distinction of mergers there also exist different forms of mergers. For example horizontal merger is one when companies sharing sharethe same product lines and markets join hands. When supplier and company merge it is termed vertical merger. Conglomeration happens when companies having different businesses come together. There re different reason given for the mergers and acquisition among companies but three hypotheses are very well known practically as well as theoretically. The synergy hypothesis, hubris hypothesis and managerialism hypothesis have been studied and different observations made regarding them. "The synergy hypothesis proposes that acquisitions take place when the value of the combined firm is greater than the sum of the values of the individual firms. Managers are assumed to be motivated by shareholders' interests to create economic value, and to have the ability to judge accurately the value potential of the combined firm. Other explanations do not assume value-maximizing behavior on the part of managers. The managerialism hypothesis suggests that managers embark on acquisitions to maximize their own utility at the expense of the shareholders of the firm. The hubris hypothesis suggests that bidding firm managers make mistakes in evaluating target firms, but undertake acquisitions presuming that their valuations are correct" (Pettit, Seth & Song, 2000). Synergy Hypothesis Two companies joined together may create the effect of three not two is the reason why most companies choose the path of mergers & acquisitions. The synergy is considered one of the main reasons. By mergers and acquisitions the companies seek to create more value for the shareholders. Synergy gets many benefits for the engaging companies. Most important benefits come in the form of revenue augmentation and cost savings. Due to staff reductions the company gets to save a lot. Especially, when one of the two CEO leaves the company with other employees they also forgo their expensive compensation packages causing huge reduction in costs. Economies of scales can be achieved by two companies together than separately. Relationship with suppliers also improves when stronger and larger groups negotiate. When placing orders for the company management can have a stronger position and as result could get better bargain. Some companies achieve an edge in a particular area by acquiring or merging another company. For example a small company having an edge in IT or any other scope of