Analyzing Effects of Merger and Acquisitions on the Recent Worldwide Financial Crisis - Assignment Example

? ANALYZING EFFECTS OF MERGER AND ACQUISITIONS ON THE RECENT WORLDWIDE FINANCIAL CRISIS Unit Unit School Introduction The world experienced global financial crisis in the year 2007 and 2008. This marked the period when its effects were felt all over the world. The effects included collapsing of financial institutions, a fall in stock markets, mergers and acquisitions, among others. The last two decades have marked significant growth of activities involving merger and acquisition. The volumes of M&A have reached the world record levels (Campbell 2011). The increased Mergers and Acquisition activities can be attributed to globalization, funding at low cost, and the financial turmoil, which is being experienced across the globe (Luc 2010). The three factors have led to increased demand for creation and formation of large business entities in order to compete effectively while seeking growth as a way to increase profits. According to Senese (2009), mergers and Acquisitions have also increased due to the fact that governments have introduced various reform programs in order to revive the economic sector. These programs have led to increased capital flows as a result. Market liberalization is also in the increase in the developing countries, which has further led to demand for mergers and acquisitions. Increased growth for mergers can also be attributed to the increased global investment in seeking better rates of return, and a means to diversify risk. Many businesses prefer venturing overseas. Nowadays, mergers and acquisitions have proved to be common events within the economy. This paper analyzes the effect of mergers and acquisitions on the recent worldwide financial crisis. The effects of mergers and acquisition during the financial crisis will also be analysed in the Banking industry. Discussion Many strategic investors use the terms ‘mergers’ and ‘acquisitions’ interchangeably while making investment decisions. It is, however, important to know the difference between the two terms. Mergers come as a result of two equal entities coming together to form one single business. On the other hand, acquisition involves a smaller company becoming part of a bigger, existing company, which is the acquiring firm. The recent worldwide financial crisis has subjected the financial markets to uncertain environments that are volatile, too. The markets are currently in a vicious cycle of investor redemptions and asset deleveraging. Prices have also declined significantly. Credit spreads have also gone to undesirable levels with indices of equity dropping by 25% in the year 2008. Global demand has also been marked to decline; hence depressing prices of commodities (Mankiw 2009). All these market conditions, among them decreased oil prices, have led to the global downturn. Mergers and acquisition activities have not been spared either because of the financial turmoil. Mortgage markets have also collapsed. The current financial situation has made investors, both institutional as well as government investors, to turn to M&A activities because they appear to be the only solution. Previously, before the global financial crisis, investors would participate in merger and acquisition transactions only if they wanted to sell their businesses at a profit. However, the current market situation merger and acquisition deals are taking place so that business owners can preserve their businesses using best terms possible. Some third parties wishing to take over a business prove to be hostile. For example, a competitor may want to take control of another business by whichever means he wishes. M&A transactions therefore become necessary to transfer business control. In most cases, the buyer dictates the terms of the transaction (Krug 2009). Luc (2010) agrees that, the current financial crisis has affected the M&A market a great deal. Its effects have been adverse on most companies. The sector has been marked by decreased activities. Mergers and acquisition sector has also experienced lull. This means a period when the business experiences reduced transactions, and not total stoppage of transactions. Mergers and acquisition transactions require a lot of labor, as well as effort. The investors must follow the necessary legal procedures. Several other factors must also be considered, among them the financial condition of the business being acquired and the acquiring firm. Owners’ financial condition must also be evaluated. Psychological peculiarities of the owners must also be considered. The most important factor, however, is the financial and economic situation. Investors usually consider three issues when it comes to the merger and acquisition activities. The first block involves the method to be used while making the transactions. The second block is the procedure to be followed while transacting. Finally, security must be considered in order to ensure obligations relating to performance. The first issue pertains to the legal mechanisms regarding transfer of assets or business from one owner to another ought to be considered. Merger and acquisition involves choosing between keeping the business and shares interest in the company’s capitals. Several other options are available and must e evaluated. Financial crisis comes along with complications that do not exist in a growing market. First, financial crisis leads to lack of money in the form of stock (Hitt & Duane 2012). Complexities are also experiences in credit engagements. In such a situation, big companies, operating their shares in an open market, prefer making payments using liquid securities. Without the economic crisis, these same companies would have paid using their assets or borrowed money. Another problem is the cat that in the production field, selling assets does not mean full pledge to keep the business. The personnel also need to be transferred. At a time of financial crisis, manipulation of personnel on a large scale basis leads to mass dismissal. It can also bring breaching rights of employees. This leads to a reaction that is negative, from the local authorities. Investors will always fear dealing with companies. They prefer directing their money elsewhere instead of dealing with companies that risk having problems. Wolgust, (2011) asserts that the procedure of activities to be followed during transactions is very vital and must be known, and followed. There must be a plan of steps necessary for completion of any transaction. Some activities are mandatory according to the law and must be considered. When the market is experiencing financial crisis, investors who wish to invest prefer to follow many steps before making a particular decision. This method has an obvious drawback because it prolongs transactions. Prolonged transactions become risky because there is a possibility that they may never become completed. This possibility comes due to several reasons. First, financing may get stopped. Other reasons may include political change in the relationship between the involved parties, revelation of hidden agenda or bad faith, among others. Global financial crisis makes buyers conservative. They prefer losing a few funds rather than discovering that the business they are purchasing is totally worthless as this would mean losing all the money (Hughes 2012). Finally, merger and acquisition transactions require an agreement on how to guarantee interests of the two parties. Interests of the purchaser must be considered particularly, because he bears the risk by purchasing the company’s assets. Distribution of risk means negotiating on the transaction, necessary documentation, and the necessary procedures. These could include disclosure letters and other necessary documents such as due diligence investigation. Global financial crisis, however, makes the parties fail to agree on the transactions because guarantees become hard to agree on. At this point, the two parties require that patience and skills be exercised. This patience means extra time and the interested parties may not be willing to drag any more (Senese 2007). Effects of merger and acquisition during the recent financial crisis on the banking industry The financial crisis caused the degradation of values of banks as establishments of public confidence (Korzeb 2010). Banks could not operate efficiently and recorded minimum profits. However, M & A (Mergers and Acquisitions) became a way of seeking alternative income away from the normal banking activities. M & A transactions are amongst the complex investment procedures that allow shareholders to obtain large profits as long as they are conducted effectively and the synergy effect utilized (Hay & Millelli 2012). Furthermore, M&A resulted in obscuring the actual financial and economic condition of partners in the consolidation. This strategy is understood when a partner undertakes a relatively cheap acquisition, limiting the operating costs of an acquired bank, and dynamically increasing the dividend pay-out of and payments transferred to the shareholder. This strategy made further acquisitions possible. Acquisitions protected all parties in the crisis and short term goals were achieved as everybody was happy (Korzeb 2010). However, such actions were against banking operations as it interfered with three basic elements of value creation; appreciation of share prices, possibility of obtaining potential dividends, and ability to generate free cash flow from the bank or from subsequent reinvestments (Korzeb 2010). Lastly, there was violation of shareholder rights which was possible with banks increasing shareholder value. The actions associated when bank managers looked for short term success through increasing shareholder values during the financial crisis were (Hay & Millelli 2012): disregarding professional ethics code and good banking practice; saving a parent company in financial crisis at the expense of dependent companies doing well; transferring profits abroad and draining away capital necessary for proper operation of acquired banks; and attempting to conceal actual situation of the bank resulting in difficulty in evaluating the institute. Conclusion The recent global financial crisis affected different sector of the economy, among them mergers and acquisition sector. Many M&A practitioners did not consider financing risk because financing would come easily and with much assurance. Many businesses collapsed as a result of financial crisis. Some other businesses that were on the verge of collapsing turned to M&A deals in order to save them. The big businesses would acquire the small businesses and the acquiring firm would dictate the negotiation terms. In the discussion part, the reader finds that big companies would make payments using liquid securities, which further uplifted the financial crisis. Furthermore, in the banking industry it is evident that banks turned to M&A for survival. The effects were that banks could found alternative way of income, operated against their operation procedures which was value creation, and shareholder rights were violated. References Campbell, D, 2011. Mergers and Acquisitions in Europe: Selected Issues and Jurisdictions. Deventer: Kluwer Law International. Pp. 48-65 Fassin, Y, Gosselin, D, 2011. Journal of Business Ethics102. 2 (Aug 2011): 169-191. Hay, F & Millelli, A, 2012. The Impact of the Global Financial Crisis on the Presence of Chinese and Indian Firms in Europe. Eastbourne: Sussex Academic Press.Pp. 30-57 Hitt, A & Duane, I, 2010. Strategic Management: Competitiveness and Globalization, Concepts. Stamford: Cengage Learning. Pp. 350-382 Hughes, J, 2012. Foundations of Business. Stamford: Cengage Learning. Pp. 465-498 KORZEB, Z 2010, 'IMPLICATIONS OF CROSS-BORDER MERGERS AND ACQUISITIONS IN THE POLISH BANKING SECTOR IN THE CONTEXT OF THE GLOBAL FINANCIAL CRISIS', Annals Of The University Of Petrosani Economics, 10, 4, pp. 143-156, Business Source Complete, EBSCOhost, viewed 18 April 2012. Krug, J, 2009. Mergers and Acquisitions: Turmoil in Top Management Teams. Malmo: Business Expert Press. Pp. 89-139 Luc L, 2010. 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