Corporate Mergers and Acquisitions
Mergers and Acquisitions are the absorption of a smaller firm by a larger firm, while a merger is the combination of two firms to form a single entity. In a merger, there is often an exchange of stock between the companies where one company issues shares to the shareholders of the other company at a certain ratio. The firm whose shares continue to exist is generally referred to as the acquiring firm while the other is the target firm. Except for synergies, the post-merger value of the two firms is equal to the pre-merger value. The target firm’s shareholders, however, often benefit because they are paid a premium for their shares.
Mergers and Acquisitions (MandA) is well known as one of significant business activities all around the world which have attracted the attention of every business administrators in the economic competition. In the intense competition, companies have to tackle many difficulties and desire to become profitable, active and efficient ones. They could not be the winners in market share’s volume competition without added capital, technology and human resources, especially from M&A activities. Besides several different noticeable methods to get more resources such as strategic alliances, technology transfer and joint ventures, M&A is greatly considered as the most powerful relationship between company and its partner in the deal. Noticeably, the considerable increase in the number of M&A deals in several recent years let the foreign capital investment into some Asian developing countries such as: Vietnam, Philippinesâ€¦ rise dramatically. It is obvious that M&A creates thousands of must – buy opportunities for businessmen, which add remarkably the huge value to the global economic growth. M&A effectiveness is undiminished and it depends on the depth of resources of both sides as well as the experience in restructuring companies after the deal. Many research showed that the main percentage of M&A cases take place in banking and finance sectors when banks and financial firms want to approach to new market; pharmaceuticals or software technology when one firm might merger with the other companies in their production system. There are many deals between thousands of the largest and most successful global firms such as Daimler Chrysler, Chase-J.P. Morgan, NationsBank- Bank of Americaâ€¦ regarded as the impressed deals in M&A history. However, there are still some arguments that suspect the benefits of M&A and emphasize too many firms which could not reach to the intended results. Therefore, I think that we should consider the benefits of M&A carefully and help companies be confident when they conduct M&A deals. Particularly, I write this essay to study more specifically what companies receive in M&A cases.
Merging makes it cheaper for companies to access materials from suppliers, and can get such materials at a discount due to the economies of scale. This is beneficial in the long-term performance of the company since it leads to more savings, hence more investment and overall increased profitability. The benefits of mergers are usually traced to shareholders and company performance, and these are derived from the value of shares. The merger turned company into one of the largest employers and is expected to increase the company’s revenue both in the short term and in the long term. Following the positive changes in the company’s share value, the merger supports the existing literature on the claim that mergers increase shareholder value and company profitability. Additionally, the merger follows the observation that investors use a company’s previous performance record to predict a merger’s future performance (DePamphilis, 2009).In addition, firms often use merger and acquisition as a strategy to enter into new market or a new territory. This gives them ready platform on which they can further build their operations. Tax shield is one another aspect of consideration. Tax shields play an important role. Firms in distress have accumulating past losses and unclaimed depreciation benefits on their books. A profit making taxpaying firm can derive benefit from these tax shields. They can reduce or eliminate their tax liability by benefiting from a merger of these firms. In some countries, tax laws do not permit passing of such tax shields to the acquiring firm except under specific circumstances (DePamphilis, 2009).
Summing up, to check whether our results are driven by geographic factor, we re-run regression analyses with three geographic proxies. After controlling for the geographic effect and other determinants of announcement returns, the political ideology effect still exists. Finally, we reassign local ideology values to acquirer and targets based on all elections to mitigate potential update issue. The result with new local ideology values is still consistent with the previous results. Collectively, our evidences suggest that corporate political ideology have an impact on the probability of completing deals and in determining announcement returns, supporting “Cultural distance hypothesis”.
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DePamphilis, D., (2009). Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. London: Academic Press.
Frankel, M. (2005). Mergers and acquisitions basics: the key steps of acquisitions, divestitures, and investments. San Francisco: John Wiley and Sons.
Gugler, K., Mueller, D., Yurtoglu, B. & Zulehner, C. (2003). “The effects of mergers: an international comparison.” International Journal of Industrial Organization 21, no. 2003 (2003): 625-653.
Hunt, P. (2009). Structuring Mergers & Acquisitions: A Guide to Creating Shareholder Value. New York: Aspen Publishers Online.