Question

1. If you are planning an acquisition that is motivated by trying to acquire expertise, you are basically seeking to gain intellectual capital.

What concerns would you have in structuring the deal and the post-merger integration that would be different from the concerns you would have when buying physical capital?

2. Diversification is good for shareholders. So why wouldn’t managers/owners acquire firms in different industries to diversify their company?

Answer 1

1. Shareholders have different appetite of risks and returns. Some may chose to have higher risk exposure and some may chose limited. Hence the managers must understand the risk appetite of the majority of their shareholders and then decide about diversification. He should chose industries with higher risk return trade off only if majority of the shareholders have got a higher risk appetite. Accordingly he should chose the ones with lesser risk-return trade off is the risk appetite of the shareholders is limited. So he should begin by understanding the shareholders' expected returns and risk they are willing to undertake.

2. Whenever human intellectual expertise is acquired under the scheme of mergers and acquisitions, the first concern would be for how to retain them in your company. For this purpose, the company acquiring them got to think of various emoluments and incentives to keep them motivated and retain them back. In case of hostile acquisitions the retention of such employees is much more difficult as they tend to move out to other friendly organisations for jobs. Thus the organisation must tactfully keep such risk lower on one hand and be tiptoed to quickly to grab the market opportunities. Hence it's challenging.