Page 25 - Banking Finance October 2022

ARTICLE

2) Profitable and cash rich companies trying to gain
market leadership
3) Market entry strategy
Survival option - Business wants to survive, competitors
don't let them to survive, so, the option is either to be
a competitor or merge. Small companies will not be able
to compete with large company because large
companies have lot of money they can invest in
technology, they can invest in advertisement, small
companies cannot have enough resources, So they fail
to compete with the large company, then the left out
option in to survive is merge. Cannot fight then join this
is all about business first fight if not join i.e. merge to
survive rather than to die
Financial Synergy - It involves combining both the
Specific assets - it is easy to get tangible assets like land,
acquirer and target company balance sheets to achieve
building, machinery but what cannot get in the open
either a reduction in the weighted average cost of
market is intangible asset i.e., specific asset like
capital or a better gearing ratio or other improved
goodwill . Customers are addicted to brands, they are
financial parameters. This deals with the impact that a
not bothered about the promoter of the company or
merger has on the cost of capital of newly formed firm
the shareholders of the company or where is the
resulting from merger. The minimum return required
company located or where is the company's registered
motivating the investor and lenders to buy a firms stock
office and head office is located
or lend to the firms known as cost of capital. Lower cost
Cross border motivations - sometimes it may be of borrowing results when a firm has excess cash flows
difficult to company A to sell its product in other country combines with a firm that has internally generated cash
so then it acquire a company in other country or there flows insufficient to fund its investment opportunities
may be another scenario like market imperfections for in a matured industry. Firms with low growth may
example there would be a software company in US and produce cash flow in excess than the available
that company acquires software house in India, where opportunities. Another firm with high growth may lack
they are low cost developers so, that is an another enough cash required for the available investment
motivation or sometimes the technology may transfer opportunities. Thus firm in a mature industry may have
to other companies in other countries where they can a lower cost of capital than the one in which high
use the technology much better and this can happen growth industry when combining such firms could lower
only through acquiring the company. So, like this there the average cost of capital of the merged firm. In other
are several cross border motivations. Cross border words there could also be a benefit of offsetting the risk
means a company acquiring another company in other in cash flows. If the two companies have fluctuating cash
country. flows, like one company may a have a surplus cash flows
at one moment of time and other may have deficit cash
Benefits flows. Then the company can offset these cash flows
and to a large extent they can be saved from the burden
Regulatory change - Deregulation has played a
of interest charges. If the company borrow in bulk they
significant role in mergers. Industries subjected to
get a better rate and asset based security is easy &
deregulations in the years like, telecommunications,
charged at low rate. This is another benefit
health care, insurance, media, Banks also had been
actively indulging in merger activities. Deregulation Marketing Synergy - It also involves leveraging on the
promotes the mergers by eliminating the barriers brand equity of one of the two companies to push the

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