What are the reasons for mergers and acquisitions, Financial Management

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Reasons for mergers and acquisitions

The key reasons for mergers and acquisitions, is to maximise shareholder wealth otherwise it wouldn’t be worthwhile.

Reasons for mergers and acquisitions

Economies of scale

Larger capacity results in reduced costs. With vertical integration it's easier to achieve this as duplication is avoided. For conglomerates, combining of some of the departments will achieve this (centralised head office, HR department, Marketing etc.)

Increased market share

Thus increasing profitability and becoming a leader in the market, which improves earnings quality.

Improved efficiency

Poor management and inefficient operations would be improved.

Reducing the competition

Profitability can be increased if competition was removed. However the implications from the competition commission need to be considered.

Tax relief

Group companies and taxation relief. A company which is not being able to obtain tax relief as it isn't generating profits can merge or acquire a company which generates profits.

Liquidity

Target company may be cash rich and this will improve group's statement of financial position (balance sheet).

Asset stripping

Acquiring other entity and then selling off their assets.

Diversification

This helps reduce risk by attaining businesses in other industries.


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