Acquisitions are the purchase of a company by another company. The goal of any financial manager is to make good solid investment decisions for the company so that the company makes money. The objective of the company is to maximize the shareholders’ wealth (Gitman, 2009). The goal in buying a company is to create shareholder value over and above that of the sum of the two companies. The reasoning behind mergers and acquisitions is that the companies together are more valuable than the two separate companies. These acquisitions can be friendly or hostile. There are four types of acquisitions or mergers.
• Horizontal Merger. A Horizontal merger is when two companies who are competitors in the same market merge together
• Vertical Merger. A vertical merger is when a company merges with a distributer or a customer.
• Congeneric Merger. A congeneric merger is when two companies are in the same general industry, but there is no customer supplier relationship.
• Conglomerate Merger. A conglomerate merger is a merger between companies that have nothing in common with each other (Gitman, 2009)
There are many reasons why firms acquire other corporations. One reason why companies merge together is for growth purposes. Mergers can give the company that wishes to acquire another company the chance to grow market shares without actually doing it themselves. The acquirer would purchase a competitor’s business for a price. Synergy is another reason why a company would acquire another company. Synergy is the ability of the merged company to generate higher shareholders wealth than the companies can individually. Acquisitions and mergers also occur to reduce competition. If there are two companies that produce the same products and one may decide to acquire the other to reduce the competition in the market. One last reason I would like to discuss is eliminating inefficiencies. By merging together, companies that have outdated computer systems or are not performing to expectations would benefit from an acquisition (Investopedia, 2009).
Some corporate acquisitions can result in losses to the acquiring firms’ stockholders. The stock price may drop considerably. The acquiring company gains all of the assets and liabilities of the firm and therefore may have to prove themselves to customers or suppliers.
Does the acquiring company pay too much for the acquired corporation? I think that depends on the company and the type of acquisition. I would say in most cases no. The reason is because as I stated before, the goal of the financial manager is to maximize the shareholders wealth. The only way that an acquisition is not going to benefit the shareholders is if they have an inefficient financial manager.
Gitman, L. J. (2009). Principles of managerial finance. 12th Edition.
Pearson Prentice Hall. San Diego State University
Investopedia. Mergers and acquisitions: definitions. Retrieved January 28, 2009 from http://www.investopedia.com/university/mergers/mergers1.asp