Synergy

The main motivation behind most mergers is to increase the value of the combined company. If companies A and B combine to form a C corporation, and if the value exceeds the value of C and A and B, if viewed separately, then synergy can be said to have occurred.

Tax Considerations

Tax considerations have led to a number of mergers. For example, a profitable company and is in the range of the highest taxes can acquire a company that has accumulated tax losses in large numbers. If the company is experiencing lack of internal investment opportunities when compared with free cash flow is available, then the firm can (1) pay an additional dividend, (2) invest in securities, (3) buying back its stock, or (4) buying another company.

Purchase of Assets in Lower Cost of Replacement

Sometimes a company will be seen as an acquisition candidate because of the cost of replacing assets is much higher than its market value. For example, in the early 1980s, the oil companies can buy back at lower prices through the purchase of other oil companies instead of doing exploratory drilling.

Diversification

The manager is often mentioned as one reason for the diversification of the merger. They argued that diversification would help stabilize the company’s profits and consequently benefit the owners. Stabilization of the advantages is that it is definitely beneficial for employees, suppliers and customers, but from the standpoint of shareholders, the stabilization is less certain value.

Private Incentives Manager

Discretion will be able to deter it also can motivate merger. After most of the takeover, some managers of acquired companies that lose their jobs or at least autonomy they have. Therefore, managers who have less than 51% shares of the company they are trying to find ways that will minimize the chances of a takeover. Such defensive mergers are very difficult to be maintained based on economic reasons.

Residual value

The company can be judged from their book value, economic value, or replacement value. More recently, the takeover specialist companies have begun to recognize the residual value as one another to do a valuation basis.

Types of Merger

There are four types of merger:

• Horizontal Mergers, occurs when a company joins other companies in similar lines of business.
• Vertical Mergers, acquisitions form a company with one of the suppliers or customers.
• Congener Mergers will involve companies that are related but not a producer of a similar product or company that has a supplier-manufacturer relationship.
• Mergers conglomerate, occurs when companies unrelated to join.