Mergers and Acquisitions - Essay Example

? FINANCIAL MANAGEMENT In the recent past strategic alliances have dominated the world of business, this has made the trend mergers and acquisitions to experience an increasing trend. A merger refers a situation where two organizations of approximately equal size (in terms of assets and liabilities), decide to join and become one entity. In a merger both companies usually surrender their original stock and issue new stock for the new company of organization formed. (Sherman, 2010) Acquisition on the other hand, refers where a large company which is financially stable buyout a small company. The small company is usually faced by struggling financially that is the company that is acquired usually financial problems. The large company acquires the all the stock of the smaller company and makes become component of their business, that is, the smaller company usually ends up changing its and adopts the name of the large company. In most cases acquisition are usually friendly, where two parties enter into an agreement but sometimes it involves hostile takeover. For example if the board of directors accept the tender offer. Many scholars have postulated a number of different types of mergers and acquisitions in an effort of delineate the increasing trend of strategic alliances observed in the business world. Nevertheless, there are three main types of mergers and acquisitions which are based on the structure perspective. The main three types of mergers and acquisitions include; Vertical merger refers to a situation where two firms which is in the same industry but in different levels of production combine together to form one firm. For example, a shoe manufacturing company mergers with a shoe retailing company. In this case, the combination motive is to control the supply and distribution channel (Vachon, 2011). A horizontal merger is where two companies which are in the same level of production combines. In this case the two firms must be serving the same market with the same product. A good example to delineate horizontal is where two food processing company manufacturing the same products merges so as to enjoy the economies of scale. In doing this the number of competitors is reduced and also accord a higher edge over competition (Bruner, 2004) A conglomerate Merger is a business combination involving two firms belonging different industries. The two companies are unrelated in terms of their operation and production (Carney, 2009). For example, a shoe manufacturing companies, mergers with a road constructing company. In this case the two companies are not related but their unification can only be viewed as diversification strategy (Pablo, Javidan, & Society). A G BARR is company in the food processing sector, producing flavored juices and beverages. Over the past few years the company has experienced increase demand in its product. Therefore, due to the increased demand in the product and the increase in the level of competition in the sector there is need to acquire a firm in the in the food processing sector so as to enhance economic efficiency and scope. After preliminary analysis a horizontal merger was essential where NICHOLS was ascertained as a potential target company. After a careful analysis of Nichols financial stability and the market it was ascertained that a merger was not essential but an acquisition of the company was sufficient. In order, to make the acquisition process successful and also to avoid failures that has hampered many merger and acquisition deals a well constructed plan to acquire shares was formulated together with a study of the financial performance of the company was carried out. The company would acquire the entire share in Nichols. AG BARR goal is to expand its market share in order to satisfy the need of customer as well as venture in to new markets. Nichols was the most suitable company to take over based on its financial health the company performance has not recorded major significant improvements the company has an annual turnover of approximately $80 millions. With this level of turnover the company enjoys a low market share. Therefore, an acquisition process initiated against Nichols will not be faced with much resistance or even engagement of the resistance tools such as; poison pill, golden parachute or even white night (Carney, 2009). The acquisition of Nichols is essential to the expected growth of the company in pursuit of it aims and objectives, thus acquisition would result to the following benefits to my company. Economies of scale, economies of scale can be used to refer large scale production that leads to reduced cost of production. Therefore, the move to take over NICHOLS will lead to increase in cost efficiencies. With reduction in cost efficiency there will be increased profitability of the new company as compared to the total profits of the companies before combined. Increased market share, A G BARR will benefit from acquisition of NICHOLS through increased market. AG BARR has an annual turnover of about 210 millions, while NICHOLS has an annual turnover of 80 million. Therefore, the combination of the two would lead increased market share (Bruner, 2004). In addition, A G BARR will benefit from a high edge in competition. A G BARR will benefit from the acquisition since this will lead decline in the number of competitors in the market. A decrease in the number of competitors in the markets offers the resultant company a higher edge in competition. Acquiring NICHOLS, A G BARR will benefit from tax gains. Tax exemption will be granted to resultant company since the target company experienced financial distress. Therefore this results to benefits in tax allowance. A G BARR will also enjoy a pool of highly skilled, competent and experienced personnel. Through use of the personnel of both companies, A G BARR will benefit by having highly experienced and component personnel. This will in turn increase the productivity of the company, thus leading to increased profitability (Schlossberg & American, 2008). The company will also benefit from enhanced research and development. With the increase in resources at the disposal of the company both in terms of personnel and machinery research and development activities will be enhanced and innovation level increase significantly. This also increases chance of the company introducing new products in the market. Apart from this, the company will also produce goods of highly quality. Production of goods of high quality will result to customer loyalty and also attraction of new customers (Gole & Morris, 2007). A G BARR will also benefits from enhanced marketing effort. The company will benefit from increased marketing efforts, the target marketing team together with the A G BARR marketing personnel both combine efforts to market the products of A G BARR products as compared to before where both teams were rivals with good cooperation the improved marketing efforts will lead to increased sables thus an increase in profitability (Bruner, 2004). With an aim to venture to new market, acquisition of NICHOLS will make this a reality. The one objective of the company is to increase its presence everywhere, acquisition of the target company increase the presence of the companies to areas where ,it did not serve before, therefore, enhancing achievement of the company objectives to venture into new markets. Apart from the benefit mentioned above the company will also befit from the acquisition in of administrative benefits, improved earnings per share as well as profitability of the company, reduced cost of operation as well as increased value generation (Gole & Morris, 2007). Literature review There are number of academic studies that have been conducted so ascertain why mergers and acquisition occurs. Out of these studies various theories have been postulated to mention a few, the value increasing theories and the value destroying theories. The proponents of the value increasing theories postulated that mergers and acquisition occur mainly because they generate synergies. They argue that, synergies generated leads to increased value of the firm. The theories of value increase include one, the theory of efficiency. According to theory of efficiency, mergers will only take place where there are expectations that mergers will result to generation of enough synergies that will b beneficial to the two firms (Cefis, 2008). This theory has been basis of acceptance or reject of mergers that have taken over past decades. The proponents of this theory argues that a merger or acquisition only take place if it is beneficial to the two firms, that is if the gains that a target company obtains from the acquisition are not positive then the target company will not attest to the acquisition and if the gains to the bidder company are negative then bidder would not attest to the deal. Therefore, it can be ascertained that if the efficiency theory is necessary in the prediction of the value created, from an acquisition or a merger and an acquisition or a merger will only take place if and only if they are positive gains to both the Target Company and Acquirer Company. The second component of the value-increasing theory is the market power theory. According to theory of market power, mergers and acquisition result to allocative synergies. Allocative synergy offers the firm positive gains as the firm’s gains a higher competitive edge in the market. A number studies conducted by various scholars have ascertained that firms that higher marker power usually the capability of apportion the consumer surpluses thus increasing their profitability. From economic theory, market dissuade future potential entrants in the market, this help the firm enjoy some monopoly powers (Cartwright & Schoenberg, 2006). Third, theory of corporate control postulated by the value-increasing school of thought argues that usually there is a manager or firm whose objective is to acquire an underperforming so as to remove the inefficient management of the company. This theory argues always there is a manager will to replace an underperforming manager who does not meet the objective of the firm to increase the value of the shareholders (Shleifer, 2003). On the other hand, the proponent of the value destroying theories argues mergers and acquisition leads to decline in performance of the acquirer company. They argues that, the theory of management discretion which states that, it is not overconfidence that triggers unproductive acquisition but the existence of excess liquidity. The increase in excess liquidity leads to increased manager discretion, thus causing managers to take mergers and acquisition that do not benefit the company (Krug & Krug, 2009). There are various approaches available to the acquirer company; the friendly takeover or a hostile takeover. Before the board of directors decide whether to adopt a friendly takeover or a hostile take a tender is necessary involves. If the tender offer is accepted by the target Company then the takeover will be a friendly one but the board of directors of the target company turns down the offer, then this result to hostile takeover (Shleifer, 2003). A friendly takeover the shareholders of the target company are compensated usually in form cash or share or any form of compensation as shall be determine by both parties. While in a hostile take the company will buy the target company share in the open market then it has in its possession more than 5% then it must inform the SEC (Security and Exchange Commission) of it plans to acquire the target company. After acquiring 5% it continue purchasing the shares until it has in its possession 66.7% where it obtain the rest of the shares through a resolution which needs a super majority (Rhodes-Kropf, 2004). In order to ascertain the success of the merger or acquisition it is necessary to compute a number ratios using the financial information from both the target and the acquire company. The ratios includes, price earnings ratio, earnings before interest, taxes and deprecation adjustments, return on equity the book value of the firm. Also the management of the acquirer company may carry out the liquation valuation that is obtaining the liquidation value of the firm which is equal value of the asset less liabilities, thus the net asset value. The net asset value of the target company is positive implying that its acquisition will result to synergy thus improving the company efficiency as well as enhancing the company profitability. Determination of net asset value of Nichols as at 31st December 2012 (Nichols Plc, 2012) In addition after computation of the weighted average capital as illustrated below WACC = E/ (E+D) x Ke + D/ (E+D) x Kd = 36302000/ (36302000+ 0) x 13.28% + 0/36302000 x 0 =13.28% Where Kd- cost of debt D - Long-term debts E - Shareholders fund Ke (cost of equity)= Expected divided/ market share prices + growth rate in dividends = 14.10(0.13)/ 645 + 0.13 = 0.1328 = 13.28% After a careful analysis, NICHOLS is fully equity financed (Nichols Plc, 2012), therefore, the company cost of capital was ascertained to be 13.28%. WACC is the minimum required rate of return acceptable by a company in order to undertake an investment venture. 13.28% is considerable significant for our company and will help in financial leveraging. After a through consideration of the above mentioned valuation approaches it was ascertained that acquisition of the NICHOLS would enhance the profitability of the firms since the acquisition will lead elimination of inefficiencies. In conclusion for a merger to be successful there is need for affirm to proper strategies in place as well carry out the expected results from the merger or acquisition so to that the firm only engages in the Result to positive gains to the acquirer firm. Works Cited Boeh, K., & Beamish, P. (2007). Mergers and acquisitions:text and cases. New Delhi: SAGE Publications. Bruner, R. (2004). Applied mergers and acquisitions. Upper Saddle River: John Wiley and Sons. Carney, W. (2009). Mergers and acquisitions. New York: Aspen Publishers Online. Cartwright, S., & Schoenberg, R. (2006). Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities. British Journal of Management , 22-24. Cefis, E. S. (2008). Effects of coordinated strategies on product and process R&D. Journal of EConomics , 10-40. Gole, W., & Morris, J. (2007). Mergers and acquisitions:business strategies for accountants. Upper Saddle River: John Wiley and Sons. Krug, J., & Krug, K. (2009). Mergers and acquisitions: turmoil in top management teams. New York: Business Expert Press. Nichols Plc. (2012, March 08). Investor Relations. Retrieved March 09, 2012, from Nichols Plc: http://www.nicholsplc.co.uk/announcements.aspx Pablo, A., Javidan, M., & Management, S. S. (2004). Mergers and acquisitions: creating integrative knowledge. Upper Saddle River: John Wiley & Sons. Rhodes-Kropf, M. a. (2004). Market valuation and merger waves. Journal of FInancial economics , 2685-2718. Schlossberg, R., & American, B. A. (2008). Mergers and acquisitions: understanding the antitrust issues. Illinois: American Bar Association. Sheppard, C. (2010). ASX-SGX Merger: What Should Matter? Illinois Business Law Journal , 23- 29. Sherman, A. (2010). Mergers and Acquisitions from A to Z. New York: AMACOM Div American Mgmt Assn. Shleifer, A. a. (2003). Stock market driven acquisitions. Journal of Financil Economics , 294- 313. Vachon, D. (2011). Mergers and Acquisitions. New York: Random House. Read More