Question 11.S-tQ.10: Describe briefly some of the important contributing factors ...

Possible reasons why the shareholders of acquiring companies rarely benefit from takeovers include the following:

• if the bid is contested, the acquisition can cost the company more than it originally intended to pay, reducing its shareholders’ wealth;
• predicted economies of scale and synergy may fail to materialise;
• the acquiring company’s managers may lack knowledge and expertise in the business they have acquired;
• the quality of the acquired assets may turn out to be lower than expected;
• cultural problems may be experienced between acquirer and target;
• if the takeover is for cash, the acquiring company may be drained of liquidity and face a high level of gearing. This restricts its ability to accept attractive projects.