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Mergers & Acquisitions - The Best Option Of CEO

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CEO’s have four options when it comes to creating cash flow and profits, they include; Mergers & Acquisitions, Research & Development, Stock Buybacks & Dividends, and Tax Consequences. Each option has its advantages and disadvantages, but Mergers and Acquisitions creates the most profit and upside for businesses. A merger is when two organizations join forces to become a new business, usually forming a new name. While an acquisition happens when one business buys a second and generally smaller business that may be absorbed into the parent organization or run as a subsidiary.

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Some advantages of Mergers & Acquisitions include accessing a wider customer base increasing market shares. They also can help obtain quality staff or additional skills needed in the industry or sector of business intelligence, if a business is underperforming. Mergers & Acquisitions allow businesses to access funds or valuable assets for new development, bettering production or distribution facilities. Since it is often less expensive to buy than to build, many businesses look to target companies that are only marginally profitable and have a lot of unused capacity.

Not only does Mergers & Acquisitions create a wider market, but it reduces costs and overheads through shared marketing budgets, all while lowering costs and increasing purchasing power. In the past, many economists decided that mergers & acquisitions will be more efficient, as they are able to deliver goods of the same quality at lower rates than before. Since companies are colliding into one, this also reduces competition as companies are teaming up. With organic growth, businesses in the same sector or location can combine resources to reduce costs, remove duplicated facilities or departments and increased revenue.

Research & Development refers to the work a business conducts toward the introduction, innovation and improvement of its products and procedures. It is a series of investigative doings to improve existing products and procedures or to lead to the development of new products and procedures. Research & development can benefit companies trying to create or improve products, but also always carries a risk. Since R&D focuses on trying out the new or untested ideas they are not always positive. For, example in 2014 Amazon came out with the fire phone which ended up being their biggest failure to date.

Some risks include new or modified products or services proving more difficult or costly to develop than anticipated. Another disadvantage is businesses developing a product or service that isn’t commercially successful or initiating the development of a product that turns out to be unworkable. With R&D it usually comes as a hit or miss, so depending on how companies try to portray themselves sometimes it is best to avoid research and development.

Another option CEO’s consider when creating cash flow and profits is Stock Buybacks and Dividends. Stock Buybacks refer to the repurchasing of shares of stock by the company that issued them. A Buyback ensues when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. Stock Buybacks are sometimes used to consolidate control of shares in fewer hands. A buyback may be used to prop up a sagging price. It is also sometimes used as part of a poison acquirer making the share more expensive.

Growth companies hardly buyback their shares as their share price is already at a premium and it doesn’t make any sense to buy back shares at a high price. Usually it is the undervalued companies who generally buy back their shares as they do not have much growth prospects to invest, but enough cash in their account. IBM has been among the most explicit companies in their pursuit of higher per share earnings through financial engineering, for a while their plan for boosting EPS worked but after a few years it started to decline.

For the past three years IBM’s revenue has declined along with their earnings, and their stock being down a third from its 2013 peak, because of IBM’s gamble with stock buybacks they employ 55,000 fewer employees compared to 2012. Another downfall of buybacks is that they affect a company’s credit rating if it must borrow money to repurchase the shares. With the stock market constantly going up and down in price, buybacks are seen as a risky option to create cash flow and profits.

Tax consequences include lobbying, accountants and lawyers and is another option CEO’s consider when trying to create profit. Lobbying is the act of attempting to influence business and government leaders to create legislation or conduct an activity that will help a particular organization. The morals/ethics involved with lobbying are complicated. Lobbying can, at times, be spoken of with contempt, when the implication is that people with inordinate socioeconomic power are corrupting the law in order to serve their own interests. Some disadvantages of lobbying include companies only trying to benefit themselves.

Additionally, lobbyists tend to give more favor of the interests of the upper or middle class over the poor because the lower class doesn’t have an abundance of money to contribute to their cause. Lobbying can also cause criminal activities. Some groups need a large sum of money in order to successfully lobby. They will need donations to cover expenses, where controversies arise about lobbyists influencing policy makers. Whether it be bribery, theft, fraud or corruption. Lobbyists can have a great impact on government rules and society, but should not be exempt from the law when it comes to the methods used to create the change.

CEO’s should look towards mergers & acquisitions when trying to generate cash flow and profits. They are far less risky than stock buybacks and dividends and provide a cheaper way for businesses to form a market. Since mergers & acquisitions create a wider market, it reduces costs and overheads through shared marketing budgets, while increasing purchasing power and lowering costs. Whereas, research and development may require a large sum of money creating a product that may be a flop. After diving into each option, businesses that excel in mergers & acquisitions have the best chance to create cash flow and profits.

Work Cited:

  1. “Lobbying.” Wikipedia, Wikimedia Foundation, 28 Sept. 2018, en.wikipedia.org/wiki/Lobbying.
  2. Migrator. “Benefits of Mergers and Acquisitions.” Nibusinessinfo.co.uk, 21 Nov. 2017, www.nibusinessinfo.co.uk/content/benefits-mergers-and-acquisitions.
  3. Reports, Special. “Corporate America’s Buyback Binge Feeds Investors, Starves Innovation.” Reuters, Thomson Reuters, 16 Nov. 2015, www.reuters.com/investigates/special-report/usa-buybacks-cannibalized/.
  4. Segal, Troy. “Why Would a Company Buy Back Its Own Shares?” Investopedia, Investopedia, 20 June 2018, www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp.
  5. Staff, Investopedia. “Research and Development – R&D.” Investopedia, Investopedia, 25 Apr. 2018, www.investopedia.com/terms/r/randd.asp.
  6. Thoma, Mark. “Are Mergers Good or Bad for the Economy?” CBS News, CBS Interactive, 29 Dec. 2016, www.cbsnews.com/news/mergers-and-acquisitions-good-or-bad-for-the-economy/.
18 March 2020

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