Cost of Capital Dissertation Example | Topics and Well Written Essays - 9500 words

Cost of Capital - Dissertation Example Cost of capital is the minimum returns that a company can give shareholders on their investments and accordingly the company has to earn the minimum returns. If merging happens between one company that has high cash flows and another company that has low internally generated cash flows, then such merger can reduce the cost of capital. Introduction In today’s economic world, mergers and acquisitions (M & A) have become common strategy for growth and diversification of companies. During the 1990s, M & A activities broke all previous records both in terms of the number of such transactions and also the size of the mergers or acquisitions. In the early 2000s, there were major setbacks in the economies all over the world with global recession setting in. This resulted in drop of M & As worldwide although the volume still remains at a high level (Stahl & Voigt, 2003, p.2). The terms mergers and acquisitions involve a large number of transactions. Mergers can be of different forms li ke one firm can take over a different firm resulting in both the firms ceasing to exist individually to create a new firm. The principle purposes of merger of two companies are to strengthen their hold in the market and also to earn a competitive advantage in the industry. There are five common types of mergers. ... This type of merger is done to reduce the manufacturing cost and to acquire a larger share of the market. For instance, merger between Coca-Cola and Pepsi will be a horizontal merger and will allow both companies to acquire large share of the soft drink market. The third type of merger is market extension merger. This happens between two firms dealing with similar products but in different markets. The goal is to capture greater portion of the market. For instance, acquisition of Eagle Bancshares Inc by the RBC Centura has allowed RBC to extend its operations in the North American market. The fourth kind of merger is vertical merger which occurs between two firms that manufacture different types of products, but the products are manufactured for the purpose of common finished products. Vertical merger is done between firms in different stages of the industry’s supply chain to increase efficiency of their production process. For instance, vertical merger can take place between an automobile manufacturing firm and its supplier firm. The fifth and final kind of merger is production extension merger which takes place between firms manufacturing associated products in the same market. One example is the acquisition of Mobilink Telecom Inc. by Broadcom. Here it is expected that the products of the two firms will compliment each other (5 types of Company Mergers, 2013; Vadapalli, 2007, p.1). The processes involved in mergers and acquisitions are complicated and needs a complex web of preparations. Series of negotiations are needed along with due diligence which means the buyer company needs to be aware of any obstacles that may arise because of the merger. Activities also include