Activities related to expansion of a firm’s operations or changes in its assets or financial or ownership structure are referred to as corporate restructuring. The most common forms of corporate restructuring are mergers/amalgamation and acquisitions.
Profitable growth constitutes one of the prime objective of most of the business firms. It can be achieved internally either through the process of introducing / developing new products or by expanding enlarging capacity of existing products.Alternative, the growth process can be facilitated externally by acquisition of existing business firms. This acquisition may be in the form of mergers, acquisitions, amalgamation, takeovers, absorption, consolidation, and so on.
Although the legal procedure involved in these are different,in view of the perspective of economic considerations these terms are used interchangeably here.
There are strengths and weakness of both the process of promoting growth. For instance internal expansion apart from enabling the firm to retain control with itself also provides flexibility in terms of choosing equipment, mode of technology , location and the like which are compatible with its existing operations. However,internal expansion usually involves a longer implementation period and also entails greater uncertainties particular associated with developing new product. Above all, there may be sometimes an added problem of of raising adequate funds to execute the required capital budgeting projects involving expansion. Acquisition obviate in most of the situations, financing problem as substantial payment are normally made in the form of share of the purchasing company.
Further, it also expedites the pace of growth as the acquired firm already firm already has the facilities or products and therefore obviously, saves the time otherwise required in building up the new facilities from scratch in the case of internal expansion programme.
Merger evaluation are relatively more difficult budgeting decision, the two chief reason being.i) all benefit from merger are not easily quantifiable and so also all costs, for instance benefits of less competition and economics of scale are not easily measurable attributes
ii) Buying a company is more complicated than buying a new machine in that the firm is to address itself to many tax, legal and accounting issues.
Types of Mergers
Merger can be usefully distinguished into the following three types
i) Horizontal Merger- Horizontal merger take place when two or more corporate firms dealing in similar lines of activity combine together. Elimination or reduction in competition, putting an end to price cutting, economies of scale in production, research and development, marketing and management are often motives underlying such mergers.
2) Vertical Merger- Vertical merger occurs when a firm acquires firms “upstream” from it and or firms supplying raw materials and to those firms that sell eventually to the consumer in the event of a ‘downstream’ merger. Thus, the combination involves two or more stages of production or distribution that are usually separate.
iii) Conglomerate merger- Conglomerate merger is a combination in which a firm established in one industry combines with a firm from an unrelated industry. In other words, firms engaged in two different economic business activities combine together .Diversification of risk constitutes the rationale for such mergers.