Date: November 16, 2016
The Directors
Inkline Plc
34, Ojodu Street
Ikeja, Lagos
Dear Sirs,
RE: PROPOSED EXPANSION VIA MERGER AND ACQUISITON
We have gone through your request asking us to offer advice on your proposed expansion via merger and acquisition, we advise as follows:
a. (i) The benefits derivable from the proposed method of expansion include:
Your company will experience faster growth than when the internal development is pursued.
If your company’s expansion is made through acquisition of another company, there is greater likelihood that your company may inherit new
products, new markets and new/additional customers from the acquired company which may be difficult to obtain through internal development.
Your mode of expansion will enable your company enter a new market and set up a new business which would have been difficult because of high entry barriers.
Your acquisition of a competitor will prevent it from acquiring yours. Your company may save cost and earn higher profits from synergy effects
(ii) The probable demerits of employing your proposed method of expansion include:
It might be very expensive since bid price should be high enough to make the target company sell their shares. This may as well result in low return
on your investment.
A proportional loss of ownership may result from acquisition of another
company. Merger of two organisations having different structures, management styles, cultures, etc may be difficult and might result in loss of employees. Employees may feel threatened by possible redundancies which may
PROFESSIONAL LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 101 bring about downsizing. Resolution of likely disruption might take considerable time. Convergence of different individuals may result in ‘clash of culture’ since they are from differing backgrounds. This will make working together difficult.
b. Alternatives to merger and acquisition:
From the foregoing, a comparison of the merits and demerits of your expansion proposal might result in searching for alternatives. The following are alternative expansion programmes which your company may pursue:
i. Growth through internal development of the business; (organic growth)
ii. Growth by means of a joint venture;
iii. Licensing;
iv. Franchising; and
v. Strategic alliance.
c. Criteria for choosing an acquisition target include:
i) Strategic aims and objectives: Target company should be one that will help to grow the acquiring company in terms of existing market expansion, increase in new products and entry into new geographical area;
ii) Cost and relative size: Although there are occasional examples of small companies acquiring much larger ones in a reverse take over, target companies are usually selected because they are affordable;
iii) Opportunity and availability: In many cases, targets for acquisition are selected because of circumstances. An opportunity to acquire a particular company might arise, and the acquiring company might decide to take the opportunity whilst it is available;
iv) Potential synergy: Targets for acquisition might possibly be selected because they provide an opportunity to increase total profits through improvements in efficiency. We hope this will meet your quest for advice for your proposed expansion bid. If you need further clarification, do not hesitate to contact us.
Yours faithfully,
Signed:
Name
For: ABC Management Consultants