Provide the theoretical and practical analysis of international mergers and acquisitions.

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This report aims to provide the theoretical and practical analysis of international mergers and acquisitions. The case chosen in this report is the acquisition of BP Amoco and Atlantic Richfield Company (ARCO). Only secondary research was used in this report. The collected data about this acquisition primarily came from the Internet and the Financial Times CDROM.

Rationale of International Mergers and Acquisitions

'Mergers and acquisitions have become the most dramatic demonstration of vision and strategy in the corporate world. With one single move you can change the course of your company, the careers of your managers and create value for your shareholders.' (Puranam, 2000)

Mergers and acquisitions have been classified into three categories: (Arnold, 2002)

Horizontal In a horizontal merger or acquisition two companies that are engaged in similar business are combined.

Vertical Vertical mergers or acquisitions take place when firms from different stages of the production chain combine.

Conglomerate A conglomerate merger or acquisition means the combination of two firms that operate in unrelated business areas.

Firms decide to merger or acquire with other companies for variety reasons. A merger or acquisition is rational if synergy is created. This means the combined entity will have a greater value than the sum of its parts. Synergy is often express in the form 2 + 2 = 5. (Arnold, 2002)

? One of the important forces to drive mergers or acquisitions is to increase market power. This is the ability that controls the price of the product. It can be achieved through a monopoly, oligopoly, dominant producer positions or collusion.

? Another important synergy is the ability that exploits economies of scale. Large size often leads to lower cost per unit of output. Economies in marketing can be achieved through the use of common distribution channels or joint advertising. There are also economies in administration, research and development, purchasing and finance.

? By vertical merger or acquisition an acquirer may achieve more efficient co-ordination on the different levels. The costs of communication and the costs of bargaining are the focuses.

? If a firm wants to enter a particular market without the right knowledge, the quickest way maybe acquire an existing player in that product or geographical market.

? In conglomerate mergers one of the primary reasons is that the overall income stream of an acquirer will be steady if the cash flows come from a broad variety of products and markets. Risks will be reduced without decrease of return.

? More efficient management is dominant after a successful merger or acquisition. This type of merger or acquisition can raise the welfare of society and the firms.

The trend of mergers and acquisitions is going to be more international. In the UK and US institutional shareholders are willing to sell their shares if a satisfied offer is made. Furthermore SSAP 22 allows goodwill to be offset against reserves directly. Therefore in the UK acquisitions are likely to be encouraged. In Germany or Japan mergers and acquisitions are much more difficult than in the UK or US. The reason primarily is banks control the financial systems of these two countries, and have long-term relationships with companies. They are not easy to sell their stakes.

The Efficiency of Stock and Foreign Exchange Market

"An 'efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value." (Fama, 1995)

There are three types of efficiency: (Arnold, 2002)

Operational efficiency This means the costs to buyers and sellers of transactions in securities on the exchange minimize.

Allocational efficiency when society lacks some resources, it is important that mechanisms are able to allocate those resources to where they can be most productive.

Pricing efficiency In a pricing efficient market the investor can expect to earn merely a risk-adjusted return from an investment as prices move instantaneously and in an unbiased manner to any news.

In 1953, Maurice Kendall found the prices of shares etc. moved in a random fashion i.e. one day's price change couldn't be predicted by looking at the previous day's price change. There are no patterns or trends. The reason is the share price at any one time reflects all available information and it will only change if new information arises. And the prices follow a random walk because the next piece of news will be independent of the last piece of news.

Fama (1970) produced a three-level grading system to define the extent to which markets were efficient.

Weak-form efficiency Share prices fully reflect all information including past price movements. In other words, technical analysis is of no use.

Semi-strong form efficiency Share prices fully reflect all the relevant publicly available information. In other words, fundamental analysis is of no use.

Strong-form efficiency All relevant information, including privately holding information, is reflected in the share price. In other words, even insider information is of no use.

Efficient markets depend on market participants who believe the market is inefficient and attempt to outperform the market through trading securities. The more participants and the faster the dissemination of information, the more efficient a market should be. Although, numerous stock market anomalies seem to contradict the efficient market hypothesis. Theoretically, once an anomaly is discovered, investors will attempt to exploit the inefficiency for profit, and then it should disappear. In fact, numerous anomalies that have been documented via back-testing have subsequently disappeared or proven to be impossible to exploit because of transactions costs.
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In reality, markets are neither perfectly efficient nor completely inefficient. All markets are efficient to a certain extent, some more so than others. Large and sophisticated stock markets, such as the UK and US stock markets, respond efficiently to new information, and only exhibit inefficiencies in some areas, particularly at the strong-form level. It is reasonable to conclude that they are substantially efficient and it is rare that a non-insider can outperform the market. We also have seen how many of the semi-strong inefficiencies, from bubbles to underpricing low PER shares. Since such cases are small in number ...

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