Revenue Enhancement

One important reason for an acquisition is that the combined firm may generate greater revenues than two separate firms. Increases in revenue may come from marketing gains, strategic benefits, and increases in market power.

Marketing Gains It is frequently claimed that mergers and acquisitions can produce greater operating revenues from improved marketing. For example, improvements might be made in the following areas:

1. Previously ineffective media programming and advertising efforts

2. A weak existing distribution network

3. An unbalanced product mix

For example, when Microsoft purchased tiny Vermeer in 1996, Vermeer's FrontPage software (used to create web pages) was selling at a snail's pace. When the software was rebadged as Microsoft FrontPage, however, sales took off, reflecting Microsoft's marketing muscle.

Strategic Benefits Some acquisitions promise a strategic advantage. This is an opportunity to take advantage of the competitive environment if certain things occur or, more generally, to enhance management flexibility with regard to the company's future operations. In this latter regard, a strategic benefit is more like an option than a standard investment opportunity.

For example, suppose a sewing machine manufacturer can use its technology to enter other businesses. The small-motor technology from the original business can provide opportunities to begin manufacturing small appliances and electric typewriters. Similarly, electronics expertise gained in producing typewriters can be used to manufacture electronic printers.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

25. Mergers and Acquisitions

© The McGraw-Hill Companies, 2002

CHAPTER 25 Mergers and Acquisitions

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