The Merger of Granda and Compass - Research Proposal Example

The Merger of Granda and Compass: Research aims and objectives With the changing environment of business all over the world the need for the companies to audit and update their strategies has also increased. Merger is an important strategy, which is being adopted by most of the companies in order to increase their market share and acquiring other motives. "Usually mergers occur in a consensual setting where executives from the target Company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties." 1 The main aim of the study is to study merger between UK media and leisure group Granada and compatriot foodservice provider Compass. The success/failure of the merger will be analysed according to the The merger will be examined according to the following motives: Economies of scale: "This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit."2 Through the merger the companies will consolidate under price and margin pressure. "Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and double its power (by capturing increased market share) to set prices. Previous research: Many authors have dealt with the issue of clarity and understandability of the topic of mergers. Most of the research studies are aimed at studying the factors, which motivate the management of the companies to undertake the decision of merger and the benefits or the losses The study of mergers and acquisitions focuses on understanding what motivates managers to engage in this type of activity and the impact that mergers and acquisitions have on shareholder returns. Mostly the main aim of the companies for mergers could be empire building through growth in size, sales, and assets. 3 Mostly the motivation for the merger involve the increase in the market gains, the competitive advantage in shape of technological advancement, and the increase in the strength of the companies. In some cases the HR practices also improves as the result of these mergers. Efficiency improvements can be gained from synergy of target and bidding firms due to economies of scale and use of excess capacity. Recent studies stated that value creation couldn't be achieved in case of horizontal merger. 4 5 6 The entity formed by the merger of Granada and Compass, "Granada Compass", was 66.25% owned by Granada shareholders and 33.75% by those of Compass. The merger proposal said that prior to the IPO, Granada Media was expected to be capitalised with no net debt. At the end of March 2000, Granada's net debt was 1.9bn and Compass's was 1.1bn. In a joint statement Granada and Compass said that they expect their combined businesses to be "better placed to exploit the significant growth opportunities in each of its core markets and to benefit from the combination of its complementary businesses." 7 On the other hand the horizontal merger of Bell south and AT&T is expected to provide both the companies with the following advantages. Cross selling: Through the merger the companies become enable to sell their products to the customers of the other company. The natural combination of two will improve the services provided to the customers. Financial Benefits: The merger of both the companies will lead to a "financial benefits for stockholders of both companies; an expected net present value of $18 billion in synergies resulting from a more than $2 billion annual run rate in synergies expected in 2008, growing to $3 billion in 2010." 8 On the other hand the expected merger will lead to "accrete AT&T adjusted earnings per share in 2008, double-digit adjusted EPS growth in each of next three years (earnings adjusted for merger integration costs and amortisation of intangibles) and significant growth in free cash flow after dividends in 2007 and 2008". 9 Geographical or other diversification: Another advantage both the companies will acquire is the decline in the cost of last-mile broadband access which is the most expensive part of the most expensive part of the broadband network "will continue to drop because AT&T will be able to take advantage of greater economies of scale. The same holds true for the cost and quality of content. A combined AT&T-BellSouth will be in a better position to give consumers nation-wide what they want: a functional bundle of basic and premium broadband services and applications that work across voice, video, and wireless platforms." 10 Resource transfer: In his article Barney has mentioned that the resources of the firms are resources are unevenly distributed. 11The firms can acquire the scarce sources by combining with the other company. Through the merger the supply chain of the companies became very large which expanded the market share of the companies. This gave the combined BellSouth and AT&T a cutting edge on the companies such as Comcast, Covad, EarthLink, Google, Sprint Nextel, and Vonage. "The day when regulators could justify arbitrary barriers on service providers based on geography or history is long gone. Those barriers, not consolidation, slow deployment and keep prices high."12 In order to test the positions taken by the researchers above we will test the merger of the Granda and Compass according to the following hypothesis mentioned in the research design and statistical analysis section. Data sources and collection: The study will cover the material available on the event of the merger between the two companies. The main data sources will be the periodicals, Financial and business journals and the Annual reports of the Company. The overall effects of the merger between UK media and leisure group Granada and compatriot foodservice provider Compass on the market situation also needs to be analysed therefore the Market analysis provided by the Government bodies will also be reviewed. Information on take-over bids and the effects of the merger on the share price of the companies will be collected from the annual financial report of the companies before and after the merger. Research design and statistical analysis H1: Vertical Mergers and acquisitions create positive and significant for the companies. H2: Horizontal Mergers and acquisitions do not create significant and positive value for the companies. The above mentioned hypothesis favours the findings of the studies conducted by the previous researchers. In case of the contradiction with the above-mentioned hypothesis we will accept Pryor's (2001) 13conclusion that different factors such as careful planning can make the merger achieve the desired results in shape of value creation. The study will utilise the standard event study method and calculated abnormal returns around merger announcements to shareholders. The qualitative data regarding the merger will be analysed according to the criteria of the merger success developed by the previous researchers and the increased/ decreased return to the shareholders. Conclusion The proposed study is the first to examine the event of the merger between the UK media and leisure group Granada and compatriot foodservice provider Compass. The research will underline the overall position of the companies before and after merger. It will also provide analysis of the factors, which lead to the prevalence of the corporate event. The effects of the event on the overall economy will also be analysed. Evidence of increase in the profit margin of the companies and the additional operating costs attached to the event. The response from the investors regarding the combination of the two companies will also be discussed through the difference in the share prices before and after the merger. Finally, since the companies are regulated by the UK GAAP the effects of the change in the regulations due to the merger will also be underlined. References 1. Wikipedia, (2006). Mergers and acquisitions, available from http://en.wikipedia.org/wiki/Mergers_and_acquisitions 2. Ibid. 3. Mastracchio, Nicholas J. & Zunitch, Victoria M., (2002). " Differences between mergers and acquisitions," journal of Accountancy, Online Issues, November 2002, available at http://www.aicpa.org/pubs/jofa/nov2002/mastra.htm 4. Berger, P.G. & Ofek, E. (1995). Diversification's effect on firm value. Journal of Financial Economics, 37, 39-65. 5. Lang, L.H.P. & Stulz, R.M. (1994). Tobin's q, corporate diversification, and firm performance. Journal of Political Economy, 102, 1248-1280. 6. Maquieira, C.P., Megginson, W.L., & Nail, L. (1988). Wealth creation versus wealth redistributions in pure stock-for-stock mergers. Journal of Financial Economics, 48, 3-33. 7. E-consultancy, (2000). Feature: Compass merger points to market for Granada Media, Compass merger points to market for Granada Media, Date: 17 May 2000 8. BellSouth Media Room, AT&T, BellSouth to Merge Combination Will Speed Innovation, Competition and Convergence http://bellsouth.mediaroom.com/index.phps=press_releases& m=2827 9. Ibid. 10. Ibid. 11. Barney, J. 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 99-120. 12. Titch, S., AT&T/BellSouth Merger a Necessary Step for Industry Transition, News Releases, March 7, 2006 The Heartland Institute, available at http://www.heartland.org/Article.cfmartId=18649 13. Pryor, F.L. (2001). Dimensions of the world-wide merger boom. Journal of Economic Issues, 35 (4), 825-840. Read More