THE USE OF MERGERS TO INCREASE SHAREHOLDER VALUE IN FINANCIAL DECISIONS

 THE USE OF MERGERS
TO INCREASE SHAREHOLDER VALUE
IN FINANCIAL DECISIONS
2008
Breadth Component Abstract
Merger financing can be accomplished by a leveraged buy-out, a stock option
plan in some instances, or a stock buy-out/transfer. The best way a company can finance
a merger they want to pursue is truly up to their own needs and abilities. If they do not
have a lot of money then one regime may suit them better than the other such as the
leveraged buy-out. It is in this instance where the advantages and disadvantages of the
different finance schemes come to light. Once financing for a merger can be procured,
the decision as to what type of merger would benefit the company best should be decided.
Vertical and horizontal mergers are two of the main mergers. Horizontal is the merging
of rival companies, and this integration type has its advantages and disadvantages.
Vertical is the merging of two companies within the supply-chain, and this integration
type has its advantages and disadvantages. It should be of note that vertical integration
can be up or down within the supply-chain. Ultimately the choice between vertical and
horizontal should be whether the company wants to have a larger portion of the supplychain or if the company wants to buy a rival.
Depth Component Abstract
Horizontal and vertical mergers are two of the biggest types of mergers available
for a company. Each merger format has some benefits and drawbacks. Vertical merger
will present a company with a wealth of tax benefits, cost benefits and a higher degree of
profitability due to greater efficiency. Horizontal merger offers a chance at greater
market share and a higher degree of market and price controls. Both types of mergers run
into some problems with antitrust regulation. In vertical integration the antitrust
guidelines mainly look to whether or not the buying of a supply-chain company will
become a barrier to entry for other companies. The horizontal integration and antitrust
procedures are a little more intense. The government utilizes antitrust guidelines and an
index that is normally called the HHI to determine whether a horizontal merger violates
antitrust laws, although the government and many economists will admit that horizontal
mergers often benefit the public. Despite the overwhelming power of antitrust, other
conditions will cause a vertical and horizontal integration to not occur as well. In vertical
merger an issue of what type of property right is being transferred as well as the
accounting costs outweighing the benefits are two items that can cause a company to
have second thoughts about pursuing the combination. In horizontal merger a company
will have doubts about the integration if the market is already too concentrated or the
rival already has a large amount of the market share. The two merger types can be
complicated and present the company with many pitfalls, but the benefits often outshine
the numerous downsides.
Application Component Abstract
Vertical and horizontal integrations have benefits and negative ramifications, but
all of this information would provide little knowledge without some actual examples to
accompany it. First, a merger of any type usually succeeds more if the acquired company
maintains some type of personal image through the keeping of managers and workers.
Often companies will replace the management team at the target company, and this
appears to be a mistake and one of the biggest elements that will determine merger
success or failure. The vertical merger successes of Dell Computer and the music
industry demonstrate how supplier control and promotional support can assist a company
in the market. The vertical merger failure of the network television industry
demonstrates how merger can stifle innovation. The horizontal successes of the beer
industry and drug companies demonstrates how timing and cutting of costs as well as
pursuit of opportunities will help a merger’s bottom-line. The horizontal failure of the
Chrysler and Daimler example shows how a lack of vision, planning, and cultural
sensitivity will cause a loss in identity and a lack of cohesion between the two companies.
A merger plan developed on these examples would be beneficial to an executive who is
thinking a horizontal or vertical merger would be ideal for his shareholders.
Introduction to the Study
Background
International finance has changed throughout the more recent decades as the
advent of globalization has firmly taken precedence over every avenue of worldwide
economics. The introduction of globalization and an opening of foreign markets have
introduced an increase of mergers that occur overseas between foreign companies as well
as domestic companies. The fact that the Communist nations have fallen, OPEC has a
diminished power, capital flows, new financial instruments and the spread of financial
institutions, and the determinants of exchange rates all demonstra