Advantages, Disadvantages, and Roles of International Mergers and Acquisitions - Essay Example

Advantages, Disadvantages, and Roles of International Mergers and Acquisitions Introduction Mergers and acquisitions (M&As) are modes that provide ways in which companies are able to undertakes internal and international strategies that guarantee the firms growth and development in the international market. The increase in competition in the international markets has necessitated companies to adopt mergers and acquisitions as an essential strategic choice (Boateng et al., 2014). Acquisitions refer to process in which a company transfers the control operations and management to another company and of becomes unit of the acquirer. Acquisitions are run by the same name of the company, which has greater financial power in terms of stocks and shares (Peng and Meyer, 2011). Mergers refer to the operational and management combination of two firms to create a new legal firm (Peng and Meyer, 2011). Two merged firms lead to increased core strength and operational synergy, which position them on an international market. Mergers and acquisitions provide a potential feature to leverage superior organizational capabilities, enhance market power, reduce costs, and access complementary resources. A number of M&As theories and concepts have been developed such as empire building, disciplinary and synergistic, hubris hypothesis, and market power gain, which are not mutually exclusive because a firm can decide to gain market power and at the same time focused on building an empire. According to Ferreira, Santos, Almeida, and Reis (2014), firms have diversified reasons for implementing the M&A including possible contributions of becoming global firms through attaining synergy value, better international market position, and broader market access. AT&T is a multinational firm that offers telecommunications services. Recently, the company acquired Direct TV to form a firm that would cater for a new telecom and television needs as well as developing the company into and global organisation offering telecommunication services to China, United States, and the rest of the world (Grant and Meadows, 2014). The advantages, disadvantages, and roles of M&A will be discussed in the paper in reference to AT&T move to embrace mergers and Acquisitions strategy using the synergistic and empire building theory. Synergistic M&A framework compromises of managerial, financial, operational, and market power market topologies. Advantages of International Mergers and Acquisitions International mergers and acquisitions are associated with various advantages linked to the M&As theories, which also play as the key drivers towards a company’s breakthrough in the international market. The advantages range from the financial aspect to the workforce that contributes towards the achievement of international goals set by the firm. Some advantages to the buyer (acquirer) may be thee disadvantage to the seller and vice versa. Increase Synergy Value International merger and Acquisition strategy is a source of synergy and surplus power that enables a firm to boosts its performance and efficiency (Du and Boateng, 2014).Companies coming together in the mergers and acquisitions have different market shares that would give them a better performance index if they combined efforts. The move also increases cost efficiency for firms that deal with the same product or come from the same industry. The combined effort results to an entity that enjoys immense profit and related financial gains that single rival firms cannot get from the market (Dilshad, 2013). Consequently, increased synergy is associated with the topology of market power gain as well as empire building aimed at reaching a global level. Additionally, the increased synergy value that is in a number of forms including revenues, expenses, and cost of capital ensures that the new legal entity realizes revenues, and a lower overall cost of capital. This corresponds to the synergistic theory, which indicates the ability of two combined companies to be more profitable compared with the two firms individually. AT&T acquisition of DirecTV is a move seen to acquire synergy and build an empire. High-cost efficiency and increase economies of scale Mergers and acquisitions allow the firming together to enjoy high-cost efficiency (Fraser and Zhang, 2009). The strategy improves the purchasing power of the new entity in which merged firms have increased funds to make purchases. One of the top considerations for mergers and acquisitions is reducing the number of staff members with the aim of cutting overall cost and give room for more profit margins. New entities gain power to increase the volume of production, but at a reduced cost compared to an individual company. The cost per unit production is kept in check and reduced to a manageable level; hence, increase economies of scale that counter any error or excess production. This corresponds to the theory of financial synergy, which hypothesis that two combined companies enjoy lower costs of internal financing, which aims at increasing the market power as well as building an empire. According to The Street (2014), AT&T features cost synergies in excess of $1.6 billion, which implies that the acquisitions will contribute to a huge cut on costs that were averaging at 60% for video content provision to AT&T subscribers. Organizational core competencies Mergers and acquisition allow the firms coming together to maintain a competitive edge. The firms combine resources and talents that put both companies on the lead. The resources and talents become the primary tools for contesting issues and strategies that are unveiled by the rival firms in the industry (Gupta, Kumar and Upadhyayula, 2012). Organizational competency is linked to the differential efficiency theory that indicates acquisition of a firm that is that has a less management efficiency leads to an improvement of the management efficiency to the levels of the acquirer (Finkelstein and Cooper, 2013). Competitive advantages work best for firms that have different performance index in the market. A company having a robust market presence would keep competition at bay if it acquires another firm in line to the same services and products produced, but with weak performance. The target of gaining competition edge is for the firms to get out of difficult situations and eventually acquire a larger market share than before. The Street (2014) notes that AT&T and DirecTV were struggling to fight strong rival firms with better cable TV services. The new telecom and television entity created was aimed at prompting fresh competition. AT&T strategy of retaining 20 million subscribers from DirecTV acquisition would see the firm unveil less pay-tv subscriptions to the new customer base, improved high-speed internet and phone offers. Rival firms such as Comcast have sold pay-tv and high-speed internet leaving the market ready for the new entity created by the mega acquisition. The acquisition has provoked other leading companies in the telecom industry to consider better service offerings under a platform of bigger size and diversity. AT&T intends to reduce the overall cost of TV for consumers and stronger TV package that combines satellite, wireless and fibre-optic networks. The legacy of phone services and TV businesses will reinforce the competitive power of both companies. Enhanced and Broader markets Access for the two companies Mergers and acquisitions create new strength in firms that are coming together aimed at a building a broader empire. The move enhances and expands business networks because the clientele and marketing outreach are sought from a single platform (Kernstock and Brexendorf, 2012). The new opportunities and business network acquired prompts new sales and new marketing areas. Mergers and acquisitions explore areas where business is possible. One firm may be in the process of unveiling new products and the new business areas could provide a viable market for the new products. New deals would be created that would sustain the firm in the market and with relevant strategies in place, the new entity created can cause ripples in its line of industry. Besides offering new market power for the company, mergers and acquisitions enables a company to withstand stiff market competition. Subsequently, this indicates that both the empire building and market power theories are mutual in global achievements of an entity. AT&T seeks to explore pay-tv and internet subscription services since it has operated as a mobile service giant since its inception. The link between telecom and television networks gives a different market where the firm is set to make a name with the new firm. The firm has a huge potential in the new market since its aim is to reduce rates for watching TV and using wireless and cabled internet. AT&T is committed to expand the broadband service that DirecTV did not manage to provide during its time. The 15 million residential homes and commercial buildings targeted will provide new business and market opportunities for telecommunication technologies it has acquired from DirecTV (Yu, 2014). Disadvantages of International Mergers and Acquisitions Loss of jobs Employees become first victims of top considerations when mega mergers and acquisitions happen. Firms coming together lose prime and skilled employees who know about how business is done. The firms retrench employees with the aim of reducing costs and boost profit margin in order to fit in the market. Subsequently, the loss of employees may cause a loss in motivation because the employees left consider themselves as possible target in the event major reshuffles are done by the management. Mergers and acquisitions may eventually hurt the overall production and reduction in revenues that the strategy had targeted to boost and keep check. In contrally to what empire building theory may indicate, a possibility arises in that the new entity has to remove some of the employs to retain only efficient staff. In reference to AT&T acquisition of DirecTV, it is expected that employees from both companies may be on the way losing their jobs particularly in the human resource management department. According to Young (2014), AT&T will only retain the valued employees, but there will be a probable job loss after the acquisition of DirecTV. There is no guarantee that all DirecTV employees will retain their jobs after acquisition by AT&T. This is because some of the position for both companies will be merged rendering one employee jobless. However, it is expected that AT&T employee Head headcount will increase as it did after the acquisition of BellSouth in 2006, breaking a decreasing trend reported from 2008 to 2013 as shown in Appendix 1 (Young, 2014). Poor Strategic Fit and contagion effect The inefficient management theory explains the efficiency of the management after a new entity if formed, which explores the possibility of a resultant incompetent management. A company has a mission, vision, strategies, and objectives in line with the products and services it provides to the client. Contagion effect is when the two companies become interdependent; hence, an economic shock due to poor strategic fit affects both companies instead of an initial company. Merge or acquisition may read to a poor strategic fit as both companies may have incompatible objectives, vision, and mission, which will lead to possible organizational strategies conflict. AT&T is a telecom company whereas DirecTV is a television company; hence, both have different strategies in ensuring their position in the market. Merging the telecom and TV companies will eventually lead to a poor strategic fit if the process of acquisition is undertaken in consideration of the variances in service conveyance of the two companies. However, AT&T has been providing TV streaming services over the internet in 22 American States to 5.7M viewers; hence, the major challenge will be integrating the internet TV with the DirecTV (The Economist, 2014). Poor management of the integration Organisational management and leadership hierarchy differs from one company to the other; hence, merger and acquisition has to undertake post acquisition integration to ensure that the organisational differences between the two companies does not result into reduction of the value of the intended products and services (Savovic, 2012). Failure of ensuring post integration of the people is properly managed may lead to employee disengagement, goal misalignment, cultural misalignments, and key talent loss. Consequently, mismanagement of organisations cultural and social differences after merge and acquisition may adversely affect the realization and achievement of merger synergies (Kernstock and Brexendorf, 2012). For example, AT&T and DirecTV represent two different technologies in the media and telecom industries; hence the working environment in which the perspective workers are subjected may be different as well as leadership within the companies. Subsequently, Acquiring of DirecTV by AT&T will possibly result to organisations culture and social differences because each of the company has a different organisation culture and social norms that govern and form the leadership hierarchy. Inadequate and Incomplete Due Diligence The process of merge and acquisition requires a careful planning and competent financial advisors that will guide the merger managers in a broad perspective in which the mergers synergies may be achieved. However, most merges and acquisitions do not report 100% realization of the mergers synergies because of incomplete and inadequate “watchdog” overseeing the process. Due diligence ensures that tangible and intangible assets are considered during the merge, but in most cases, the one of the company may influence the work done by the watchdog leading to consideration of only tangible assets such as intellectual property disregarding the intangible assets such as the relational capital and cultural fitment. This results to substantial problems during the M&A process that may lead to a failed merger or an incorrect valuation of the target company. For instance, if DirecTV merger mangers approach independent financial advisors who in turn give a valuation different from the already set value of $48.5 billion in cash and shares, then the company may rethink its deal to be acquired by AT&T Company due to a possible inadequate due diligence. Cultural and social differences International mergers and acquisition deal with companies that have diversified cultural and social norms that are susceptible of affecting the management of the new entity (Stahl and Mendenhall, 2005). Considerably, acquiring and target companies have to determine the impact that the M&A will have on the cultural and social norms of each of the companies for them to be able to access the cultural compatibility. Additionally, every company possesses a unique personality that permeates the entire company. Acquiring a company that may have a different approach of treating the workers may lead to goal misalignment. Consequently, M&A focused to build an empire and gain market power have to take into consideration of the cultural and social differences that are invetable for such ventures. For example, if AT&T Company focuses on timely delivery or accomplishment of a certain task from an employee and on the other hand DirecTV culture shows a relaxed perspective of delivering work on service on time, then the realization of the mergers synergies may be limited. Compromised Consumer and lawmakers perception Mergers and acquisitions have the possibility of purchasing a bad reputation as well as an undesirable union (Young, 2013). Consumers have diversified perception of companies; hence, the need to consider the consumers’ views and access whether they provided basis in which the two can be compactible in providing services and products in a satisfactory manner to clients globally. In case the merging two merging companies are the only ones offering the services, the lawmakers will view this as a move to monopolise the service or product, which will necessitate the client get the services from the new entity not because of improved services, but lack of another option. Consequently, if the acquiring company fails to consider the reputation of the target company, then it can compromise the reputation of the merged entity. Additionally, if the merge is perceived by the public monopolising services, the company’s vision towards becoming a truly global organisation will prove difficult to realize. For example, if DirecTV television unsatisfactory reviews from the subscribers, and on the other hand AT&T provides satisfactory service as per the clients view, AT&T acquisition of DirecTV will compromise its reputation regardless of the strategies it has to ensure quality services in provision of telecom and television services. Additionally, Johnson (2014) indicates that the lawmakers have already raised an issue with the merge citing that it would worsen the situation for smaller competitors and greater power in distribution pricing. Roles that M&As may play in contributing to AT&T vision of becoming a global Organization Cost reduction International Mergers and Acquisitions play a strategic role in reducing the costs of a company and increase the overall profits. For example, AT&T was set to gain 20 million more subscribers after acquiring DirecTV. According to Grant and Meadows (2014), DirecTV was a company that had deep-seated cash flows and a fat bundle of offerings. AT&T was a phone service provider that made profit to a point of acquiring DirecTV to a tune of $49 billion in the deal. Consumers had already started raising concerns regarding the options the company had in phone service and internet speeds. Though the acquisition is expected to materialize within a period of 12months, AT&T is set to enjoy up to $28.50 in cash out of $95 it is acquiring DirecTV per share. Moreover, the mobile service provider expects to make $66.50 in stock out of the acquisitions (Yu, 2014). The new face of AT&T will enable it to caution rising TV subscriptions and the speed of internet and communications for its subscribers. The company does not aim at prompting competition but giving customers efficient products and services through the acquisition. Consequently, the strategy further promotes improved delivery of services and products to the client at cut costs increasing their opportunities in the international market. Improved Positioning of one or both the companies International merger and Acquisition strategy takes advantage of possible opportunities that are likely to be associated with one of the companies (Krug, 2009). According to the differential efficiency theory, some companies operations are below their potential; hence, poor market positioning. Consequently, merging two companies that offer products and services such as telecommunications and media ensures that the new entity has a capability to ensure that the acquired low performing firm achieves its maximum potential and increase its market positioning. M&A strategy also plays an integral role for a firm that has unveiled a global vision, but lacks the capability and resources to achieve such a vision (Peng, 2014). For instance, the planned acquisition of DirecTV by AT&T will put AT&T Company at a higher position in the telecommunication industry. Consequently, M&A strategy plays a major role in ensuring that a company archives the potential to deliver diversified services and products on an international level. The acquisition is targeted at creating a brand that would be used to compete with other rival firms within the television and telecom global market. Gap Filling The strategy fills a gap that a company may have in regard to its mission of delivering various goods and services. Merging two companies further fill an organizational management gap that may exist in one of them; hence, each of the company’s strengths and are merged forming an entity that has long-term survival strategies required in the international market (Deng and Yang, 2015). As a result, the strategy plays a main role in ensuring that company implements strategies that will ensure it thrive and survive in a competitive global market. Industrial Globalization Globalization is the global integration that arises from cross-borders exchange of goods and services. The recent trends of international mergers and acquisitions have contributed to higher percentages of foreign direct investment. M&As plays a major role in driving a company from a regional service provide to a globalised organization offering its service on the international market. The synergy topologies including financial, operational, managerial, tax shields, and market power plays a major role in ensuring that a company achieves the vision of a company becoming truly a global organization within the desired tome and estimated operational costs. Conclusion Mergers and acquisition forms a mode in which a firm seeks to develop and grow in the international market. Despite that mergers and acquisitions are implemented in various approaches, they closely share the advantages and disadvantages that are associated with various M&As theories including the efficiency theory, market gain, and empire building. Every company has a motive towards engaging the practice, which increases the chances of the new entity to achieve a vision of becoming a truly global organisation. M&A can enable a firm to achieve its objective economically through increased synergy. The strategy further ensures that the weaknesses of a company are eliminated by filling its gap through acquiring another company that may not be having a similar weakness. Broader access to the market is a result of M&A strategy as the two merged companies enjoys wider market network, which result to high competences of the new entity. The positive results of M&A such as cutting costs, improved market positioning and wider market networks play key roles in ensuring a company such as AT&T realizes the mission to become a global firm offering quality and satisfactory television and telecom services globally. These advantages are in line with the theories such as empire building, differential efficiency, synergistic theory, and market gain for M&A with a motive of growing in the international market. However, mergers and acquisition have a number of negative impacts including job layoffs, inappropriate fit of the strategies implemented by companies, compromised reputation, and customer perception, differences in cultural and social norms, and misalignment of the goals because of post integration mismanagement. Word Count: 3518 Reference List Boateng, A., Hua, X., Uddin, M. and Du, M., 2014. Home country macroeconomic factors on outward cross-border mergers and acquisitions: Evidence from the UK. Research in International Business and Finance, 30, pp.202-216. Deng, P. and Yang, M., 2015. Cross-border mergers and acquisitions by emerging market firms: A comparative investigation. International Business Review, 24(1), pp.157-172. Dilshad, M., 2013. Profitability Analysis of Mergers and Acquisitions: An Event Study Approach. Business and Economic Research, 3(1). Du, M. and Boateng, A., 2014. 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