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Introduction to Mergers and Acquisitions
The study of subject of Mergers and acquisitions in a corporate world is highly extensive and occupies a very strategic position in the functioning of any business unit. The decision towards taking this step by an organization is attached with many critical aspects and is driven by various forces existing in the market. Companies looking for economic expansion by consolidation of different segments into one forms to be one of the factors persuading corporates to undertake this decision of merging in a horizontal line of industries. Apart from the steps of the company to integrate on a vertical or horizontal basis in order to satisfy the need of expansion, another vital driving force is posed by the desire of diversification. The rationale behind undertaking this decision is to mitigate risk by investing in variety of areas or assets. This further enables the company to bring down the element of volatility in the business and further minimize its exposure to idiosyncratic risks which has the potential to hamper a specific asset by reducing its price or any particular area of the business. Such a kind of risks works in an unsystematic manner to deteriorate the conditions related to peculiar aspects of an enterprise. The decision of diversification leads to formation of conglomerates which in turn minimizes cash flow volatility of the company as it further reduces the vulnerability of conglomerates to risk from any specific industry. In other words, it enables the corporates to offset the effects of downfall in one industry with the other unconnected industry.
The concept of bargain hunting is another factor which leads to the decision of mergers and acquisition by the organizations. This can also be viewed through the term leveraged buy-out, which in essence take assistance of debt capital and such sources for acquisition were preferred to either destitute or undertake a simultaneous move of expanding and downsizing the businesses. The rationale behind such decisions was to reduce the immense debt obligations existing on the business units. This trend was primarily prevalent during the years of 1984-1989 and then witnessed a slow down in this market pursuant to 1989. Post 1990, the international market experiences a major boom and brought economical prosperity, with the major focus on Globalization. This era witnessed mergers and acquisitions beyond the geographical borders and hence emerged the concept of a significant trend which can be characterized as cross-border acquisitions and mergers. The emergence of this trend could be credited to the desire of corporates to make best utility of opportunities on a global level and enhance the growth of the business in terms of exposure and monetary. Hence, business units started looking outside the borders of their home to target some new and fresh markets of the world. Some of the mega deals which were witnessed during this era and were driven by the force of Globalization are that of Citibank and Travelers, Exxon and Mobil and so on . This led to technological innovations and redirected the companies to focus on the enhancement of their core competency, which in turn can enable them to attain a competitive edge in the market.
In pursuance to these trends shown by the Mergers and acquisitions market, the present report seeks to explain various factors which form the driving force for the corporates to undertake such strategic and critical decisions. It is an established fact that the main core of undertaking any decision by a business unit is based on the requirement of enhancement at the economical level and hence, the instant study shall elaborate on various aspects of the said economical forces, prevalent in the modern era.
Factors leading to merger and acquisition
Merger and acquisition of businesses generally takes place due to presence of many type of strategic reasons but the main reason is linked with economic condition where businesses have to utilize resources for enhancing overall performance in the market. Various economic reasons are present which are associated with merger and acquisition and they are discussed below:
Generally capability of any business enterprise increases through expansion into research and development activities. Further, in case if any organization acquires advanced technology then it enhances overall capability and in turn overall challenges present in the business environment can be faced easily. Apart from this, other main reasons involve businesses are interested in combining to leverage costly manufacturing operations. In case when any two organizations merge with each other then overall capability to carry out operations within the market enhances and this in turn acts as development tool for the business. As per view of Kemal and Shahid, in every sector concept of merger and acquisition is gaining importance and it has become one of the main reason behind success of businesses in t