The theory of mergers and divestitures: [Essay Example], 434 words GradesFixer
exit-popup-close

Haven't found the right essay?

Get an expert to write your essay!

exit-popup-print

Professional writers and researchers

exit-popup-quotes

Sources and citation are provided

exit-popup-clock

3 hour delivery

exit-popup-persone
exit-popup-close

Haven't found the right essay?

Get an expert to write your essay!

close
This essay has been submitted by a student. This is not an example of the work written by professional essay writers.

The theory of mergers and divestitures

Print Download now

Pssst… we can write an original essay just for you.

Any subject. Any type of essay.

We’ll even meet a 3-hour deadline.

Get your price

121 writers online

blank-ico
Download PDF

The theory of mergers and divestitures is developed in this paper. This theory is not dependent on taxes or the acquirer having huge surpluses. The inability of short horizon projects or firms which are marginally profitable to finance themselves as independent entities due to problems caused by agency between managers and potential claim holders is given as the motivation behind mergers. Good performance of the once marginally profitable projects allows for divestiture in the future. There exist two preconditions for this theory to be applicable. One that financial distress must be being experienced by one of the merging firms and the other that there must be severe agency problems between the mangers and the claimholders of the distressed firm. Therefore this theory is more applicable to mergers where one of the merging firms is facing cash flow verifiability and is small in size.

The fact that positive net present value projects may be denied funding where the cash flows can be manipulated by the management is well known. Marginally profitable companies are sometimes unable to support outside equity since the manager’s incentive constraint requires that he/she receives a cut of project’s cash flow. Thus a merger can serve as a tool whereby such firms can survive their distressed period as merged entity can raise total finance easier than a standalone entity. Shareholder value is increased according to the authors’ theory and empirical evidence as mergers allow marginally profitable firms to get funding. However this financial synergy may not persist. Once the project has reached a stage where it can raise finance on its own there are coordination costs associated with mergers. This stems the firms to divest. This paper measures vertical relation between two merging firms using industry commodity flows information in input output table. A merger is classified as a vertical merger when one firm can utilize others’ services or product as input for its final output or its output is the input for the other firm. Significant positive wealth effect is generated through vertical mergers. During the 3 day event window surrounding the announcement of mergers, the average combined wealth effect is about 2.5%. The paper measures the vertical relatedness by using an interindustry vertical relatedness coefficient. The merger is classified as a vertical merger if the coefficient is more than 1% (lenient criteria) or 5% (strict criteria). Further, those firms which exhibit vertical relatedness with the lenient criteria (1%) and belong to different input-output industries are identified as Pure vertical mergers by the author. To measure the wealth effect of mergers the authors uses CRSP value weighted index as market proxy.

Remember: This is just a sample from a fellow student.

Your time is important. Let us write you an essay from scratch

100% plagiarism free

Sources and citations are provided

Cite this Essay

To export a reference to this article please select a referencing style below:

GradesFixer. (2018, December, 03) The theory of mergers and divestitures. Retrived May 29, 2020, from https://gradesfixer.com/free-essay-examples/the-theory-of-mergers-and-divestitures/
"The theory of mergers and divestitures." GradesFixer, 03 Dec. 2018, https://gradesfixer.com/free-essay-examples/the-theory-of-mergers-and-divestitures/. Accessed 29 May 2020.
GradesFixer. 2018. The theory of mergers and divestitures., viewed 29 May 2020, <https://gradesfixer.com/free-essay-examples/the-theory-of-mergers-and-divestitures/>
GradesFixer. The theory of mergers and divestitures. [Internet]. December 2018. [Accessed May 29, 2020]. Available from: https://gradesfixer.com/free-essay-examples/the-theory-of-mergers-and-divestitures/
close

Sorry, copying is not allowed on our website. If you’d like this or any other sample, we’ll happily email it to you.

By clicking “Send”, you agree to our Terms of service and Privacy statement. We will occasionally send you account related emails.

close

Attention! this essay is not unique. You can get 100% plagiarism FREE essay in 30sec

Recieve 100% plagiarism-Free paper just for 4.99$ on email
get unique paper
*Public papers are open and may contain not unique content
download public sample
close

Sorry, we cannot unicalize this essay. You can order Unique paper and our professionals Rewrite it for you

close

Thanks!

Your essay sample has been sent.

Want us to write one just for you? We can custom edit this essay into an original, 100% plagiarism free essay.

thanks-icon Order now
boy

Hi there!

Are you interested in getting a customized paper?

Check it out!
Having trouble finding the perfect essay? We’ve got you covered. Hire a writer

GradesFixer.com uses cookies. By continuing we’ll assume you board with our cookie policy.