BBS DEGREE PROGRAMME
STAGE 3: FINANCIAL MANAGEMENT
Continuous Assessment Assignments 2009 â€“ 2010
Organisations have many avenues open to them for business expansion. One option is to undertake a Merger or Acquisition in order to diversify, enter new markets or increase customer base.
Discuss the role of a Financial Manager in assisting with the valuation and financing of a Merger or Acquisition and identify the main potential pitfalls associated with such deals.
The term â€˜Mergers and Acquisitionsâ€™ refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance and ...view middle of the document...
Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A suitable example of such a takeover is of Chrysler by Damiler-Benz in 1999 which was widely referred to in the time and is still is today as a merger of two companies.
Financial Managers are experienced finance professional who will lead the financial due diligence and accounting efforts as well as assist with the integration for new mergers and acquisitions and strategic investments.
Advantages and disadvantages of mergers and acquisitions may or may not be present in the short or long term company financials of the new and acquiring companies due to the costs and business circumstances surrounding the corporate takeover.
There are a number of reasons to provide sanction for a corporate merger and acquisition, not all of which are necessarily or a financial nature. Usually, mergers and acquisitions are within the scope of the Board of Directors to pursue and the company executives to initiate and execute.
The operational and financial advantages of mergers and acquisitions are widely documented and may also present the face of mergers and acquisitions activity to shareholders, the public, corporate appeals to legislators etc. These advantages can include increased market share, lower cost of production, higher competitiveness, acquired research and development know how and patents. These and other advantages of mergers and acquisitions are listed below:
* Increased market share
* Higher competitiveness
* Industry know how and positioning
* Lower cost of operation and/or production
* Financial leverage
* Improved profitability and EPS
Not all the above advantages of mergers and acquisitions may be realised, but are often included among the reasons for engaging in the corporate activity. When a company is able to benefit from all these advantages it can lead to more stability as a corporate entity and cold also provide for higher political influence and industry leadership.
Mergers and acquisitions can be costly due to the high legal expenses, and the cost of acquiring a new company that may not be profitable in the short run. This is why a merger or acquisition may be more of strategic corporate decision than a tactical maneuver. The main expanses involved are:
* Legal expenses
* Short-term opportunity cost
* Cost of takeover
* Potential devaluation of equity
* Intangible costs
In some cases, mergers and acquisitions may not only disadvantage the shareholders but consumers as well. In both cases, this may happen when the newly formed company becomes a large monopoly. More so, when higher pricing power emerges from reduced competition, consumers may be financially disadvantaged. Some of the potential disadvantages facing consumers in regard to mergers are the following.
* Increase in cost to consumers
* Decreased corporate performance...