Mergers are a natural part of the business world. Some companies win and some companies lose. There are only so many resources they can exploit and as these become more limited in the global market there is a higher chance that mergers and takeovers will happen. There are signs that an impending merger will happen and many reasons why these mergers are enacted.
Have you ever seen a stock go up mysteriously in price and a few weeks or days later a merger or takeover is announce? When stock goes up in price without any other explanation there is a good chance that insider trading is happening. Executives begin to purchase more stock if they believe that it will rise in value as the new parent company buys up all the stock.
During a merger or takeover the senior executives start sending their resumes to every company that may be remotely interested in hiring them. They do this because the company that is under a bid will likely replace all these executives since these are the executives that allowed the company to become vulnerable in the first place. New companies want new leadership to enact a profitable change.
Before a takeover can happen, in many cases the company sees a decline despite it being in a potentially profitable industry. This is due to mismanagement of the assets, failure to get more clients and customer service issues. The stagnant industry can’t grow and expand simply because the leaders don’t know what they are doing or have become complacent.
The stockholders and executives in the firm still have a great amount of power to accept or decline a takeover bid. The executives and other investors still own the stocks and don’t have to sell then if they don’t want to. Since they own the majority of stocks they are the easiest for the take over firm to bargain with. Yet bids can be made on small shareholders until the takeover company has what it needs to control the strings. This is called a hostile take over.
There are many reasons why a company would want to enact a takeover. These include the following:
Cash Flow: Taking over another company can produce more cash flow to the parent organization. This cash flow can help in increasing the investments, operational needs and growth of the parent company. Cash gives it flexibility.
Economies of Scale: A company might want to take over another company because it increases its market share and this can lead to better profits. Likewise the cost of doing business reduces as the company gets larger. Not the total cost but the cost per unit decreases with size. They are able to make better deals with suppliers, customers, and more.
Knowledge: In some industries it makes sense to take over another business if that business has unique knowledge that will help the parent company. For example, company A invents a new product but hasn’t had the opportunity to exploit that product. Company B might make a bid on A because it recognizes the future profitability of that product.
Tax Credits: There are tax credits to larger companies that might not be available to smaller businesses. Thus these tax credits act as a tertiary reason for making a bid.