The Effects of Merger and Acquisitions on the Recent Worldwide Assignment

The Effects of Merger and Acquisitions on the Recent Worldwide Financial Crisis - Assignment Example Mergers occur when two or more entities come together (in a form of partnership) to form a single trading unit- the entities cease to exist and form a new firm. A good example is the merger of two banks Lloyds TSB and HBOS, following the global financial crisis, to form Lloyds TSB-HBOS (Rosenbaum, 2009). Acquisitions on the other hand, refer to one entity, the bidding company, taking over a target entity, by acquiring, through purchase, of its stakes that could include shares, stocks (majority control of its capital) or assets. For example, Lehman Brothers was declared bankrupt (at a debt of 613 Billion Dollars) due to the recent global financial crisis was bailed out by the American Federal Government (Mihm, 2010). Therefore, the major distinction between mergers and acquisition is the position of the shareholders. In mergers, the shareholders exchange their shares for shares of the new entity, while in Acquisitions; the target company is bought out, with shareholders paid in cash o r debt. Objectives of Mergers and Acquisitions The current wave of M&A began in 2005. A report by the International Monetary Fund indicates that, during this time, the world’s real GDP grew by 4.8%. ... Many business firms opt for M&A due to many reasons. To state briefly, it is argued most firms, go for M&A, to cut on production costs; that, it is cost effective in the long run to merge with or acquire a firm producing a raw material for the larger firm. This saves on market exchange costs while the synergy due to M&A cuts on departmental and running costs, compared to an increased revenue stream from a large market share and a centralized management. Secondly, M&A is seen to achieve competitive advantage, due to new market knowledge and goodwill acquired, territorial advantage of the native firm acquired. A firm will merge or acquire another, and excel in the new market, due to the knowledge and experience of the target entity, as opposed to efforts of the bidding company going to it alone, in the foreign market (Shan & Hamilton, 1991). Another reason for M&A is the financial advantage of tax reliefs. It is argued that a company which reports loses, is more likely to be bought off by another profitable one, as the target company’s reported loss will be utilized in reducing tax liability. However, most governments like the United States have legislations that limit and check against this practice (Mihm, 2010). A statistical study by Emirates Centre for Strategic Studies & Research indicated that, the Arabian banks and Companies, which are smaller in size compared to similar foreign institutions needed to merge so as to remain globally competitive. Also, indicated in the report is because, in the first three quarters of 2008, there were 48 mergers in the Middle East only (Emirates Centre for Strategic Studies and Research, 2009). Shan & Hamilton in their article â€Å"country-specific advantage and