Business Policy and Strategic Management - Research Paper Example

MERGERS Corporate-level strategies are basically about the choice of direction that a firm adopts in order to achieve its objectives. It is basically about decisions related to making decisions related to allocating resources among the different businesses of a firm, transferring resources from one set of businesses to others, and managing and nurturing a portfolio of businesses in such a way that the overall corporate objectives are achieved. This whole set of exercise provides a set of strategic alternatives that an organization can consider. “Strategic alternatives revolve around the question of whether to continue or change the business the enterprises are currently in or improve the efficiency and effectiveness with which the firm achieves its corporate objectives in its chosen business sector (Glueck, 1984). According to Glueck (1984) there are four grand strategic alternatives: stability, expansion, retrenchment and any combination of these three. These strategic alternatives are termed as grand strategies. Growth is the way of life. Almost all organizations plan to expand. This is why expansion strategies are the most popular corporate strategies. Companies aim for sustainable growth. A growing economy, burgeoning markets, customers seeking new ways of need satisfaction, and emerging technologies offers ample opportunities for companies to seek expansion. Apart from competitive strategies, competition could coexist with cooperation. Corporate strategies could take into account the possibility of mutual cooperation with competitors while competing with them at the same time, so that the market potential could expand. Cooperative strategies could be of the following types: 1. Mergers 2. Takeovers (or Acquisitions). 3. Joint Ventures & 4. Strategic Alliances. Merger and takeover (or acquisition) strategies essentially involve the external approach to expansion. Basically two, or occasionally more than two, entities are involved. There is not much difference in the three terms used for such types of strategies and they are frequently used synonymously. But a subtle distinction can be made. While mergers take place when the objectives of the buyer firm and the seller firm are matched to a large extent, takeover or acquisitions usually are based on the strong motivation of the buyer firm to acquire. Takeover is a common way for acquisition and may be defining as “the attempt (often spring as a surprise) of one firm to acquire ownership or control over another firm against the wishes of the later management (and perhaps some of its stock holders). Joint ventures occur when an independent firm is created by at least two firms. In an era of globalization, joint ventures have proved to be invaluable strategies for companies looking for expansion opportunities globally. Strategic alliances are partnerships between firms’ where by their resources, capabilities, and core competencies are combined to pursue mutual interests to develop, manufacture or distribute goods or services. Organizations follow the growth paths can be pursued via external expansion and mergers are the most popular measures. In this case (Merger) the business does not create the productive facilities itself, but purchases existing production. A merger is a situation in which, as a result of mutual agreement two firms decide to bring together their business operations. A merger is distinct from a take over in so far as a takeover involves one firm bidding for another’s shares. One firm there by acquires another. A merger implies that managers through negotiation have reached an agreement acceptable to both sides. Mergers provide a much quicker means to growth than internal expansion. Not only does the firm acquire new capacity, but also it acquires additional consumer demand. Building up this level of consumer demand by internal expansion might have taken a considerable length of time. The telecommunications, media and technology, automobiles etc. has seen many mergers in recent times where companies in different market segments have come together. The acquisition by America Online (AOL) the internet group, of Time-Warnerbrough together a firm strong in media distribution with a media content provider. The two businesses were clearly complementary and allowed AOL to grow and expand its range of media-based interests. Once the merger has taken place, the constituent parts can be recognized through a process of rationalization. The result can be a reduction in costs. For example, only one head office will now be needed. On the marketing side, the two parts of the newly merged company may now share distribution and retail channels, benefiting from each other’s knowledge and operation in distinct market segments or geographical locations. The merger of Airbus Industries partners, Aerospatiale- Matra of France, Daimler-Chryster Aerospace of Germany and Construcciones Aeronautics of Spain, is estimated to save through rationalization, hundreds of millions of pounds annually. The newly created firm European Aeronautics space and Defense company (EADS) owns 80% of Airbus, while BAE systems of the UK owns the remaining 20%. The rationalization process was seen by many as necessary, if Airbus was effectively to challenge its main rival Boeing of the USA. The motive of merger is to reduce competition and there by gain greater market power and larger profits, with less competition, the firm will face a less elastic demand and be able to charge a higher percentage above marginal cost what is more, the new more powerful company will be in a stronger position to regulate entry into the market by erecting effective entry barriers, thereby enhancing its monopoly position yet further. A merger can benefit shareholders of both firms if it leads to an increase in the stock market valuation of the merged firm. If both sets of shareholders believe that they will make a capital gain or their shares then they are more likely to give the go-ahead for the merger. Mergers within Europe have been predominantly horizontal rather than vertical or conglomerate. This has led to an increase in concentration with in a wide range of manufacturing and service sector industries in a number of European countries. Despite growing number of horizontal mergers there has also been a tendency for companies to become more focused, by selling off parts of their business which are not seen as core activities. For example, not long after its take over of Wellcome-Glaxo decided to concentrate on the production of prescription drugs and as a consequence to sell its share of Warner welcome which produced non-prescription drugs. Another example is of Volvo that after unsuccessful attempt to merge with Renault in 1993, the subsequently divested many of its businesses. This trend of horizontal mergers and conglomerate and vertical de-mergers has allowed companies to increase their market power in those specific sectors where they have expertise. Consumers may gains from lower costs, but the motives of the companies are largely to gain increased market power-something of dubious benefits to customers. Basically mergers by reducing the number of rivals can correspondingly reduce uncertainty. At the same time, they can reduce the costs of competition. In a period of rapid change where uncertainty is prevalent, firms may seek to protect themselves by merging with each others. A widely held theory concerning merger activities are that it occurs simply as a consequence of opportunities that may arise: Opportunities that are often seen. Therefore business mergers are largely unplanned and as such, virtually impossible to predict. Dynamic business organizations will be constantly on the lookout for new business opportunities as they arise. Mergers are generally have the effect of increasing the market power of those firms involved but this could lead to less choice and a higher prices for the consumer. References: Glueck, W. F and L.R. Jauch, 1984, Business policy and strategic management, 4th edn. New York: McGraw-Hill, p.209. Read More