Page 35 - Banking Finance December 2020

ARTICLE

exclusively with the meaning. In practice, businesses
define cross-selling in many ways. Elements that might
influence the definition include the size of the business,
the industry sector it operates within and the financial
motivations of those, required to define the term. For
example, a bank buying a stock broker could then sell
its banking products to the stock broker's customers,
while the broker can sign up the bank's customers for
brokerage accounts. Or, a manufacturer can acquire
and sell complementary products.
5) Synergy: It is the interaction of multiple elements in a
system to produce an effect different from or greater
than the sum of their individual effects. Synergy is the
magic force that allows enhancing cost efficiencies of
the new business. Synergy takes the form of revenue
Motives behind Mergers and Acquisitions enhancement and cost savings. For example,
The dominant rationale used to explain merger activity is managerial economies such as the increased
that acquiring firms seek improved financial performance. opportunity of managerial specialization. Another
The following motives are considered to improve financial example is purchasing economies due to increased order
performance: size and associated bulk-buying discounts.
1) Economy of scale: This refers to the fact that the 6) Taxation: A profitable company can buy a loss maker
combined company can often reduce its fixed costs by
to use the target's loss as their advantage by reducing
removing duplicate departments or operations,
their tax liability. In the United States and many other
lowering the costs of the company relative to the same countries, rules are in place to limit the ability of
revenue stream, thus increasing profit margins.
profitable companies to "shop" for loss making
2) Economy of scope: Economies of scope are companies, limiting the tax motive of an acquiring
conceptually similar to economies of scale. Whereas company.
economies of scale for a firm primarily refers to
7) Geographical or other diversification: This is designed
reduction in the average cost (cost per unit) associated to smooth the earnings results of a company, which over
with increasing the scale of production for a single
the long term smoothen the stock price of a company,
product type. It refers to lowering the average cost for giving conservative investors more confidence for
a firm in producing two or more products. This implies
investing in the company. However, this does not always
that efficiencies primarily associated with demand-side
deliver value to shareholders. Resource transfer:
changes, such as increasing or decreasing the scope of resources are unevenly distributed across firms and the
marketing and distribution, of different types of
interaction of target and acquiring firm resources can
products.
create value either through overcoming information
3) Increased revenue or market share: Market share is asymmetry or by combining scarce resources.
the percentage of a market (defined in terms of either 8) Hiring: some companies use acquisitions as an
units or revenue) accounted for by a specific entity. This
alternative to the normal hiring process. This is
assumes that the buyer will absorb competitor and thus especially common when the target is a small private
increase its market power (by capturing increased
company or is in the startup phase. In this case, the
market share) to set prices.
acquiring company simply hires("acquires") the staff of
4) Cross-selling: Cross-selling is the action or practice of the target private company, thereby acquiring its talent
selling among or between clients, markets, traders, etc. (if that is its main asset and appeal). The target private
or the action or practice of selling an additional product company simply dissolves and little legal issues are
or service to an existing customer. This article deals involved.

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