CIMA F3 Syllabus D. Business valuation - Interests of different stakeholders - Notes ^{1 / 7}

The effect of mergers and takeovers on stakeholders:

• Acquiring company shareholders

  There might be a decline in profitability compared with industry averages. 

  Returns to equity can often be poor relative to the market in the early years, particularly for equity-financed bids and first time players. 

  Costs of mergers frequently outweigh the gains.

• Target company shareholders

  Usually, it is the target shareholders who benefit most from a takeover. 

  Bidding companies have to offer a significant premium over the market price prevailing prior to the bid in order to achieve the purchase.

• Acquiring company management

  The management of the newly enlarged organisation will often enjoy increased status and influence, as well as increased salary and benefits.

• Target company management

  Whilst some key personnel may be kept on for some time after the takeover, a significant number of managers will find themselves out of a job.

• Other employees

  Commonly the economy of scale cost savings anticipated in a merger will be largely achieved by the loss of jobs, as duplicated service operations are eliminated and loss-making divisions closed down. 

  However, in some instances, the increased competitive strength of the newly enlarged enterprise can lead to expansion of operations and the need for an increased workforce.

• Financial institutions

  These are perhaps the outright winners. 

  The more complex the deal, the longer the battle, and the more legal and financial problems encountered, the greater their fee income, regardless of the end result.