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r when it sees an opportunity to make an investment with a positive incremental net present value. It is likely to perceive such an opportunity in either one of the following situations. One, where it considers that the incremental cash flow from the investment when discounted at a rate consistent with the level of risk associated with the cash flow are positive or two, where the reduction in the level of risk associated with the bidder’s existing cash flows causes the appropriate rate for discounting those cash flows to fall, thus increasing the net present value of the existing cash flows of the bidder (Ross et al, 2007).

Too Much Debt and the Risk of Bankruptcy

A risk when acquiring another firm is in terms of financing. If a company has excess surplus cash then this would not be a problem. However, some firms finance their acquisitions through the issue of debt. Debentures have their part to play but have serious disadvantages from both viewpoints. They create binding contractual obligations on the bidder both as regards to interest and capital repayment (McLaney, 2001). To the equity holder of the target, they represent a distinct change of investment, a change to a risk/ return profile which they may find unacceptable. Switching back to equities would involve them inconvenience and cost. Hence, a company may find itself with too much debt and this would increase the risk of bankruptcy, especially when the merger is a failure and drains the company’s cash.

Potential for Product Synergies

There are many reasons why a firm may want to buy over another. One of them is synergy. In theory, mergers can bring real benefits to shareholders due to genuine increases in positive cash flows or risk reduction. These benefits are often referred to as arising from synergy, a ‘two plus two equals five’ syndrome with the whole being greater than the sum of the parts (McLaney, 2001).

Another reason for mergers and acquisitions is risk spreading and reduction through diversification. Merging two firms with different activities will reduce risk since the returns from the different activities are unlikely to be perfectly positively correlated with one another. Though this fact is frequently put forward as the justification for such mergers, in the context of maximization of shareholder wealth, it is invalid in itself. This is because such diversification could be undertaken by individual shareholders at little or no cost. Their wealth will not be increased by having this done for them, because the security market prices seem to assume that such diversification will already have taken place (Ross et al, 2007). This could create conflicts between shareholders and management.

Access to New Technologies and Emerging Markets

A third reason for mergers and acquisitions are access to new technologies and emerging markets. Furthermore, they result in the economies of scale that a larger business could yield. Such economies may be in a wide variety of areas. For example, a larger buying power may lead to lower prices being paid for raw materials, larger production runs may become possible leading to savings in the setup costs and other overheads (Rugman and Hodgetts, 1995). Combining administr本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。