ACCA AFM Syllabus C. Acquisitions And Mergers - Reasons for and against acquisitions, mergers and divestments - Notes 1 / 6
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.