Bangladesh University of Professionals

Faculty of Arts and Social Sciences

Department of Economics
Industrial Economics-II
ECON 2405

Course Instructor: Wasik Sajid Khan

Lecturer
Department of Economics
Bangladesh University of Professionals

Submitted by: Naorin Akter

Roll:2014881081 (Sec:A)
Date:10-12-2021
Mergers and acquisitions: Meaning, importance and market responses.

Introduction: Mergers and acquisitions are popular corporate strategies which

play a significant role to build powerful partnership among companies and
business organizations. In business world, mergers and acquisitions refer to
transaction in which ownership of one business organization transferred or
amalgamated with other organization. Mergers and acquisition may be completed
to expand company’s market share, to carry on with new competitors, to cope up
with technological breakthrough and to keep up with sophisticated customers.

Mergers and acquisitions: Merger is a legal amalgamation of two business

organizations into one. It is the mutual decision. It provides partial ownership to
each party’s shareholders and command of the combined new firm. Through
merger share holder can increase their net worth.

An acquisition generally refers to purchasing a smaller company by a large one. It

is also known as takeover or a buyout. In the context of business, a big company
purchase ownership of small company for controlling interest in another existing
company’s capital share. There are different types of acquisitions such as friendly
acquisition, hostile acquisition, and reverse acquisition. In reverse acquisition, a
comparatively smaller firm acquires ownership and control of an established and
larger company. In friendly acquisitions, the target company’s board accepts
acquisition offer in a friendly manner but in hostile acquisition entire process is
done by force.
Source: Deal Room
Types of mergers:

Horizontal Merger: Horizontal merger occurs between two competitors firms

(Offering same product or service).A merger between Mojo and Clemon would be
horizontal merger.

Vertical Merger: A merger between two companies who produce different goods
but exit in the same supply chain. If an automobile company joins with a part
supplier, it will be a vertical merger.

Market-Extension Merger: It takes place between two firms whose products are
same but deal in different markets.

Product-Extension Merger: It takes place between two firms whose products are
related to each other and deal in the same market.
Conglomerate Merger: Mergers between firms who are involving in business
activities which are totally unrelated. Examples: a leading manufacturing shoe
company merges with a broadcasting company.

Differences between mergers and acquisition:

Mergers Acquisitions

Merging of two organizations into one. Buying one organization by other.

Generally, mergers are the mutual But acquisitions can be friendly as well as
decision. hostile takeover.

Mergers are expensive because of Acquisitions are less expensive and faster.
higher legal cost. They are also time
consuming.

The main of purpose of merging The main purpose of acquisitions is to

companies is to decrease competition amalgamate an instantons growth.
and to increase operational efficiency.

The size of merging companies is more The acquiring organization is always

or less the same. bigger than the acquired one.

Example: In 1998 the Exxon and Example: Acquiring whole foods by

Mobil deal (the largest oil producers Amazon in 2017 for $13.7 billion deal.
companies in US) successfully merged.
 Image source: Patriot Software

Practices of mergers and acquisitions in Bangladesh: Despite the lack of clear

corporate and regulatory guidelines, merger and acquisition activities are gaining
momentum in Bangladesh. In 2016, the most notable merger was the merger
between Robi and Airtel Bangladesh. The merged company is currently known as
Robi Axiata Limited and it has become the second largest operator in Bangladesh
telecommunication sector after Grameenphone. In the end of 2018, Japan
Tobacco international acquired tobacco business of Akij Group Bangladesh. This
acquisition was cross-bordered and the value of this acquisition was almost $ 1.47
billion.
Again, merger and acquisition activities in ready-made garments sectors are
increasing because foreign investors are interested to buy out their local joint-
venture partners.

Benefits of mergers and acquisitions:

There are many advantages to grow business and increase financial power through
mergers and acquisitions. These include-
Accessing wider customer base and reducing competition.
In terms of economics of scale merger and acquisition is beneficial (lower
cost of operation, increasing capital access).
 Increased market share is a common motive of mergers and acquisitions.
For example, a Spanish retail bank named Santander has become one of
the largest bank in the world by acquisition of smaller banks.
Expansion of business into new geographical area.
Various tax advantages such as tax cuts or reduction is offered by
governments after completion of mergers and acquisitions.
Merger boost ups research program in merged company.
Increased good will.

Disadvantages of merger and acquisition:

Merger and acquisition can be causes of huge amount of debt.
Though mergers and acquisitions reduce competition and enlarge market
share, new company can gain monopoly power and price can be raised.
Large amount of costly legal and accounting works are associated with
M&C activities.
Many employees may loss their job because after mergers and acquisitions
combining department of new companies may overlap.
If M&A activities make new firm too big, it can be less efficient and result
diseconomies of scale.

Reasons for failure in M&A activities:

Business firm overpaying for acquisition
Improper management and lack of clear strategy
Failures in cultural and operational consolidation
Lack of proper training of employees for cross-selling opportunities and
executive biases
Huge amount of debt
Over diversification
Economic uncertainty, inefficient cash flow
Valuation Mistakes
A good example of failure in M&A activities is eBay’s acquisition of Skype in
2005. (US $2.6 billion).Because of eBay’s miscalculation of customer’s demand
the acquisition had not performed as expectation and only after 4 years later, two
thirds of Skype is sold for US$1.9 billion.
 Causes of failure in Mergers and acquisitions. Source: Coopers and Lybrand
(1993)

Conclusion: In today’s economy, mergers and acquisitions play a vital role to

explore a wide range of service and product. They are the major part of any healthy
economy. Mergers and acquisitions are also important for boosting up economic
research and development. Again, due to globalization process, cross border
merges and acquisitions are also increasing. This is a great way to improve
economic state of any country in the world and increasing global market
efficeiency.

References:
Wikipedia (2021). Mergers and acquisitions. Last modified on November,2021.
IFLR(March28,2017). 2017 mergers and acquisitions Report: Bangladesh.
IFLR(March25,2020). M&A Report 2020:Bangladesh.
Deal Room(2021).10 benefits of mergers and acquisitions you should know.
Boyce Wire(2021). Merger ang acquisition definition.
Deal Room(2021).The 8 Biggest M&A Failures of All Time
Dr. Halil Kiymaz (October 14,2020).Why Mergers and Acquisitions Fail, and
What to do about It?