BBS DEGREE PROGRAMME
STAGE 3: FINANCIAL MANAGEMENT
Continuous Assessment Assignments 2009 – 2010
Organisations have many avenues open to them for business expansion. One option is to undertake a Merger or Acquisition in order to diversify, enter new markets or increase customer base.
Discuss the role of a Financial Manager in assisting with the valuation and financing of a Merger or Acquisition and identify the main potential pitfalls associated with such deals.
The term ‘Mergers and Acquisitions’ refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance and hopefully help a growing company in a certain industry , grow rapidly without having to create another business identity.
Although the two terms ‘Mergers’ and ‘Acquisitions’ are often spoken in the same lines, the two terms mean slightly different things. When one business takes over another business and clearly establishes itself as the new owner this purchase is known as an acquisition. From the legal side of things, the target company ceases to exist, the buyer “swallows” the business and the buyer’s stock continues to be traded.
A merger happens when two companies agree to go forward as a single company rather than remain owned and operated separately. This type of action is more precisely know as a “merger of equals”. Usually both firms are of a similar size. Both firms stocks are surrendered and a new company is issued in its place. An example of a successful merger is in 1999, when Glaxo Wellcome and SmithKline Beecham ceased to exist and when the merged a brand new company was formed known as GlaxoSmithKline.
In real life business terms actual mergers of equals don’t happen too often. Usually, one firm will buy another firm and as part of the terms of the deal, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an...