Profit Maximization vs.

Wealth Maximization
The financial management has come a long way by shifting its focus from traditional approach to
modern approach. The modern approach focuses on wealth maximization rather than profit
maximization. This gives a longer term horizon for assessment, making way for sustainable performance
by businesses.
A myopic person or business is mostly concerned about short term benefits. A short term horizon can
fulfill objective of earning profit but may not help in creating wealth. It is because wealth creation needs a
longer term horizon Therefore, financial management emphasizes onwealth maximization rather
than profit maximization. For a business, it is not necessary that profit should be the only objective; it may
concentrate on various other aspects like increasing sales, capturing more market share etc, which will
take care of profitability. So, we can say that profit maximization is a subset of wealth and being a subset,
it will facilitate wealth creation.
Giving priority to value creation, managers have now shifted from traditional approach to modern
approach of financial management that focuses on wealth maximization.

This leads to better and true evaluation of the

business. For e.g., under wealth maximization, more importance is given to cash flows rather than
profitability. As it is said that profit is a relative term, it can be a figure in some currency, it can be in
percentage etc. For e.g. a profit of say $10,000 cannot be judged as good or bad for a business, till it is
compared with investment, sales etc. Similarly, duration of earning the profit is also important i.e. whether
it is earned in short term or long term.
In wealth maximization, major emphasizes is on cash flows rather than profit. So, to evaluate various
alternatives for decision making, cash flows are taken into consideration. For e.g. to measure the worth of

a project, criteria like: present value of its cash inflow present value of cash outflows (net present
value) is taken. This approach considers cash flows rather than profits into consideration and also use
discounting technique to find out the worth of a project. Thus, maximization of wealth approach believes
that money has time value.
An obvious question that arises now is that how can we measure wealth. Well, a basic principle is that
ultimately wealth maximization should be discovered in increased net worth or value of business. So, to
measure the same, value of business is said to be a function of two factors earnings per share and
capitalization rate. And it can be measured by adopting following relation:
Value of business = EPS / Capitalization rateAt times, wealth maximization may create conflict, known as
agency problem. This describes conflict between the owners and managers of firm. As, managers are the
agents appointed by owners, a strategic investor or the owner of the firm would be majorly concerned
about the longer term performance of the business that can lead to maximization of shareholders wealth.
Whereas, a manager might focus on taking such decisions that can bring quick result, so that he/she can
get credit for good performance. However, in course of fulfilling the same, a manager might opt for risky
decisions which can put the owners objectives at stake.
Hence, a manager should align his/her objective to broad objective of organization and achieve a tradeof
between risk and return while making a decision; keeping in mind the ultimate goal of financial
management i.e. to maximize the wealth of its current shareholders.

Mergers & acquisitions

1. 1. MERGERS & ACQUISITIONSBy-Prabhjot 112Jaspreet 66Mithun 82
2. 2. Business CombinationWhy Business Combine??? -Synergy -Diversification -Growth
-Eliminate Competition
3. 3. MERGERSB usiness Amalgamation ACQUISITIONSC ombination Takeovers
4. 4. When two or more companies combines into one company may merge with existing
co,MERGER form new company in India merger is called Amalgamation
5. 5. Merging Companies are called Amalgamating CompaniesMERGER New Company is
called Amalgamated Company
6. 6. MERGERMerger through Merger through ABSORPTION CONSOLIDATION
7. 7. Merger Through AbsorptionAn Absorption is Combination oftwo or more companies into
an existing company All companies except one lose their identity
8. 8. Example Absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL) Tata Oil
Mills Ltd. (TOMCO) with Hindustan Lever Ltd. (HLL)
9. 9. Merger Through ConsolidationA consolidation is a combinationof two or more Companies
into a new Company All companies are dissolved to form a new Company
10. 10. Example Hindustan Computers Ltd + Hindustan Instruments Ltd + Indian Software Co.
Ltd + Indian Reprographic Ltd = Hindustan Computers Ltd(HCL)

11. 11. TYPES OF MERGER Horizontal Merger Vertical Merger Market-extension Merger
Product-extension Merger Conglomeration
12. 12. TYPES OF MERGER 1 Horizontal Merger It refers to the merger of two companies who
are direct competitors of one another. They serve the same market and sell the same
product.Example The formation of Brook Bond Lipton India Ltd. through the merger of
Lipton India and Brook Bond The merger of Bank of Mathura with ICICI (Industrial Credit
and Investment Corporation of India) Bank
13. 13. TYPES OF MERGER 2 Vertical Merger This type of merger involves a customer and a
company or a supplier and a company merging. Imagine a bat company merging with a
wood production company. This would be an example of the supplier merging with the
producer and is the essence of vertical mergers.Example Pixar & Disney
14. 14. TYPES OF MERGER 3 Market-extension Merger This involves the combination of two
companies that sell the same products in diferent markets. A market-extension merger
allows for the market that can be reached to become larger and is the basis for the name of
the merger.Example- Dells Alienware Gaming Laptops
15. 15. TYPES OF MERGER 4 Product-extension Merger It takes place between two business
organizations that deal in products that are related to each other and operate in the same
market. Companies which sell diferent products of a related category.
16. 16. TYPES OF MERGER 5 Conglomeration It refers to the merger of companies, which do
not either sell any related products or cater to any related markets. Here, the two companies
entering the merger process do not possess any common business ties.Example TataSky
17. 17. ACQUISITIONAn Acquisition may be an act of acquiringefective control by one company
over assetsor management of another company withoutany combination of
companies..Companies may remain independent, separateBut there may be change in
control ofCompanies..
18. 18. Example-Godrej Consumer Care bought Keyline Brands-Dabur acquired Balsara
19. 19. TAKEOVERS A corporate action where an acquiring company makes a bid for an
acquiree. If the target company is publically traded, the acquiring company will make an ofer
for the outstanding shares.
20. 20. Types Of Takeovers Friendly Takeover- Also commonly referred to as negotiated
takeover, a friendly takeover involves an acquisition of the target company through
negotiations between the existing promoters and prospective investors. This kind of takeover
is resorted to further some common objectives of both the parties.
21. 21. Hostile Takeover- A hostile takeover can happen by way of any of the following actions:
if the board rejects the ofer, but the bidder continues to pursue it or the bidder makes the
ofer without informing the board beforehand.Example- HP taking overCOMPAQ
22. 22. Why Should Firms Takeover??? To gain opportunities of market growth To seek gain
benefits from economies of scale To gain a more dominant position in the market To
acquire the skills or strengths of another firm to complement existing business To diversify
its products or service range in the market
23. 23. Indias 11 largest M&A deals Tata Steel-Corus: $12.2 billion Vodafone-Hutchison Essar:
$11.1 billion Hindalco-Novelis: $6 billion Ranbaxy-Daiichi Sankyo: $4.5 billion ONGC-

Imperial Energy: $2.8 billion NTT DoCoMo-Tata Tele: $2.7 billion HDFC Bank-Centurion
Bank of Punjab: $2.4 billion Tata Motors-Jaguar Land Rover: $2.3 billion Suzlon-RePower:
$1.7 billion RIL-RPL merger: $1.68 billion