Essay on Mergers and Acquisitions

The percentage of inflation is either reducing or steady There is increase in the rate of inflation

There is an increase in the earnings report when compared to the same period last year There is a decline in the earnings report compared to the same period the previous year

There are more winners and few losers since the decline line is consistently positive There are fewer winners and more losers. The decline line is on a negative trend

Market closes at the high for the day. The market sells off toward the close or at the lows for the day.

Strong volume on up days, and rallies for several days in a row. Weak volume on up days. A high amount of down days.

The trend line is reasonably positive The trend line is negative

Table 1: Differences between bull markets and bear markets

In understanding the economic condition of EU in the period between 2002 and 2013, it is essential to know the financial terms between 1990 and 1992. There was a fall in the business activities during this specified period. Consequently, this led to a reduction in the rate of inflation. Despite the dropping rise, the nominal prices of interests were still high, thus increasing real rates of interest. In addition to that, there were tax reforms in 1990-1991 in various countries such as Sweden. With the predicament, results were an increase in the real rate of interests after tax of the households. Moreover, people no longer took loans, started paying off their debts, and this led to a reduction in demand and consumption. The levels of unemployment started increasing as well. During the happening and occurrence of the event, banks incurred substantial credit losses.

Forms of Mergers and Acquisitions

There are three primary forms of M&A's; these are; consolidation, the acquisition of assets and the acquisition of shares.

Consolidation- since a merger is a form of absorption of one company (target) by another firm (bidder). The bidder company now takes all the assets and liabilities belonging to the target company. It is important to note that once the merger takes place, the target company does not exist as a separate company anymore. When two or more groups come together, they form a new company and, this is gains terming to as consolidation (Acharya & Hasan, 2006). The companies that come along lose their former existence and become a new company.

Acquisition of shares involves when the target firm's voting shares face extinction.

Acquisition of assets is when all the assets belonging to the target firm fall in shortage or purchases. However, the existence of these target firms does not end with the addition of their shares or their assets.

Categorization of Merger and AcquisitionThere are three types of mergers and acquisitions. They include; conglomerate acquisitions, horizontal acquisitions and vertical acquisitions.

Horizontal acquisition- it occurs when the bidder and target firms merging belong in the same industry.

Horizontal acquisitions- these occur when mergers and acquisitions happen in the banking industry (Akben & McNulty, 2006).

Conglomerate acquisition - When the bidder and target firms are in entirely different fields, this gains terming as conglomerate acquisition (Altunbas & Mrques, 2008).

Mergers can also gain geographical categorization. They can be cross-border mergers or domestic mergers and acquisitions. Domestic acquisitions are those that happen in the same country whereas cross-border acquisitions take place between bidder and target companies found in different nations (Berger & DeYoung, 2000).

Stock, cash and debts are the three forms of payment in all transactions and exchanges involving mergers and purchases. When the primary form of payment is cash or debt, the impact of this trade is that it will raise the financial leverage of the bidder (Lorenz & Schiereck, 2007). The effect of an increase in the monetary advantage is that the shareholder value of the bidder will reduce because the risk of financial distress heightens. When the form of payment is debt, the tax shield increases, and consequently, this decreases the tax (Margisi et al. 2008)

Theory about Merger and Acquisition

There are several theories which explain the motives behind companies coming together to form mergers. They include the Synergy theory, market power theory, Agency theory and the Information Asymmetry theory.

Market Power Theory

Companies may decide to go together so that they can control the prices, the type and nature of products and the quality of the products in the market. Market power can potentially result in un-competitively high and risk-free profits (DeLong, 2003a). With arguments from the perspective of the market power theory, mergers and acquisitions will lead to a reduction in the number of banks, competition reduces, and ultimately, there will be a higher market concentration while the market power in the banking increase is going to rise significantly. Therefore, banks will have the potential to increase prices within the market; this will translate to higher profits. Mergers and acquisitions, therefore, ought to enhance the performance of the target firms and bidder firms (Belratti & Paladino, 2011).

Synergy Theory

The synergy theory is the second theory. The theory proposes that the amount of economic value which will result because of a merger and acquisition is dependent on the number of resources that the company owns. However, that amount is relative to the total amount of funds available in the economy together with the availability of opportunities to utilize the resources. M&A's increase the future cash flow the firm value through synergy in financing and operating costs (Scholten & De Wit, 2004). It is evident from an increase in the economic scope due to a combined advantage of the two firms that have merged. Revenues rise because of either cross-selling (sell (a different product or service) to an existing customer) or up selling (a sales technique whereby a seller induces the consumers to buy more costly goods, upgrades or other add-ons so that they can make more profits). The reduction of costs due to inefficiency gains and tax reduction advantages. All these factors collectively result in synergy. Concerning this theory, the performance of both targets and bidders is usually expected to rise (Pasiouras et al. 2007).

Agency Theory

Agency theory proposes that every company has incentives which can help the business to grow beyond their size. The power of the manager increases and the number of resources under their control increases as well due to the growth of a company (Berger et al. 2004). According to this theory, the management of bidder banks entails the acquisition of just personal benefits without bearing in mind the economic implications (Hankir & Umber, 2011). The hubris theory is similar to the agency theory. According to the hubris theory, the management of the bidder bank incurs a high price since they are cocky with their knack of knowing undervalued target banks. With agency and hubris theory, there is a decrease in the performance of bidder banks (Hagendorff & Nieto, 2013).

Information Asymmetry Theory

The information asymmetry theory is the fourth theory. The approach stipulates that mergers and acquisitions have adverse effects on the stock return since the announcement signal to the market that firm's stock is mostly in full. The overall performance of bidders will drop (Roller & Verboven, 2001).

Motives of Merger and Acquisition

There are several reasons why companies enter into mergers and acquisitions. They involve; growth in revenue, cost reduction, target management, reducing operating cost, and observing the economies of scope.

Growth in revenue - The growth and increase in revenue occur due to marketing benefits; monopoly power created and other strategic gains. All these factors result in a rise in the operating cash (Degryse et al. 2006). Monopoly power enables the company to eliminate competition and control prices thus enjoy monopoly profits.

Cost reduction is the second motivation for mergers and acquisitions. With reduced costs, the operating efficiency of the company increases. Inefficient management reduces; there is an improvement in the economies of scale, transfer of technology and innovation, savings of vertical integration and availability and use of complementary resources (Rezitiz, 2008). When the merged company is more efficient compared to the target and bidder companies, there is going to be economies of scale. Horizontal mergers benefit from economies of scale through the sharing of resources. Consequently, this results in a reduction in the production costs while increasing the production and manufacturing levels (Bernard & Gomez, 2013).

Target management- When the control of the bidder companies assumes that the target company is not performing well in the market as it should be, this results in target management.

Reduce operating costs- Bank mergers and acquisitions also happen to reduce the operating costs. It is achieved by lowering the overhead staff costs, merging the different branch networks and, the integration of risk management and info technology system. Another reason why bidder banks acquire other banks is to increase and expand the size of the company and the capital base while increasi...