M&A 1

WHY CAN A MERGER CREATE THE APPEARANCE OF EARNINGS GROWTH ?

 

A MERGER OCCURS WHEN TWO FIRMS COMBINE TO FORM A SINGLE COMPANY.

THE PRIMARY MOTIVES FOR MERGERS ARE :

  1. SYNERGY
  2. TAX CONSIDERATIONS
  3. PURCHASE OF ASSETS BELOW THEIR REPLACEMENT COSTS
  4. DIVERSIFICATION
  5. GAINING CONTROL OVER A LARGER COMPANY

AN ACQUISITION CAN CREATE THE APPEARANCE OF EARNINGS GROWTH, WHICH MAY FOOL INVESTORS INTO THINKING THAT THE FIRM IS WORTH MORE THAN IT REALLY IS.

LIKE ALL GOOD MAGIC, THE EARNINGS-GROWTH MAGIC IS AN ILLUSION…IT MAY WORK FOR A WHILE, BUT IN THE LONG RUN THE EFFICIENT MARKET WILL WORK ITS WONDERS AND THE VALUE WILL DECLINE.

DO ACQUISITIONS BENEFIT SHAREHOLDERS ?

ON AVERAGE, THE SHAREHOLDERS OF ACQUIRED FIRMS FARE VERY WELL,WHILE THE SHAREHOLDERS OF ACQUIRING FIRMS DO NOT GAIN MUCH.

MOREOVER, IF MERGERS CAN PROVIDE ECONOMIC BENEFITS THROUGH ECONOMIES OF SCALE OR THROUGH CONCENTRATION OF ASSETS IN THE HANDS OF MORE EFFICIENT MANAGERS, THEY ALSO THE POTENTIAL FOR REDUCING COMPETITION.

PHLDUCX

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