Companies Achieve Growth By The Means Of Acquisition Of Another Firm

1781 Words Sep 11th, 2014 8 Pages
1. Introduction

There has been much discussion on the issue of whether can firms achieve growth by the means of acquisition of another firm. Acquisition can be generally defined as “taking possession of an asset by purchase.” (Business Dictionary, 2014) Although some researchers have argued that acquisition can contribute to firm growth, others take a different view that, to some extent, most of the acquisitions fail resulting in over confidence of CEO and the fraud by acquired firm. For instance, Sudarsanam (2003) suggested that successful acquisitions constitute less than 50% of all acquisition. This essay will aim to demonstrate that firms in their majority cannot always achieve growth by the means of acquisition of another firm.
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Synergy can be defined as the “extra energy or effective that people or businesses create when they combine their efforts.” (Macmillan Dictionary, 2009). Chatterjee (2006) suggested that there are three types about synergy: financial synergy, operational synergy and collusive synergy. All of these three types of synergy could show in acquisition. It has been argued that, the over expect of synergy usually caused by the over confident of the manager and the incorrect analysis of the market. Due to the over expect, the parent company could acquired another firm with a high price, the price could more than actual value of the acquired firm. Moreover, after the acquisition, the money spent on the acquisition cannot be gained back through the acquired firm, it could become a new pressure to parent firm and also influence the acquiring firm’s circulating fund. Besides that, once the acquiring firm cannot afford the costs of the acquired firm, the majority of the parent firms would chose to sell the acquired firm in a really low price, even less than half of the purchase price, and that could lead to a financial loss for both acquired firm and acquiring firm. For example, HP spent 10.2 billion dollar to acquire Autonomy and after a few months the HP management argued that Autonomy was overpriced. CEO Meg Whitman said Autonomy was “smaller and less profitable than we had thought.”
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