Mergers and Acquisitions Essay Example | Topics and Well Written Essays - 5000 words

Mergers and Acquisitions - Essay Example A study conducted by UNCTAD (2006) shows that 17 percent of the FDI in the world comprise South-North and South-South flows and of this the cross-border acquisitions occupy a significant proportion. This project would look into the cross border acquisitions with an insight into the reasons driving the acquisitions and influential factors impacting such acquisitions. Factors motivating cross border acquisition Various theories have been developed that explain the significance of the mergers and acquisitions. According to Efficiency theories the main motive behind such deals is to exploit the benefits arising out of synergies or economies of scale. Market power theories highlight that acquisitions lead to oligopoly benefits. Agency theories state that the acquisition and acquisition deals mitigate agency problems like removing the inefficient managerial staff. This theory also states that it may also give rise to agency problems such as imprudent managerial decisions solely guided by t he motive of empire building. Besides this the acquisition deals are also guided by the advantages arising from the ‘benefits of diversification’. Though there is no single theory on mergers and acquisitions however these theories have garnered empirical support. Studies have shown that the shareholders of the target firm benefit the most in such deals whereas the shareholders of the bidder firm do not derive any immediate benefit from the deal. The abnormal return that that the bidders can enjoy is either slightly negative or zero. The combined return of the bidder-target firm is found to be universally positive indicating that the acquisition deals lead to value creation. It has also been seen that the stock price of the target firms’ exhibit higher returns in the case of cash offers as compared to the stock offers; hostile takeovers as compared to friendly takeovers; and multiple bidder as compared to contests by single bidders (Gregoriou & Neuhauser, 2007, p. 1). The success associated with the M&A deals has eluded many corporations. Marks & Mirvis (1998) state that the failure rates of such deals is around 50 to 75 percent. Despite the uncertainties associated with the deal the acquisition and acquisition deals are on the rise. The various benefits arising out of the deal include managerial synergies, cost synergies, market synergies etc. The sources of synergies include consolidated purchases, production, administration, marketing, market power, cross-selling, acquisition of technical expertise, patent, knowhow of the target, market expansion etc. In the horizontal acquisitions that involve integration of two companies belonging to the same sector the main motive is gaining market share of the target firm. This happens in the case of matured industries where the opportunities of growth are nearly exhausted, presence of excess capacity etc. Horizontal acquisitions result in enhanced revenue, savings in cost and better growth opportunit ies (Hitchner, 2006, p.106). The acquiring firm also gets a control over the customer base of the target firm thereby raising the total revenue base of the bidder firm.