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Chapter 7
Reasons of Acquisition
Increased market power when firm is able to sell its products above competitive levels or when the costs of its primary or support activities are lower than those of its competitors To increase market power, firms often use horizontal, vertical and related acquisitions
Horizontal Acquisition
The acquisition of a company competing in the same industry as the acquiring firm is referred to as a horizontal acquisition Horizontal acquisition increase a firms market power by exploiting cost based and revenue based synergies Horizontal acquisition results in higher performance when the firms have similar characteristics
Vertical acquisition
A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more of its goods or services
Related Acquisition
The acquisition of a firm in a highly related industry is referred as related acquisition
Increased diversification
Firms may use acquisition for diversification Firms might find it difficult to develop a new product for a new market and in a case of unrelated diversification the firm would go for acquisition
Integration problems arises due to different corporate culture, linking financial and control system, building effective working relationships, resolving problems regarding status of the newly acquired firms executive Inadequate evaluation of target The potential acquirer evaluates the target firm through a process called Due diligence in which hundreds of items are examined like financing for internal transaction, differences in culture, tax consequences of the transaction, actions needed to meld the two workforces Due diligence is performed by investment bankers/accountants/management consultants etc at times this can be done by an internal team If the due diligence is not done properly it may result in acquiring firm paying an excessive premium for the target company Research shows that in times of high stock prices due diligence is relaxed and so the purchase price is driven by other factors rather than rigorous assessment of where, when and how management can drive real performance gains