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Chapter 12

1.2 Specific reasons for merger / acquisition

Some good reasons given for one company taking over another are as follows:

 Synergies – ‘2 + 2 = 5’ i.e. the wealth of the shareholders should increase
after the takeover.

 Increased market share/power – a larger market share may enable an entity
to drive prices – for example reducing prices in the short term to eliminate
competition before increasing prices later.

 Economies of scale – result when expansion causes total production costs
to increase less than proportionately with output.

 Combining complementary needs e.g. a small entity might have a unique
product but lack the engineering and sales organisations necessary to
produce and market it on a large scale. Solution: merge with a larger entity.

 Improving efficiency – a classic takeover target is an entity operating in a
potentially lucrative market but which does not fully exploit its opportunities.

 A lack of profitable investment opportunities – entities with excess cash are
usually regarded as ideal targets for acquisition – a case of buy or be
bought.

 Tax relief – an entity may be unable to claim tax relief because it does not
generate sufficient profits. Solution: merge with another entity which does
generate such profits.

 Reduced competition – as long as the merger does not fall foul of the
competition authorities.

 Asset stripping – the acquirer sells the target’s easily separable assets,
perhaps closing down some of its operations.

 Big data opportunities – the knowledge and expertise of the target entity
can increase the amount of big data available to the predator, to enable the
combined firm to develop better competitive advantage.

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