Happy New Year

Happy New Year - 2013

Discuss Synergy with reference to merger

Synergy :

Synergy results from complementary activities. For example, one firm may have a substantial amount of

financial resources while the other has profitable investment opportunities. Likewise, one firm may have a

strong research and development team whereas the other may have a very efficiently organized production

department. Similarly, one firm may have well established brands of its products but lacks marketing

organization and another firm may have a very strong marketing organization. The merged business unit in

all these cases will be more efficient than the individual firms. And, hence, the combined value of the

merged firms is likely to be greater than the sum of the individual entities (units). Symbolically;

Combined value = Stand alone value of acquiring firm, V

a + Stand alone value of acquired target firm,

V

t + Value of synergy, Vat

Normally, the value of synergy is positive and this constitutes the rationale for the merger. In valuing synergy,

costs attached with acquisitions should also be taken into account. These costs primarily consist of costs of

integration and payment made for the acquisition of the target firm, in excess of its value, V

t. Therefore, the

net gain from the merger is equal to the difference between the value of synergy and costs.

Net gain = Value of synergy,
Vat  costs.

Why do Companies want to measure intellectual capital?

There a number of reasons why firms want to measure IC and the predominant reason has been for strategic

or internal management purposes. Specifically, the reasons include :

(i) Alignment of IC resources with strategic vision. To support the implementation of a specific strategy

via a general upgrading of the work with the companies’ human resources (support and maintain a

strategy concerning the composition of staff as regards seniority, professional qualifications and

age. Through the description of the staff profile, measuring, discussion and adjustment become

possible).

(ii) To support or maintain various parties’ awareness of the company.

(iii) To help bridge the present and the past (stimulates the decentralized development of the need for

constant development and attention towards change).

(iv) To influence stock prices, by making several competencies visible to current and potential customers.

(v) To make the company appear to the employees as a name providing an identity for the employees

and visualizing the company in the public. Knowledge of employees and customers will stimulate

the development of a set of policies to increase customer satisfaction and customer loyalty.

(vi) Assessing effectiveness of a firm’s IC utilization - Allocate resources between various business units.

Extract full value from acquisition and joint ventures.

(vii) Determine the most effective management incentive structures.