Corporate Acquisitions, Essay Example

An acquisition is based on the principle of synergy whereby ‘one plus one, equals three’. Firms purchase other corporations in an effort to create shareholder value, through the combined force of two companies into one. The two companies combined are considered more valuable than the same companies separated. The acquisitions occur during tough times, whereby strong companies will by other companies to become more effective and cost-efficient in its operations. Additionally, the companies benefit from staff reductions, economies of scale, new technologies, improved market and industry visibility (Sherman & Hart, 2006).

During an acquisition, Datta et al (2001) believe that the purchasing company purchases the shares of the other company, which is often valued higher than the actual market value due to the bidding that is involved. However, if the director and shareholders of both companies agree to peaceful transfer, the purchase price may be favorable (Sherman & Hart, 2006).

Due to the coming together of two companies, synergy results in the form of cost saving and revenue enhancement. However, for companies in the same industry the coming together results in a decline in the revenue to the point of overlap of the business in the same market and alienated customers. Therefore, losses to the shareholder will be minimized if cost-saving measures to counter the revenue decline. Therefore, the resulting synergies from the coming together should be highly valued than the initial value lost. The acquiring firms’ shareholders incur aggregate revenue losses because of a small number of acquisitions with negative synergy gains by firms with high valuations (Datta et al., 2001).

Synergy from the coming together of companies’ in spite of being costly to the acquiring firm is also responsible to lowering the shareholder losses.

References

Datta, S., Mai, I-Datta & Kartik, R. (2001). Executive compensation and corporate acquisition decisions. Journal of Finance, 56, 2299-2336.

Sherman, A. J. & Hart, M. A. (2006). Mergers & acquisitions from A to Z. 2^nd ed. Boston, MA: AMACOM Div American Mgmt Assn.