Mergers and Acquisitions: GlaxoSmithKline and Human Genome Sciences - Case Study Example

Mergers and acquisitions The Case Study of GlaxoSmithKline and Human Genome Sciences Table of Contents Table of Contents 1.0 Introduction 2 2.0 Reasons for mergers 2 3.0 GlaxoSmithKline and Human Genome Sciences 3 4.0 Economies of scale 3 5.0 Economies of vertical integration 4 6.0 Combining complementary resources 4 7.0 Elimination of inefficiencies 5 8.0 Increased power in the market 5 9.0 Speed growth 6 10.0 Financial benefits 6 11.0 Conclusion 7 References 8 1.0 Introduction Coyle (2000) described the term merger as the combining of two or more companies, by offering the stockholders’ of one of the companies, securities to acquire the company in exchange for the surrender of their stock. This is a process where two companies become one and work together as a single entity. Buono and Bowditch (2003) defined acquisition as corporate action in which a company buys most of the target company’s ownership stakes in order to assume control of the target firm. Acquisitions are normally done by either acquiring the company’s stock or paying in cash or a combination of both. Acquisitions are mostly made as part of the organization’s growth strategy whereby it is more beneficial to take over an existing firm’s operations and position compared to expanding on its own (Buono and Bowditch, 2003). There are two types of acquisitions, the friendly acquisition, and hostile acquisition. The friendly acquisition occurs when the target firm expresses its agreement to be acquired, while the hostile acquisition occurs when the target firm does not have any agreements with the acquiring firm, their main interest is just to purchase large stakes of the target company in order to have majority stake (Carney, 2009). Hostile acquisitions mostly involve poorly performing organizations and when the board of directors of the firm targeted is opposed to the sale of the company (Carney, 2009). 2.0 Reasons for mergers Mergers and acquisitions are important in the business ventures because they ensure that big deals reduce competition in the market hence creating profitable companies controlled by major players in the market. Stahl and Mendenhall (2005) stated that there are two theories that explain reasons for mergers and acquisition; the disciplinary mergers theory, which suggests that mergers and acquisitions target firms whose managers who pursue objectives other than profits maximization. The disciplinary theory suggests that acquiring firms helps the poorly performing targets and improve their performance as new management realizes the full potential of a target’s assets (Stahl and Mendenhall, 2005). The other theory is the synergistic mergers theory, which holds that firm managers achieve efficiency gains by combining an efficient target with their business and then improving the target’s performance (Stahl and Mendenhall, 2005). 3.0 GlaxoSmithKline and Human Genome Sciences In the year 2012, GlaxoSmithKline (GSK) acquired Human Genome Sciences (HGS). GlaxoSmithKline is pharmaceutical giant company based in London and Human Genome Sciences is company based in the United States. Buying Human Genome Sciences gave GlaxoSmithKline full control of lupus drug Benlysta and pipeline drugs; Albiglutide and Darapladib, which the two companies were working on. Human Genome Sciences was not performing well as expected hence they had to let go of some of their employees to reduce its operation cost. It was a difficult move for GlaxoSmithKline to let HGS fail because they were collaborating on making the Benlysta drug, which had taken much longer to start. The offer of GlaxoSmithKline to buy Human Genome Sciences had been rejected hence the hostile takeover process made the longtime partners hate each other at first but later on they decided to work together in peace to find treatment for heart diseases and diabetes. GSK acquired all the outstanding shares of HGS and they started working together, improving people’s life by enabling them to do more, feel better and live longer. This report seeks to analyze this acquisition using seven different criteria. 4.0 Economies of scale Bruner (2011) defined economies of scale as the cost advantage that arises with increased output of a product. Bruner (2011) continued to state that the greater the quantity of products produced, the lower the per-unit fixed costs because these costs are shared over a larger number of goods. The acquisition improved the economies of scale of the businesses because GSK Company was successful and performed even better after acquiring HGS. Together the firm was able to borrow from lending institutions at lower interest rates and the costs involved in the business operation reduced (Brito and Catalao-Lopes, 2006). The merged companies would be able to improve the production of their products and get goods of high quality since the production costs are shared, and hence lower. 5.0 Economies of vertical integration Albrecht et al (2011) defined economies of vertical integration as a process when a company expands its enterprise into areas that are at different points on the same production path, such as when a manufacturer owns its supplier. Vertical integration helps the companies to reduce the costs incurred in the transportation of goods and services, turnaround time, packaging and branding of products. The acquisition of HGS by GSK enabled it to reduce the cost involved in some of its operation since they had to use only the best services in the market. The transportation of the finished products, advertising costs, and marketing costs now had to be done by both GSK and HGS using the same resources hence saving the operation cost of the business. 6.0 Combining complementary resources This is a process whereby organisations combine resources through acquisitions and mergers. According to Weygandt et al (2010) complementary resources are two or more resources that can be used instead of another and when taken together, they supplement each one other so that an individual requires less of them when taken together than when taken separately. When GSK and HGS merged, complementary resources were combined hence leading to better firm performance as the result. Pablo and Javidan (2004) stated that integrating complementary resources provides an opportunity for GSK and HGS to create competitive advantages that can be sustained for a long period, present opportunities for enhanced learning and develop new capabilities. 7.0 Elimination of inefficiencies This is a process whereby those factors that are causing the organisation to fail are eliminated and the enterprise strives to work on improving its operations. HGS accepted to be bought by GSK after a long hostile takeover campaign in order to eliminate the inefficiencies in their company and become successful. In the article written by the Center for continuing legal education (2003) it is stated that, HGS company started failing in the business when two initial drugs they were working on failed in clinical trials and their stock share price declined. HGS had to be acquired by GSK to ensure its success in the biopharmaceutical business hence eliminating its inefficiencies. 8.0 Increased power in the market One of the major reasons for acquisition is to enable organizations to gain greater power in the market (Kumar, 2012). To ensure that a company gains power in the market, they have to gain the size necessary to exploit its core competence by becoming larger in terms of the size of its market (Straub, 2007). This is because an increase in the market size enables the company to increase its market share hence getting more profits (Emerson, 2009). GSK acquired HGS, which was its competitor in the biopharmaceutical field and hence meeting its market power objective. GSK acquiring HGS also increased its power in the market since it strengthened the business network by improving market reach. GSK got new sales opportunities and together with HGS, they would explore new areas to start other businesses in relation to biopharmaceuticals. 9.0 Speed growth Curry (2008) stated that acquisitions increase the speed of growth of the company since labor and recourses in the business are increased. Acquisition of HGS established a relative market power over GSK’s competitors and thereby achieving new products advantage (Pride et al, 2012). GSK was able to enter foreign markets in the United States more rapidly since HGS is based there, hence developing more markets for their products. Acquisitions makes it easy for companies to enter other international markets because they have access to the resources and capabilities of the acquired company hence creating new markets (Ferenczy, 2008). The acquisition of HGS by GSK led to increased speed growth, as the two companies were able to share ideas on how to improve their products in the market to reduce competition from other companies that deal with biopharmaceutical. 10.0 Financial benefits Acquisition of companies leads to increased financial benefits since the two or more companies support each other in the operations of the business hence resulting to tremendous profits in terms of work performance and financial gains (Daniel and Metcalf, 2001). When GSK acquired HGS, it became cost efficient for both the businesses as it improved the purchasing power, as there were now more negotiations with bulk orders (Gaughan, 2011). This acquisition led to increase in the volume of products produced hence resulting in reduced cost of production per unit. HGS had also reduced most of their staff members when the business had started failing, this was an advantage to the business because it helped in cutting cost and increasing profit margins of the company. After the acquisition of HGS, GSK was able to get more profits from their business and thereby increasing competition in the pharmaceutical companies, as Ilzkovitz and Meiklejohn (2006) stated in their writings that investments in large-scale manufacturing facilities enable companies to achieve economies of scale so that they can offer prices that are more competitive. 11.0 Conclusion GlaxoSmithKline acquiring Human Genome Sciences is an example of a company following the disciplinary mergers theory where HGS was poorly performing and hence was acquired by GSK. Mergers and acquisitions are important in the business operations since they ensure production of more goods and service, reduced costs in the operation of the business by reducing the transportation cost and increased profits in the business. Mergers and acquisition enable firms to be managed by experts hence ensuring cost efficient means of production and enhanced work performance. Emerson (2009) stated that merger and acquisition increase the market power of companies hence taking advantage of technological advancement against obsolescence and price wars. References Albrecht, W, Stice, K., & Stice, D. (2011). Financial accounting. Mason, OH, South-Western/Cengage Learning. Brito, D, & Catalao-lopes, M. (2006). Mergers and acquisitions: the industrial organization perspective. Alphen, Kluwer Law Internat. Bruner, F. (2011). Applied Mergers and Acquisitions Workbook. Hoboken, John Wiley, & Sons. Buono, F., & Bowditch,L. (2003). The human side of mergers and acquisitions: managing collisions between people, cultures, and organizations. Washington, DC, Beard Books. Carney, J. (2009). Mergers and acquisitions. Austin, Wolters Kluwer Law & Business. Center for continuing legal education (American bar association). (2003). Employee benefits in mergers and acquisitions: a publication of the American Bar Association Center for Continuing Legal Education ... [et al.]. Chicago, IL (541 N. Fairbanks Ct. Suite 1600, Chicago, IL 60611-3314), American Bar Association, Center for Continuing Legal Education]. Coyle, B. (2000). Mergers and acquisitions. Chicago, Glenlake Pub. Co. Curry, K. (2008). MBA fundamentals: business law. New York, Kaplan Pub. Daniel, A., & Metcalf, S. (2001). The management of people in mergers and acquisitions. Westport, Conn, Quorum Books. Emerson W. (2009). Business law. Hauppauge, N.Y., Barrons Educational Series. Ferenczy, I. (2008). Employee Benefits in Mergers & Acquisitions 2008-09. Aspen Law & Business. Gaughan, A. (2011). Mergers, acquisitions, and corporate restructurings. Hoboken, NJ, Wiley. http://www.washingtonpost.com/blogs/capital-business/post/glaxosmithkline-buys-human-genome-sciences-for-36b/2012/07/16/gJQAW9JfoW_blog.html Kumar, R. (2012). Mega mergers and acquisitions case studies from key industries. Basingstoke, Palgrave Macmillan. Ilzkovitz F. & Meiklejohn R. (2006). European merger control: do we need an efficiency defence? Cheltenham, Elgar. Pablo L., & Javidan, M. (2004). Mergers and Acquisitions Creating Integrative Knowledge. Oxford, Blackwell Pub. Pride, M., Hughes J., & Kapoor,R. (2012). Business. Mason, OH, South-Western Cengage Learning. Stahl, K., & Mendenhall, E. (2005). Mergers and acquisitions managing culture and human resources. Stanford, Calif, Stanford Business Books. Straub, T. (2007). Reasons for frequent failure in mergers and acquisitions: a comprehensive analysis. Wiesbaden, Deutscher Universitats-Verlag. Weygandt J., Kimmel D., & Kieso, E. (2010). Financial accounting: IFRS. Hoboken, N.J., Wiley. Read More