Value of Mergers for Offeror and Offeree - Essay Example

Do mergers create value for the offeror and offeree? Introduction Mergers and acquisition are some of the business strategies taken by the current organizations in order to survive in the market and to compete effectively. Global recession has broken the back bone of many big organizations and it is increasingly difficult for them to survive independently in the market. Bruner (2004) has pointed out that Merger and Acquisition (M&A) as one of the most important means by which companies responding to changing conditions (Bruner, 2004, p.3). The resources and the abilities of a single corporation may not be enough in the current globalized world to conduct the business in a successful manner. For example, most of the big organizations are currently looking to expand their business to overseas countries in order to exploit the opportunities opened up by the globalization. Merger & Acquisition is one way of business expansion adopted by big companies. Gaughan (2007) defined merger as the combination of two corporations in which only one corporation survives while the merged corporation goes out of existence after the merger process (Gaughan, 2007, p.12). Theoretically mergers and acquisitions should be value creating for the shareholders of both the offeror and offeree companies. But in practice, it is not 100% true. This paper critically evaluates the pros and cons of merger and acquisition to the shareholders of both the offeror and offeree companies Value for the offeror and offeree with respect to Mergers and Acquisition Increased market share, lower cost of production, higher competitiveness, acquired research and development know how and patents, Financial leverage, Improved profitability etc are some of the advantages or values for the offeror and the offeree through M & A (Helium, 2010). The offeror and the offeree can increase their customer base through merger and acquisition. For example, consider the recent merger deal between two telecommunication giants, India’s Bharti Airtel and South Africa’s MTN. As per this deal, MTN and its shareholders would acquire around 36 per cent economic interest in Bharti Airtel, while Bharti Airtel would acquire 49 per cent stake in South African telecom giant MTN (Indias 11 largest M&A deals, 2009). The above deal helped both the companies to exploit the opportunities in India and South Africa more judiciously for the mutual benefits. Bharti Airtel will get the assistance from MTN for their operations in South Africa whereas the MTN would get assistance from Bharti Airtel for their operations in India. The understanding of business climate and formalities in these countries can be exchanged for the mutual benefits through this merger. In other words, the offeror and the offeree got mutual benefits of diversifying their business portfolios for mutual benefits. It is evident that both MTN and Bharti Airtel can increase their competitive power across the world, and moreover both of them can take benefit out of the research and development done by each of them. MTN would have more awareness and data about the Soth African market whereas the Airtel may have more awareness about the Indian conditions. The culture, politics, economic conditions, legal requirements, social norms etc might be different in these countries and both MTN and Airtel can exchange these data for their mutual benefits and for the collective growth. Miller, (2008) has argued that Edwin L. Miller (Author) › Visit Amazons Edwin L. Miller Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central Mergers and Acquisition (M&A) will help the offeror and the offeree to diversify into other areas which will change the risk profile for both the companies (Miller, 2008, p.12). It is not possible for an organization to stick with one business portfolio at present because of the rapid changes in the business fields. For example, Sony Corporation has established ties with Ericson to make mobile phones as part of their business diversification. Sony has realized that even though they are supposed to be the leaders in the electronic goods manufacturing industry like the audio and video equipments, they are not so in areas like the mobile phone manufacturing. Even though mutual growth is mainly accepted as the major objective of mergers and acquisitions, synergistic benefits are also there for the offeror and the offeree. “The combination of two firms will yield a more valuable entity than the value of the sum of the two firms if they were to stay independent: Value (A + B) > Value (A) + Value (B)” (Gaughan, Ph.D., 2001, p.5). In mathematics, 1+1 =2 whereas in business, 1+1 >2. In other words, when two companies function independently, they will compete each other and will destroy some of the opportunities as part of their competition. But when they function together, they will not compete each other and will help each other which will definitely increase their capabilities in the market. Sharma (2001) has pointed out many advantages or values as result of merger to the offeror and the offeree. Accelerate product development,Spread risk/share resources, Access to new markets, expand customer base,Increase market presence, Provide added value to customers, Access knowledge and expertise outside of your company,Strengthen reputation – credibility etc are some of them (Sharma, 2001, p.17). As mentioned in the earlier example of merger between Bharti Airtel and MTN, merger will help both the offeror and the offeree to offer more benefits increase their market base by offering advanced products to a wide range of customers. Moreover the collective financial capabilities and resources of the merged firm would be immense compared to the resources of the independent firms before the merger. The technological developments in two countries need not be the same and merger will help both the offeror and offeree to have access to new trends in technology. The operational and financial advantages of mergers and acquisitions are immense both for the offeror and the offeree. The supply chain networks of the offeror and the offeree would help the new company formed after the merger immensely to reach even distant places. Fore xample, the merger between MTN and Airtel will definitely help MTN to reach even the rural areas of India using the Airtel networks. In other words, MTN can offer their sophisticated telecommunication products to even the villages of India using their tie ups with Bharti Airtel. Even though many values and advantages were associated with M & A, it should be remembered that M&A has got some demerits as well. M&A Disadvantages The major disadvantage associated with merger and acquisition is to the offeree. The offeree will lose their corporate identity and brand value because of their merger with another company. Whatever the advantages the offeree had in the market, developed by them facing stiff challenges, would be the wealth of the offeror after the merging process. Some of the workers of the offeree may lose their jobs while some others may be forced to shift their positions in the new company. The freedom and work benefits enjoyed by the workers in the offeree company need not be preserved in the offeror company. When M&A activity reduces industry competition and produces a powerful and influential corporate entity, offeree may suffer from non-competitive stimulus and lowered share prices (Helium, 2010). Lowered share prices will result in immense loses to the shareholders and investors. The merger will help the offeror to increase their monopoly in the market and the consumers would be forced to pay more for the products because of the less competition faced by the offeror because of merger. Berry (2010) has mentioned the 2008 merger between Bank of America and Merrill Lynch as a well known example where mergers gone badly. He pointed out that this merger was surrounded by complications ranging from employee bonuses and added debt (Berry, 2010). Moreover, Daniel (2002) has mentioned that more than half of all mergers are essentially financial failures in the sense that the combined entity produces less shareholder value than the two individual pre-merger companies (Daniel, 2002, p.3). The major reasons for the failures of merger and acquisition are the over estimation about the outcome of the merger, lack of business strategy, and lack of communication and management strategies poor business plan etc. The offeror and offeree may expect and set unrealistic outcomes as a result of the merger which may not happen always. The failure to achieve the over exaggerated outcomes may develop dissatisfaction among both the offeror and offeree which may result in lack of communication between them and subsequent management failures. Conclusions Merger and Acquisition are popular in the business world as part of the business strategies to compete more effectively in the market through expansions. In normal cases, both the offeror and the offeree would benefit immensely as a result of the merger. Synergistic benefits and growth prospects are the major benefits out of a merger. The combined resources and capabilities would help both the offeror and the offeree to extend their wings and to increase their control over the market more effectively. At the same time most of the merger attempts result in failures because of the unrealistic goals set by the offeror and the offeree. Over exapectation, improper management and business plan, lack of communication etc are the major reasons for the merger failures. In short, merger is beneficial to the offeror and the offeree only if both of them set realistic targets and work on mutual cooperation principles. References 1. Berry A.W (2010), Advantages and disadvantages of acquisitions and mergers, Retrieved on 24 January 2010 from http://www.helium.com/items/1561489-mergers-and-acquisitions 2. Bruner Robert F. (2004) Applied Mergers and Acquisitions, with CD-ROM (Wiley Finance) Publisher: Wiley (April 2, 2004) 3. Daniel Patrick D (2002), Mergers and Acquisitions – a Part of the Enbridge Strategy for Growth, Retrieved on 24 January 2010 from http://www.enbridge.com/about/pdf/pat-020608.pdf 4. Gaughan Patrick A. Ph.D., (2001), MERGERS AND ACQUISITIONS: AN OVERVIEW, Retrieved on 24 January 2010 from http://media.wiley.com/product_data/excerpt/79/04714143/0471414379.pdf 5. Gaughan Patrick A. Ph.D (2007), Mergers, Acquisitions, and Corporate Restructurings Publisher: Wiley; 4 edition (February 2, 2007) 6. Helium, (2010), Advantages and disadvantages of acquisitions and mergers, Retrieved on 24 January 2010 from http://www.helium.com/items/1561489-mergers-and-acquisitions 7. Indias 11 largest M&A deals, (2009), Retrieved on 24 January 2010 from http://business.rediff.com/slide-show/2009/may/29/slide-show-1-indias-11-largest-m-and-a-deals.htm 8. Miller Edwin L. (2008), Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide Publisher: Wiley (January 9, 2008) 9. Sharma Harish (2001) Corporate Relationships: Pros and Cons, Retrieved on 24 January 2010 from http://www.cata.ca/files/PDF/Resource_Centres/hightech/reports/studies/Overview_09.pdf Read More