CHAPTER-II

REVIEW OF LITERATURE

This chapter is to present the overview on the study through the different views and
ideas expressed by the past researches and philosophers on the issue related to the
study. This chapter has presented theoretical literature which explains the theories
related to the merger and the empirical literature which explains the empirical results
conducted by the researchers on the merger and acquisition.
Theoretical Literature Review: Different theories related to merger and acquisitions have
been presented for the justification of its impacts. Theories have been classified as value
increasing and value decreasing. Value increasing theories focuses on the generation of the
synergy from the M&A.

a) Differential Efficiency Theory: This theory explains that the merger and acquisition
increases the value of the firm as the firm’s management is strengthen from the merger of other
firms and as a result increases the efficiency of the management of the firm. The firm through
merger of same industry would be benefited as it would mean that company which is merging
with
the other company can expand without much cost because of the efficient utilization of all the
resources. This theory explains that the company having good potential if merged could be
utilized at optimum level with lower cost and increasing efficiency of the firm. This theory also
explains that the synergy would be gained from transfer of knowledge, economies of scale and
economies of scope.

b) Financial Synergy Theory: This theory explains that the financial synergy could be
gained by the firm through M&A as the firm could use internal financing at lower costs than
external financing. This would increase the diversification opportunities and lower the cost of
capital.

2.1 Conceptual Framework

2.1.1 Concept of Merger

In simple words, merger is complete abs