Economic Goals

In order to achieve economic goals, stay competitive and improve market position, firms have to advance with times by executing all kinds of strategies, one of which is acquisition. “An acquisition resembles more of an arm’s-length deal, with one firm purchasing the assets or shares of another, and with the acquired firm’s shareholders ceasing to be owners of that firm” (Sudarsanam, 2003). Serving as an important capital restructuring tool, acquisition offers firms a conceivable opportunity for development by taking over another firm economically and legally. This essay aims to demonstrate that initially firms can achieve growth by the means of the acquisition of another firm, but the long-term effect of acquisition appears to be a double-edged sword. Targeted financial indicators will be cited to support this view, and different factors, which include stock market value, shareholders’ income, firm management, external pressure, supply of resources and internal cooperation, will be discussed respectively.

Acquisition initially provides growth to the acquirer. An empirical research study based on a sample of 12023 acquisitions shows that these firms received an equally weighted abnormal announcement return of 1.1% (Moeller, Schlingemann and Stulz, 2004). The return was generally positive, which indicates that acquiring-firms’ market value might ascend faster than original schema while the overall risk is constant. Therefore after a formal announcement is made, acquisition, to some extent, stimulates firms’ growth within a short-term observation period. Moreover, according to another study in the US, shareholders of both target firms and bidder firms benefited from acquisitions at different levels in the short-term (Sudarsanam, 2003), which could probably be explained by the generalized market rise promoted by optimistic expectations of investors after careful and thorough risk analysis (Petmezas, 2009). The rise of market value means available revenues newly collected from funding market would enrich the firm’s portfolio management and strengthen the firm’s short-term market impact, which in return probably enhances potential investor confidence, leading to a likely sustainable increase. It is apparent that therefore initially certain growth can be gained by acquisition concerning acquirer’s stock market value and shareholders’ gains.

However, in the long-term, some changes brought by the acquisition to the acquirer might lead to negative resistance against growth. According to the large sample test mentioned above by Moeller, Schlingemann and Stulz (2004), shareholders of acquiring firms suffered an average loss of $25.2 million upon announcement, which mainly resulted from large firms’ disastrous shareholder income. Size effect is robust regarding acquisition despite the ways firms are financed (Moeller, Schlingemann and Stulz, 2004), but it seems that large firms might not be the only victims