Motives Underlining Mergers & Acquisition and Compare the Outcomes of the Different Methodologies - Essay Example

?Discuss the Motives Underlining Mergers & Acquisition and Compare the Outcomes of the Different Methodologies Used To Analyse M&A Mergers &Acquisitions (M&A) is a popular strategy for organisations in present days. Basically, M&A is adopted as well as implemented by different organisations for the purpose of accomplishing quick business growth and entering into new business markets successfully. Moreover, it can also enhance business or operational performance of the organisations at large. Through M&A, organisations can attain higher economies of scale and greater operational effectiveness. However, the impact of M&A has been viewed to be quite different on the basis of different industry type. Considering this aspect, the paper discusses the motives underlying M&A in different organisations. The objective of the article is to explore as to why organisations opt for executing M&A strategy. Furthermore, the paper also compares about the outcomes of different methodologies that are used in analysing the impact of M&A. Table of Contents Abstract 2 Literature Review 4 Overview of Merger & Acquisition 4 Nature of Merger & Acquisition 4 Motives Underlying M&A 5 Comparative Analysis of M&A 10 References 13 Literature Review Overview of Merger & Acquisition Merger & acquisition (M&A) which is also acknowledged as takeover is regarded to be an important strategy that use by various organisations in recent days in order to accomplish higher economies of scale. According to Lahovnik (2000), M&A is considered as one of the most prevalent approaches of organisations in today’s global businesses. The incorporation of local market into international economy, improvement of financial market along with liberalisation and deregulation procedure strongly supports the approach of M&A. Schoenberg (2009) stated that M&A provides a common way for organisations in terms of accomplishing quick growth and rapid market entry. With the arrival of new era, organisations are spending billions of dollars every year on conducting the activity of M&A. M&A has been one of the prevalent approaches for different organisations that lead them towards attaining superior competitive position over the chief business market participants (Schoenberg, 2009). . Nature of Merger & Acquisition According to Alao (2010), merger denotes the amalgamation of two or in excess of two corporations into one big corporation. Such activities are usually voluntary in nature and often lead towards a new corporate identity. Merger can be aggressive or friendly in nature and in this procedure, the acquirer exercise full control on the acquired organisation. Gaughan (2007) described merger as grouping of two or more than two organisations where only a single organisation can sustain. Sudarsanam (2003) stated that M&A is implemented interchangeably. He defined that merger is a procedure where organisations share their resources in order to accomplish mutual objectives, but the shareholders still retain their ownership in the newly formed organisation. On the basis of the study conducted by Picot (2002), M&A indicates number of different transactions ranging from acquiring as well as selling of undertakings, agreements, collaboration and joint ventures to the establishment of organisations or corporate progression that certify individuality of dealings, transformation in legal form, preliminary public offering and reorganisation. Jagersma (2005) stated that merger is the arrangement of two or in excess of two organisations in establishment of a new entity or creation of a holding company. On the other hand, acquisition is the buying of shares and assets of other organisation in order to accomplish administrative powers. Motives Underlying M&A Carline & et. al., (2009) has described three motives for organisations to engage in M&A that comprise cooperation motive, hubris motive and intervention motive. Every motive has its own inference in relation to the advantages of organisations adopting as well as implementing M&A. Lemnsic & Maslennikova (2008) stated that M&A can only occur when combination of two or more organisations lead to financial benefits. There pertain different perspectives of M&A that comprise financial perspective, organisational behaviour perspective and human resource management perspective. The financial perspective of understanding the motives underlying M&A is basically dependent on efficiency impact of M&A on the financial performance through evaluating higher economies of scale, determining market leadership and corporate authority. Financial worth created through M&A activities are determined by market characteristics comprising market attractiveness. Researchers observe M&A as a way of business progression and diversification (Ebimobowei & Sophia, 2011). According to Paulter (2001), there are various motives underlying M&A. The most common motive underlying M&A is that the purchasing organisation considers this strategy as a profitable investment. Organisations can only thought about M&A as a way of improving the capability, attaining new understanding, entering into new market and rearranging resources in most efficient manner. Scheffman (1993) claimed that the organisations consider static cost minimisation while making effective M&A decisions. In addition, Andrade & et. al., (2001) stated that M&A activity happens as a response of deregulation. Irrespective of general motivations of M&A, few other motives underlying M&A have been described hereunder. Operational Effectiveness One of the fundamental motives underlying M&A is operational effectiveness. Organisations combine their respective business operations by conducting M&A in order to minimise production expenses, enhance productivity, improve product quality, attain new skills and develop new products. The possible advantages of M&A include functional and professional effectiveness. In this similar context, functional effectiveness can arise from higher economies of scale, enhanced resource allocation, transformation to inexpensive production structure, upgraded utilisation of information as well as knowledge, better focus on central abilities of organisations, efficient arrangement of properties and minimisation of transportation along with business expenses. M&A possess the ability to generate a corporate power in the business market. Several economists believe that the aspect of corporate authority is regarded as a vital factor concerning towards the protection against unproductive management. The benefits of M&A are not restricted to organisations, rather it is also advantageous for customers by a greater extent (Paulter, 2001). Financial Advantages M&A also result in mounting financial competences. For instance, organisations can diversify their incomes by buying other organisations with different earning streams. Diversification of income can reduce the difference of profitability and also can minimise the risk of insolvency and its associated expenses (Paulter, 2001). Market Dominance One of the most vital motives behind underlying M&A is market dominance. M&A can help organisations to enhance their operational or business performance and hence can also minimise risks related with development of new products. The recent activities of M&A have been recognised as an effort for acquiring greater market position in this competitive financial market (Paulter, 2001). Economies of Scale An organisation can gain economies of scale when its average expenses get reduced and total productivity increases. More severely, economies of scale appear when the marginal expenses of production get reduced. Economies of scale can be gained by coordinating merging organisations. This is owing to the reason that amalgamation of two organisations allows reduction of fixed expenses, i.e. expenses that are related with managerial, customer service and operational activities. In the short-run, economies of scale can be accomplished by rearrangement of productivity across dissimilar elements of operational process. On the other hand, in the long-run, economies of scale can be attained by increasing productivity in comparison with significant inputs (Motis, 2007). Cost Effectiveness M&A can help to enhance cost effectiveness of the organisations if the management system of purchasing organisation is more efficient at economising expenses and is capable of removing excessive costs from business operations. Several studies support the view that the aspect of cost effectiveness motivates organisations towards conducting M&A. Acquiring organisations are usually more cost effective as compared to other organisations that are not acquired (Bank for International Settlements, n.d.). Monopoly Authority M&A can enhance monopoly power and permit organisations to earn more profit by setting high prices of the products. It is possible when merging organisations are competitors and thus, their combination result in substantial increase in market leadership (Bank for International Settlements, n.d.). Synergy Achievements Synergies are regarded as the competences that can only be accomplished through M&A. It is usually related with transformation in production opportunities of merging organisations that goes beyond technical effectiveness. In general, it can be affirmed that synergies encompass procedure of learning and close incorporation of particular assets or transfer of information among the merging organisations. For instance, when a medium sized organisation introduces new product but lack large scale sales, M&A with a reputed organisation can possibly provide large scale sales. On the other hand, transmission of information can be accomplished when merging organisations interchange different research and development activities, human abilities and organisational principles (Motis, 2007). Technological Effectiveness M&A has significant effect on technological improvements. M&A can lead to technological changes which in turn can enhance the scale of manufacturing. It also helps to extend the high operation expenses of new technological infrastructure. Furthermore, a merged organisation can also assist in counterbalancing the competitive stress and provides the ability for constant technological upgrades necessary to accomplish unit cost advantage (Bank for International Settlements, n.d.). Comparative Analysis of M&A In order to conduct comparative analysis of M&A, it has been apparently observed that M&A impose diverse impact upon the organisations. From the study of Akhavein & et. al., (1997), it can be observed that merged banks have gained significant benefits in comparison to other big banking organisations. However, the benefits of M&A did not appeared from market dominance or cost minimisation, rather merged banks had gained benefits from enhanced technical effectiveness which resulted in transformations in product mix towards mortgages and securities. Most importantly, M&A facilitated in enhanced utilisation of assets of merging banks that eventually stimulated profit prospects by a considerable level (Akhavein & et. al., 1997). On the other hand, in comparison to banking industry, hospital industry has also been viewed to reap extensive benefits from conducting M&A in different ways. According to the study of Sinay (1998), it can be observed that merged hospitals has become more cost efficient in comparison with those hospitals which did not followed the process of merger. Connor & et. al., (1998) also found similar outcomes on their research conducted on hospitals. They had observed that merged hospitals have gained significant effectiveness in terms of cost per admittance, average income per admittance and profit margin activities. They had also observed that in comparison with other hospitals, the average expenses have been lessened in merged hospitals. The authors viewed that the advantages of M&A in hospital industry can increase if hospitals are of similar size and occupancy rate are low before the conduct of M&A. In addition to cost advantages, M&A in hospitals also impose significant impact on the competition and healthcare services. With respect to beer industry, M&A pose considerable impact on the performance of the organisations. From the research of Tremblay & Tremblay (1988), it has been viewed that M&A in beer industry has raised organisational effectiveness by simplifying the process of transfer of assets. M&A always does not bring profitability for organisations. At times, it can lead to ineffectiveness, if the risks are not being considered effectively. For instance, the study of Pautler (2001), focusing upon mergers of aviation industry depict that M&A often lead towards increasing expenses and deliverance of ineffective services. The study of Kim & Singal (1993) that conducted on 14 aviation organisations reveal that after M&A, the average relative fee on the merging destinations has augmented by 10%. According to the study of Fuentes & Sastre (1998) on Spanish banking industry, the basic motive of M&A is to widen the variety of strategic options available to the organisations. They have found that M&A in Spanish banking industry has determined for increase in productivity and improvement in the level of effectiveness. In comparison to Spanish banking industry, study of Ebimobowei & Sophia (2011) on Nigerian banking industry reveals different outcome. Their research discloses that irrespective of M&A, the merging banks faced difficulties from weak risk management, weak corporate governance activities, excess dependence on public segment funds, poor working arrangement, inadequate instruction as well as reporting system, weak credit evaluation skills, lack of competency and skill gap. The study of Evantec Corporation (2006) described that there are seven factors that can determine the success of M&A in different organisations that embrace mutual understanding of objectives, tactical orientation as well as support, establishing supporters of change, ensuring constant communication, implementing M&A on specified mission along with vision, effective business procedures and retaining valued employees (Evantec Corporation, 2006). According to the report published by KPMG LLP (1999), it has been viewed that there pertain six vital aspects that are required to make M&A profitable such as appropriate business fit, strong planning, carefulness, proper administration, effective team selection, consideration of different cultural aspects and effective communication with major stakeholders like employees, shareholders and suppliers (KPMG LLP, 1999). References Akhavein, J. D. & et. al., 1997. 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