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What are some valid economic justifications for mergers?
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Answer
Some of the valid economic justification for mergers is that it
helps the two companies who are undergoing merger increase the
wealth of the shareholders.The two companies which are
consolidating in business result in synergies which increase the
value of the newly formed business organisation. There are two
types of synergies one is the revenue Synergy which is improving
the company's revenue generation ability and the other is cost
Synergy which means that there is a reduced in the company's cost
structure.
The Other motive for merger is diversification in which a company
uses merger to diversify its business operation by entering into
the new markets or offering new products or services which
diversify the risk related to the company. The shareholders of the
company are not always agreeable in the situation of merger because
it increases the risk rating to the business operation.
Merger increases the financial capability of the operation, which
helps the company to get more financial capability in order to
secure higher financial capacity and employment in business
development.
Merger also help the company in substantial carry forward tax
losses in order to generate significant taxable income. After the
merger has happened the total tax liability of the the merged
company will be much lower than the tax liability of the individual
profitable company.
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