The Concept Merger and Acquisitions - Research Paper Example

? Mergers and Acquisitions (Assignment) (College Merger and Acquisition Introduction The concept, merger and acquisitions (generally M&A) is a corporate strategy by which corporate management deals with buying, selling, and combining different companies. This strategy assists a growing company to expand rapidly without initiating new business entities. The two terms, ‘mergers’ and ‘acquisitions’ are conceptually different from one another. The term merger is a financial tool by which two or more companies are joined together on the strength of its mutual consent. By this process, the merging companies aim to enhance their long term profitability by expanding their operations. In contrast, acquisitions occur between the bidding company and the target company and it may be either hostile or friendly. Under acquisition, often it is seen that bidding company purchases the assets of the target company. There are several types of M&A and the mode is chosen according to the nature, market position, and requirements of concerned companies. This paper will examine five types of M&A such as horizontal, vertical, congeneric, conglomerate and spin-offs using recent examples. 1. Horizontal M&A In the case of a horizontal M&A, two competing companies merge together so as to take advantage of its same product lines and markets. This strategy reinforces the market position of the integrated firm since the large scale production considerably minimizes the cost of production and thereby increases the profitability. It is precise that the large scale operations will certainly increase the market reputation of the integrated firm which would in turn enable the firm to negotiate successfully with its suppliers and buyers. In the opinion of Frensch (2007), a horizontal M&A aids the integrated firm to divide the labor among different large organizational units effectively. Merger between Daimler- Benz of Germany and Chrysler Corporation of United States is a good example for horizontal mergers. 2. Vertical M&A Zain (2008) states that a ‘customer-company or company-supplier relationship’ is reflected when two companies are merged under vertical M&A concept. Scholars opine that vertical M&A mitigates market uncertainties and thereby promotes decrease in transaction costs. According to Buhner (as cited in Frensch, 2007, p. 46), these transaction cost may include search and information cost, contract conclusion cost, quality control cost, and administration and taxation costs Amalgamation of Apple with Intel can be termed as a vertical merger. 3. Congeneric M&A Congeneric M&A is a merging strategy where two companies in the same or related industries offering different product lines merge together. In other words, these companies would not have common customer or buyer. Under congeneric M&A, it is observed that the merging companies may share similar distribution channels. A well popularized congeneric merger is Citigroup’s acquisition of Travelers’ Insurance. 4. Conglomerate M&A A conglomerate M&A refers to the merger of two organizations that are engaged in totally unrelated business operations. In most cases, the merging companies would be operating in different geographical areas. It is a best available strategy for extending business territories and extending product ranges. However, it is noted that conglomerate mergers occurs rarely as a result of strategic failures. It has been identified that Kelso’s acquisition of Nortek was a conglomerate merger. 5. Spin-offs Under this technique, an existing business division of a parent company distributes new shares so as to create an independent company. It can be reflected as a type of divestiture. Business houses wishing to reshape their structure often sell less productive businesses as spin-offs. Factors leading to M&A activities From the above discussion, it is easy to analyze the benefits of different mergers and acquisition strategies. It is found that severe competition is the major reason that often causes amalgamation or mergers (Mergers & Acquisitions advisory). When firms face cut-throat competition from rivals, they are forced to spend more on promotional techniques such as advertisements and price reductions. Under such circumstances, the firms must maintain an innovative product development team in order to capture market concentration. In addition, this situation necessitates the frequent application of market research techniques as it is necessary to par with varying market trends and competitors. In short, intensity of market competition proportionally reduces the profitability of organizations having similar product lines and common markets. Therefore, it is obvious that intense competition would adversely affect both the competing firms. It compels the firms to think about horizontal mergers. When the companies face weakness in managerial operations, they wish to integrate with other firms so as to form a customer-company relationship. By this, the weaker company gets access into the strategic operations of the other so that it can improve managerial efficiency. It is a common belief that synergies exit and the situation allows the merged firm to work more efficiently than the component firms would perform separately. Mainly, such synergies may occur due to the economies of large scale operation and accessibility to larger amounts of capital. Business expansion will be a major objective of almost all firms. We saw that conglomerate M&A is the best fitted strategy for any organization to expand its territorial area and product lines. Since this technique does not require further capital accumulations, an organization may expand its business horizon by applying this concept. In certain cases, it is indicated that organizations may derive some extra tax benefits from a merger and this factor probably play an undeniable role in mergers. M&A activities during last three years In today’s business world, it is essential to maintain different elements such as diverse product lines, potential sources of capital, and an experienced management team in order to confront with daily fluctuating market trends. It will be very difficult for an average organization to acquire all these elements at a time. As a result, global mergers and acquisitions largely increased during the last two decades. Stack (2011) asserts that there were 102 M&A deals that worth a total of $13.3 billion announced in 2010. She continues that data reached an all-time high value. The aggregate deal value has risen to 42% as compared to 2009 and it can be attributed to the re-emergence of big deals. Out of the whole M&A transactions in 2010, 40% represents ‘intelligence, cyber, and command and control related acquisitions’ (Stack). Last year’s M&A activities reflect the point that there is a notable increase in the acquisition of publicly trading companies as compared to previous two years (2008 and 2009). A comparison of M&A strategies From the detailed research it is identified that vertical mergers has accounted for the most value. As discussed earlier, a vertical integration contributes to the organizational efficacy as it accumulates different elements of production so as to ensure the uninterrupted supply of finished goods and thereby customer satisfaction. Therefore, it adds value to supply chain coordination (vertical integration). Under vertical merger concept, the subsidiary companies would possess a central communication system that is comparatively cheaper to use. Since the parent company gets an easy access to its subsidiaries, it can take advantage of transaction costs associated with communication activities. While a firm receives input products from its subsidiaries, it does not need to doubt the product quality and it further enables the parent company to develop standard products. The most fascinating feature of this concept is that it provides opportunities for the organizations to monopolize the market since well organized application of this concept would assist the company to defend competitors and new entrants. Similarly, conglomerate M&A strategy accounts for the least value. Although it provides many attractive theoretical benefits, it does not attain them in actual practice. When firms from two unrelated industries are merged together, it will be a troublesome challenge for the managements to coordinate the strategic operations of the integrated organizations. When two entirely different organizations merge to seize the market, they cannot properly focus on their particular areas. These merged firms’ marketing strategies may not suit each other and that would be a cumbersome task for the marketing managements to integrate these firms successfully. Since each firm’s product lines are different, they are forced to spend separately for the sales promotion. In this case, market stature of one firm would not boost the sales volume of other due to lack of interrelation among product ranges. In short, wider geographical coverage is the only benefit obtainable from conglomerate mergers. Conclusion Although there are varieties of M&A strategies, all concepts would not match the structure and objectives of every firm. While formulating a merger decision, it is necessary to examine a number of factors such as firm’s market reputation, degree of competition, and basic management strategies. A thoughtless selection of M&A strategy may adversely affect the ultimate aims of the organization. The vertical merger is found to be the most effective strategy for the expansion of firms while conglomerate integration strategy contributes less to the organizational sustainability. Undoubtedly, the rate of mergers and acquisitions has been notably increasing for the last three years. References Frensch, F. (2007). Social side of mergers and acquisitions: Cooperation relationships after mergers and acquisitions. Wiesbaden: Deutscher Universitats-Verlag. Mergers & Acquisitions advisory. (n.d.). PWC. Retrieved from http://www.pwc.com/gx/en/mergers-acquisitions-services/index.jhtml Stack, J. (March 7, 2011). “5 M&A trends you need to remember”. Washington Technology. Retrieved from http://washingtontechnology.com/Articles/2011/03/14/Insights-Stack-MandA-trends.aspx?Page=1 Vertical integration. (n.d.). Strategic Management. QuickMBA. Retrieved from http://www.quickmba.com/strategy/vertical-integration/ Zain, M. (March 3, 2008). “Mergers & acquisitions: The rationale and benefits”. Dinar Standard: Growth strategies for emerging Muslim markets. Retrieved from http://dinarstandard.com/leadership/mergers-acquisitions-the-rationale-and-benefits/ Read More