Syllabus C. Acquisitions And Mergers C1. Acquisitions and mergers versus other growth strategies

C1a. Reasons for and against acquisitions, mergers and divestments 1 / 6

Syllabus C1a)

Discuss the arguments for and against the use of acquisitions and mergers as a method of corporate expansion.

Reasons for mergers and takeovers

The main reasons

why one company may wish to acquire the shares or the business of another may be categorised as follows.

  • Operating economies 

    Elimination of duplicate facilities and many other ways.

  • Management acquisition

    Acquisition of competent and go-ahead team to compensate for lack of internal management abilities.

  • Diversification

    Securing long-term future by spreading risk through diversification.

  • Asset backing

    Company with high earnings: assets ratios reducing risk through acquiring company with substantial assets.

  • Quality of earnings

    Reducing risk by acquiring company with less risky earnings.

  • Finance and liquidity
    Improve liquidity/ability to raise finance through the acquisition of a more stable company.

  • Growth

    Cheaper way of growing than internal expansion.

  • Tax factors

    Tax efficient way of transferring cash out of the corporate sector. In some jurisdictions, it is a means of utilising tax losses by setting them against profits of acquired companies.

  • Defensive merger
    Stop competitors obtaining advantage.

  • Strategic opportunities

    Acquiring a company that provides a strategic fit.

  • Asset stripping

    Acquiring an undervalued company in order to sell off the assets to make a profit.

  • Big data access 

    Big data refers to a collection of data sets too large and complex to analyse using traditional database management tools. 

    A technology company may want to acquire a company for the data it holds on users which can be of great value to that company.

FB and Instagram

Facebook acquired the photo-sharing app company lnstagram tor $1billion. 

Although lnstagram was not profitable, it had 30 million worldwide users before the acquisition. 

Acquiring the data of lnstagram users is valuable to Facebook, for example, it could allow Facebook to track the movements of users who upload a photo on a mobile device, and place targeted advertisements to the user.