Factors That Motivate Mergers and Acquisitions - Literature review Example

Factors that motivate mergers and acquisitions 7 February, The paper seeks to evaluate the factors that motivate companies to engage in mergers and acquisitions. Many companies seek to consolidate their market position through acquiring other companies. In an acquisition, the parent company often swallows the small company that is acquired. There are many benefits of merging or acquiring other companies depending on the motive of the company. An analysis of different cases of UK firms that went through acquisitions and mergers show that their success or failure mainly depended on the approach and strategy they used. There are various factors that motivate mergers and acquisitions in different countries. There are also different outcomes of mergers and acquisitions as a result of the methodologies that are used to undertake the process. As such, this paper has been designed to analyse the major factors that motivate mergers and acquisitions drawing examples from institutions from the UK that have mergers and acquisitions. The paper will start by defining the meaning of the two key terms namely merger and acquisition in order to gain a full understanding of the whole concept. According to Jackson & Schuler (2000) a merger is a company that is formed after two companies have been joined or merged to form one entity and these companies have proportional ownership shares in a merger. On the other hand, in an acquisition, the other company takes full control of the other organization which is bought out through an acquisition. There are various factors that motivate companies to merge or to acquire other organizations. For instance, the need to increase market share, increase their geographic reach as well as responding to new deregulation as a result of globalisation are some of the forces that motivate mergers and acquisitions. Companies involved in mergers and acquisitions ought to reach a mutual agreement in order to obtain the envisaged benefits from the deal. The agreement between the two companies involved in a merger or acquisition has a bearing on the success or failure of the initiative. There are also quite a number of factors that motivate mergers and acquisitions in different nations. The realisation that markets are global as a result of globalisation has significantly contributed to an increase in the activities involving mergers and acquisitions especially of multinational companies (MNCs). According to a paper entitled ‘Factors that motivate mergers and acquisition’ (ND), deregulation of the global markets has significantly contributed to an increase in mergers and acquisitions. This has enabled the other companies to migrate to other countries where they can merge with other companies there to form a viable business entity. This is also related to little risk in opening a new business venture in the other country given that two companies will be merged to form one company. This is different from opening a new company from scratch. The need to obtain market power has significantly contributed to the rise in mergers and acquisitions in different countries. In the event that a certain company has acquired another organization, this entails that it takes over control of the newly formed company and this gives rise to the new company’s dominance in the market. Other companies are motivated by the need to share the benefits of an improved operating margin through reduction of operating costs when they engage in a merger or an acquisition (Factors that motivate mergers and acquisitions, ND). It can be observed that many of today’s acquisitions often involve a company with a favorable operating margin which goes on to acquire a firm with a lower operating margin. This helps the acquirer to gain more shares as well as to increase synergies that are designed to reduce costs by spreading administrative overhead while at the same time eliminating redundant personnel. This helps the management of the new firm to remain focused on their core business through eliminating employees who have become redundant as a result of market changes taking place in the environment in which the organization operates. Mergers and acquisitions are also seen as a viable strategy to increase the company’s competitiveness. Quality and productivity are likely to be increased since there is likely to be migration of talent from one company to the other following a merger or an acquisition. Knowledge is likely to be transferred to the other employees when a merger or an acquisition has been implemented in the organization. Essentially, the merged company’s competitiveness is increased when it is merged with another company since there will be transfer of knowledge and skills from one organization to the other. However, the outcomes of mergers and acquisitions are determined by various factors which can lead to their success or failure. For instance, government regulation of mergers in different countries has an impact on the success or failure of the initiative. Government regulation of mergers and acquisitions is primarily concerned with minimizing the chances of emergence of monopolies (Zhao, 2008). It is the duty to make sure that it regulates the activities of the mergers and acquisitions so as to ensure that decisions made by these organizations are beneficial to the consumers as well as the investors at large. It is imperative for the government to regulate the activities of mergers and acquisitions so as to be in a position to protect the interests of the citizens. For instance, mergers and acquisitions in the European Union (EU) are guided by article 101 of the Treaty on Functioning of European Union (TFEU) that prohibits organisations which have as their objective the prevention, restriction or distortion of competition within common market (EU competition law Rules applicable to merger control Situation, 2011). The European Union strives to promote competition among all the countries that operate in this region. According to Zhao (2008), regulation is essential since it is designed to prevent other companies to outcompete the small firms in the host country. The activities of large multinational companies in host countries may destroy competition which can result in the emergence of monopolies in such country. In as much as business is concerned, this state of affairs would be detrimental to the host country since the other companies will find it hard to compete with large MNCs. Essentially, large MNCs are allowed to merge with other companies in the host country with the aim of stimulating economic growth. Therefore, the government has a duty to regulate the activities of these MNCs so as to protect the interests of the citizens as well as the country at large. A health market environment should be characterised by competition and there is no one company that should wield more power than any other organization. Quality can be compromised if there is one dominant company offering particular services or goods to the market. Deregulation of trade among nations as a result of globalisation is a noble idea but it can be seen that it needs to be regulated for the betterment of the host nation since it will be in a position to protect its economic interests. However, some governments tend to put stringent measures that can negatively impact on the operations of mergers and acquisitions in different countries. This negatively impacts on the operations of mergers and acquisitions in such countries. As such, this part of the paper seeks to analyse the outcomes different methodologies that have been used by different institutions in the UK that have undergone the process of a merger or acquisition. The main aim of this section is to analyse the driving forces into mergers and acquisitions by different institutions. Braggion, Dwarkasing & Moore (2010) state that “When takeovers took place in a competitive environment wealth creation appears to be related to efficiency gains. As competition decreased, gains to shareholders appear to be related to increased oligopoly power. Thirdly, in a less competitive environment, banks tended to reduce the amount of loans and their capital ratios.” This particular study focused on a forty year period where the banks merged in an unregulated and virtually unconstrained environment. The result in mergers and acquisitions particularly in the banking sector in the UK shows that larger banks ended up swallowing smaller banks as a result of the fact that they acquirers wanted to consolidate their market in this sector. Since this sector of the economy has not been regulated during the period of the study, it can be observed that large financial institutions such as Barclays benefited through mergers with small banks to become renowned commercial banks in the UK and the world over. However, of notable concern is the fact that this study shows that there have been little financial gains as a result of mergers and acquisitions in the UK banking sector. Instead, the institutions were more concerned with establishing themselves as forces to reckon with in the UK financial sector. For instance, the authors of this particular study posit to the effect that the banking sector is negatively impacted by a downturn in the economy since they may not be able to offer loans due to high interest rates which will in turn deter the borrowers from applying for loans. The other trend observed by these authors is that the acquirer gets the biggest chunk in the deal and the small firm acquired ceases to exist in the long run. Another example of a merger and acquisition between two institutions in the UK include the London-based brewer Fuller, Smith and Turner which bought Gales Brewery, a formerly family-run brewer based in Hampshire in the south of England in November 2005 (Mind Your Business, 2006). However, there were concerns that this merger should not have taken place by some pressure groups since they argued that it was going to compromise on the aspect of their favourite brand, Gales. There has been a growing trend in the UK where smaller brewers have been acquired by large brewers over the past three decades. The main driving force in this particular merger and acquisition was related to market consolidation. The aim was that Fuller intended to continue brewing Gales beers so that it could complement its product portfolio. The Gales brand was so popular such that Fuller saw it wise to acquire it so as to improve its competitiveness as well as performance in the market. “Fullers recently announced its profit figures for the half year to September 2006 and it stated that it was up by nearly a third to £10.9 million,” (Mind Your Business, 2006). This could be good news to the acquirer but Gales brewery closed down shop in 2006 and 21 people lost their jobs. The other trend that has been witnessed as a result of mergers and acquisitions is that the number of firms is decreasing especially in the UK. Companies that offer the same product in the market often face the fate of being swallowed by larger ones in case of mergers and acquisitions. However, the company that acquires the other one is capable of increasing its capacity as well as the economies of scale in its operations. This entails that its production would increase if it acquires the assets of the other company like the case of Fuller acquiring Gales brewers. Mitleton-Kelly (2004) also highlighted two cases involving an international engineering company (EnFirm - EnF) and a company in the Service Sector (SSFirm - SSF). EnFirm-EnF witnessed a major success because it diligently analysed all the processes that could lead to the success of the company. On the other hand, SSF suffered from severe dysfunctional relationships after two years given that the individuals were uncertain of boundaries of their authority. A merger needs to be carefully planned in order to be successful. However, SSF took it for granted that they were going to succeed since they had taken all the necessary precautions. Initially, the majors and acquisitions highlighted in the case study were intended to consolidate the market in their operations. As noted, the success and failure of the two companies discussed were caused by different approaches that were taken by the companies involved. Over and above, it can be noted that there are different motives by companies to engage in mergers and acquisitions. For instance, the need to increase market share, increase their geographic reach as well as responding to new deregulation as a result of globalisation are some of the forces that motivate organizations to engage in mergers and acquisitions. As illustrated in case studies analysed above, it can be seen that some mergers and acquisitions fail while others succeed and this depends with the approach taken by the companies involved. Bibliography Braggion, F., Dwarkasing, N. & Moore, L.( 2010) Mergers and Acquisitions in British Banking: Forty Years of Evidence from 1885 until 1925. [Online]. Available from: . [Accessed 22 February, 2013]. EU competition law Rules applicable to merger control Situation [online] ND. Available from: < http://ec.europa.eu/competition/mergers/legislation/merger_compilation.pdf >. [Accessed: 08 March, 2011]. Factors that motivate the mergers and acquisitions. (2011) [online] Available from: .[Accessed: 08 March, 2011]. Grant, R.M. (2004) Contemporary Strategy Analysis. Massachusetts: Blackwell Publishers Inc. Grobler, P. Et al (2006) Human Resource Management. 3rd Edition. London: Thompson Learning. Jackson, S.E. & Schuler, R.S. (2000) Managing Human Resources: A Partnership Perspective. NY: South Western College Publishing. Kelly, M 2004. ‘Co-Evolutionary Integration: A Complexity Perspective on Mergers & Acquisitions,’ Complexity Research Programme London School of Economics UK. [Online]. Available from: . [Accessed: 08 March, 2011]. Mind Your Business (2006) Mergers and acquisitions.[Online]. Available from: < http://www.bized.co.uk/current/mind/2006_7/041206.htm>. [Accessed: 08 March, 2011]. Mintzberg, H., Quinn, J., Goshal, S. (2003) The Strategy Process (Revised European Edition), London: Prentice Hall Robinson, AA (11-13 September 2003), Mergers and acquisitions-some current issues, Taxation institute of Australia. Zhao, Y. (2008) The International Comparison on the Regulations of Cross-border Merger and Acquisition. School of Education: Huazhong University of Science & Technology. Read More