The Perspectives of Cross Border Merger and Acquisition Deals - Coursework Example

 Today, we are living in an era of globalisation in which people are heavily exposed to media. The developments and advancements in information technology and improvements in communication networks have forced the companies to change their business strategies and to focus more on product development, market development and diversification in addition to orthodox market penetration policy / strategy / tactic. Without any doubt, the emergence of mass media has greatly affected / influenced the attitudes, perceptions, behaviours, beliefs and lifestyles of people all across the globe, thereby compelling the people (who are also potential customers of companies and business enterprises) to consider themselves as a part of this global world or global village. Businesses today, therefore, focus more on expansion and entrance in new markets to make the most of available lucrative opportunities in different regions worldwide. However, it must not be forgotten that this recent globalisation, universalization, westernisation, commercialisation or internationalisation has not only affected the customers (and created opportunities for businesses to expand) but it has also resulted in a fast, highly unpredictable, unstructured, unclear, unexpected and uncertain business environment. Different business expansion, growth and international market entry strategies include Joint ventures, Contract Manufacturing, Exporting, Licensing, , Franchising, Turnkey project, Management contract and Cross Border Mergers and Acquisitions. This paper will throw light over Cross Border Mergers and Acquisitions across the world. The paper will analyse the circumstances which may this (M&A) activity the most appropriate entry mode for a firm considering entry into a new international market. The points developed in this paper will be supported with the real world examples. Also, it will include an Analysis over the reasons why many cross border M&As are deemed to have failed or underperformed. The journal articles obtained from internet will be used as an appropriate research method to garner qualitative and quantitative information that will then analysed by the author. (Brakman, Garretsen, and van Marrewijk, 2008) Cross Border Mergers and Acquisitions: Merger refers to the integration or amalgamation of two firms in a respective manufacturing or services sector to reduce competition, improve productivity, ensure survival, growth and sustainability. Acquisition, on the other hand refers to the activity in which a large or powerful business group or organisation, having mammoth financial resources, market share and technological dominance, purchases the shares / ownership / stake in another firm which is either financially weak (or strong in some cases), expecting a closure, incurring losses because of any certain internal and external factors etc. Cross Border Merger and Acquisition refers to the fact that firms from two different countries signs a deal to either integrate or sell one’s operations to another dominant firm. These Cross border M&As have become increasing popular in last two decades, since most of the multinationals or supranational organisations have expanded their businesses in foreign countries and they prefer to acquire failing or near to fail domestic firms in their host nations. These M&As have various benefits and disadvantages (and consequences) for both acquiring / purchasing firms or parties as well as the economies that attract Foreign Direct Investment through these acquisitions and mergers. First, I would like to discuss the possible merits and demerits that acquiring or investing firms may receive from engaging in this activity. The investing firm, with higher market share, reputation, goodwill, management expertise, production efficiency, an established supply chain (marketing, advertising and branding) network gets access to new markets that not only improves its profitability but also allows to exploit the resources and plus points of the acquired firm or business unit. Secondly, it enables that enterprise to achieve ‘Economies of Scale’, that is the large scale production operations that in turn increases the marginal productivity, output and internal efficiency while reduces the costs of doing business. Furthermore, it enables the firm to enhance its market and product offerings by utilizing its extensive resources, brand value / image, distribution channel network and market reputation to reap excessive profits and margins. Third, it enables a firm to get a competitive edge over its foreign rivals and domestic operators in the same industry, as M&As reduce the number of players and strengthen the position of existing firms. It is better to call it a shift from monopolistic competition (more buyers and sellers) to oligopoly (with barriers to entry thus few sellers and more buyers). (Brakman, Garretsen, and van Marrewijk, 2008) and (Coeurdacier, De Santis and Aviat 2009) On the negative side, the cross border M&As may create some management related issues such as top managers and strategic planners (of parent company) may lose control over their overseas employees and executives that may lead to failure of new business venture or in goal accomplishment. The reason is quite obvious, as policy makers may fail to implement whatever they have planned for business growth. In addition, the unexpected changes in host nation’s economy or external relationships may aggravate business outlook in that nation thereby resulting in losses or lower gains on investment. Next, if planners fail to understand the societal and cultural norms, taboos, standards etc; it may lead to inter organisational conflicts and towards an ultimate failure in managing diversity and ensuring equality of opportunity. These mergers and acquisitions are extremely successful when the other parties lack managerial expertise and have high internal inefficiencies, despite the fact there are chances for survival because of enormous market potential and opportunities at their disposal. Secondly, these mergers and acquisitions become the most appropriate international entry when the host nation has developed and implemented flexible business and environment friendly policies (such as rational corporate tax rates, financial liberalisation, regulations and laws, property leasing and withholding criteria, deregulation of business sectors) along with decent economic growth rate and infrastructure facilities (utilities, industrial zones, information technology and communication networks). The reason behind it is the fact that economic growth in host nations leads to improvement in purchasing power (real disposable incomes) and thus betterment in market potential and scope that, in turn, triggers investment related decisions by investors and leading business groups. Thirdly, this mode of entry is more appropriate when external environment is favorable for businesses. A right time for international entry could be when international demand is improving (perhaps not in a recessionary stage), oil and commodity prices are stable, there are few conflicts and disputes between the host country and its neighbors etc. Summarizing the above, it is worthwhile to mention that M&As play a vital role in strengthening the economy of both home (contribution to Gross National Product) and host nations (contribution to Gross Domestic Product and employment) because they have the ability to produce and offer want satisfying goods and services, can satisfy future demand, can reduce costs through large scale operations, could change and influence the market dynamics / market structure of home and host nations. Finally, they reap profits to maximize their shareholders’ and employees’ wealth. (Coeurdacier, De Santis and Aviat, 2009) These cross border mergers and acquisitions are usually common in Developing countries that aim to attract firms from Developed Nations to help improve their domestic employment outlook, to ensure alleviation from vicious poverty cycles, to stimulate competition so that existing businesses in those economies start Research and Development, to improve their image among international community and to attract more established groups, businesses and corporations to arouse economic activities and growth perspectives. Some Important Facts: Brakman, Garretsen, and van Marrewijk (2008) mentioned the OECD data in their paper according to which the UK, the Netherlands, Germany and France, were the key nations whose firms participated actively in cross-border M&As. Business enterprises, corporations and organisations did colossal investments and acquired ownership / shares in companies from both developing and developed nations to improve their financial position, market strength and Price to Earning ratios to become global leaders in true sense. Brakman, Garretsen, and van Marrewijk (2008) pinpointed the fact that UK’s telecommunication giant acquired German “Mannesmann Corporation” for US $172 billion in 2000. This has still been the largest cross border M&A in Europe. In addition, Coeurdacier, De Santis and Aviat (2009) and Rajan and Hattari (2009) highlighted some important cross border facts that they gathered from (UNCTAD (2006)), which mentioned that M&As skyrocketed during decade of 1990s whereas the deals peaked in 2,000 (recorded to be nearly $1,200 billions) but declined sharply in 2001 to 2002 after September 11 attacks in USA. Rajan and Hattari (2009) further mentioned that foreign direct investment (FDI) was reported to be US$2,000 billion by 2007 compared to meager US$14 billion in 1970, a large amount of which is attributable to mergers and acquisitions (M&As) of presently operational business enterprises than creation of firms from scratch. Rajan and Hattari (2009) quoted United Nations Conference on Trade and Development (UNCTAD) estimated about global cross-border M&A deals that were reported to be around US$880 billions in 2006. As quoted, “Over the 2003-2005 period, developed countries accounted for 85% of the USD 465 billion cross border M&As, 47% and 23% of which respectively pertain EU15 and US firms either as acquirer or as target countries.” (Coeurdacier, De Santis and Aviat, 2009) Case of Air France and KLM: This section will provide a real world example of Air France and KLM merger (formed by Dr. Albert Plesman in 1919). The Air France and KLM were merged in 2006 after mutual discussions and collaboration of strategic management, top planners and executives of both air carriers that were operational in European Market. There were some definite reasons behind that merger among the two interested groups or parties. First, European Market was no longer regulated by governments of different countries. Therefore, any carrier or airline service was free to launch any routes or offer any services based on its competitiveness and market potential. Secondly, there was a potential threat from low cost aircraft services such as Easy Jet, Ryanair which were competing on their low cost no frill services. Third, there were some big players and giants in that industry namely British Airways, Lufthansa etc. who were giving tough time to both firms. In the words of company’s Chief Executive, “We were at risk because we were middleweight champions in a heavyweight contest”. So this issue forced the executives of two airlines to engage in merger so that their integration, coordination, resources and efficiencies could enable to improve their competitiveness, thereby finally resulting in profits and lower risks in an increasingly competitive global airline industry (which is also threatened by its colossal overheads). Reasons for Success: The first and major reason of this successful venture was the fact that the strategic planners shared the same vision to survive, grow and sustain their airlines in upcoming future business environment. Also, the management of both airlines was well aware of the similar size related weakness of both airlines. So, they proposed to merge in order to tap and cater a huge Single European Market. Secondly, they both merged and remained successful because they improved their economic efficiency. They introduced a common bottom line to conduct their potential European operations. In fact, AF-KLM although merged together yet their combine goal was to promote integration. Thus, they merged shareholdings and shared the same bottom line for the sake of above mentioned strategy. (Spinetta, 2006) In the words of company’s Chief Executive, “We were two efficient airlines – KLM was reaping the benefits of a radical recovery plan, and Air France was consistently posting profits - but we were at risk because of changing global environment in airline industry”. (Spinetta, 2006) The third reason behind success of this merger was the fact that both airline had employed well trained, well educated, highly skilled and qualified labor workforce that did not resist to change rather they mingled with each other for greater goal accomplishment and joint benefits. Also, the management did not involve in any lay offs or dismiss employees to maintain trust, cooperation and cohesiveness (both socio-emotional and instrumental) among employees. Third, the two airlines had observed enormous development potential of Schiphol Airport and Paris-Charles de Gaulle that were expected to be top revenue generators for Air France-KLM Group. (Spinetta, 2006) In short, this merger made Air France-KLM Group as one of the world’s largest airline since the combined revenue and sales turnover touched nearly 21 billion euros in the fiscal year 2006. The group served more than 70 million passengers in that year, had then achieved the status of providing employment to more than 100,000 employees and had a fleet of more than 558 aircrafts comprising those manufactured and supplied by Air Bus and Boeing companies. (Spinetta, 2006) Failure of Delta and Continental Airlines: The merger between two other non European, basically American, airlines namely Delta and Continental failed to reach any point because they internal conflicts among the pilots and their (unions) resistant to change. The pilots were not inclined to tolerate pilots from their rival airline because they feared they could lose their authority power and importance of their positions. These conflicts at middle level management forced the top management to annihilate their move. Secondly, there were other issues such as financial problems, internal inefficiencies and lack of trust between employees and employers. Hence, it could be said that a merger or acquisition can not remain successful if there are poor relationships among various levels of management hierarchy. (Spinetta, 2006) Conclusion: From the above analysis, it can be concluded that Cross Borders Mergers and Acquisitions is much feasible option for international market expansion when businesses are satisfied with their financial and business performance in their existing home and host nations. Secondly, a company may acquire or merge with another firm after analysing its external environment (mainly international factors) the market potential and scope in proposed host nation and its firm, the ground facts including political, legal and socio-cultural factors, accurate and pertinent information and knowledge regarding its economy, infrastructure and technological developments etc. Indeed, the Merger and Acquisition strategy is less risky then initiating a Green Field Venture (creating a company or subsidiary from scratch) in a new foreign market. This can be supported because the investor can sell its acquired firm in case it observes that probability of failure is higher than probability of success. References / Bibliography: Brakman, Steven, Harry Garretsen and Charles van Marrewijk (2008). “Cross-border Mergers and Acquisitions” Tinbergen Institute Discussion Paper Available at http://publishing.eur.nl/ir/repub/asset/11079/2008-0132.pdf Coeurdacier, Nicolas, Roberto A. De Santis and Antonin Aviat (2009) “Cross-border Mergers and Acquisitions – Financial And Institutional Forces” European Central Bank Available at http://www.ecb.int/pub/pdf/scpwps/ecbwp1018.pdf Dodge, Nancy and John Barkdull, (2009) “Governance and Cross-Border Mergers and Acquisitions” All Academic.com Available at http://www.allacademic.com//meta/p_mla_apa_research_citation/3/1/7/0/4/pages317048/p317048-1.php SYDNEY FINKELSTEIN, Sydney (1999) “Cross-Border Mergers and Acquisitions” Available at http://mba.tuck.dartmouth.edu/pages/faculty/syd.finkelstein/articles/Cross_Border.pdf Mody, Ashoka and Shoko Negishi (2000) “THE ROLE OF CROSS-BORDER MERGERS AND ACQUISITIONS IN ASIAN RESTRUCTURING” Available at http://www.ifc.org/ifcext/fias.nsf/AttachmentsByTitle/TheRoleofCrossBorderMergersandAcquisitionsInAsianRestructuring.pdf/$FILE/Role+of+Cross+Border+Mergers+by+Ashoka+Moody+and+Negishi.pdf DG Internal Market and Services (2005) “Background Paper: Obstacles to cross-border mergers and acquisitions in the financial sector” Available at http://ec.europa.eu/internal_market/finances/docs/cross-sector/mergers/consultation_en.pdf Spinetta, Jean-Cyril (2006). “Cross-Border Mergers & Acquisitions - The AIR FRANCE KLM Story” Nyenrode European Business Forum Available at http://corporate.airfrance.com/uploads/media/Speech_by_JC_Spinetta_Nyenrode_European_Business_Forum.pdf No Author (2007). “Cross-border M&A (Mergers and Acquisitions), Foreign ownership and South East Asia business since the 1997 financial crisis” Global Policy.com Available at http://www.global-policy.com/fileadmin/user_upload/GPI/Asia_Programme/GPIForeignOwnershipSEAsia.pdf Hwy-Chang Moon, Hee-Kyung Kim and Dong-Hyun Lee “CROSS-BORDER MERGERS & ACQUISITIONS: CASE STUDIES OF KOREA; CHINA; AND HONG KONG, CHINA” Available at http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN021130.pdf Rajan, Ramkishen S. and Rabin Hattari1 (2009) “The Global Financial Crisis and Cross-border Mergers and Acquisitions in Developing Asia” Institute of South Asian Studies Read More