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Company’s performance

Several literatures have dealt comprehensively on the subject of mergers and acquisitions. However, only few exist that attends to the subject of shareholders’ wealth effect of mergers. The percentage of international mergers with respect to total M&A has risen in the past few years especially in the 1990’s (Evenett, 2003). The decision made by a corporation to acquire new assets has a pivotal role in company’s performance and shareholders’ wealth. The literature review shows two important findings. The first shows positive relations on target firm shareholders wealth and the other show a negative effect on acquiring firm.

M&As are a common phenomenon today usually in business world including financial institution. M&As are usually carried out in the corporate business to add value to the business (Freeland, 2007). Both Merger and Acquisition are usually used interchangeably but they are different. Mergers and acquisitions have turned out to be the most dramatic expression of dream and tactic in the business and corporate world. Quite a lot of scholars dispute that mergers and acquisitions of companies are a universal and significant reaction to the globalization as well as transforming market setting (Welch, 2006).

Mergers and acquisitions have considerable roles on the bearings of business operational

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mode as well as on the careers of its managers and workforce. The justification in mergers and acquisitions is improvement of synergy. The one plus one equals three approach is targeted at escalating production levels by guaranteeing synergy savings. This is the unique alchemy of any merger or acquisition prospect. An important code at the rear of purchasing a company is to produce shareholder wealth that will exceed that of the addition of the two companies (Welch, 2006).

Even though M&As are frequently used as if they were the same, the expressions merger and acquisition denote somewhat different stuffs. When one corporation takes over another with the view to establishing itself as a fresh holder, the procurement is called an acquisition. In fundamental terms, a merger takes place in a situation in which two firms, usually of almost the same magnitude, consent to advance as a single fresh company rather than staying independently owned and managed.

Situations where CEOs of dissimilar companies see eye to eye that unification is in the paramount interest of the two companies are also regarded to as mergers (Lodorfos & Boateng, 2006). 2. 1. Reasons for Merger and acquisition Various advantages and benefits accompany M&A in financial institutions. One is the increase in profits. In order words, M&A can create multiple or duplicate departments that can assist in cutting down cost. It also assists in exploring duplicate resources. M&A saves and conserves taxes especially when a company that is presently making profit acquire one that is losing .

By so doing, it reduces its own tax liability. M&As also allow a company to gain a more powerful hold on the market . In order words, it helps in monopolizing and capturing wider market and this allows financial companies to sell out their niches at certain prices and terms. “If consolidation does in fact lead to performance gains, then shareholder wealth can be increased. However, if consolidating merging entities is sufficiently difficult, then mergers may lead to a less profitable and valuable banking industry. ”(Piloff, 1996)

2. 2. Factors influencing wealth creation 2. 2. 1. Specialist M&A advisors’ firms and shareholders wealth. These are also known as the ‘transition companies’ and they help companies in transition. There have been rising waves of specialist advisors in M&A and they provided full time services on M&A with respect to financing. An advisor in the US needs to be licensed and he is subject to certain regulations. The importance of merger advisor to its success can’t be overemphasized. A positive correlation between merger advisor of reputation of an investment bank and the shareholders wealth has been found (Bowers&Miller, 1990).

Rau, 2000 also responded by saying that “quality of investment banks may also signal higher probability of successful completion of a merger to shareholders but he found no important impact on the acquirers’ abnormal returns. ” 2. 2. 2. Relatedness of target and acquirer firms “Diversifying mergers may reduce instead of increasing shareholders wealth. ” (Berger &offer, 1995) Similar pieces of evidence were put forward when the relationship between diversification of US firms and market value were considered(Lang&Stutz, 1994).

It was also found that more value was created by mergers of the acquiring firms than any other merger types(Delong, 2001) 2. 2. 3. Improved efficiency as a key to shareholders wealth Performance improvement is usually assessed from efficiency improvements, increased market power or diversification. Efficiency gain is usually assessed in terms of cost efficiency, revenue efficiency and market operatation. Larger financial institutions usually come out with increased efficiency following Merger especially when excess facilities are got rid off in the new post merger organization.

If the new single bank can offer several products at reduced prices, this will cause lower cost in comparison to separate banks marketing individual products (Santomero&Piloff,1996). There may also be improved cost efficiency when the acquiring financial bank has better skills in holding down expenses than that of the target. (Cline,1996) Revenue efficiency may also be promoted by Mergers as in the case of acquisition of Boatmen Bancshares by NationsBank (Santomero&Pillof, 1996).

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