Benefits of Merger and Acquisition over Partnership - Essay Example

? Benefits of Merger and Acquisition over Partnership Introduction Merger can be viewed as a business strategy which involves combining the operations of two or more sole business entities to form one single entity with a financial, market control and reduction of cost of production motives. Mergers are necessitated by firm’s need to improve on profitability, change of management and administration system, need to conquer or acquire a significant market share and/or improve on productivity from its operations as a single entity to a stronger merged entity. The merged entity enjoys stronger management and administration base as the leadership of the merging firms take respective roles in their area of specialization and they pool their expertise towards running this new merged firm (Enkel & Covin, 2012). It should be noted that since the merging firms were operating as sole entities before, then the size and scale of operations may vary from each other and thus merger clauses are spelt out on the benefits and contributions of each firm in terms of segments and roles which in a big picture, defines the expected targets (Clark, 2009). Acquisition or simply a takeover involves purchase of a firm by another firm with an aim of maximising profits and management expertise or gaining market share and /or expansion motive. The acquiring company may decide to retain its name after acquiring the new firm or depending on the purchase clauses, if for instance the acquirer purchases a given percentage of the firm, they may decide to consolidate the two firms with a new name, new image and operation targets (Warde, 2010). Partnership can be viewed as an alliance between business entities on contractual basis and/or an exclusive bond with an aim of achieving a short term objective. Some partnerships are viewed as differentiation in which firms form alliances with an aim impressing customers and/or competitors with the size of network but with a business commitment of not allying with third party entities. Depending with the motive of the alliance, partnerships can take forms of: an exclusive supplier, customer, an intermediary channel and a vendor of a given complementary or supplementary offering of the firm’s products. For instance, a telecommunication company can partner with Internet service provider to provide a certain region or class of customers with some customized internet services for a given period. This is meant to attract more customers to the class and try to lure the internet providing firm into business with its telecommunication company’s operations within that period without the provider engaging with other third parties (Deering & Murphy, 2008). In this paper we will analyse the benefits of merger and acquisition over the partnership agreements. Question 1: Under what circumstances is merging with or acquisitions of other companies a better solution than entering into partnerships or alliances with this companies? To answer this question we shall look at the circumstances that necessitate mergers and acquisitions, the benefits then compare with those of partnerships /alliances. For instance, when a firm acquires another firm on the grounds of productivity, both the acquirer and the acquired firms enjoy mutual benefits of improved productivity. For example, firm “A”, with a significant economies of scale, a stronger investment/capital base and effective management/administration acquires firm “B” which has a competitive advantage of market share due to their edge cut technological advancement in their products but with a weak management and capital base, there are defined clauses of the acquisition in that for instance firm B has weak production methods but has a considerable market share in terms of the products it produces. Firm A’s acquisition will strengthen productivity and /or cut the total costs that could have been incurred by firm B and they benefit with the returns of their investments as there will be increased output by combination of both firm’s productivity levels and the market share of firm B will ensure sufficient destination of the final product .Partnership on the other hand, seeks to satisfy the short term need of complementing and supplementing firms’ production or marketing goals. In our example above, firm A could have chosen to partner with firm B in marketing campaigns so as to attract more customers for their product, that is, firm B supplement firm A’s marketing strategy. The fact that most partnerships are contractual and short lived; there is disparity of benefits accruing to each party (Hammel & Denhart, 2007). For instance, if firm A’s strategy of the alliance works well, then its image and products will hit the market but will the productivity and administration of firm B improve significantly? This will depend on the partnership clauses but the overall effect will be one sided. Merging and acquiring for vertical integration with an aim of internalizing an external problem. For instance, in situations where two firms are monopolistic in their operations but there is double marginalization in that, their monopolistic operations reduce the profitability of the firms in the long run. Merging or acquiring of one firm will improve the profitability by setting one entity as a competitive entity increasing profits and consumer surplus (Lipczynski, 2008). Partnership on the other hand would call for complementary services or products of these monopolistic firms which will lead to dead weight losses in the long run. Merging and acquiring for economies of scope with an aim of increasing or controlling the network in terms of marketing and distribution of their products will benefit the involved parties in terms of controlling the demand-side changes which can help them control prices and their respective production for profitability. Partnerships on this context, would call for supplementing firm’s product supply without the control of the demand side. Merging and Acquisition on the grounds of improving economies of scale and transfer of resources, comes with benefits of reduced fixed costs by the combined company, lowering the total costs of the company by removing duplicate departments and increases the profit margin. Resource transfer will enhance even and effective resource allocation with benefits such as overcoming business information asymmetry and creation of value by combining scarce resources. Partnership on the other side, would not call for even allocation of resources and minimization of both fixed and total costs as the firms operate independently but with alliances on customer attraction and retention and/or the marginal profits would not be realized. Mergers and Acquisitions for diversification and synergy will improve firm’s value and shareholder’s portfolio by improving managerial economies as there will be increased opportunity of managerial specialization. Geographical diversification will smoothen firm’s earning by strengthening investor confidence. Partnership on the other hand will not focus on diversification but strengthening its internal sections like marketing, finance etc. This will lock participating parties from diversification opportunities. Mergers and Acquisitions for taxation and hiring motives whereby firms with large financial base buy/merge with loss making firms so as to reduce the tax liability while others opt to buy a firm with stronger leadership / management structure instead of hiring new staff. These strategies reduce the tax burden; improves on talent and personnel of the acquirer and satisfaction of the staff from the target company (Collan & Jani, 2011). Partnership on the other hand would not concentrate on taxation and satisfaction of the personnel but on the short term objective of meeting the supply and/or attracting customers. Question 2: How do mergers and/or Acquisitions contribute to enhancing a companies’ position? Merging and Acquisition enhance companies’ position by improving their respective productivity, market share, management and administrative effectiveness, enhancing diversifications and resource transfer and overall improvements on profitability of the firms as a single entity by a collective reduction of fixed and total costs and removal of duplicated departments and channels as discussed above. Conclusion Merger and Acquisition have an intrinsic measure of mutual benefits to the participating parties as compared to partnerships. They might be cumbersome with respect to time and complexities of agreements but the business perspective in them is long term and beneficial. References Clark, J. J. (2009). Business merger and acquisition strategies: A handbook for entrepreneurs and managers. Englewood Cliffs, N.J: Prentice-Hall. Warde, A. (2010). Acquisition. Los Angeles, Calif. [u.a.: SAGE. Lipczynski, J. (2008). Business. Chicago: Chicago Review Press. Collan, M & Jani, K (2011). Acquisition: Journal of Real Options and Strategy 4 (1): p 117–141. Deering, A., & Murphy, A. (2008). The partnering imperative: Making business partnerships work. New York: J. Wiley. Hammel, L., & Denhart, G. (2007). Growing local value: How to build business partnerships that strengthen your community. San Francisco, Calif: Berrett-Koehler Publishers. Enkel, D. & Covin, J. G. (2012).International Strategies: “Meta-analyses of Post-acquisition Performance: Indications of Unidentified Moderators". Strategic Management Journal 29. Read More