Question

The dividend policy is a set of guidelines that a business uses to decide how much of its earnings it will pay out to its shareholders. The guidelines include whether to issue dividends and what amount. This is most influenced by a company’s long-term earning power.

In using corporate profits to buy up every firm he possibly could, Tyco’s CEO, Dennis Kozlowski, didn’t waste investor money in the sense that he invested it in worthless projects, but he did ultimately cost Tyco investors millions of dollars. In your initial post, consider the benefits and drawbacks of acquisitions. How does acquiring other companies hurt investors? How does acquiring other companies help investors?

Answer 1

Answer.

Acquisition is when one company purchases a portion or all of another company's shares or assets. The acquiring company will buy the shares of the assets of the target company, which gives the acquiring company powers to make decisions concerning the acquired assets without needing the approval of shareholders from the target company.

Benefits of acquisition:

1. Speed : Acquisition helps you to grow quickly & is a very time-efficient growth strategy. Entry into new product segment with recognized brand & positive reputation with existing customer base.

2. Market power : You can quickly get presence in market for your company. It can also reduce the competition for you in the market from other players.

3. Financial gain : Acquiring organizations with low share value or low price earning ratio can bring short-term gains due to assets stripping.

4. New ideas or perspective : It helps put together a new team of experts with different perspective about helping the business reach its goal.

Drawbacks of acquisition:

1. Huge Cost : In few scenarios the cost of acquisition can be too high considering what you have projected earlier i.e. in case of hostile takeover bids.

2. Integration issues : Integration of the acquired organization can bring a number of challenges. Company cultural clash can erupt and activities of the old organizations may not mesh as well as anticipated when forming the newly combined entity.

3. Financial Fallout : Returns may not benefit stakeholders to the extent the same was expected. This happens when the cost of acquisition is higher than what anticipated.

When company acquires other company, stock price of the target company tend to rise while the stock price of the acquiring company falls in short term.

That the reason it is important to consider both short term & long term impact of acquisition. If the acquisition goes smoothly, it will be good for the acquiring company and will lead to higher stock price.

So acquiring other companies hurt investors in short run as stock price tends to fall but if the acquisition is successful it will benefit investors in long run.