a. Synergy
Every merger has its own unique reasons why the combining of two companies is a good business decision. The underlying principle behind mergers and acquisitions ( M & A ) is simple: 2 + 2 = 5. The value of Company A is Sh. 2 billion and the value of Company B is Sh. 2 billion, but when we merge the two companies together, we have a total value of Sh. 5 billion. The joining or merging of the two companies creates additional value which we call "synergy" value.
b. Bargain Purchase
It may be cheaper to acquire another company than to invest internally. For example, suppose a company is considering expansion of fabrication facilities. Another company has very similar facilities that are idle. It may be cheaper to just acquire the company with the unused facilities than to go out and build new facilities on your own.
c. Diversification
It may be necessary to smooth-out earnings and achieve more consistent long-term growth and profitability. This is particularly true for companies in very mature industries where future growth is unlikely. It should be noted that traditional financial management does not always support diversification through mergers and acquisitions. It is widely held that investors are in the best position to diversify, not the management of companies since managing a steel company is not the same as running a software company.
d. Short Term Growth
Management may be under pressure to turnaround sluggish growth and profitability. Consequently, a merger and acquisition is made to boost poor performance.
e. Undervalued Target
The Target Company may be undervalued and thus, it represents a good investment. Some mergers are executed for "financial" reasons and not strategic reasons. A company may, for example, acquire poor performing companies and replace the management team in the hope of increasing depressed values.
f. Increasing Earnings per Share – Some acquisitions that offer no evident economic gains nevertheless produce several years of rising earnings per share.
Kavungya answered the question on April 14, 2021 at 11:22
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ii. A and C
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Four assets have the following distribution of returns.
Required.
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b. Compute the covariance of asset
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REQUIRED:
(a) Compute the expected annual cash flows associated with the proposed equipment investments.
(b) Would you recommend acceptance of this project if it involved expansion of sales for an existing product?
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REQUIRED:
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ii. Compute the payback period and the accounting rate of return.
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(b) Comment on other matters which the management should take into account before reaching
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Required:
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