Mergers and Acquistions Paper
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Mergers and Acquisitions Paper
Organizations have been merging with and acquiring other organizations for some time now. This process has also shown an increase in foreign countries. This paper will assess the impact of mergers and acquisitions on a business to include sensible and dubious reasons for the action. The financial risks of merging with or acquiring an organization in another country and how those risks could be mitigated will also be examined.
The term mergers and acquisitions basically mean that an organization has a business strategy to merge with or acquire another organization. “Mergers and acquisitions immediately impact organizations with changes in ownership, in ideology, and eventually in practice (Rhodes, 2004). The main impact of merging with or acquiring an organization is with finances and assets. Once an organization merges with or acquires another organization there will be new owners and leadership. If not handled properly, this could have a major effect on an organization. New ownership of an organization, according to how things are handled can have a negative or positive impact.
Once an organization mergers or acquires another organization there will be a change in ideology and in practice. When two organizations combine to become one, different ideas and views are being brought to the table. As a new organization, issues such as these must be worked through to determine which ideological methods would be most valuable to the organization. The same applies when it comes to the practice of the company. The way the organizations once were ran before merging or acquiring will change to better meet the needs of the change that has occurred.
There are many reasons why an organization would want to merge with or acquire another organization. According to McDougall, (1995), four reasons for mergers and acquisitions are numerous and include: to diversify or expand markets, to acquire particular production technologies, to take advantage of work forces with particular skills or to benefit from “good opportunities” to take over a cooperation. One may also want to eliminate growth opportunities for their competitors. Reasons such as these all have one thing in common. The main motive behind all these reasons is to increase profit or returns for the owners and all other shareholders.
When two organizations merge or one organization acquires another organization, there is an exchange of stock in which one of the organizations issues new shares to their shareholders. In the merging of organizations, total post-merger value of both organizations is equal to the pre-merger value. “The post-merger value of each individual firm likely will be different from the pre-merger value because the exchange ratio of the shares probably will not exactly reflect the firms values with respect to one anther”(Quick MBA Finance, 2006). As a result the exchange ratio is skewed. The reason for the skew is because the target firms shareholders have to be paid for their shares.
“Synergy takes the form of revenue enhancement and cost savings” (Quick MBA Finance, 2006). Organizations combined revenue usually declines to an extent that businesses will overlap in the same market, when the two organizations are in the same industry. “For the merger to benefit shareholders there should be cost saving opportunities to offset the revenue decline; the synergies resulting from the merger must be more than the initial lost value” ( Quick MBA Finance, 2006). The equation pre-merger value of both firms + synergies/post-merger number of shares=pre-merger stock price is used to calculate the minimum value of synergies required. This equation