Corporate Finance Essay Example | Topics and Well Written Essays - 2000 words

Corporate Finance - Essay Example In addition, environmental factors like macro economic conditions and cyclical behaviour of the industry may influence on their performance. The hubris hypotheses formulated by Roll, states that often company managers systematically commit error in evaluating merger opportunities which are due to their excessive self-confidence. So, managerial motives play important role in determining the outcome of the merger and acquisition. In contrast, in some instances even when shareholder wealth is destroyed, executives still seem to gain from mergers and acquisitions, which show that, managers through mergers and acquisition activities may seek to utilise their own utility at the expense of shareholders (Casper Flugt, 2009). Main objectives of merger Companies go for merger and acquisitions to expand their business. By the process they try to develop their companies’ brands. Aim to reduce market competition. Aim to cutting costs by laying off employees, removing management and other r elated actions. To reduce taxes they go for merger. Aim for ‘empire building’ by acquiring managers and other purposes, they may go for acquisition. It is a strategic move by companies to diversify their business away from their resources. Company managers think that joint company will be able to generate more value than the separate firms. There are many options for payment for a company when it goes for acquiring another firm. It can pay in fully cash, or it may buy targeted shares. It can also choose a combination of loan notes, share and equity, deferred payment. Actually, the payment method is important for several reasons. Payment by means of cash and debt will benefit more for a company than stock acquisitions, as it could be used more efficiently... At the time of stock market boom, mergers were more appealing. On the other hand, falling share prices can lead to a company being undervalued, and make it an attractive for acquisition. Mergers and acquisitions can either be value destroyers or value creators that depend on factors like company’s cost of capital, its strategies and decisions and cash flows generated from the business operations The performance is not related to the nature of an industry, instead it was driven by the quality and strategy of management. Good strategy by management can produce good results, on the other hand, poor decision and strategies may end with poor performance. In the present competitive market companies are looking for mergers and acquisitions to expand their business to a newer region. Most of the mergers and acquisitions resulted in value creation. Especially, in case of big companies it is true. There is some perception that nearly 50-70% of mergers fail to deliver shareholder value. In many occasions employees feel the pinch as the new group goes to cut jobs to reduce cost to the company. But, ultimately performance is not related to the nature of an industry, instead it was driven by the quality and strategy of management. Sound financial management along with other favourable factors is necessary for value creation, its survival and growth for any company.