Economy at the expense of scale, Improving the quality of management...

Savings by scale

In addition to synergies, consolidation of companies can lead to savings due to the scale (reducing fixed costs in production). The main idea of ​​economies of scale is to do more work without increasing the capacity and number of employees. However, economies of scale are limited. Let's explain this graph (see Figure 7.1).

The income with increasing the volume of resources used in production (production scale) varies along a certain 5-shaped curve OKMM. The maximum production efficiency (Etax) is reached at point I (at this point, the straight line OB touches the 5-shaped curve):

A straight line OA, drawn from the origin at an angle of 45 °, intersects the S-shaped curve at two points: K and M, in which the costs are equal to the effect achieved. The points K and M are break-even points. If the scale of production is less than or more Zм, then production

The effect of scale (the amount of resources used) on production efficiency

Fig. 7.1. Effect of scale (volume of resources used) on production efficiency

is unprofitable. In this regard, the merger and merger of companies is advisable to implement with limiting the scale of production of a particular final product by the optimal value.

Usually, the linear dependence of income and costs on the volume of output is used to determine the limiting scale of production. However, this method allows us to determine (with some error) only the first break-even point and the break-even margin (how much more product is realized than at the break-even point) and does not allow to determine the optimal production scale and the second break-even point.

In practice, the construction of S-shaped curves (income, resources) can be performed by statistical methods.

Improving management quality

If an enterprise has management capacity, that is, improving the quality of its management can bring a significant increase in profits, this circumstance is a sufficiently powerful argument for the acquisition of such an enterprise by an absorbing company.

Information Effect

The fact of merger/acquisition, as a rule, creates an information effect. During the reorganization of companies, the value may increase as a result of the appearance of new information circulating on the stock market. If, for example, the shares of an absorbed company were underestimated, the merger announcement could cause a positive shift, that is, an increase in the company's share price. The fact of merger/acquisition is more convincing evidence of an underestimation by investors of the company's potential profitability than many other arguments.

An announcement of divestment may signal a change in the investment policy or performance of the company, which, in turn, may have a positive impact on the value of shares. On the other hand, such an announcement can be interpreted as selling the most liquid branch in order to correct the company's affairs, in this case the signal will be negative.

Transition benefits. A merger that reduces the riskiness of cash flows can lead to the transfer of capital from shareholders (participants) to creditors, as the market value of the company's liabilities in this case increases. On the contrary, absorption, increasing relative risk, for example, liquidation of investments or attraction of borrowed funds, can lead to a reverse transfer of benefits - from creditors to owners of own capital, as the market value of obligations decreases.

The Effect of Taxation

The motive for many mergers of foreign companies is taxation. In particular, in the case of prolongation of tax payments from a company that has a significant amount of accumulated tax arrears, it is doubtful whether it will be possible to obtain a profit sufficient in the future to use this postponement. When a merger of such a company with a more profitable one for the first appears a chance to use the postponement more effectively. However, there are conditions that limit the use of deferral by a certain percentage of the market value of the company being absorbed.

thematic pictures

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