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Theories and Concepts - M&a

Autor:   •  February 19, 2018  •  903 Words (4 Pages)  •  662 Views

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These theories are really important to understand why mergers and acquisitions are made. Moreover, other concepts must be taken into consideration.

First of all, the concept of Johnson, published in 1996, explains that a company with high cash flow available will engage easily in a process of merger and acquisitions. However, directors will take less time and less guarantee to be sure that the merger is good for the company. Indeed, the amount available is a kind of “assurance” that creates a psychological effect of “no risk”.

This concept is directly correlated to the concepts of way of doing payment and reaction of the market. Indeed, the market will react positively or without effect to an acquisition payment in cash. It means that the company is in a good health situation and is sure of its transaction.

In the other hand, the market will not appreciate the way of paying in stocks. it is a signal of over pricing and it will create a negative effect on the market. The price will decrease in order to reach an equilibrium price. It is so better to pay a merger and acquisition in cash instead of stocks.

Finally, to understand totally the concept of merger and acquisition, its reasons and its results, important theories, usually used, should be explained.

First of all, the signalling theory is important to understand the misleading between shareholders, so the market, and board of directors. It is an information, generally from directors, which is passively or unintentionally misunderstood by shareholders. For example, if a company issues stocks in order to raise funds, shareholders will think that the price on the market is over valuated. On the contrary, if a company ransom stocks, shareholders will think, in this case, that the price is under valuated.

The pecking order theory (1994) is also a main concept linked to merger and acquisition process. It explains priorities of funding of a company. First is internal funding by using cash or short term debts. Then is external funding by using long term debts and finally issuing stocks on the market.

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