Assignment3 (1).docx

ASSIGNMENT (MACR) DATE OF SUBMISSION: 23MARCH 2019 Q. After exhausting all opportunities of internal optimization potentials the only way for many companies to grow or to ensure survival is to merge with other companies. The CEOs of the companies try to manage the growing requirements by extending the business portfolios or even acquiring whole companies. But are M&A the panpharmacon to handle the changing global markets and to ensure the prospective success of the companies?

A corporate merger or acquisition can have a profound effect on a company’s growth prospects and long-term outlook. But while an acquisition can transform the acquiring company literally overnight, there is a significant degree of risk involved, as mergers and acquisitions (M&A) transactions overall are estimated to only have a 50% chance of success. In the sections below, we discuss why companies undertake M&A transactions, the reasons for their failures, and present some examples of well-known M&A transactions. Some of the most common reasons for companies to engage in mergers and acquisitions include: To become bigger. Many companies use M&A to grow in size and leapfrog their rivals, in contrast, it can take years or decades to double the size of a company through organic growth. To pre-empt competition. This powerful motivation is the primary reason why M&A activity occurs

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attractive portfolio of assets before a rival does so generally results in a feeding frenzy in hot markets. Some examples of frenetic M&A activity in specific sectors include dot-coms and telecoms in the late 1990s, commodity and energy producers in 2006-07, and biotechnology companies in 2012-14. To create synergies and economies of scale. Companies also merge to take advantage of synergies and economies of scale. Synergies occur when two companies with similar businesses combine, as they can then consolidate (or eliminate) duplicate resources like branch and regional offices, manufacturing facilities, research projects, etc. Every million dollars or fraction thereof thus saved goes straight to the bottom line, boosting earnings per share and making the M&A transaction an “accretive” one.

To achieve domination. Companies also engage in M&A to dominate their sector. However, a combination of two behemoths would result in a potential monopoly, and such a transaction would have to run the gauntlet of intense scrutiny from anti-competition watchdogs and regulatory authorities. For tax purposes. Companies also use M&A for tax reasons, although this may be an implicit rather than an explicit motive. For instance, since until recently the U.S. has the highest corporate tax rate in the world, some of the best-known American companies have resorted to corporate “inversions.” This technique involves a U.S. company buying a smaller foreign competitor and moving the merged entity’s tax home overseas to a lower-tax jurisdiction, in order to substantially reduce its tax bill. Why do mergers and acquisitions fail? Some of the main risks that may precipitate the failure of an M&A transaction are: Integration risk. In many cases, integrating the operations of two companies proves to be a much more difficult task in practice than it seemed in theory. This may result in the combined company being unable to reach the desired targets in terms of cost savings from synergies and economies of scale. A potentially accretive transaction could therefore well turn out to be dilutive. Overpayment. If company A is unduly bullish about company B’s prospects – and wants to forestall a possible bid for B from a rival – it may offer a very substantial premium for B. Once it has acquired company B, the best-case scenario that A had anticipated may fail to materialize. For instance, a key drug being developed by B may turn out to have unexpectedly severe side-effects, significantly curtailing its market potential. Company A’s management (and shareholders) may then be left to rue the fact that it paid much more for B than what it was worth. Such overpayment can be a major drag on future financial performance. Culture Clash. M&A transactions sometimes fail because the corporate culturesof the potential partners are so dissimilar. Think of a staid technology stalwartacquiring a hot social media start-up and you may get the picture.