Monday, April 9, 2012

Acquisition and Shareholder Value

Firms purchase other corporations for the numerous benefits that are offered through acquisitions. The firm gains source supply because they have access to the source supply that the previous owner of the corporation did. They also acquire their new distribution channel. If they decide to keep the employees that were working at the corporation, they gain new creative talent that can offer the current workforce and different perspective on how to do things. Acquiring corporations adds value to a company and enhances its earnings per share. It can also add new product lines to ones already established. Firms gain the technology that the corporation was implementing and access to an established infrastructure. They increase their access to working capital finds and gain an advantage for time to market. The rapid expansion of customer base obviously isn’t the only benefit that makes acquiring corporations the best return on investment for large firms (Hari, 2011).
            The amount that a firm pays for the corporation that it is acquiring factors in many different aspects. The value of strategic fits are difficult for anyone to measure and are very much up to both of the companies involved in the merger. The accounting, tax, and legal aspects must be factored in a well and usually tend to be very complex. The firm may be gaining market share because they are eliminating the competition, which can appear very valuable to the firm. Mergers can also lead to a lower cost of capital and lower taxes (Advameg, Inc, 2012). All of these different benefits have to be factored into the valuation of the corporation that is being acquired. It is solely the firm’s decision when deciding how much they are willing to pay for corporations.
            The National Bureau of Economic Research (2012) suggests mergers and acquisitions destroy shareholder wealth in the acquiring companies and that “over the past 20 years, U.S. takeovers have led to losses of more than $200 billion for shareholders”. These losses are primarily dominated by acquisitions that are made by large firms. It is thought that when a large firm’s begins to go down the acquisition route, they have exhausted all internal growth opportunities. Even if a takeover results in a positive net present value, negative return can be seen in share prices following the transaction.

References

Advameg, Inc. (2012). References for Business. Retrieved from Mergers and Acquisitions- advantages, percentages, types, benefits, cost, Types of acquisitions: http://www.referenceforbusiness.com/small/Mail-Op/Mergers-and-Acquisitions.html#ixzz1rYs3xldm
Balls, A. (2012). The National Bureau of Economic Research. Retrieved from Big Firms Lose Value in Acquisitions: http://www.nber.org/digest/aug03/w9523.html
Hari. (2011, August 2). Knowswhy. Retrieved from Why Do Firms Purchase Other Corporations?: http://www.knowswhy.com/why-do-firms-purchase-other-corporations/

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