Mergers and Acquisitions Explained

This assignment delves into the complex world of mergers and acquisitions (M&A). Students are tasked with understanding the various reasons why companies engage in these strategic combinations. The provided readings cover diverse perspectives on M&A, including economic rationale, competitive strategies, and legal considerations. The assignment emphasizes critical analysis of different viewpoints and encourages students to synthesize their understanding of the driving forces behind mergers and acquisitions.

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MANEGERIAL ECONOMICS
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Introduction
Predominantly, horizontal mergers imply the consolidation of businesses in the same
market structure or industry. Unlike vertical mergers, horizontal mergers are meant to promote
efficiency in the economies of scales. Typically, there are various reasons behind the formation
and acquisition of horizontal usually ,mergers are for profit maximizing reasons and non profit
maximizing reasons such as expansion of operations, provide better services at low prices among
other reasons. Curently, the banking industry has experienced consolidation in the recent years
due to various reasons. Majorly risk diversification and deregulation of the sector are among the
notable reason for this trend.
Profit-maximizing Mergers and Acquisition
Predominantly, for-profitmaximizing horizontal mergers, the main reasons firms
consolidate their operations is to maximize their profits margins through enjoying large
economies of scale(Collino 2011). Mostly,firms do form mergers and acquisitions to maximize
their profit levels through increased production and increased market share which is available
through the formation of mergers and acquisitions.Acquisitions happen when a firm is absorbed
by another firm,resultingin the company absorbing the other company to continue existing.
Moreover, the desire to eliminate competition within a given geographic location has encouraged
the formation f mergers and acquisition(West Encylopedia of American law 2016).Usually,
horizontal mergers happen between firms producing same or identical products thus through
consolidation and acquisition these two firms become one, facing no competition in that
geographical area allows them to control large market shares thus resulting in huge profits.

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Also, there are high chances of exemplary management in cases of horizontal mergers
and acquisitions which is likely to contribute to better resource allocation and quality of products
by the merger resulting in normal and supernormal economic gains. The desire to produce high-
quality goods to boost sales and in turn multiply the profits is a major motivator for profit-
maximizing mergers to form (US Department of Justice 2006).Mainly, due to low operating and
marketing costs enjoyed by mergers ,profit margins are bound to increase significantly thus the
force behind mergers for profit maximizing. Inevitably, there s reduced marketing and
advertising costs with the formation of mergers thus leading to low operations costs and more
profit for the company. In addition, due to the large economies of scale available following the
merger, the firm is likely to venture into research and development, an innovative product which
in the long run maximizes the profit margins of the company.
In addition, the need to enjoy large economies of scale that are available after mergers
and acquisition is a strong motivator for profit-maximizing mergers (Economy watch
2010).Primarily, mergers experience large economies of scale through the elimination of
competition which guarantees large market control, reduced operating capital and low
advertisement costs. All these economies of scale guarantee profit maximization for the merged
firm. In the event that a horizontal monopoly is formed,there's no market or industry competition
thus increased market share and a lot of consumers which is ideal for profit maximization for
mergers and acquisition firms. Moreover,through horizontal mergers,there s reduced production
costs which implies the firm is able to save its operational costs and still maintain substantial
profit margins.
Through horizontal mergers,there s massive firm growth which implies increased market
share,ideal for profit maximization. The growth of a firm can be through increased

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production,increased market share, employees among other factors which are achievable under
mergers and acquisitions hence for profit-maximizingreasons,some companies may consider
merging or acquisition to achieve firm growth(Martin 2015).Usually, individual firms possess
share market power unless the market structure is a monopoly in nature. Through the need to
increase market share,horizontal mergers resulting into monopolies might arise or otherwise
increased market share and power which is beneficial to all profit-maximizing firms. Moreover,
the desire to possess unique capabilities such as licenses, patent capabilities could be behind the
reason for mergers and acquisition.
Through mergers and acquisitions,a firm can engage in diverse activities on a product
due to the ownership or permission to use the patented rights which could lead to supernormal
profits for the firm (Martin 2015).Also, efficiency is a major motivator for the formation of
mergers and acquisition(Elgar 2006).Due to the changing economic conditions, competition,
globalization, most firms aim to achieve economic gains which means low operations costs,
allocative efficiency to maintain profits thus the need to form mergers and acquisitions to boost
firm efficiency. The desire to have low productions costs as opposed to the profit margin and to
avoid wastage or underutilization of resources has prompted the formation of mergers. Under
horizontal mergers, there's production efficiency and proper utilization of resources leading to
low operational costs due to the efficiency experienced in mergers and acquisitions.
For-profitmaximization,there need to operate on low production costs, proper utilization
of resources which is achievable under mergers and acquisition. Mergers are considered more
efficient as compared to cartels that are why mergers are sometimes encouraged by different
governments.

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Non profit maximizing Mergers
Usually, mergers are formed for profit making but not always. Sometimes mergers are entered
into to maximize the resources of the enterprise (Swan,2014).Typically, mergers are consider a
show of strength and vitality thus one of the reason for business to consider mergers that aren’t
based on profit maximization. Through such non profit oriented mergers, there’s room for
sustainability and growth of the merged business enterprise. Also, there s enjoyment of low
production and operation costs being enjoyed under such mergers and acquisitions. In addition,
Non profit mergers have been able to provide and sustain better service provision due to the
enjoyment of low costs available through mergers. For instance the Arizona ‘s Children
Association made seven acquisitions to enable it provide better services and at lower costs to its
beneficiaries((Milway,Orozco and Botero 2014).
Through the numerous acquisition, its revenue has grown substantially from $12 million
in the year 1998,to $36 million in the year 2012 .In some cases mergers though not intended for
profit maximizing ends up being profitable for the acquired business enterprise. In addition,some
companies consider mergers for the good and welfare of the society.Typically,most business
operate with the aim of making profit solely without considering the societal needs and other
human welfare needs. According to the institutional perspective, some companies form mergers
to combat the externalities for the betterment of the society and its employees (Kanter
2011).Also, diversification is another motivator for firms to merge. Through product
diversification, companies are able to engage in a variety of products under the same business
enterprise(Peavler 2017).

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Moreover, mergers offer investment diversification too in the sense that a business
enterprise can participate in a totally different new venture than before and in the process
generate more revenue for itself and create employment opportunities in the process. In certain
cases, mergers and acquisitions are motivated by taxation efficiency and incentives. For instance,
in the case that tax breaks and concessions are offered to companies enjoying monopoly status or
other advantages not enjoyed by other industry players. Some companies may merge to enjoy
such taxation benefits. Moreover, risk reduction is another reason why companies choose to
merge (Peavler 2017).Under global or regional trade, foreign exchange and market acquisitions
are frequent due to the risk reduction being offered through mergers and acquisitions thus
motivating the consolidation of foreign businesses.
Also,the necessity to boost a companies financial standing can motivate mergers and
acquisitions.In an attempt to prevent bankruptcy and liquidation some companies have opted for
mergers and acquisitions to save themselves and their employees from going under.Acquisitions
and mergers can improve the finances of a company and save it from winding up. Additionally,
synergy is a motivator for mergers and acquisitions in the world today.Through synergy,
companies are able to record low operation costs with increased performance(Renauld
2017).Also sharpening business focus has motivated companies to merge in the sense that they
are able to control deeper markets. Moreover, the desire to grow the business enterprise without
necessarily keen on making profits can be easily acquired through mergers and acquisitions.
Notably ,there is an increase in the supply chain through mergers and acquisitions. The
desire to increase business capabilities has been considered as a reason for businesses
consolidating (Schlachter and Hidebrandt 2017).Typically, informed capabilities maybe in the
form of research, development and innovation. Also, the desire to gain and enjoy competitive

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advantages may be the force behind recent mergers and acquisitions in the sense that companies
merge to produce quality products at relatively low costs. Through acquisitions and mergers ,an
acquired company enjoys an already established consumer base. Sometimes, mergers are made
to replace company leaders in the event that there are no evident successors in sights thus
acquisitions, old leadership team can be replaced. Also, cost reduction is another significant
motivator of mergers and acquisitions.
Through mergers and acquisitions, there’s integrated function and large production
which might lead to reduced costs. Similarly, survival can induce the need to merge or acquire.
For instance, following the Global Financial Crisis, most car manufacturers opted to merge in
order to survive.Also,the banking industry experienced several mergers and acquisition as a
survival tactic. Similarly, mergers and Acquisitions are meant to add value to companies and to
grow companies rapidly as compared to starting over(Rappaport 1979).Usually, internal growth
strategies are not so effective owing to economic uncertainties and regulation. Further,most
companies are opting for mergers and acquisitions so as to expand their operations.
To what extent is the literature on the motives for merger and acquisition relevant in
explaining the long-term trend observed in many countries in recent decades towards
consolidation within the banking industry?
Noteworthy the banking industry has recorded a long history of mergers in the United
States of America due to the fact that most banks have opted to expand and provide a wider
range of services. Also ,the financial deregulation of the banking sector has motivated the
formation of banking acquisitions.Specificially ,the consolidation of banks is supported by the

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Gramm-Leach –Bliley Act 1999 which encourages diversification(Hagendorff and
Vallascas2011).In addition, the banking industry consolidation is motivated by the increase in
market power possible after acquisitions, efficiency in profit making ,diversification of risks,
system proficiency improvements and expansion of the safety net for financial
services(Berger,Demsetz et.al,1999).Predominantly, maximum shareholder value has drove the
banking industry towards acquisitions and mergers through expanded operations of a bank by
increasing the number of banking institutions under one umbrella.
The rapid banking sector consolidation is directly affected by technological, financial
conditions, international finance sector consolidation, financial decline or surplus and
deregulation of the finance and banking sector. Among the factors accounting for the increase in
mergers in the banking sector across Europe and North America is wealth creation for
stockholder, improved efficiency and value enhancement to stockholders(DeYoung, Evanoff
et.al 2009).In addition, there are subsidies for bank mergers which have encouraged banking
sector consolidation locally and abroad. Due to the ability to further diversify financial services
under mergers, most banking institutions are considering consolidating to enjoy the benefits that
come with consolidation.
According to professor Dewey consolidation of the banking through mergers is
justifiable under bankruptcy and liquidation circumstances. Mergers and acquisitions are a result
of a successful financial market and not necessary for market power
control(Manne,1965).However, through mergers, control is taken over from the corporation
Further, consolidation of the banking industry is motivated by the desire to protect non
controlling shareholders and general public welfare from an economic view
point(Manne,1965).However, its been recorded that domestic banking consolidation through

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mergers and acquisitions is more rampant as compared to international banking
consolidation(Buch,Splinder et.al 2015).
Notably, the slow trend in International banking sector consolidation is due to politically
and regulatory frameworks .In addition, cultural restrictions among the global countries is also a
factor hindering the development of an international consolidated banking system. Moreover,
there are various shortcomings with the operation of internationally consolidated banking system
such as performance disparities such as language ,regulatory framework, expectations of the
shareholders and customers, different set of operating laws of the banking sector and the
physical difference of the host and home country may render the consolidation
ineffective(Buch,Splinder et.al 2015). Contrary to the belief that mergers do not value ,recent
studies prove otherwise
. Through mergers, positive outcomes of bidder and target stocks have been
recorded(Houston et.al,2001).With the announcement of mergers, market values of acquired
banks rise. Due to the mergers, valuations gains that are implied are large with projected 60
percent projected gains. Mergers gains are derived from reduced operation costs and increases in
revenue this is due to the combination and expansion of operations acquired through the merger
or acquisition by the consolidated bank. Commonly, such merger gains are enjoyed in similar
geographic located banking institutions.Usually,cost savings are a major motivator for banking
consolidation trends in different parts of the world. Through mergers there are reduced operating
costs and increased accounting profits thus offering incentives for more banking institutions to
consider acquisitions and mergers.

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In addition, another merger gain, stems from the stock price performance levels owing to
merger announcement.Typically, merger gains are recorded in circumstances where the bidding
and target combined values increases with the knowledge of the merger. Noteworthy, the United
States banking deregulation and dormant branching restrictions has greatly contributed to the
banking consolidation trend observed since the 1990s(Critchfield and Jones,2005).Further, with
the banking industry venturing into consolidation, there been a massive decrease in the number
of banking organizations which is a positive indicator of the success of the banking consolidation
sector. Also, massive foreign banks relocating to the United States and other foreign nations has
greatly contributed to the ever growing banking consolidation trend currently observed in the
world today.
According to Crifchfield, the number of banking organizations have rapidly declined
due to the increase in banking mergers and acquisitions. In addition, banking failures are credited
for contributing to the rising decline of banking organizations and corporations in the United
States of America. The increase in the financial or banking industry has further contributed to the
rise of banking mergers and acquisitions globally. Moreover, supported by the banking industry
concentration and asset growth, the banking industry journey towards consolidation proves
successful and attainable worldwide. However, the fragmentation of the banking industry has
slowed down international and regional banking sector consolidation(Berger,Molyneux
et.al).The banking industry consolidation is likely to continue growing due to the merger gains
and other merits achieved through mergers and acquisitions.

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Conclusion
Regarding mergers and acquisitions, there are profit maximizing factors and non profit
maximizing factors that have contributed to the need for consolidation. All in all, its true that
mergers and acquisitions have led to positive outcomes. By and large, there s been cross border
banking which goes to show there’s hope for more international banking consolidation.
Preceding the Global financial crisis of 2008-09,40percent of cross border banking acquisitions
have taken place. Notably, the decline of banking mergers is attributed to the global financial
crisis of 2008-09 which saw the failure of most financial institutions globally.

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