The impact of pharmaceutical mergers on economic agents

Date

1998-12

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Publisher

Texas Tech University

Abstract

Mergers and acquisitions are methods of corporate growth. When internal growth is not efficient or desirable, a firm will expand externally by acquiring another firm. Basic finance teaches that the main goal of a firm is the maximization of stockholder wealth. Therefore, the objective of an acquisition is to increase wealth. This goal may be achieved by increasing sales, market share, assets, or research along with decreasing costs. Many firms and managers equate size with power. Mergers allow for an increase in critical mass, which the firm and managers believe will give them increased power in the marketplace. Mergers are a part of the business strategy of a firm and help create a sustainable competitive advantage for the buyer firm through the addition of the positive and desirable attributes of the acquired firm.

A merger is the combination of two firms with the stockholders of both firms jointly owning the new firm. A merger forms a new entity. An acquisition occurs when one firm purchases the assets of another firm with the acquired shareholders ceasing to be owners. The acquired firm becomes a part of the buyer firm. A takeover is an acquisition where the buyer firm is substantially larger than the acquired firm is. The definitional differences are important for accounting and regulatory purposes but have little economic or financial meaning. Therefore, the terms merger, acquisition, and takeover are used interchangeably.

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