Reaching Win-Win for All Stakeholders by Merger and Acquisitions - Essay Example

Are Merger and Acquisitions a “Win-Win” Event for Shareholders of Both Bidder Firms and Target Firms? Course Date Total Number of Words: 1,553 Introduction Merger and acquisitions (M & A) is often used as a corporate strategy by large-scale business owners. Merger is simply the combination of two or more business entities into one via purchase acquisition or a pooling of interests (InvestorWords, 2008b) It can also be defined as a corporate law that joins togather two corporations wherein one corporation transfers all of its assets to the other (Hill & Hill, 2005). On the other hand, acquisitions is the act of acquiring control over a corporation by purchasing stocks or exchange in order to receive the right to takeover (InvestorWords, 2008a). There are companies that purposely enter into M & A through buying, selling, or combining their businesses with another company. In most cases, M & A is done for the purpose of easing their financial difficulties or to expand their businesses in order to enable them to grab more of the local or global market shares. On top of these, M & A can also be considered as a good strategic decision when a company decides to enter new markets, acquire technologies, for tax shield purposes, utilizing surplus funds, or to integrate the business vertically. Based on a survey study that was conducted in the past, approximately 83% of the responders agree that entering into M & A could become unsuccessful when it comes to generating business benefits related to the shareholder value (Kelly, Cook, & Spitzer, 1999). Since shareholders of merged or acquired companies belong to two or more different companies, internal problems associated with M & A is likely to occur. Aside from the serious management problems that may arise due to the cultural differences of the stakeholders, balancing the potential wealth between the bidder firms and the target firms is very difficult to attain. In relation to the “win-win” event for the shareholders of both the bidder firm and the target firm, this report will explain the reasons behind the potential wealth effects of entering into M & A on the shareholders of the bidder firm as well as the target firm. Upon identifying and discussing the factors that can triggers the different effects of M & A between the two groups, some recommendations that could promote a “win-win” situation for both group will be provided. Potential Wealth Effects of Entering into M & A on the Shareholders of the Bidder and the Target Firm In a well-managed deal-making of M & A, both the bidder and the target firms can benefit from this transaction. Basically, the bidder can enjoy potential wealth through economies of scale, by grabbing a bigger market share, and increase the market value of the company (Massoudi, 2006, p. 197; Gugler & Mueller, 2003). Likewise, entering M & A transaction could improve the profitability of a company provided that there is a proper management on all business aspects including the cultural differences between the two groups of employees will be handled properly. Economy of scales can be achieved when the bidding firm enters into a horizontal M & A. Although the research findings of Sharma and Thistle (1996) revealed that “acquisition of market power does not purely motivate mergers”, this strategy can be effective in terms of immediately responding to the global competition, deregulation, and industry consolidation (Massoudi, 2006, p. 198). In terms of reducing the cost of production, the bidding firm can enter into a vertical M & A to enable the company purchase some of the needed raw materials at a much lower price. Aside from using M & A as a strategic way of restructuring a company, M & A can be used to enable a company monopolize a specific industry. In case a newly merged company could monopolize the market within a specific industry, the company could easily compete with the rest of the smaller players within the industry. As a result, the smaller players within the same industry may end up declaring bankruptcy for failing to beat the low market price of homogenous products offered by the newly merged company. Factors behind the Different Effects of M & A on the Bidder and the Target Firm There are a lot of businessmen who finds merger as the best solution to current business crisis. Most of these individuals believe that entering M & A transaction could help them cut down the operational cost which could eventually increase the company’s revenue. On the contrary, the Department of Trade and Industry reported that approximately 50% of the companies that entered into M & A transaction failed to increase the productivity level of the company. In some cases, M & A could only result to a break-even profit after the bidder purchase another company (Cartwright & Cooper, 1992, p. 22). Lack of Proper Integration and Miscommunication between the Bidder and Target Firm One of the most common failures behind M & A is due to improper integration of the two companies. It is probably the differences between cultures of the bidder and the target firm that causes the lack of integration between two or more companies (Ran, 2008; Hopkins, 1999). Because of the cultural differences between the two groups, miscommunication between the shareholders of both companies is likely to happen. In the case of the bidding firm, serious miscommunication could result to transactional errors related to production and delivery of goods, lower profitability, lower credit rating, declining shareholder value, long-term stagnation, or even bankruptcy in the long-run (Massoudi, 2006, p. 4 – 8). Although there is the promise of a good profit M & A could bring to the bidder and target firms, not all companies that enter into M & A contract were able to experience benefit in terms of profitability. The past M & A experience of Mercedes is a good example when the company decided to acquire Chrysler. Prior to the M & A transaction, Mercedes declared that the company could generate $1.3 billion operational cost savings within the first year of the merger. However, Mercedes failed to meet its projected target due to mismanagement (Cooke, 1986, p. 27). Value Creation in Strategic Planning and Decision-Making Both the bidding firm and target firm are often uninformed with the business opportunities presented to them. However, it is given that a strategic and opportunistic bidder would always purchase its target company at a relatively low price. When buying and selling of companies occur, the target firm which often faces serious financial difficulties often ends up selling their company at a relatively low price. This can result due to either lack of knowledge in dealing with M & A transaction or simply because of lack of sufficient preparation time prior to closing the business deal. The same factors could affect the bidding firm. The lack of knowledge and sufficient time in making decision could make the bidder firm purchase a wrong company. In general, a value-minded shareholder of a bidding firm would consider not only the size of the company their business is planning to purchase but also its profitability and potential in terms of technology and expertise among others (Massoudi, 2006, p. 19). This is the main reason why it is critical for decision-makers (both the shareholders of the bidder and target firm) to highlight the importance of ‘value’. Recommendations that will Promote a “Win-Win” Situation for the Bidder and the Target Firm Since most sellers do not have the expertise in business valuation, target firms are advised to seek professional advice from an intermediary such as an investment banker or a business broker. Advices received from these professionals, review of government filings, access to target company, or information received from interviewing key outsiders could enable the seller to make a better decision-making with regards to the selling price in which the seller is willing to sell the business (Clemente & Greenspan, 1998, p. 316). Since M & A could create a major disruption in the flow of business (Bourke, Laidlaw, & Woods, 2001), the bidding firm should carefully appoint a competent management team that has the capability of resolving the cultural issues between the two groups. This is necessary for the success of a newly merged or acquired company. Likewise, building a two-way communciation between the two groups could increase the success of the company ventures. The mode of payment behind the M & A transaction matters in terms of the shareholders between the bidder and the target firm. To increase the business advantages on the part of the bidding firm Both cash and share payment should be combined to allow the bidder’s shareholders retain the same level of control within the company aside from having a bigger chance of becoming accepted by the target firm’s shareholders. Likewise, combining the mode of payment also delays the need for the bidding company to immediately pay the capital gain tax. Conclusion M & A is not always a “win-win” event for shareholders of both bidder firms and target firms. To create a “win-win” situation to the stakeholders of the bidding and target firm, both parties should gather business information concerning the market value of the company being sold. Gathering necessary information before finalizing the M & A contract could prevent the target firm from selling the business below par. On the contrary, the bidding company can avoid spending more than the market value of its target firm. *** End *** References Bourke, E., Laidlaw, G., & Woods, I. (2001). Achieving Post-Merger Integration. Financial Services , 10 - 13. Cartwright, S., & Cooper, C. (1992). Mergers & Acquisitions: The Human Factor. UK: Butterworth. Clemente, M. N., & Greenspan, D. S. (1998). Winning at Mergers and Acquisitions. The guide to market-focused planning and integration. Clemente, Greenspan & Co., Inc. Cooke, T. (1986). Mergers and Acquisitions. UK: Basil Blackwell, Ltd. Gugler, K., & Mueller, D. (2003). The Effects of Mergers: An International Comparison. International Journal of Industrial Organization , 21(5):625 - 653. Hill, G. N., & Hill, K. T. (2005). Farlex. [Online] Retrieved May 10, 2010, from Merger: http://legal-dictionary.thefreedictionary.com/merger Hopkins, H. (1999). Cross-Border Merger and Acquisitions: A Global and Regional Perspective. Journal of International Management , 5(3): 207 - 239. InvestorWords. (2008a). [Online] Retrieved May 10, 2010, from Acquisition: http://www.investorwords.com/80/acquisition.html InvestorWords.com. (2008b). [Online] Retrieved May 10, 2010, from Merger: http://www.investorwords.com/3045/merger.html Kelly, J., Cook, C., & Spitzer, D. (1999). Unlocking Shareholder Value: The Key to Success. Mergers & Acquisitions A Global Research Report , 1 - 22. Massoudi, B. B. (2006). Do the Right Deal, Do the Deal Right. 35 Success Factors of Mergers & Acquisitions. Seattle, Washington: Continental Publishers. Ran, Z. (2008). “Dual Different Cultures” Integration: An Integration Performance Measuring Model of Corporate Cross-border M&A. International Journal of Business and Management , 3(3):30 - 34. Sharma, M., & Thistle, P. D. (1996). Is Acquisition of Market Power a Determinant of Horizontal Mergers? Journal Of Financial And Strategic Decisions , 9(1):45 - 55. Read More