Rationale for mergers, Financial Management

Rationale for Mergers

Many of the motives behind mergers of firms are discussed hereunder:

Growth

Growth is the most general and important motive for mergers. Merging firm provides an immediate growth opportunity to a firm which was earlier operating within a single country. There are various factors which encourage a firm to merge internationally for growth. They are:

  • A firm having surplus cash flows operating in a slow growing domestic economy can invest its cash in a fast growing economy.
  • Firms, which operate in a domestic market i.e., too small to accommodate the growth of the corporates or where the domestic markets are saturated, enter into foreign markets.
  • Overseas expansion may enable medium-sized firms to attain the size necessary to improve their ability to compete.
  • Size enables firms to achieve the economies of scale necessary for effective global competition.

Technology:

Technology affects mergers in two ways:

  • A technologically superior firm may make acquisitions in another country in order to exploit its technological advantage.
  • A technologically inferior firm may make acquisitions in another country to enhance its competitive position both at home and abroad.

Technological superiority can be exploited very easily without a lot of cultural interference unlike specific management functions like marketing, labor relations etc., which are environment-specific, and are not readily transferable to other surroundings. The acquirer may intentionally select a technologically inferior target, which because of its inferiority is losing market share and market value. By bringing in technology into the acquired firm, the acquirer can improve its competitive position and profitability both at home and abroad. On the other hand, the acquirer firms with surplus cash, but technologically inferior can obtain the necessary technology by acquiring a firm with superior technology to remain effective as competitors on the worldwide scene.

 

Posted Date: 9/11/2012 5:31:23 AM | Location : United States







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