acf-shamz - Q: Why do companies pursue mergers and...

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Q: Why do companies pursue mergers and acquisitions? Sutphin: Primarily for growth. Some companies rely almost exclusively on acquisitions for growth and others not at all. Sun is somewhere in between. For decades, Sun has invested heavily in R&D and technology innovation — creating a broad and deep product portfolio that includes technologies such as Java, Solaris, and SPARC. Internal development is important, but it's not enough. Acquisitions are one means of bringing to a company the innovation that, in the words of a Sun co-founder, "happens elsewhere." But it's important to emphasize that acquisitions complement Sun's organic efforts, they are not a substitute for them. They are also a great way of adding new talent to the company. The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance: * Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. * Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. * Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. * Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. * Synergy: For example, managerial economies such as the increased opportunity of managerial specialization. Another example is purchasing economies due to increased order size and associated bulk-buying discounts. * Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company. * Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothes the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below). * Resource transfer: resources are unevenly distributed across firms (Barney, 1991)
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acf-shamz - Q: Why do companies pursue mergers and...

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