How Corporate Takeover Is Influenced by the Corporate Environment - Essay Example

?Merger and acquisitions Introduction Merger in general terms are referred to as an amalgamation of companies. The integration is strictly corporate with the existence of the merger company as a legal entity. In a takeover, mainly there is change in the control power from one group of shareholders to another group. In the process of merger, a company takes over another company after the joint approval from the board of directors. Terms and conditions are prepared and price is negotiated between the two companies. General business issues like competition, efficiency, marketing and tax issues are the main reasons relating to corporate mergers. Corporate greed has been studied to be an important cause for merger and acquisitions. Since the prime objective of every firm is to maximize the profit, the corporations in greed want to acquire other competing firms. Thus through merger market competition can be eliminated. Moreover it is generally assumed that the larger firms are in a position of enjoying cost efficiency and hence economies of scale. Thus merger can be the result of the firm’s desire of enjoying economies of scale through the acquisition of other small firms of the market. The company, which is being taken over by the parent company through merger, is known as the ‘subsidiary company’. Accomplishment of the corporate amalgamations can be done in three different ways, by consolidation, by acquisition or by pooling of interests. Pooling of interest is often called a tax-free merger and is generally accomplished by swap of common stocks at specified ratios. Acquisition on the other hand consists of the purchase of assets of one company by the other at a given price and the shareholders of the targeted company need to surrender their stocks. For example the merger of the Wrigley and Mars Company had been finalized in a deal of 23 billion dollars in which Mars announced to acquire Wrigley after being approved by both the companies. The shareholders of Wrigley thus need to surrender their stocks receiving 80 dollars for each of their shares. Thus the targeted company remained to a ‘stand alone separate subsidiary of Mars’. Consolidation is another process of corporate combinations. This process involves the formation of a separate entity by dissolving both the companies. The new stocks of the consolidated firms are issued to the existing shareholders of both the individual companies. (Hoskisson, Hitt and Ireland, 102-103; Sorkin; Mullins) Takeovers can influence corporate environment if the takeover is hostile. There are generally four types of takeovers. These are strategic, defensive, growth and financial. In a strategic takeover, the acquiring firm tries to target the much-developed product of the firm that is to be acquired. This product is in the form of either services or any intellectual property. In a defensive takeover, the acquiring firm tries to sell the assets of the acquired firm in the market after buying them from the targeted firm. In a growth takeover strategy, the acquiring firm targets to acquire such a firm that has high growth potential. The acquiring firm markets the products of the targeted firm by utilizing own sales and distribution channels. In a financial takeover strategy, the acquiring firm is generally interested in a financially sound firm. Sometimes acquiring firms can take interest in firms that are financially weak. This is done in order to offset the tax liability. There can be various reasons for which a merger takes place. Firms acquire other firms to increase their market share. A firm gains larger market share when it gives tough competition to other firms in terms of lower production costs as well as higher sales costs. Market power mainly depends on the size of the firm and the market share it covers. The results of these acquisitions are big firms, which in turn create economies of scales. Sometimes acquisitions are means to raise funds. (Hoskisson, Hitt and Ireland, pp 245) Culture Differences Organizational values are noticed through emotional display from the management. With the intimation of takeover from the manager to the employees, emotions like fear, anxiety or anger can develop from the employee’s side. These can be for reasons like promotions being blocked or employees being retrenched. On the other side also the employees may feel sympathy for the manager and be sad at the same time also. (Gilliland, Steiner and Skarlicki, 215) Firms undergoing transition give importance to strategic, financial and operational issues. (Deetz, Tracy, Simpson, p 162) Human aspects are given less importance. Mishandling of cultural and personnel issues creates problems in the firm. (Gill, 316) According to Effective Leadership in M&As by Jeffrey Schmidt (2002), leadership means to create new vision for the new company. It also refers to chalk out the transition goals and the corporate values. Another leadership style stresses in the fact to accept the changes caused by M&As. There is a natural tendency of people to resist changes. After a merger the culture of the company is bound to change. A research carried out at Roffey Park Management Institute revealed, “the merger experience itself shapes the culture of the new company. The leaders of the company must bring values, behaviors and working styles of the people in harmony.” (Harrison, p479) Though there exist many cultural differences, both the companies work effectively together. Their accounting format of work includes preparing ‘consolidated balance sheets’ which generally portrays the combined assets and liabilities. The income of a consolidated entity is the net income of the parent and the parent’s proportion of the subsidiary company’s income. For example for a particular financial year, suppose the Parent company earned a net income of $400000 and the Subsidiary company incurred a loss of around $100000. The parent company has 100% ownership where as the subsidiary company enjoys 60 % parent’s ownership of each company. Therefore the subsidiary company incurred a loss of $ 60000. Thus the consolidated net income of the parent company is $340000 (400000-60000). (Hofstede, 444) The control mainly vests with the culture of the parent company. (Joachim, 243) Difference between the culture of the acquired and the acquiring company causes major obstacles. A lot of time is required to acquire the cultures of the parent company by the acquired company. This is so because the whole organization structure of the management changes. Implementation of corporate cultures is achieved through intercultural approaches. (Joachim, 243) Corporate Identity The impact of retaining the name of the Company can be somewhat undesirable if it is financially a weak company. The firm is bound to face stiff competition from the competitors in the market. Retaining an acquired name provides an impetus to the personnel. The administrative infrastructure of the acquired company either gets disrupted or the people along with the systems are absorbed in the parent company. The existing operation needs to be reorganized. The merger may be taken as a cause for failed management. Through acquisition the company can benefit by getting skilled personnel. Assuming an acquired name gives competition to the other companies. (McLaughlin, pp79-80) A brand is given much importance since it represents a much greater financial value over any tangible assets of a company like equipments. A takeover has a direct impact on branding. After takeover if a company diversifies into various fields and extends the brand portfolio it can run into troubles. This move affects the company’s balance sheets due to excessive expenditure regarding expansion. The brand is a part of the goodwill of the acquired company to the parent company. Annual reviews of brand values must be done. This is so because the amortization that is the reduction in the value of the brand needs to be done only when the brand value depreciates in the market. The impact of the merger of the Wrigley Company with the Mars provides tremendous value to the stockholders of the Wrigley Company, which generally arises from the enhanced opportunities of growth associated with the merger. The merger results in enhancing the sales of the firms along with increasing the potential associated with cross-pollination of people along with different ideas and brands. The merger resulted in preserving the existing values of the company along with long-term generational growth opportunities. The confectionary traditions of two outstanding companies are united through this merger. Thus merger of two global confectionaries results in formation of the leading confectionary company of the world. (Perille and Henderson: Rano; Franzen and Moriarty, 489) Communication The merger agreement depends heavily on the type of the seller. It can be single corporate shareholder, private company or public limited company. Regarding single corporate shareholder or any private company with minimal shareholders, stock purchase agreement means the stock and price to be paid in stock or cash at which the deal is fixed. For a large shareholder group, generally tender offer is used. (Machiraju, 206) The US Securities and Exchange Commission (SEC) or the corresponding body of a nation should be informed and intimidated about the merger. It is important to communicate the occurrence of the merger and the subsequent policies and strategies planned by the company to the employees in order to prevent any uncertainty prevailing in the organization (Kandler). This can be carried out through issuing newsletters with incorporation of innovative features such that the employees are aware of the major corporate changes before finding them in local print media. Effect on people The issues regarding human resource of the merging entities are the most neglected ones. Due to issues related to the people merger and acquisitions sometimes ironically fails in bringing the expected consequences. Uncertainties associated with the slackly managed areas of human resource are basically the main reasons behind the failure of merger and acquisitions. The impact of the merger is the high turnover along with decrease in the motivation and morale of the people. This often leads to fall in productivity of the workers, hence leading to the failure of the merger. There occur changes in the policies related to the human resource management, along with downsizing and increased stress on the workers. The uncertainty associated with activity of merger and acquisition results in diversion of the focus of the people working in the firm from productive work to certain issues of job security and changes in the pattern of designation of the workers, along with their career path. Moreover there occurs a change in departments of the workers with which there remains the fear of working in a changed environment of new team. Duplication of certain departments associated with merger and acquisitions results in manpower excess and hence the need of downsizing the employees. Thus it affects the security of the jobs of employees. The well-defined career paths of the working employees experience changes along with changes in the future opportunities for working in the organization. The performances of employees are also affected by relocation of the workers. Employee engagement surveys reports reveal that productive work of each employee of at least two hours per man-day may be lost during the period of merger and acquisition in the company. The structures of organizations and the different layers of management differs among firms hence merger and acquisition often results in change of the management layers of the firms along with change in the number of employees working in each layers. This affects the span of the layers as well. Psychological strain along with enhanced work pressure and stress can result from merger and acquisitions of firms. Moreover with merger the commitment of workers towards the firms as well the employee’s loyalty may experience a decrease. This results in affecting the morale of employees. (Pande & Krishnan, 2-3) The contract of employment of the workers working in the firm experiencing a merger may in certain instances gets invalidated emphasizing the one sidedness of the employment relationship leaving workers with no control over the employer’s decisions. The process of the merger is often described as legitimate means of discontinuing implicit contracts for the purpose of restructuring the firm. (International Labor Organization) Jobs in cases of mergers become redundant leaving people terminated, however unemployment and job insecurity of the workers are not true universally for every instances of merger and acquisitions. For example in the process of merger of the Wrigley company with that of Mars, there had been no reduction and cuts in the number of working employees of the firms and no change in their existing management teams. (Scribd; Ahrens) The acts of merging also affect the customer loyalty for both the companies. The image of the customers on the merging firm may influence the growth of the firms and even it may result in negative impacts on them. The loyalty of the customers may be stronger through merger if both the companies are synergistic and negative synergy may results in weaker loyalty for the merger firm than the individual companies. The valuation of the merger firms may also in those cases prove to be incorrect if there is an increase in customer attrition. (Genroe) Premerger merger announcement Post merger Expectations met Building neutral Customer loyalty Expectations not met Loyalty through loyalty through merger loyalty from actual Experience expectations delivery From the diagram it can be said that the loyalty of the customers vary along with their expectations associated with the merger and actual happenings after the merger. The firm retains the customers’ loyalty if the expectations of customers are fulfilled through merger and loss the customers otherwise. Thus the value creation of the firms experiencing the merger along with the loyalty of the customers changes from the actual experience of the customers and expectations of the customers from the mergers. For preserving the loyalty of the customers the management needs to focus on maximizing its value by the method of retention of customers. It can be achieved through policies of introducing competitive strategies along with meeting the priorities of customers and restructuring of their organizations. (Abt Associates Inc.) Merger between the United Airlines and Us Airways have resulted in huge profitability for the consumers as they are leaved with the opportunity of traveling long distances at much little costs and continued to enjoy the greatest choices. (House of Representatives, 2) Employee benefits The benefits of the employees through merger and acquisitions vary on the basis of the organizational structures of the firms. If the compensations provided to the employees in the individual firm less than that of the firm that is acquiring the existing one then pay scale of the employees may experience an increase. However compensations across each and every divisions of the firm may remain equal if pay scale of the acquiring firm is lower than the individual existing firm. This can be achieved through collective bargaining between the employers and the trade unions. A number of benefits are in certain instances provided by firms to their employees. The employees in working for the corporations receive some forms of privileges which have effect on the loyalty of employees and their motivation for the works. The merger and acquisitions of firms must ensure that the labor laws are actually met by the organization. The charges of social security of the employees along with the charges of insurance are to be paid out fully with proper respect to regulations and measures regarding safety of the employees. The workings hours of the employees should be according to the legal laws and the overtime hours also need not increase the maximum limit of the legal laws. All these rules should comply with the rules of the organizations experiencing the merger. Thus the merger firms working according to these labor laws prove to be beneficial for the employees. (Klein and Kahn, 15, 62) Technology Merger and acquisitions affect the technological performance of companies experiencing the merger, which remains related to high tech sector of the company. The organizational fit along with the strategic ones that result from merger plays important role in the improvement of the technological performance of the companies involved in the merger. Merger and acquisitions can led to the introduction of modern technologies and technical products through the combined efforts of the two companies leading to the company’s profitability. Continuous search for capabilities associated with new and modern technologies are supported by the process of merger and acquisition through proper emphasis on research and development. Moreover merger of companies with intensive focus on research and development resulted in the creation of new skills and capabilities of the workers. This can be achieved through proper training resulting in improvement of the companies’ performance. (Hagedoorn and Duysters, 1-3, 28-29) Cross border acquisition in general results in changing the pay systems of the firms. The foundation stone for the system of financial rewards in companies is provided by their pay systems. Because of the different pay system in different companies, merger led to a change in the system. (Pay systems; Guests, 2) In United States of America merger in different airline companies resulted in huge changes in network and technology focusing on research and development and the structure of Hub and spoke. (Shaw and Ivy, 234) Thus to conclude it can be said that merger and acquisition among firms often results in increase of the productivity of the firms, increasing the benefits of the stockholders and also improvement in technology of the merging firms. However the job insecurity of the workers along with increased stress of employees remains an essential factor associated with it. References 1. Abt Associates Inc., Maximizing merger value by reserving customer loyalty, 2004, 4th June, 2011 from http://www.abtassociates.com/newsletters/BRC_Nov2004.pdf 2. Ahrens, Frank, Wrigley, Mars Reveal Some Terms of Deal, The Washington Post, 2008, 4th June, 2011 from http://www.washingtonpost.com/wp-dyn/content/article/2008/06/01/AR2008060101843.html 3. Deetz, Stanley , Tracy, Sarah J ,and Jennifer Lyn Simpson, leading organization through transition, SAGE, 2000 4. Franzen, Geip and Sandra Moriarty, Science & Art of Branding, M.E. Sharpe, 2008 5. Genroe, Merger Effects on customer loyalty, n.d, 4th June, 2011 from http://www.genroe.com/component/content/article/1-public/58-merger-effects-on-customer-loyalty 6. Gilliland, Stephen, Steiner, Dirk, Douglas, and Daniel, Skarlicki, Emerging perspectives on values in organizations, IAP, 2003 7. Gill, Robert, Theory and Practice of Leadership, SAGE, 2006 8. Guest, Paul, M, The Impact of Mergers and Acquisitions on Executive Pay in the United Kingdom, Centre for Business Research, (n.d), 4th June, 2011 from http://www.cbr.cam.ac.uk/pdf/Paul_Guest_Paperr.pdf 9. Hagedoorn, John and Geert Duysters, The effect of merger and acquisitions on the echnocal performance of companies in a high tech environment, (2000), 4th June, 2011 from http://arno.unimaas.nl/show.cgi?fid=287 10. Harrison, Financial Accounting, Prentice Hall, 2001 11. Hitt, Michael, A, Hoskisson, Robert, E, and R, Duane Ireland, Strategic management concepts, South Western College Publisher, 2006 12. Hoftstede, Geert, H, Cultures consequences: comparing values, behaviors, SAGE, 2003 13. House of Representatives, THE AIRLINE MERGERS AND THEIR EFFECTON AMERICAN CONSUMERS, COMMITTEE ON ENERGY AND COMMERCE, (2001), 4th June, 2011 from http://republicans.energycommerce.house.gov/107/action/107-3.pdf 14. International Labor Organization, The employment impact of mergers and acquisitions in the banking and financial services sector, Sector Publications, 2001, 4th June, 2011 from http://www.ilo.org/public/english/dialogue/sector/techmeet/tmbf01/tmbfr.htm#_Toc501871862 15. Joachim, Kentes. Strategic Management, Gabler Verlag, 2006 16. Kandler, David. 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