Diversification can be achieved through internal

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• Diversification can be achieved through internal growth as well as mergers.
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E. STRATEGIC REALIGNMENT TO CHANGING ENVIRONMENT • It says that mergers take place in response to the environmental changes. External acquisitions of needed capabilities allow firms to adopt more quickly and with less risk than developing capabilities internally. • Strategic planning is concerned with the firm’s environments and constituencies, not just operating decisions. • The strategic planning approach to mergers implies either the possibilities of economies of scale or tapping an under used capacity in the firm’s present managerial capabilities. • By external diversification the firms acquirers mgt skills form needed augmentation of its present capabilities. • Competitive mkt for acquisitions implies that the NPV from M&A invts is likey to be small. • If these invts, exploit synergy opportunities & can be used as a base for still additional invts, with +ve NPV, the strategy may succeed. F. UNDRVALUATION • It states that mergers occur when the market value of target firm stock for some reason does not reflect its true or potential value or its value in the hands of an alternative mgt. • One cause of under valuation may be that mgt is not operating the co up to its potential. • Second possibility is that the acquirers have inside information. • If bidders possess information which the general mkt does not have, they may place a higher value on the shares than currently prevails in the mkt. • Another aspect of under-valuation theory is the difference b/w the market value of assets and their replacement costs. • Inflation had double-barreled impact. • Due to inflation in 1970’s the stock prices sere depressed & did not recovered until the latter part of 1982, as the level of inflation dropped & business prospects improved. • Current replacement costs of asset was substantially higher than their recorded historical book values. • This twin effects resulted in a decline of the q-ratio. Q-ratio , defined as the ration of the market value of the firm shares to the replacement costs of the assets represented by these shares. II. INFORMATION & SIGNALING • It attempts to explain why target shares seem to be permanently revalued ---- in a tender offer whether or not it is successful. • The information hypothesis says that the tender offer sends a signal to the market that the target shares are undervalued or alternatively the offer signals information to target mgt., which inspires them to implement a more efficient strategy on their own. • Tender Offer: A method of effecting a takeover via a public offer to target firm shareholders to buy their shares. A hypothesis based on this empirical observation posits that New information is generated as a result of the tender offer and the revaluation is permanent. a tender offer disseminates information that the target shares are undervalued and the offer prompts the market to revalue those shares. No particular action by a target firm or any other is necessary to cause the revaluation . This has been called the “sitting on a gold mine”. The offer inspires target firm mgt to implement a more efficient business strategy on its own. This is the “kick in the pants”. No outside input other
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