Mergers, Acquisition, and Value Creation

An ice-cream manufacturer can create value for shareholders by acquiring a soup manufacturer. In as much as they understand where value hides, they can purchase the firm to enhance shareholder wealth. Buying a soup maker will prevent profit and sales fluctuations based on weather changes. A viable purchase would increase sales and profitability and improve cash flow by achieving synergies, but the acquirer must avoid overpaying for the acquisition so that the firm’s value could move up.

Circumstances under Which the Acquisition Could Create Value for Shareholders

Where there would be less sales and profit fluctuations, an ice-cream maker might buy the assets of a soup manufacturer. The acquisition is likely to create an opportunity for the organization to maintain high sales and net profits throughout the year. In such a case, an increase in earnings growth would translate to a rise in the dividend growth rate. A positive change in financial performance would thus contribute to the maximization of shareholder wealth.

Where the acquisition price is not beyond what the acquirer is willing to pay, merging the businesses might foster shareholder wealth. It is difficult to build owners' value if the acquisition is overpriced. While executing an acquisition at the right price augments wealth for shareholders, high-cost acquisition destroys shareholder value. If the cost of acquiring a soup producer is reasonable, then the acquirement should be conducted. A financially feasible acquisition has more benefits than costs and, therefore, leads to the generation of shareholder wealth.

Where the risk spreading strategy would boost cash flow by generating synergies, the ice-cream maker might add the business assets to its portfolios. In most cases, companies seek expert help with business risk management from consultants to ensure effective processes. If the acquirer is confident of realizing synergies greater than the cost of acquisition, then they can obtain a soup maker. Synergies arise from economies of scale and scope gained by integrating operations of the two businesses, including marketing, production, administration, and distribution. Financial synergies attribute to a reduction in the firm’s cost of capital, for instance, improved leverage raises the firm’s return on equity, increasing shareholder value. Merging businesses raises value-creating cash flows by generating economies of scope and scale resulting from operational efficiencies.

Conclusion

The benefits and costs of integrating an acquisition into a business must be taken into account. A value-creating investment should present such opportunities as economies of scale, scope, synergy, and better cash flows. Economically unfeasible acquirement has less benefits than costs. Merging the two business entities might increase savings and lessen sales and profit fluctuations, thereby increasing the anticipated returns of shareholders.