Pros and Cons of Takeover
While pros and cons of a takeover differ from case to case, there are a few reoccurring ones worth mentioning.
Pros:
- Increase in sales/revenues (e.g. Procter & Gamble takeover of Gillette)
- Venture into new businesses and markets
- Profitability of target company
- Increase market share
- Decreased competition (from the perspective of the acquiring company)
- Reduction of overcapacity in the industry
- Enlarge brand portfolio (e.g. L'Oréal's takeover of Body Shop)
- Increase in economies of scale
- Increased efficiency as a result of corporate synergies/redundancies (jobs with overlapping responsibilities can be eliminated, decreasing operating costs)
Cons:
- Goodwill, often paid in excess for the acquisition
- Culture clashes within the two companies causes employees to be less-efficient or despondent
- Reduced competition and choice for consumers in oligopoly markets. (Bad for consumers, although this is good for the companies involved in the takeover)
- Likelihood of job cuts
- Cultural integration/conflict with new management
- Hidden liabilities of target entity
- The monetary cost to the company
- Lack of motivation for employees in the company being bought.
Takeovers also tend to substitute debt for equity. In a sense, any government tax policy of allowing for deduction of interest expenses but not of dividends, has essentially provided a substantial subsidy to takeovers. It can punish more-conservative or prudent management that do not allow their companies to leverage themselves into a high-risk position. High leverage will lead to high profits if circumstances go well, but can lead to catastrophic failure if circumstances do not go favorably. This can create substantial negative externalities for governments, employees, suppliers and other stakeholders.
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—Georg Wilhelm Friedrich Hegel (1770–1831)
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—Georg Wilhelm Friedrich Hegel (1770–1831)
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