Planning for Corporate Merger

by J. Weston



A brief summary of the factors that have led to the increased use of mergers during the post-World War II period is first presented. Among the many involved, three major influences are complementarity, common thread and differential price earnings ratios. Complementarity refers to the tact that one firm has strengths and weaknesses which will be complemented by the strengths and weaknesses of another firm. Another force may be a common thread. In the common thread, management that has shown its competence in organizing and managing the operations in a particular enterprise is led to apply the same ability and experience to other enterprises in an industry. This rests on the fundamental principle that the assets under the use of one firm take on greater value when placed in the hands of more competent management. The acquisition program of MSL Industries illustrates this principle. A third influence is differential price-earnings ratios. This may be illustrated concisely in a numerical example. Suppose two firms are equal in size of total earnings. The firm with the price-earnings ratio of 20 acquires the firm with the price-earnings ratio of 10.

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