Merger and Acquisitions - Essay Example

Merger and Acquisitions Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx August 12th, 2012. Introduction According to research by Kitchen, Lorenz, Porter and many others the majority of mergers and acquisitions (M&A) of companies fail. This paper therefore reports on the notion why board of directors still continue to take over others firms either in merger or acquisition. In addition, the report will discuss why mergers and acquisition fail shed more light on the reasons behind failure of such mergers and acquisitions. Moreover, the paper will give examples of successful mergers and the reasons behind their success to refute the research findings as well as support the reason of board of directors taking over other firms through merger or acquisition. Discussion 1. Why mergers and acquisitions fail Mergers and Acquisitions fail for various reasons that may characterize the new firm that has undergone the process. Before we discuss the reasons for failure of mergers and acquisition, it is important to note that it is sometimes difficult to define what success is in relation to M &A. Nevertheless, it is estimate that out-of 80 M&A, 50% of them fail due to different reasons (Grüsgen, Kyriakides & Venizelou 2011, pp. 8). Again, the existing theories of reasons of failure of M&A approach it from managerial and human perspectives not clearly reflecting on human and cultural cost associated with M$A. However, there are reasons associated with merger and acquisition. Financial theories mergers and acquisition as a form of investment is aimed at creating value to the shareholders of the investment. The shareholders of the acquired firm do not gain any value from the resultant acquisition. In acquisition therefore, only the shareholders of the acquiring firm generate value hence benefit. With this, the separation of corporate management and the risk assumption in most cases triggers a misunderstanding between the managers and the shareholders. Another reason for failure of merger and acquisition is the fact that if the process was triggered by the market forces like the stock market (Harvard Business Press 2001, pp. 35). In such a case, the M&A are doomed to fail reason being that; what the forces and the conditions are stabilizes; the managers and the shareholders of either firm may want to reclaim their share of the new firm. Moreover, it is possible that merger or/and acquisition of firms happen triggered by the need of fame, as opposed to strategic approach of achieving the company’s needs and goals (Grüsgen, Kyriakides & Venizelou 2011, pp. 15). On the same point, most of the chief executives are aimed at achieving self-actualization from either merger or acquisition. More often than not, such mergers or acquisition stand on a bumpy road and they are doomed to fail. It is noted that most of mergers and acquisitions are triggered by the fear of effects of globalization, economic downturn as well as ever changing business environments. If merger or acquisition is based on these or such fears, then the chances are that it will fail in the long run. Furthermore, if the joining firms adopt different business cultures in the newly established firm, then the firm has no chance of success. Another reason of failure of merger and acquisition of firms is due to the cost of interrelationships (Harvard Business Press 2001, pp. 45). It is obvious that the employees of the two joining or acquired firm had different working cultures in there prior firm. Put together in one firm, the employees will be working from different cultures hence hindering the process of success (Brooks et al 2005, pp. 33). On the same point, distinct business ought to change their previous behaviours and adapt to the new behaviour in the general aim of sharing and contributing effectively and efficiently. If that is not implemented then, the new firm is likely to fail (Grüsgen, Kyriakides & Venizelou 2011, pp. 19). Alternatively, if the cost of the value of the new firm is higher than the average cost of the acquiring firm, an element called negative synergies occurs which leads to collapsing of the new firm hence failure. Prior to merger or acquisition, the two uniting firms in case of a merger should review the degree of conformity using legal regulation in order to check the possibility of any unwanted future repercussions that may arise from the past activities of the two companies. When this process is not properly undertaken then the new firm stand on a shaky ground and it can fail or collapse any time. Finally, managers ought to investigate and consult from accountants, specialists in management and market, lawyers about the other firm for either company to avoid the mistake of joining with a falling (collapsing) firm which can constitute the failure of the new firm (Harvard Business Press 2001, pp. 47). 2. Why directors seek mergers and acquisitions Even though we hear stories everyday of how a company that was recently bought off spun from the company. Recently, e-bay acquired Skype but later sold it off as following advice from its financial advisors. M&A are not simple process and they do not simply conclude the minute the merger deal is concluded. The complexity of this process has seen the collapse of many mergers in the present global business environment. However, every month there is at least one company that is concluding or starting a merger process as merger remain an attractive option for most companies in an increasingly competitive and globalized business environment. Several theories try to explain this increasing appetite for mergers and acquisitions among company directors. Srinivasan and Mishra (2007) divide these theories into agency theories, tax advantages, information theories, efficiency theories and market power. Agency Theory of M&A This theory suggest that companies come together so that managers can increase their power and receive more compensation from the firm as the larger the firms they oversee the larger their remunerations and power (Brigham and Ehrhardt 2005, pp.96). Agency motivated M&A may not be for the benefit of shareholders as they mostly happen in situations where shareholders do not have enough authority over the operations of the firm. Financial advantages Companies merge to take advantage of the opportunity presented by mergers in terms of taxes and valuation. Loss making companies whose shares are valued lowly at security exchanges desire mergers with companies that have shares that are performing better to increase the value of their shares (Srinivasan and Mishra 2007, pp. 390). Secondly, such a merger is of interest to the better performing company as it able to avoid tax that is pegged on the profits made. Finally, mergers of provide entrepreneurs with a chance to recover the value of their private companies while at the same time acquiring shares of the merged firm. Monopoly or Market Power Theory Due to intensity in competition in most sectors of the global economy companies operating in the same sector are forced to merge to reduce the power of market forces. Combined firms have a larger market share and thus are able to determine prices to a larger extent than when they were competing against each other (Srinivasan and Mishra 2007, pp. 390). However, mergers that seek to monopolize a market are highly regulated and in countries like the United States monopolies are illegal. At one point software giant Microsoft was forced to split as the government viewed it as a threat to fair competition. Efficiency Theory This theory proposes that when two firms merge they realize a larger efficiency than when they are separate as they lower operating costs and can achieve higher managerial efficiency. M&A are used by companies with lower managerial know-how to acquire the skills and managerial resources to become more efficient (Srinivasan and Mishra 2007, pp. 389). Synergy in mergers occurs when the two firms have a higher combined value than when they are operating together. The case of the merger of Iberia and British airways is a good example as each Airline as the combined airline is able to take its customers to more destinations. Information Theories This theory suggests that directors are motivated to take over other companies as they have more information about the positive prospects of the business they are acquiring (Srinivasan and Mishra 2007, pp. 394). Once the acquiring company realizes the firm being acquired has greater value than estimated it moves more hastily to acquire it regardless of merger failures being experienced in the market. Raider Theory This theory proposes that directors take over smaller underperforming private firms and later sell them off (Srinivasan and Mishra 2007, pp. 394). A raider type acquisition is non-strategic and is aimed at enhancing the efficiency of the acquired firm to make a profit from the additional value. 3. Examples of successful mergers and acquisitions As from the statement provided it is true that businesses still merger and acquire although some of them fail. Nevertheless, not all of them fail but we have some successful business resulting from merger and acquisition. One example of such successful mergers is the one between GTE-Bell Atlantic and the new established firm called Version Communication. One of the many reasons for success is the desire of the two companies to merger. Moreover, the renaming of the new firm from the old-individual names to the new name of the firm contributed to the success of the merger. The two companies were very compatible in terms of merger and acquisition which was the main driver of merger of the two businesses. Finally, the firms wanted to reduce their cost of production among other likeminded interests. Another such successful merger and acquisition of firms it that between Sirius and XM in USA in the year 2010 (XM-Sirius merger, 2011, pp. 7). Though the two firms initially competed after merger, they integrated their facilities and services fully in the year 2011. It is important to note that some of the factors that led to the success of the merger are as follows; the interest of maximizing the customers with variety of contents and channels to choose from. The merger was aimed at increasing technology innovation as well as to provide better returns for the investors. Moreover, the merger aimed at enabling the satellite radio to be the main advantage of competition in a rapidly revolving and evolving audio entertainment industry2010 (XM-Sirius merger, 2011, pp. 18). Finally, the new firm benefited allotted from the initially two highly experienced management teams with good understanding of radio, consumer electronics, media, and technology. In Australia, Bupa and MBF merger in 2008 has enabled the new created firm to wither past their individual challenges (Bowden (n.d.), pp. 1). One of the reasons behind the success of the merger is the fact that the new created firm was able to manage its people. In other words, the employees from the two firms were integrated into one organizational culture which enabled the firm to flourish. Another reason for success is the ability of the two prior firms to decide on which strategies initiatives to carry-on to the new firm, which to stop, and which ones to modify. Finally, the new firms were on a verge of being acquired which triggered the need for merger hence “pulling up their loots.” The acquisition of Pixar by the Walt Disney to form Disney-Pixar is also considered one of the examples of a successful merger story (DiMaggio 2009). Although, the firms were working together before the merger they had been rivals for a very long time. The merger was predicted to bring about an acrimonious relationship. However, the merger has become one of the few examples how a cautious integration for two firms can create greater value for the combined firm. Disney the acquiring company allowed Pixar to continue with its human resource practice of awarding worker welfare benefits and not requiring them to sign performance contracts. Disney did not also force its organizational culture on Pixar employees. The success of this merger is evident in the sales figures of Disney-Pixar new movies and their features. The merger has seen the shares of Disney perform exceptionally well on the security exchange. The Merger of Exxon and Mobil in 1996 can also be cited as an example of a merger that avoided the fate of most mergers and acquisitions (DiMaggio 2009). The merger deal between the firms involved Exxon estimated at pre-merger share value of $175 billion buying 780 million shares of Mobil then valued at 58.7 billion(Weston 2002, pp. 23). Exxon paid 26.4 % more for each of Mobil’s shares meaning the merger provided Mobil with a valuation advantage. The merger can be seen to have been motivated by the agency theory of merger as some of the shareholders of Exxon resisted the deal alleging that the $74.2 billion paid for the Mobil shares was too much. The merger is estimated to have realized operational synergies $4.6 billion by January 2000 mostly through elimination of duplicate facilities and offloading of excess staff (Weston 2002, pp. 23). The success of the merger saw the combined company break the global cash flow record by bringing in revenues of $29 million in 2000 the company was able to pay its shareholders a dividends totaling to over $8 million (Weston 2002, pp. 23). . The success of the Exxon-Mobil merger is owed to the change management practices adopted by the two firms and the success of Exxon strategic plan. By successfully combining two different organizational cultures the two companies were able to take advantage of Exxon’s strength in finance and engineering and those of Mobil in marketing and deal making. Conclusion Merger and Acquisitions are undeniably a difficult process for the combined companies. Integrating two different commercial entities becomes especially different where the two companies have completely different organizational cultures. However, the need for companies to merge still remains high as competition in business environment increases. The reasons given for directors to continue engaging in the pursuit of mergers and acquisitions include the directors own selfish reasons, empire-building mentality of a firm, to benefit from tax breaks and other financial advantages, to make a quick profit by buying restructuring and selling off a firm at a premium, to improve the efficiencies of the firm through synergies. However, one of the reasons why mergers fail is the very intention why they were conceived. Despite this, a well conceived and planned merger can realize enormous benefits for the shareholders, directors, customers and employees of the merging firms. The trend of companies taking over others or merging and these M&A failing set to continues as there are many reasons for the failure, but still the need to merge still remains a major driving force for more M&As. References Bowden, R (n.d.) Healthy mergers, available online at: http://www.ceoforum.com.au/article-detail.cfm?cid=9717&t=/Richard-Bowden--BUPA-Australia/Healthy-mergers/ retrieved on 11th August 2012 Brigham E. F. & Ehrhardt M. C. 2005, Financial Management Theory and Practice, 11th edition, Ohio: South Western Brooks, Mary R, and Pamela Ritchie, 2005, Trucking Mergers and Acquisitions in Canada and the US since NAFTA, Transportation Journal, Summer, pp 23-38. DiMaggio, M 2009, The Top 10 Best (and Worst) Corporate Mergers of All Time... Or, the Good, the Bad, and the Ugly, 12 August 2012, http://www.rasmussen.edu/degrees/business/blog/best-and-worst-corporate-mergers Grüsgen, S., Kyriakides, S & Venizelou, C 2011 .Mergers & Acquisitions - Success or Failure. Germany: GRIN Verlag Harvard Business Press 2001.Harvard Business Review on Mergers & Acquisitions. UK: Harvard Business Press Srinivasan, R & Mishra, B. P 2007, Why Do Firms Merge/Acquire: An Analysis of Strategic Intent in Recent M&A Activity among Indian Firms , IIMB Management Review , vol. 19, no. 4, pp. 388-402. The XM-Sirius merger: monopoly or competition from new technologies: hearing before the Subcommittee on Antitrust, Competition Policy and Consumer Rights of the Committee on the Judiciary, United States Senate, One Hundred Tenth Congress, first session. Vol. 4 Weston, J. F 2002, The Exxon-Mobil Merger: An Archetype, Journal of  Applied Finance, vol 1, no.1,pp 3-45 Read More