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Corporate Acquisitions and Losses

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Scenario:

Many corporate acquisitions result in losses to the acquiring firms' stockholders. A coworker has asked you to explain what a firm would gain from purchasing another corporation. Explain to the coworker the fundamentals of corporate acquisitions.

1. Why do firms purchase other corporations?
2. Do firms pay too much for the acquired corporation?
3. Why do so many acquisitions result in shareholder losses?

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Solution Summary

This solution discusses concepts relating to the three questions on acquisitions in 730 words with four references.

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1. Why do 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 ...

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