The Concept of merger

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Chapter 2 Literature Review

2.1 The Concept of Merger

The determinants of merger and acquisition behavior have long been a topic of interest to researchers. Epstein (2004) provide that merger defines as a business activity involves two entities of relatively comparable stature coming together and taking the best of each company to form a completely new organization.

Mergers are often categorized as horizontal, vertical or conglomerate mergers. Gaugham (2007) provide the brief definition of the three type of merger. Two competitors combination is called horizontal merger. Vertical mergers are the combinations of companies which exist with a buyer-seller relationship; A conglomerate occurs when two combined companies are not competitors and without a buyer-seller relationship.

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2.2 The Motives of Merger

In order to achieve an ideal position for the organization’s business, company may decide to undertake merger activities. There are probably many different motivations for merger as involving bidders and targets.

Trautwein (1990) offers several theories of merger motives including efficiency, monopoly, raider, valuation, process, empire-building and disturbance theory. Ikeda and Doi (1983) point out that company take advantage of merger activities to increasing market share or market power, increasing efficiency, firm growth and increase of research and development all are the merger motives.

Lam and Chiu (2005) suggest that objectives for merger are diverse, including fillings critical capability gaps, achieving synergies and economic of scale, acquisition of tax losses and tending off an income trust structure and replacement of management. However, corporate takeovers and acquisitions give rise to vastly differing attitudes between the parties (Gerold 1989). Both parties are seeking to promote, or perhaps one of the companies wish to receive a friendly rescue for the financial difficulties situation.

Other than the above motivations, several empirical studies provide support to the synergy as a key merger motives. For example, Leland (2007) points out that the both positive and negative operational synergies are the primary motives for restructuring the company. Bradley et al. (1988) mention that a successful tender offer will increase the combined value of the target and acquiring firms by an average 7.4%. Berkovitch and Narayanan (1993) document that synergy is the primary motive in takeovers with positive total gains Mukherjee et al. (2004) suggest that a premium to the target firm is justified if the merger produces synergistic benefits. It will be detail discussed in the session of Literature Review.

Furthermore, Sun and Tang (2000) create the support for two firms merged in the same line of business is for the purpose of achieving economies of scale in production, distribution, or some other phases of their operation. (The detail of economies of scale will have a further discuss)

2.2.1 Economies of scale

Economy of scale is a practical concept that refers to the reduction in fixed cost per unit resulting from increased production through the operational efficiencies.

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