Mergers and Acquisitions Office Max Office Depot - Essay Example

ABSTRACT This research report is based on the discussion of mergers and acquisitions. The report reviews the merger of an oil industry firm of US, Exxon-Mobil, and the combination of these firms is analyzed based on merger. The research paper includes: Circumstances of the merger, positive benefits and negative impacts of the mergers, the consequences resulted after merger which leads to the change in HR. Analysis of successful merger attributes which leads to the change in the organizational structure. INTRODUCTION The term merger involves combination of two companies, which work together for an achievement of one common goal. Basically, the merger is between the same industry as the objectives of the two companies are the same. Although, there will be a difference of approaches and methods following by each of them, but the result achieved will be industry oriented. Moving towards acquisition, it is a term defining when a company buys the assets or equities of another and leaving the liabilities (Auerbach, 2008). In acquisition, the financial terms are led by both of the companies while in merger, financed is one company oriented. Both merger and acquisition can take place between public trading companies or private trading companies, involving the access of shares to public and shares which are not registered (Coyle, 2000). Acquiring or merger with a firm requires high level of negotiations to balance and mutual understanding of the objectives. The study of the merger of Exxon-Mobil, is a merger of giant companies in the oil industry and this has been aimed to enhance the productivity of the two companies. CIRCUMSTANCES THAT RESULT IN MERGER OR ACQUISITION The rate of merger was high in US in between 1994 to 2004, which was due to some major factors that are involved in the economy of the company and industry. The basic circumstances of the merger activity includes the increase number of merger particularly because of advancement in technologies, globalization of markets, intense nature of forms and sources to make industries deregulate, dynamic change in financial markets. Following these global trends of mergers, there some industry related trends as well. The oil industry of US is a large sized market and thus, it incorporates many challenges. Two major challenges of this industry are the addition of the future reserves within the country and the price fluctuations in the price of oil. The advantage of a large firm was firstly owned by only few firms and is now one of the barriers of entry to the industry. The major change was due to the fluctuation of oil prices which lead the industry towards major changes and merger and acquisitions was one of the changes that occurred. The merger which took place between Exxon-Mobile was declared in 12/01/1998 (Weston, 2002). Briefly discussing the characteristics of the merger: Characteristics of the Industry: Merger occurs when there is a massive change in the industrial factors. There were changes in technology, globalization, transformations, and entrepreneur innovations in the industry. These were some of the basic changes in the market as well. At that time, the oil industry was also having some major characteristics that were also supporting mergers. The US oil industry incorporates about 53% of the trade, having 10% as the global trading which was more than any other industrial trading. As oil market has globalized scope, thus it causes market segmentation in terms of quality and quantity. Aspect of Motivation in Mergers: The merger was always governed by the motivational aspect found between the merged companies. Focusing on the motivational level between Exxon-Mobile, they combine their complimentary assets, together with the aim of making a strong presence in the industry. Both the companies combine their experiences, Exxon having the experience of deep water exploration and Mobil's having the experience in production and exploration. Thus, this also helped in the merger between the two firms. Returning Measures: The major term used in activity of returning is 'stock for stock transaction' because after the return earned, there is only exchange of papers among the merged companies. Respectively, both the companies would be sharing ownership in the merged company. On merger, Mobil was paid premium of around 26.4% over the market capitalization. This in turn contradicted to the fallacy of stock transaction which claims that deal of the terms are irrelevant in such case and only exchange of papers is conducted. Contrary, the terms of deal in the case understudy determined the ownership of Exxon and Mobil in the company (Weston, 2002). Value Comparison: Comparison of firm’s transactions which is mostly done by comparing the financial ratios, including market revenues, market's EBIT, the market cash flows was the other circumstance that encouraged the merger. Ratios of price per earnings and price per cash flow which results in wide spread of values and all this encouraged in the merger. Weston (2002) reported values of the companies under consideration including USD 175 billion for Exxon and USD 58.7 billion for Mobil. Moreover, market to book value ratio of reported to be 4.0 and 3.1 and price to earnings ratios to be 23.6 and 17.9 respectively. However, in line with the valuations conducted by J.P. Morgan and Goldman Sachs for Exxon and Mobil respectively, both concluded the wide range of difference in values under the influence of various conceptual reasons and (Weston, Siu and Johnson, (2001) noted various aspect in which companies can differ despite working in similar industry. Sensitivity Analysis: It includes the assessment of the possible future changes inclined with the behavior of the value drivers. It is useful for management planning and systems. This enables the decision makers to identify the strength of the drivers. It helps in strategic planning process of firms, by reviewing and studying the information feedback structure. Weston (2002) in a valuation analysis conducted sensitivity analysis and found that Exon-Mobil has positive elasticity for rise in revenues, margin of net operating income as well as time required for achieving competitive advantage, while negative for the additional investment, rising cost of capital and the applicable tax rate. POSITIVE AND NEGATIVE EFFECTS OF MERGERS OR AQUISITIONS Positive effects of the mergers: After mergers, there is no need of having duplicate facilities and excess capacity, the positivity occurs when it is eliminated. General and administrative cost is reduced. It is beneficial to apply company's best business procedure across their worldwide operations. Access of government policies, which is extremely useful when it comes to facilitating relationship between the merged companies. Hence with these factors at work and in contrast to the initial estimate of synergies to be USD2.8 billion, the merger achieved the benefit of USD 4.6 billion within the period of seven months from synergies (CNN Money., 2000). Negative effects of the mergers: Mergers results in low quality leadership and a high rigid management structure. Low attention to consumer voice. Presence of low morale as a result of rationalization. Balancing efficiency among both employees of the merged companies. Human Rights Campaign (HRC) in the year 2012 and 2013 gave ExxonMobil a negative ranking for it is not adopting non-discriminatory policy and failed to meet the criteria of LGBT set by HRC (Juhasz, 2013). ORGANIZATION STRUCTURE RESULTED AFTER A MERGER The merger of two companies is not only the change of company name. Another great step after merger is change in the organizational structure as it impacts the potential growth of the company. Change in the organizational structure leads to change of planning and analysis of the factors involved in merger and growth of the company. New framework creates new abilities of decision making and framework that will support the new merged organization. The term organization refers to hierarchy, chain of command, management systems, and the job structures. The change of organization's structure includes analysis of the same factors and eliminating the one in favor of reducing the cost and combining the features that are best for production. The best options for this structure to be formed are involving the factors size, complexity, and objective a merged business (Kiefer, 2002). BEFORE AND AFTER CONSEQUENCES Before: Industrial revolution due to which exploitation occurs in economy. Weak industry value of the sector low and same structure revolving around an average outcome of productivity. Diversification in productivity required. As the industry is huge and there are only some companies able to deliver average economic conditions. A bunch of companies have only few champions in the industry, so it is better to have a merger to achieve economy of scale by combining all the master qualities together, thus strengthening the domestic sector. (Kleinertand Klodt, 2002). After: Rate of unemployment increases due to duplication of the functions eliminated. Involving management of two companies gives rise to difference of opinion causing inefficiency of production. Top management faces the clash of egos due to merger. The industry might be same but the difference in organizational culture causes the variations. Employees instead of working to enhance the productivitymay start working for resolving the issues among themselves. The shareholders are affected more because of the attribute of debt. Hence, broadly ExxonMobil on merger has managed to deal with the competition in addition to the objective of expanding asset base to spread the avenues of opportunities. Moreover, the rationalization factor of the industry directed both companies to come up with the merger. Also, mergers enabled the merged group to deal with wide range of environmental issues as well as capital redirection to more profitable ventures (TWST., 1998). REQUIREMENT OF HR DEPARTMENT The HR department after the birth of merged company should focus on the following: Integration should be stronger and committed management is required. Merger should be flexible enough to allow leadership to transform and value the aspects. Protection of the core competency should be the base and efforts should be made to maintain the core business. ExxonMobil changed their organizational structure into functional basis from the original geographical basis. ExxonMobil’s departments like marketing, production, distribution and human resource extra were required to more closely report to the head office. Also the level of communication among and between the departments as well as head office was increased (Gollan, et al. 2014). Moreover, merged group in order to produce a winning edge developed a culture with a medium degree of change by combining best of culture of both companies (DiGeorgio, 2002). The mixing of the culture of both companies was mandatory in contrast to imposing the culture of one over the other as both companies were leading in their place and adoption of completely new culture would have created challenges for the merged group. References Auerbach, A. J. (Ed.). (2008). Mergers and acquisitions.University of Chicago Press. CNN Money. (2000). Exxon: merger savings up. Retrieved October 21, 2014 from http://money.cnn.com/2000/08/01/companies/exxonmobil/ Coyle, B. (Ed.). (2000). Mergers and acquisitions.Global Professional Publishi. DiGeorgio, R. (2002). Making mergers and acquisitions work: What we know and don't know–PartII. Journal of Change Management, 3(3), 259-274. Gollan, P. J., Kaufman, B. E., Taras, D., & Wilkinson, A. (Eds.). (2014). Voice and Involvement at Work: Experience with Non-Union Representation. Routledge. Juhasz, A. (2013). What's Wrong With Exxon?.Advocate. Retrieved October 21, 2014 from http://www.advocate.com/print-issue/current-issue/2013/09/03/whats-wrong-exxon?page=full Kiefer, T. (2002).Understanding the emotional experience of organizational change: Evidence from a merger. Advances in Developing Human Resources,4(1), 39-61. Kleinert, J., and Klodt, H. (2002).Causes and Consequnces of Merger.Kiel Institute of World Economics, Retrieved October 21, 2014 from https://www.ifw-kiel.de/ifw_members/publications/causes-and-consequences-of-merger-waves/kap1092.pdf TWST. (1998). The Exxon-mobil Merger & Its Impact On The Energy Industry - Retrieved October 21, 2014 from http://www.twst.com/interview/1752#sthash.9GkvOvmp.dpuf Weston, J. F. (2002). The exxon-mobil merger: An archetype. Journal of Applied Finance, 12(1), 69-88. Weston, J. F., Juan A. Siu and Brian A. Johnson, (2001) Takeovers, Restructuring, & Corporate Governance, Upper Saddle River, NJ, Prentice-Hall. Read More