Reductions in Capital Needs

All firms must make investments in working capital and fixed assets to sustain an efficient level of operating activity. A merger may reduce the combined investments needed by the two firms. For example, it may be that Firm A needs to expand its manufacturing facilities whereas Firm B has significant excess capacity. It may be much cheaper for Firm A to buy Firm B than to build from scratch.

In addition, acquiring firms may see ways of more effectively managing existing assets. This can occur with a reduction in working capital resulting from more efficient handling of cash, accounts receivable, and inventory. Finally, the acquiring firm may also sell off certain assets that are not needed in the combined firm.

Firms will often cite a large number of reasons for merging. Typically, when firms agree to merge, they sign an agreement of merger, which contains, among other things, a list of the economic benefits that shareholders can expect from the merger. For example, the U.S. Steel and Marathon Oil agreement stated (emphasis added):

U.S. Steel believes that the acquisition of Marathon provides U.S. Steel with an attractive opportunity to diversify into the energy business. Reasons for the merger include, but are not limited to, the facts that consummation of the merger will allow U.S. Steel to consolidate Marathon in U.S. Steel's federal income tax return, will also contribute to greater efficiency, and will enhance the ability to manage capital by permitting movements of cash between U.S. Steel and Marathon. Additionally, the merger will eliminate the possibility of conflicts of interest between the interests of minority and majority shareholders and will enhance management flexibility. The acquisition will provide Marathon shareholders with a substantial premium over historic market prices for their shares. However, [Marathon] shareholders will no longer continue to share in the future prospects of the company.

0 0

Post a comment