Corporate finance Essay Example | Topics and Well Written Essays - 1500 words

Corporate pay - Essay ExampleAs per Grossman and Hart, takeover and mergers can create synergies or savings to the companies involved. For instance, in 2006, Arcelor of seat of government of Luxembourg was taken over Mittal Steel of Netherland thereby making Arcelor Mittal, the worlds largest steel company. Some of the have reasons for takeover or merger is to expand the market due to the threat from competitors or to penetrate into virgin markets, to achieve cost synergies the likes of eliminating duplicate functions, to attain higher productivity and to attain increased readiness from acquired assets or to attain increased revenues and to achieve a higher return on investments for shareholders. Revenue synergy can result in access to the hot distribution system, attaining extensions of brand and opening up new geographic markets. A takeover or merger strategy should be employed only when the acquiring company is able to enhance its networth through the positive employment of assets of the acquired company. It was established by previous data-based studies that above-average return is earned by the shareholders of acquired companies whereas the share expenses of acquiring company is likely to fall immediately afterward the acquisition or merger. For instance, when Myogen, a pharmaceutical company is taken over by another pharmaceutical giant Gilead Sciences, there was a decline of 10 percent in Gileads stock whereas there was about 50 percent appreciation in Myogens stock. (Hoskisson 2008, p. 244). In the majority of the cases, mergers and takeovers had negative results like cost overruns, desertion of key employees, and even may leave black holes in the restructured balance sheet. (Greenblat 2011). possibleness Though the merger and the takeover are often employed synonymously, there exists a variance in their economic impact between a takeover and a merger. In takeover, the acquiring company is arduous to acquire control over the targeted compan y by acquiring more than 50% of its shares. In contrast, in merger, as per Hampton (1989), there is a merger of two companies to form a new company. Takeover or merger theories can be explained as below Agency Theory This possibleness states that when the share price of a company is low, and then it forces the managers to initiate action either to enhance the share price in the market by performing well or to be taken over by a leader in the industry (DePamphills 2010, p. 41). Efficiency Theory It is divided into two differential efficient possibleness which tries to improve the efficiency of a company in the same industry by a predominate company and inefficient theory. As per Copeland and Weston (1988), differential efficiency theory offers an academic base for horizontal takeovers whereas inefficiency theory offers insight on conglomerate takeovers (Lee &Lee 2006, p. 543). Market Power Hypothesis This theory explains that companies combine together to enhance their monopoly authority to quote the prices of the product which is not sustainable at a cutthroat belligerent market. However, there is very little empirical support is available for this hypothesis (DePamphills 2010, p. 12). Free Cash function Hypothesis It is identical to that of agency theory and as per Jensen (1986), if the cash flow is in excess of that indigence to finance all takeovers or mergers which have net present values if discounted with the specific cost of capital (Lee &Lee 2006, p