Merger And Acquisition : Growing New Business

2013 Words9 Pages
Merger & Acquisition – Growing New Business Controlling uncertainty, realizing economy of scale, enhanced product offering, synergy to be gained or acquiring a capability not previously realized? There are a number of different reasons why a company may attempt to merge or acquire another. For all the various explanations out there in the end the simplest explanation is the best. It is all about the money. Greater efficiencies, outputs, tax breaks, complementary products, vertical integration can all translate to money. Businesses and the people running these businesses are graded based on how they do on Wall Street. Increased profits, positive company buzz can help generate company value. Individuals running successful companies…show more content…
Investors expect the acquiring company to organically growth the new business and achieve certain milestones. An inability to do this results in lower valuation and loss of shareholder trust. Procter and Gamble (P&G) learned this lesson when they acquired Gillette, in 2005, for $57 billion. Five years after the merger, P&G stock was up 12%, while this appears to have done well when compared to the S&P which was down 8% over the same period. When compared to expected returns of 25% P&G failed to meet expectations. P&G’s results failed to meet expectations when compared to competitors such as Colgate-Palmolive who were up 53% and Unilever who were up 36% over the same period of time. This left analyst to wonder whether P&G’s acquisition of Gillette was a success, or whether they overpaid for the acquisition (Neff, 2010). The P&G example serves to illustrate how a business transaction may not deliver the expected outcomes. While P&G was able to recover from such a business transaction, smaller companies are not afforded such opportunities. Furthermore, smaller businesses do not have the necessary cash flow or value to acquire a business outright and may require use of certain financial levers to facilitate merger and acquisition transactions. Let’s use an example of a 20 person operation that has been profitable for the
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