Fundamentals of Financial Management, Third Edition

23.2 MOTIVATIONS BEHIND COMBINATION

Combination is preferable to the start-from-scratch mode of investment. The more important reasons why it is opted for are as follows:

1. Reaping synergistic advantage;
2. Enjoying monopoly power;
3. Benefits of diversification;
4. Increased debt capacity;
5. Tax saving;
6. Undervalued assets; and
7. Agency issues.

First, combination provides synergistic advantages or the advantage of economies of scale. Firms that operate individually do not reap those benefits that are available when they are combined. This occurs because combination allows firms to reap economies of scale on different counts, especially on the counts of production, technological research, management, finance and marketing, etc. For example, when the fixed ...