Term Paper: Mergers and Acquisitions: A Risk Assessment

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Mergers and Acquisitions: A Risk Assessment

This paper assesses the impact mergers and acquisitions have on business, including sensible and dubious reasons an enterprise may have for engaging in such a relationship, the benefits and costs of mergers and acquisitions and the financial risks associated with merging or acquiring an organization in another country.

Sensible and Dubious Reasons for M&a

Mergers and acquisitions are more commonplace now than ever before, touted by many as a tool for increasing organizational efficiency, diversifying resources, and promoting greater value for shareholders and employees, as well as customers working with an organization (Galpin & Herndon, 2000). When initiated as a tool for improving strategic performance, and engaging two companies offering complementary services, a merger or acquisition is a sensible tool for promoting diversity and offering shareholders real value. However, mergers and acquisitions can also arise for dubious purposes. A takeover or instance where an acquisition occurs without solicitation from the acquiring firm may qualify as a dubious M&a, for purposes of eliminating competition or reducing a perceived threat within one's primary industry (Stevn, 2005).

Other dubious reasons for M&as may include the desire of the bidder or buyer to create a monopoly or empire on a specific market, or when the shareholders believe that the diversification that will undoubtedly arise from an M&a will not lower costs significantly or improve cash flow (Stevn, 2005).

Benefits and Costs of M&a

Mergers and acquisitions can be viewed in terms of their benefits and their costs. Collier (1993) notes that "it is up to a cooperative's management to assess ether customers and owners will benefit through the opportunities associated with mergers when compared to the obvious costs or threats (p. 4). Galpin & Herndon (2000) note that when merges occur between equal entities with complementary resources, benefits including increased access to resources and creation of a strong "global platform" arise, which in turn may lead to substantial growth for all involved (p. 1). Shareholders however, do not always benefit from corporate takeovers or acquisitions. Mckinsey for example, reports that many times M&as do not successfully create value for the enterprise initiating a merger or acquisition (Stevn, 2005).

Costs associated with M&as may include difficulty with the integration process, a merger or acquisition that occurs without due diligence, such that the target company is inaccurately evaluated, pre-existing debt that will increase the burden of expense on the part of the bidder and an inability between the two companies to merger successfully and create a harmonious and adaptable environment (Stevn, 2005).

Cash and Stock Transactions

Shareholders can realize significant opportunities through mergers when they create greater value and improve an organization's ability to grow and produce greater revenues (Galpin & Herndon, p. 1). Ideally an acquisition is initiated to improve cash flow from operating the target firm as the two firms merge together (Stevn, 2005). Cash flow increases when a company buys a target firm or mergers with them when both companies agree the value of the two companies combined will result in higher revenues and shareholder value than if they two companies worked independent of each other (Stevn, 2005; Galpin & Herndon, 2000).

This concept is often referred to as a "synergistic" alliance where greater economies of scale arise as a large firm can reduce per unit costs or spread fixed cost among multiple units (Stevn, 2005).

M&a Abroad: Risks and Risk Management

There are many risks… [END OF PREVIEW]

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Mergers and Acquisitions: A Risk Assessment.  (2007, May 10).  Retrieved November 14, 2019, from https://www.essaytown.com/subjects/paper/mergers-acquisitions-risk-assessment/1215

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