Mergers And Acquisitions - Essay Example

 Mergers And Acquisitions Table of Contents Table of Contents 1 Introduction 2 Why Directors Prefer Mergers and Acquisitions 3 Synergies of Expanded Corporations 6 Successful Mergers and Acquisitions 8 Addidas and Reebok 8 Exxon-Mobil Merger 9 Failed Mergers and Acquisitions 10 Daimler-Benz and Chrysler Corporation 10 Bank of America and Merrill Lynch 10 Works Cited 12 Mergers and Acquisitions Introduction Research and case analyses have shown that a significant number of mergers and acquisitions eventually end up in failure (Sherman, 2012, p. 161). Multiple business studies have attempted to explore the possible factors behind this growing reality. The complexities of the corporate mechanics involved in the mergers and the unpredictable nature of the markets have been cited as some of the possible causes of these failures. Usually, mergers and acquisitions are primarily driven by the objectives of growth and survival. A large company will seek to acquire a smaller company for the purposes of benefitting from certain synergies in various aspects of the business operation. This may include an expanded market segmentation or technological development. Companies with nearly the same market profile may merge to enhance the level of efficiencies of operation and minimize on operational costs. On the other hand, smaller companies may be willing to be acquired by bigger firms due to a hostile market environment or unpalatable market forces (Sherman, 2012, p. 67). In essence, mergers and acquisitions are aspects of business strategy. In business, there exists the possibility of a mismatch between strategy and reality. Errors of judgment by directors may lead to ill-conceived mergers and acquisitions particularly resulting from the effect of misguided information or the flux nature of the global market forces. It might be important to analyze the rising cases of failure from this perspective. Why Directors Prefer Mergers and Acquisitions Despite the recorded failures, corporate directors have continued to pursue mergers and acquisitions with remarkable determination. Usually, the pursuit of these goals is strategic in the sense that they aim at achieving a certain goal in the business operation. The synergistic benefits of engaging in mergers may tend to surpass the possible risks involved (Moeller & Brady, 2011). Directors often decide on mergers basing on certain strategic goals. Decisions are taken after cost-benefit analyses are conducted with regard to the possible risks involved in the purchase. A merger or an acquisition may present the most appropriate alternative to the growth and expansion alternatives available for the company (Sun, 2012). For instance, a company may want to expand its technological infrastructure within a specified period of time. Some of the factors to be considered include times, cost, and reliability of the development. The firm may choose to enlist the services of experts to carry out this particular development. Alternatively, the firm may choose to enter into a merger or engage in an acquisition with a firm that is already established in terms of technology with a sound technological infrastructure (Buckley & Ghauri, 2002, p. 22). This move would have saved the firm a substantial amount of money, which would be directed to alternative areas of development. Another reason why boards of directors still engage in mergers and acquisitions is to be seen in terms of expansion strategies. Market discourses of globalization and liberalization have brought about stiff competition in most areas of business operations. Mergers and acquisitions provide the most effective way for a company to consolidate its hold on a certain market segment with the short-term and long-term objective of locking out external competition (Lucks, 2007). When two large corporations enter into a merger, they are most likely to expand their market reach and intimidate other firms that may seek to operate in their business niche. In fact, market studies have shown that successful mergers have the capacity of expanding the market potential and reach beyond the sum total of the two combined forces. This is one of the synergies that are often considered by the board of directors as they engage in mergers and acquisitions. This is one of the strategies that have been adopted by companies as a response to the challenges presented by globalization and liberalization. These two forces have heightened the levels of competition, as the previously protected markets have become porous allowing the entry of new players and the emergence of new players. Directors may seek to acquire or merge with another company with a different range of products with the specific aim of increasing its own inventory of products (Grave, Vardiabasis & Yavas, 2012). This is usually deemed easier, less strenuous, and more strategic than introducing its range of similar products. An advantage of such a strategy lies in the benefits of the going concern, existing good will, a ready market, and other positive factors that are naturally associated with established businesses. Further directors may seek to reach across a different geographical region by merging or acquiring a firm that already exists in that particular location. This solves the challenges of costs and logistical perils of establishing a new firm in the region. The firm eventually benefits by increasing its geographical reach, which eventually translates into positive effects. However, such mergers have not always succeeded as they may turn costly and counterproductive. One other reason why directors opt for mergers and acquisitions is concerned with foresight. Directors may want to engage in a merger with a smaller company due to observable prospects of growth (Moeller & Brady, 2011). Analysts from the buying company may draw projections that hint at future possibilities of growth of the targeted company. By entering into a merger with such a company, the directors intend to achieve two general goals. The first goal is that they have preempted the rise of a potential rival within their area of operation. The second goal is that the buying company benefits from the growth potential of the acquired company. Ultimately, the growth of the corporate sector is dependent in multiple factors that have to do with the manner in which strategies of growth and expansion are considered from the management point of view. Further, companies may be motivated to enter into mergers or engage in acquisitions for the reason of preventing any form of business associations between the targeted firm and the rivals in the industry. There are always fears that companies operating within the same line of business may form business associations with rivals from within or without the region. Obviously this would have negative impacts on the growth prospects of the firm. The discourse of liberalization has made it nearly impossible for firms to operate like monopolies (Lucks, 2007). This is because local, legal, and international laws have been revised in a manner that has opened up the market to new entrants. Lack of protection from governments therefore leaves the options of mergers and acquisitions as the only way through which firms could survive in the increasingly competitive environment. When considering about mergers and acquisitions, directors often tend to focus on the aspect of costs. The efficiency and profitability of corporations lies in the ability to cut on costs. Mergers and acquisitions provide the most appropriate ways of cutting on the costs of operation. Cost-cutting opportunities usually present themselves in two ways. The first way is through the laying off staff, which necessarily follows any merger of acquisition venture. Mergers and acquisitions often lead to a duplication of roles and duties, which makes it necessary for the members of staff to engage in the reduction of the number of workers. In the end, such moves translate into reduced expenses in terms of salaries and wages. A reduction in expenses will often lead to positive impacts on the balance sheet. On another level, the operation costs are reduced in the sense that the company is able to procure larger quantities of stocks and other inventories that are more likely to attract discounts. It is precisely because of this reason that some companies have sought to enter into mergers. The modern corporate world is largely concerned with the desire to cut on the costs of operation. Synergies of Expanded Corporations According to experts in corporate marketing, the size of the firm greatly determines its levels of efficiency and profitability (Carleton & Lineberry, 2004). There are certain synergies and incentives that bigger firms receive, which smaller firms do not. Economists have cited the example of discounts, and the raising of capital as one of the advantages that bigger firms have over smaller ones. In the corporate world, there are always strategies to incorporate the aspect of growth into the budgetary projections of a business. Growth could happen in the course of time or it could be achieved through the aspect of merging with other firms or acquiring others. Under normal circumstances, the size of firm is directly proportional to the volume of business. Naturally, high volumes of business will tend to have a positive impact on profits and revenues (Grave, Vardiabasis & Yavas, 2012, p. 64). However, studies have shown that the size of businesses might not necessarily translate into higher profits and revenues. The synergies associated with size, according to the opinion of experts, only applies during favorable seasons of business. Bigger businesses suffer more significantly during the times of recession and financial crises than smaller firms. This assessment is consistent with the reality that has affected corporate America during the past period of financial crisis. It might be argued that the volume of business in the times of financial crises deepens while the operation costs rise hence resulting into losses. From another perspective, the size of a business ties in with the growth of the brand image. Bigger businesses often attract higher profiles in the blue chip category. The growth of the brand of these businesses often makes it easier for such businesses to attract more capital on the stock markets than smaller companies. Case reviews of the New York Stock Exchange and the London stocks market have shown that the public responds better to bigger businesses than on smaller ones. This behavior of the public is often considered as a mark of confidence on the bigger business as compared to the smaller businesses. Naturally, there is an element of confidence, which anchors on the assumption that size means success. Past studies conducted on the attitudes of the public on bigger businesses have shown that the public also associates big businesses with stability because size often implies historical progress. These are some of the perceptions that have often guided the entry of big businesses into the sphere of mergers and acquisitions. However, the high rate of failure of mergers and acquisitions is an illustration of the fact that business success is more than a sum total of assumptions, perceptions and strategy (Carleton & Lineberry, 2004). Some mergers fail because some corporate strategists misread the fortunes of the targeted firms. It might be necessary to consider these matters in light of the challenges involved in the logistical arrangement of mergers. Failure to disclose some information may leave the buyer vulnerable to liabilities incurred before the period of the merger or the acquisition. This is because most mergers and acquisitions occur within the context of going concern. Pending litigations, debts, and other liabilities may affect the future state of the new business particularly if there are no sufficient safeguards to shield the business from the adverse effects of the merger. Such consequences could easily render the business dysfunction and this explains one of reasons behind the high incidence of failure by many businesses. Successful Mergers and Acquisitions Addidas and Reebok One of the most successful acquisitions involved Addidas and Reebok. The two companies were the second and third strongest on the market after Nike. For years the two had trailed Nike on the global and American market within the sportswear industry. Following the takeover of Reebok by Addidas, the company was now able eat into the market niche of Nike recording substantial growth in the market share in the period that followed the acquisition. Addidas began on an aggressive expansion strategy locally and abroad. The expansion program was partly aided by the acquired synergies obtained from the acquired potential of Reebok. Another important strategy that was developed by Addidas was the determined increase of the firm’s profile in line with its mission of global dominance. After the acquisition, Addidas negotiated with the American National Basketball Association (NBA) on a ten-year business deal. Both globally and in the United States, Addidas experienced an increased growth in business and profile. The company’s brand image attained new heights of growth as it explored ways of impacting on the market with its acquired strength and identity. Although Nike maintained its lead in the global market and within the United States, Addidas reduced the gap of difference with a significant margin. The success of this merger has been attributed to the stability in the sportswear industry and the general profitability of the industry. Exxon-Mobil Merger The merger between oil giants Exxon and Mobil in 1999 has been rated as one of the most successful in the recent past. The merger involved a 99 billion dollar agreement that led to the formation of the largest company in the world, which acquired the name ExxonMobil. Since the merger the company has enjoyed an impressive lead on the international market and has continued to enjoy exponential rises in earnings. This new company benefited from the positive synergies that resulted from the positive factors that resulted from both sides of the merger (Kusstatscher & Cooper, 2005). Some of the positive effects of the merger entailed an increase in the market segmentation that was illustrated through increased geographical presence. There was also a general reduction of operational costs and general expenses as the operational costs lowered as a result of the synergies of the union. Moreover, the operation of the company enjoyed increased efficiencies that resulted in the restructuring process, which followed the merger. The success of the merger was significantly dependent on the goodwill that existed between the two companies and the seamless operations that had preceded the merger. Externally, market conditions were favorable for the merger to succeed. ExxonMobil enjoys significant public confidence going by the public hold of its market share. The success of this merger has often been analyzed in the context of internal and external corporate mechanics that are necessarily enjoined in the actualization of mergers and acquisitions. The micro and macro-economic factors provided the necessary structural support that gave force to the merger. Failed Mergers and Acquisitions Daimler-Benz and Chrysler Corporation One of the landmark unsuccessful mergers involved Daimler-Benz AG and Chrysler Corporation. The resultant company acquired the name of DaimlerChrysler. The designers of this merger focused on market capitalization and revenues as their driving objectives. Precisely, it was projected that the bringing together of the leading automobile companies would harness their combined potential into a formidable market force (Renze-Westendorf & Jaeger, 2010). The merger was also premised on the need to exploit the global market of automobiles in terms of opportunities across the geographical reach and diversity in the product range. The two companies were united by differences as well as similarities. For instance, the companies were united by the high market profile of their respective products although they operated in different markets. The merger was designed to exploit new markets and dominate the market by the year 2007. The eventual collapse of DaimlerChrysler has been attributed to a clash of corporate culture between the two sides in the merger. It has often been argued that Chrysler could not cope with the nature of operation exhibited by Daimler-Benz. Other reasons that have been cited include low sales and the negative effects of recession. As a result, the two equals had to separate. Bank of America and Merrill Lynch The acquisition of Merrill Lynch by Bank of America has often been cited as an example of a failed merger. The nature of failure in this particular merger resembles the case of Daimler-Benz and Chrysler Corporation particularly on the score of clash of culture. The corporate culture of Bank of America is significantly different from the one at Merrill Lynch. Following the merger, there have been significant levels of staff resentment especially from the Merrill Lynch side of the merger. Some senior staffers have opted to abandon their positions in order to join rivals in the market. These are outward manifestations of a failed merger. Corporate culture is one of the non-material attributes by which corporate organizations regard themselves. It has often been argued that mergers and acquisitions are disruptive of the corporate cultures of many organizations. Experts have suggested variously that corporate cultures ought to be factored in the preliminary stages of mergers and acquisitions (Carleton & Lineberry, 2004). Some companies have managed to overcome challenges emanating from a mismatch between cultures. However, overcoming the friction generated by a clash of corporate culture is highly dependent on the aspect of organization and leadership especially in the periods following mergers and acquisitions. It is precisely as s result of such challenges that some companies have opted to delay announcing their mergers or acquisitions until the lapse of some period of time. The intervening period after the merger is often regarded as a trial and delicate period and determines the course of events. External conditions such as the possible response of the stock markets are other factors that affect the levels of success or failure of mergers. Generally, mergers and acquisitions are dependent on a sum total of factors that control market performance, perceptions and reactions. Works Cited Buckley, P, J & Ghauri, P, N, 2002, International Mergers and Acquisitions: A Reader, Cengage Learning, London. Carleton, J, R & Lineberry, C, S 2004, Achieving Post-Merger Success: A Stakeholder's Guide to Cultural Due Diligence, Assessment, and Integration, John Wiley & Sons, New York. Grave, K, Vardiabasis, D., & Yavas, B 2012, The Global Financial Crisis and M&A, International Journal of Business and Management, 7, (11). Kusstatscher, V & Cooper, C, L 2005, Managing Emotions in Mergers And Acquisitions, Edward Elgar Publishing, New York. Lucks, K 2007, Transatlantic Mergers and Acquisitions: Opportunities and Pitfalls in German-American Partnerships, John Wiley & Sons, New York. Moeller, S & Brady, C 2011, Intelligent M&A: Navigating the Mergers and Acquisitions, John Wiley & Sons, New York. Renze-Westendorf, M & Jaeger, F 2010, Successful Vs. Failed Transactions: Are the Looser of Today the Winner of Tomorrow? GRIN Verlag, New York. Sherman, A, J 2012, Mergers and Acquisitions from A to Z, AMACOM Div American Mgmt Assn, New York. Sun, J 2012, Analysis on the Strategies Of Responding To Multinational Corporation Merger and Acquisition In China, Management Science and Engineering, 6 (2), 144-148. Read More