Acquisitions of Corporations: Benefits & Losses

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Table of Contents

Acquisitions of Corporations
Benefits of acquisitions
Whether firms pay too much for the acquired corporations
Reasons why so many acquisitions lead to shareholder losses
References

Acquisitions of Corporations

The element of corporate acquisition is a commonplace phenomenon in the business arena. It is one of the business strategies used by an organization to buy another company in the same or different industry depending on the objectives of the acquisition (Harwood, 2009). This paper takes an inquisitive stance which seeks to attain the following aims; benefits of acquisitions, whether firms pay too much for the acquired corporation and finally, reasons why so many acquisitions lead to shareholder losses.

Benefits of acquisitions

Starting with the first aim, which seeks to identify the benefits of acquisitions, the following reasons can adequately address the aim; diversification, synergy, pricing advantages in the supply chain and reducing competition. Diversification is one of the major reasons why firms purchase other corporations. It enables an organization to increase its product or service line and hence target more consumers in the market. Diversification may be pursued in a related or unrelated industry with the main objective of enhancing market presence (Fleuriet, 2008). The next reason is a synergy which enables the purchasing firm to expand its business activities and enjoy high volumes of operation at a low cost (Aharon, 2010). Firms also purchase other companies to increase their pricing privileges in the supply chain. This mostly happens if a firm purchases one of its supplier companies. In such a case, the organization can reduce the cost of material acquisition, delivery, and all other cost elements associated with logistics. Ultimately, purchasing another firm reduces competition in the industry and in the marketplace. The purchasing organization enjoys autonomy of brand preferences from the consumers and hence sales more of its products or services (Rosenbaum & Farley, 2010).

Whether firms pay too much for the acquired corporations

The next aim of the study is to establish whether firms pay too much for the acquired corporation especially given the belief that purchased companies do overprice their net worth during the acquisition. In this light, it is therefore cognizant to identify the reasons that lead to excess payments for the acquired corporations. Most purchased firms tend to give unrealistic valuation which sometimes includes obsolete assets and redundant employees (Mergers and Acquisitions Essay, 2011). The other reason is that most firms to be purchased do not have a standard pricing method, for instance, pricing decisions during purchases are made by the managers who are driven by their own selfish gains. During purchase transactions, most managers disregard shareholders’ interests and therefore quote prices which earn them extra savings at the expense of shareholders’ money (Fleuriet, 2008).

Reasons why so many acquisitions lead to shareholder losses

Drawing from the aforementioned problems, the last aim can therefore be introduced, which seeks to identify the reasons why so many acquisitions lead to shareholder losses. Most firms experience a significant decline in returns after an acquisition due to the reasons which can be attributed to management problems and overpricing of stocks. Immediately after the purchase, a dilemma occurs whereby the management finds it difficult to streamline the operations of the old company with those of the new company. This can be attributed to the differences in organization culture and structure which make may it difficult for the management to master new operational modalities and hence more loses (Mergers and Acquisitions Essay, 2011).

References

Aharon, D. (2010). Stock market bubble effects on mergers and acquisitions. The Quarterly Review of Economics and Finance, 50(4), 456-470.

Fleuriet, M. (2008). Investment Banking explained: An insider’s guide to the industry. New York, NY: McGraw Hill.

Harwood, I. C., (2009). “Confidentiality constraints within mergers and acquisitions: gaining insights through a ‘bubble’ metaphor“. British Journal of Management, 17 (4), 347–359.

Mergers and Acquisitions Essay. (2011). Mergers and Acquisitions. Web.

Rosenbaum, J. K., & Farley, J. (2010). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons.

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Acquisitions of Corporations: Benefits & Losses

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