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Development of a Linear Programming Model for the Analysis of Merger/Acquisition Situations

Published online by Cambridge University Press:  19 October 2009

Donald H. Woods  and
Thomas A. Caverly
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Extract

With the rapid growth in various types of corporate combinations, many opportunities arise in which increased internal efficiency in the allocation of capital budgeting resources may be obtained. Although the resource-transfer methodology proposed in this paper is discussed within the context of a merger/acquisition environment, the operational analysis conveivably could be applied to multiproduct, multifirm, or multinational situations. This study examines an application in which a linear programming model can be used operationally as an analytical planning device (1) to obtain efficient capital budgets for the merged companies, and (2) to quantify the monetary value of potential gains in efficiency produced by a merger. Conceptually, the model assists management in searching for excess capacity in each company, efficiently combines scarce resources, selects an optimal project list for the merged company, and indicates what the composition of the new capital budget should be. In addition, a variable step function provides for multiplicative adjustments in common resource constraints. These adjustments might be positive (negative) if the combination results in a more than proportionate increase (decrease) in the availability of a scarce resource.

Type
Financial Management
Information
Journal of Financial and Quantitative Analysis , Volume 4 , Issue 5 , January 1970 , pp. 627 - 642
Copyright
Copyright © School of Business Administration, University of Washington 1970

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