What larger company. This can be undertaken

What is a Merger and why docompanies undertake them? The answer is simple; increased shareholder value.

Companies primarily merge for the purpose of increasing their shareholdersvalue in such a manner that it yields a value over the addition of theindividual companies, in order to create effective and efficient synergies.There is a formula used to demonstrate this, a simple equation that delivers thecrux of the subject; i.e. 1+1 > 2. It indicates that the two individualcompanies, each one signified by the value of 1, when added together, i.e.

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whenthey merge, the combined entity is greater in value than just the addition.This is due to the creation of positive synergies that aid in improving and enhancingthe fundamental value of companies. Consider a scenario; there are twocompanies in a challenging, dynamic environment; in order to improve and getahead of the competition, they can merge in order to create a company withgreater effectiveness and efficiency, as there are several combined factorstaken into account, such as debtors, creditors, lenders, in order to create amore cost efficient company. Considering all such available benefits, a largenumber of companies are willing to merge, knowing they cannot survive the ferociousbusiness environment as a lone wolf, instead of a pack. Mergers andAcquisitions involve two key parties, the acquiring company and the acquired company.Merger: As defined, “A merger refersto the corporate strategy involving the combination of different companies intoone, single entity in order to pertain to the operational, financial, andbusiness strengths of both the organisations.”In layman’s terms, twocompanies join together to form one larger company. This can be undertaken inseveral ways, the foremost of which is through transfer of ownership.

How doesthis happen? A layman would answer – Through cash payments, which is one suchmethod of doing so. However, the more common approach is to utilise a stockswap, i.e. both companies agree to give up their stock (surrender it) andaccept to issue or release stock as a combined unit or company.


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