Mergers and Acquisitions Strategy for Companies - Essay Example

Mergers and Acquisitions Mergers and acquisitions (M&As) have today emerged as an important strategy for companies to perform their operations in a competitive and proficient manner. It has often been observed in this regard that M&As are used as competitive strategies by organisations to mitigate the consequences of continuously intensifying competition within the global realm. Undoubtedly, the M&A practices performed by modern day organisations tend to be a complex phenomenon which is influenced by various factors which can be explained with reference to few recent real life examples. Concerning this particular aspect, this paper presents a case study analysis of three recent mergers at a cross-border level, i.e. Johnson & Johnsons acquisition of Synthes GmbH, Microsoft Corporations acquisition of Skype Technologies, China National Offshore Oil Corporation (CNOOC)s acquisition of Nexen Inc. The study signifies that culture, business industry trends and also governmental policies among other attributes play a vital role as a cause of M&As performed by these companies. Table of Contents Abstract 2 Table of Contents 3 Introduction 4 A Theoretical Explanation to Cross-Border Mergers and Acquisitions (M&A) 5 Real-Life Practices 8 1. Johnson & Johnsons acquisition of Synthes GmbH in 2011 9 2. Microsoft Corporations Acquisition of Skype Technologies In 2011 10 3. China National Offshore Oil Corporation (CNOOC)s acquisition of Nexen Inc. in 2012 12 Conclusion 14 References 16 Introduction M&As are often considered as an important strategic function in the modern day business context where recent studies have revealed that companies principally tend to use the strategy of M&A with the intention of enhancing their performances in terms of profitability, greater market share attainment, better resources allocation, risk diversification as well as business expansion. Various factors have been identified in this context to be influencing the performances of companies and therefore, motivating organisational leaders towards the adoption of M&A strategies such as economic and political trade policies enactments as well as social functions. Moreover, globalisation as well as advancement of technology has influenced companies to adopt this strategy in order to perform effectively in the increasingly competitive global market (Coeurdacier & et. al., 2009). In this regard, companies have adopted M&A strategies with the objective of improving competitiveness as well as growth of its market share. It is in this context that M&A strategies assist companies in restructuring its business operations in order to improve its business performances in the global realm (Directors & Boards, 2006). Additionally, it has been observed that the strategy of M&As assist companies in acquiring larger market share, better resources accessibility and an enhanced competitive position within a short term period, thus minimising many hazards which are commonly witnessed by modern day organisations. The companies with M&A are able to perform business operations in a competitive manner which aids these businesses in obtaining a larger market share and a greater customer base. Moreover, with the assistance of this strategy, companies are able to perform their business operations in a cost efficient manner (Compare Infobase Ltd., 2013). The M&A strategy have also gained immense importance among companies all around the market due to intense competition. Furthermore, this strategy enables companies is performing operations efficiently in the target market segments with proper allocation of resources in a cost-efficient and less risk way (Delta Publishing Company, 2009). With due consideration to this particular aspect, the paper will intend to discuss the concept of cross-border M&A strategy. Concerning the aspect to be a complex phenomenon, the paper will depict the theoretical aspects of M&A strategy with reference to the practical examples of three recent acquisitions, namely Johnson & Johnsons acquisition of Synthes GmbH, Microsoft Corporations acquisition of Skype Technologies, China National Offshore Oil Corporation (CNOOC)s acquisition of Nexen Inc. A Theoretical Explanation to Cross-Border Mergers and Acquisitions (M&A) The M&A strategies are of great importance for modern day companies to improve their performances, growth prospects along with competitiveness. In this respect, M&A denotes that two or more than two companies combine or collaborate into a single corporation with the intention of performing business operations in a more resourceful manner. However, there is a significant difference pertaining in the manner which companies combine or collaborate their functioning with the implementation of M&A strategies. It is in this context that merger signifies that two companies combine through negotiation process with the intention of improving profitability which further tends to assist companies in acquiring greater customer base. Whereas, acquisition implies that a company wholly owns another corporate entity where the acquired company is wound up and either re-established as a subsidiary entity or as a new one. In this respect, company which totally absorbs another company is termed as acquirer and the absorbed company is referred to as acquired. Globalisation effects as well as internationalisation trends also play a major role in driving the modern day companies towards more extensive M&A practices. Companies also attempt to adopt M&A strategies to perform operations competitively deciphering greater efficiency in resource allocation (Roberts & et. al., 2012). Contextually, there are certain drivers in accordance with which companies adopt the strategy of M&A. These driving forces are the influencing factors which encourage companies towards deciding M&A approach. Companies adopt the strategy of M&A with the intention of obtaining the competitive advantages of resources as well as skills of another company and therefore obtain better internal strengths as compared to the rivals. These valuable resources further assist companies to improve proficiency. It also assists organisations in mitigating the consequences of increasingly fierce competition by creating a certain degree of monopoly in their targeted market. Increasing shareholders value as well as stock prices in a short run period is also perceived to be few major reasons owing to which, modern day organisations tend to adopt the M&A strategies. Notably, the stock markets are considered as important drivers for M&As due to variations in the share prices of companies. In this regard, at times of boom in stock markets, the acquisition activities are observed to be more attractive due to the facts that shares of the acquirer company can be obtained instead of cash with relation to business transactions in terms of M&As. Conversely, when there is a fall in stock markets cash purchase is preferred instead of shares which again direct the process of implementing an M&A (Roberts & et. al., 2012). The advancement of technology, globalisation effects and internationalisation trends of companies also determined as few of the most important drivers influencing companies for M&A (Roberts & et. al., 2012). Additionally, M&A strategy is also adopted by various companies with the objective of diversifying the existing business segments towards new areas in order to create a better balance for business risks. It has often argued in this regard that M&A is observed to be the most appropriate strategy with regard to risk management by expanding the business functions effectively towards larger and more diverse segments (Du & Boateng, 2012). It has also been argued in this context that companies attempt to adopt M&A strategies with the motive of entering new market segments as well as to improve the market share. Moreover, companies will be able to acquire a greater base of customers both in national as well as in international markets (Roberts & et. al., 2012). In this perspective, cross-border M&A has acquired greater importance among companies for internalisation as well as for the purpose of obtaining a better competitive position in the global market. However, in the global periphery, the M&A initiatives have further been observed to be strongly influenced by the cultural aspects in the cross-border level. Notably, in the international context, cross-border M&As are also observed as a common tactic among companies to penetrate a market constituted with different cultural and business attributes (Bjorvatn, 2004). Real-Life Practices In order to examine the above mentioned aspects in relation to cross-border M&As, , few examples of recent M&A have been cited below: 1. Johnson & Johnsons acquisition of Synthes GmbH in 2011 Johnson & Johnson (J&J) and Synthes GmbH merged in the year 2011 with the intention of developing the innovative as well as complete orthopaedics business worldwide with better assimilation of resources in a time and cost efficient way which. J&J is a producer of healthcare products; while, Synthes produces as well as manufactures orthopaedic devices. In this respect, J&J have come to an agreement to acquire Synthes with a transition value of $ 21.3 billion. On the accomplishment, of the M&A agreement, J&J was able to penetrate in the orthopaedic devices manufacturing sector acquiring the market share of one of the largest producers of medical as well as diagnostics devices (Johnson & Johnson Services, 2013). The basic facts concerning the acquisition agreement between Johnson & Johnson and Synthes GmbH further discloses that the cross-border M&A rewarded J&J with greater access to a diverse market segment in the medical sector in the global marketplace. The sole intention of J&J in acquiring Synthes was to gain a greater customer base and the advantages of a diverse product line arrangement by producing high-quality innovative products as well as services. This aspect will facilitate the company in performing their business operations as a leader in orthopaedics business (Johnson & Johnson, 2011). In the later performances, the acquisition was observed to assist J&J substantially in developing better products for orthopaedic segments. Moreover, the company was also able to obtain a large market share as well as customer based in a cost effective and time efficient way. In the upcoming years, it is also expected that the acquisition will help J&J in utilising the resources made available by Synthes in producing advanced technology for the development of innovative products. This is likely to reward better competency to the company in serving its customers with competitive pricing advantages and therefore strengthen its leadership positioning in the global market (Johnson & Johnson, 2011). 2. Microsoft Corporations Acquisition of Skype Technologies In 2011 Microsoft is renowned as one of the leading information communication based multinational corporations serving with innovative software assistance, internet technologies and related services. In the year 2011, Microsoft acquired Skype which is a free software offering voice communication service organisation. Prior to the acquisition, Skype was observed to possess around 650 million users worldwide (Kazimova, 2013). Microsoft acquired Skype in cash with a value of $ 8.5 billion which allowed Microsoft to serve a larger customer base acquiring the proportion of market share acquired by Skype. It is worth mentioning in this context that the acquisition was performed with the intention of improving the accessibility of voice communications as well as real-time video for consumers. Furthermore, with the benefits of acquisition, Microsoft was also facilitated with the opportunity of improving the real-time communication services as well as products which were previously offered by Microsoft. In this respect, Microsoft devices such as Xbox, Windows Phone and Kinect were to be supported by Skype delivering a better service to its customers through social networking and research facilities. Additionally, Skype users will be connected through Lync, Xbox Live and Outlook among others with the assistance of Microsoft which is likely to increase its shareholders value by a considerable extent. Skype will also be assisted by Microsoft with financial support with regard to non-Microsoft business platform which further ensures that Microsoft will be benefited with the competitive brand value already created by Skype (Microsoft, 2011). The major benefit which can be acquired by Microsoft through the acquisition of Skype is to minimise the investment cost towards the IP telephony services. The reduced investment cost is likely to facilitate Microsoft in building enhanced innovative IT products and thereby obtain better customer satisfaction. Moreover, the introduction of real-time video as well as voice communication services through the alignment of Skype and Microsoft such as Xbox console and Lync among others will purposefully aid in developing better competitiveness of the organisation on the whole. In this respect, with better competitive products, Microsoft will be able to compete with its business rivals more aggressively in its future performances. Furthermore, from the acquisition, Skype will be recognised as a renowned brand in the networking platform taking the benefits of worldwide brand image reputation created by Microsoft (Kazimova, 2013). In this context, it can be comprehended that the acquisition of Skype will facilitate Microsoft with increased competitive advantages with respect to its products with additional features of Skype in a short run performance as well as in cost effective and time efficient way. In its performance, it has been observed that after the acquisition, Microsoft has generated a substantial increase in its profits through augmented sales with relation to non-gaming products. The demand of the products offered by Microsoft has also been observed to have increased with the embedded features of Skype in various parts of the world. Hence, it can be affirmed that the acquisition took place between Microsoft and Skype due to influencing factors including the fiercely competitive market structure as well as the need to satisfying the continuously enhancing demand and sale of the products. 3. China National Offshore Oil Corporation (CNOOC)s acquisition of Nexen Inc. in 2012 CNOOC is renowned as one of the largest oil producers of the Asian continent, based in China, which operates in the offshore owned by the state. In the similar context, Nexen Inc was known to be a self-governing energy company operating in Canada. In the year 2012, CNOOC planned to acquire Nexen Inc. with an amount of $ 15.1 billion. CNOOC for the acquisition promised to pay $ 27.50 per common share and 61 percent as premium on the closing price of Nexen stocks. This acquisition is demonstrated to be the most appropriate for a Chinese company over an overseas company to penetrate and strengthen its foothold in the foreign market of Canada. It is in this context that through the acquisition CNOOC was accepted in the Canadian market and was further acknowledged with the rules and policies enacted the then government towards committed transparent commercial practices with regard to the governance of the acquired company i.e. Nexen. CNOOC was also directed likewise in accordance with the laws and principles implemented by the Canadian government with relation to capital investment and employment with the intention of improving the economic conditions of the nation (Boris, 2012). The acquisition agreement between CNOOC and Nexen has been approved with the motive of better development of the economic condition of the market which depicts that governmental interests and economic objectives also play a major role in driving cross-border M&As. With reference to the acquisition of Nexen by CNOOC is quite likely to diversifying the business area towards other key resources. This deal between CNOOC and Nexen is analysed to be the best deal with respect to the increment of national industry size and outward investment made towards energy projects. It is worth mentioning in this context that CNOOC has acquired Nexen with the motive of acquiring assets with long term value. It is in this regard that the acquisition of Nexen will facilitate CNOOC to procure a better position with relation to oil and natural gas market. Moreover, CNOOC has been facilitated with the opportunity of diversifying its business to avail better growth opportunities as well as to minimise risk factors which are associated with businesses such as safety and health as well as environmental hazards (Bloomberg L.P. 2012). Additionally, CNOOC has acquired Nexen with the motive to obtain the competitive benefits possessed by the later company in North American region in terms of innovative and technologically advanced energy industry (Saefong, 2012). Therefore, it can be observed that diversification of business areas and the intention of meeting the requirements for domestic energy industry are determined to be the major influencing factors for adopting the strategy of M&A. Conclusion M&A is a determined to be an important strategy for companies in modern day context. This strategy facilitates companies in improving profitability and in expansion of business areas or segments in the internal market with greater efficiency. The strategy of M&A has gained utmost importance with relation to the advancement of technology as well as globalisation. The companies are also facilitated with the opportunity of performing business operations in international market effectively. Moreover, with the assistance of this strategy, companies will be able to enter new market segments proficiently as well as in acquiring larger market shares. Companies will also be able to acquire greater customer base in the market segments. This strategy is recognised to be the most appropriate strategy for companies to perform their business operations in a competitive manner at times of intense market competition. It has been argued in this regard that there are certain factors which are considered as important drivers for influencing as well as motivating companies to focus on cross-border M&As. Apart from the factors such as culture, internationalisation, and developmental interest of businesses, economic goals and political influences also play a major role in driving cross-border M&As. The major drivers for adopting the strategy of M&A are to develop competitiveness, market or business expansion for minimising risks, obtaining the benefits of advanced technology, and increased shareholders’ value among others. Stating precisely, recent studies have often argued that these drivers encourage companies to adopt M&A strategies for performing their business operations in an efficient and effective manner obtaining the most possible competitive advantages in the short run. From the above described three real life practical examples, i.e. with reference to the three recent mergers Johnson & Johnsons acquisition of Synthes GmbH, Microsoft Corporations acquisition of Skype Technologies, China National Offshore Oil Corporation (CNOOC)s acquisition of Nexen Inc., it has been observed that in the modern day context companies adopt this strategy in similar perspectives as explained in theories. It has further been identified from above mentioned examples that the motivational factors or drivers in terms of business competitiveness and diversification as well as stability in the long run performances are the main determinants for adopting the M&A strategy in the cross border level. References Bjorvatn, K., 2004. Economic Integration and the Profitability of Cross-Border Mergers and Acquisitions. European Economic Review, Vol. 48, pp. 1211-1226. Bloomberg L.P., 2012. Cnooc Buys Nexen for in China’s Top Overseas Acquisition. News. 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