explain the main reasons for merger and takeover

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Explain the main reasons for merger and take-over activity in general. With reference to two specific mergers/ or take- overs of your choice, identify the motivation of such activity in each case. Analyse the effect of the proposed activity on the share price of the companies involved and comment on this. This essay hopes to explain the motivations behind external growth of the firm and the after effects by linking economic theory with real life examples. As with many decisions made by firms, the decision to merge with another or take over a smaller firm is usually in the pursuit of profit maximisation; be it cutting out the competition or taking advantage of resources and technology. With reference to the different kinds of growth, namely horizontal and vertical mergers, specifically forward and backward integration and takeovers be them friendly or hostile, it is hoped that the reasons for growth will become apparent. The mergers of GlaxoWellcome with SmithKline and Beecham and AOL with Timewarner are going to be analysed in order to understand the effect of potential mergers and the stimulus for it, as well as looking at whether or not a merger/ takeover was in the firms best interest. Mergers and takeovers are all to do with external growth of a firm, instead of reinvesting profits into further capital and expanding organically many firms decide to take the quicker and ultimately cheaper route of merging with another firm or taking one over in order to expand through different markets or reduce competition. If a firm has a large valuation ratio, that is if there is a large difference between the stock market price of a firm and its asset value, there is greater reason to grow through amalgamation rather than internal growth, however it is not always easy to place a value on certain assets, especially brands. Brands can sometimes take years and much

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