Firms Purchase Other Corporations

Firms purchase other corporations for many reasons. Firm purchase is usually part and parcel of a company's corporate strategy. The main reason of doing so is usually to grow the company. Primarily, an purchasing strategy is a speed strategy, which means that rather than starting a company from scratch, firms opt to buy out other companies offering either similar products and services, or one that offers complimentary ones as part of the firm's supply chain (either a horizontal takeover or a vertical takeover). Speed in this instance relates to how quick the company is able to get its products and services to the market, positioning itself, speed in getting to the competitive masses as well as the speed to viability. The alternative for any acquisition strategy for a company implies that the firm must grow either generically or organically. The latter two methods of growth for a company will however usually be inferior as strategies in comparison to acquisitions. This will usually be in terms of the cost of internal growth or the speed needed to execute the internal growth strategy (For Entrepreneurs, 2001).

A common argument supporting for the purchase of other corporations lies in the belief that so doing, synergies are created, permitting the two firms to efficiently work together in a better manner than they would have separately. Synergies so created would usually be from the ability of the two combined firms to take advantage of economies of scale, the elimination of duplicated functions, the sharing of managerial expertise, as well as the ability in raising larger amounts of capital (Ravenscraft & Scherer, 1987)

Do firms pay too much for the acquired corporation?

It is generally not the aim of the acquiring firm to overpay for a company, but unfortunately, this is frequently the case. In many acquisitions, the new merger tends to be a failure in its ability to generate good returns for the acquiring company, with the simple explanations for this being that usually it will have overpaid for the acquisition. The over-purchase of the new company may usually result in scenarios where the purchasing company enthusiastically over-bid for the company, subsequently paying too much premium for the acquired company's shares. This over-bid subsequently cleans out any profits made as a result of the acquisition (Henry, 2002).

Why do so many acquisitions result in shareholder losses?

Shareholder losses in acquisitions occur when acquisitions fail to work out as envisioned during the takeover process. A major reason for the failure of many acquisitions is the fact that the actual deal is usually carried out by deal making executives, who after the acquisition, simply move onto other ventures, leaving the entire process of integration as well as the management of the new acquisition