Your firm is considering acquiring a smaller company. The products and markets f

Question

Your firm is considering acquiring a smaller company. The products and markets fit well within your organization’s strategy. This potential acquisition is a high-tech company that is presently losing money. Some in your organization argue that the acquisition is not a good idea since the high-tech company is losing money and this will cause your firm’s return on equity to decrease.

Are the naysayers correct? Will your ROE decrease? Why?

How important are changes in ROE when considering an acquisition?

Explanation / Answer

In this is specific case at the small company is being acquired by a larger company, alignment of the smaller companies products in market directly delete with the larger companies structure. This definitely ensures better return of equity as smaller companies would directly merge with the larger companies structure. It would definitely increase the overall availability of the market for the smaller companies and would provide better support to the overall structure of the smaller company as the overall acquisition of the company would be totally depending on better marketing strategy of the products totally aligned with the larger companies structure.
Even if the company is losing money at the starting stage, input gain from the largest company and merging would definitely make a stable change in better acquisition of money from the same market as it would not given the economy of larger company as small company as comparatively very small relative finances as compared to the larger company.
In this specific situation the return on equity would definitely decrease a little in the starting phase of the acquisition but after a very short period, return of equity would be rising are the products and services of the small organisation are directly merging with the overall structure of the current organisation.
Sensing changes in return of equity are very essential while the company is being merged with another company. In this specific case changes in return on equity are very essential as it would definitely provide a support to the acquisition. Proper understanding of d return on equity definitely provides a better support for financial management paves a path for success for the organisation acquisition.

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