Mergers and Shareholders Wealth

A merger is the combination of two or more companies, which eventually form a new legal entity under one corporate name’s banner. High-value mergers either domestic or global have always attracted attention as they have exciting consequences over the business development and shareholder’s wealth. Some famous mergers like Disney & Pixar, Heinz & Kraft, Pfizer & Warner Lambart, Facebook & Whatsapp Acquisition are examples of some successful mergers whereas America Online & Time Warner, HDFC & Max Life, Flipkart & Snapdeal, Quaker & Snapple are examples of failed mergers. 

Motivation for Mergers & Acquisition

  • Value Creation: This is the most common motive we usually see around as companies combine to increase their shareholders’ wealth. Generally, the amalgamation of two businesses results in the synergy that increases two firms’ value, meaning that the merged company’s valuation is more than the sum of individual companies’ valuation before the merger.
  • Competition: Giant companies usually adopt this method to snap up a company with attractive portfolios and assets, before their rival companies do so. Examples of this mergers include the dotcom and telecoms in the late 1990s.
  • Tax purposes: This is also one of the types of merger often seen as giant companies worldwide acquire a small company in a country where the tax rates are low as it reduces the tax bill. This move is rather implicit and not explicit, as it does not directly affect the company’s growth or valuation.
  • Financial Capacity: Every company reaches a point where its debt and equity get a maximum capacity to finance operations. To invest more in operations, a company may merge with another as the financial capacity now increases. 

Effects of mergers and acquisitions on shareholder’s wealth

Mergers and acquisitions have long term complications for the acquiring company than the target company. For the acquiring company, bigger the deal size of merger more is the risk as the acquisition company may bear the failure of a small acquiree but a big company’s failure will completely lay their path with nails.

On the other hand for the target company, a merger gives its shareholders to either cash out their premium if it is an “All-cash” deal or gives them a stake in the acquirer’s company. Thus, giving them a vested interest in long term success.

Factors that affect shareholder’s returns:

Method of Payment 

Cash payment has been the most well known and most esteemed strategy for payment which offers better yield than value. For instance, acquiring firm is relied upon to complete stock financed consolidation if the administration of acquiring firm has better-quality inside data that the current resources of the firm are exaggerated. In any case, if the acquiring firm has confidential data about the target firm and trusts it to be undervalued, at that point, it likely offers money financed consolidation. 

Acquisition financed with stocks is a negative sign in light of the fact that the utilization of stocks as a technique for payment is bound to happen when the stock is overvalued, and the shareholders of target firm will prefer accepting amount in cash. The benefit of cash is that the acquirer investors hold a similar degree of power over their organization on the grounds that their extent of possession has not been weakened by giving target investors investment opportunities in the merger. In this way, the profits to an acquiring firm’s investors will be higher in real money financed acquisition than the stock.

Cross Borders M&A

Cross border Mergers and Acquisitions or M&A are deals between foreign companies and domestic firms in the target country. The pattern of expanding cross border M&A has quickened with the globalization of the world economy. Cross border M&A’s actualize only when there are incentives to do so. In other words, both the foreign company and the domestic partner must gain from the deal as otherwise; eventually, the deal would turn unsuccessful. 

Kang Views

Kang in 1993 expressed that cross-boundary M&A are relied upon to make more abundance than domestic ones in light of the presence of market defects which prompts Multi-National Companies (MNC) having the upper hand over foreign firms.

Foreign banks need to act as per the two guidelines one at home and the other abroad; domestic credit foundations have cost favourable circumstances, since satisfying two different arrangements of guideline authorise extra expenses on foreign banks.In addition to this, various guidelines decrease the measure of related fixed expenses. This reduces the opportunities for banks to gather profits by economies of scale and degree.

Economies of scale recommend that bank can decrease its expenses by developing the volume of the yield of items and administrations it as of now delivers. Because of forming into a new country, a bank builds its potential customer base and advantages from economies of scale. As indicated by economies of extension, banks that diversify services could decrease costs by offering more types of services.

Post-merger, the newly-formed entity typically exceeds each company’s value during its pre-merge stage. Shareholders of the merged company usually experience enviable long-term performance and healthy dividends.

By Gaurav Jhawar

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