When prospective acquirers evaluate an acquisition, their foremost focus is on the strategic logic of proposed combinations and on the potential social and regulatory consequences. Beyond the strategic logic, acquirers also study deeply into the valuation gains arising from a combination.
- How much can an acquirer pay for an asset while still creating value for its shareholders?
- What price is likely to persuade the acquisition partner to agree to a transaction?
- Revenue Synergies; where the combined entity is able to generate more revenues than each of them did individually.
- Cost Synergies; savings in the costs and expenses of the combined entity.
- Financial Synergies; Financial synergies arise from the combined entity’s increased size, greater efficiency, diversification, and improved economies of scale. They include
- Two Businesses operating in the same industry join together.
- An attempt to lower costs and increase efficiency.
- For example, Coca-Cola decides to merge with PepsiCo.
- Two companies representing different levels in a buyer-seller relationship join forces.
- For example, Internet provider America Online (AOL) combined with Time Warner which supplies content to consumers through their channels like CNN and Time Magazine, while AOL distributed such information through its internet service.
- Two companies having nothing in common decide to pool resources together.
- For Example, Procter & Gamble, a consumer goods company, engaged in a merger with Gillette.
- When a private company acquires a public company, avoiding the hassles of going through an IPO.
- A private company installs its own management and takes all required steps to maintain a public listing.
- For example, digital device-maker Handheld Entertainment purchased Vika Corp in 2006, creating the company known as ZVUE.