Do Financial Crisis Trigger Cross Border Mergers and Acquisitions - Research Paper Example

Do financial crisis trigger cross border mergers and acquisitions? Introduction It is believed thatthe recent financial crisis forced many companies to explore the opportunities in overseas countries. The opportunities for many companies in their mother countries seem to be almost saturated. It will be impossible for such companies to develop further without seeking opportunities in the overseas market. As a result of that international business or cross border business is growing rapidly in recent times. The introduction of globalisation and liberalization and the subsequent increased interests in attracting foreign direct investments by many countries is helping companies to explore opportunities in the overseas markets. Many of the prominent companies such as the Lehman Brothers forced to close down and many others are still struggling for survival because of the recent recession. Recession has struck American and European continents severely while Asian continent was least affected. As a result of that many of the American and European companies are currently looking for opportunities in Asian countries such as China and India. A lot of entry strategies such as the merger and acquisition (M & A) are used by big companies while they invest in overseas countries. According to Gaughan (2007), merger and Acquisition (M & A) is a process in which two corporations combined together to form a single one. Only one corporation survives after the M & A. The merged corporation will lose its identity and goes out of existence after the merger process. It should be noted that the awareness or knowledge about the local market is extremely important while an organization invests in an overseas country. Merger and acquisition helps foreign companies to exploit the local knowledge of the company that is acquired. Merger and Acquisition (M&A) can be considered as a response by the companies to changing business conditions (Bruner, 2004). The recent financial crisis has caused a lot many changes in global business conditions. Aim and objectives Research in the area of M&A is mostly concentrating on the merging companies instead of the context in which they take place (Oberg and Holtström, 2006; (Anderson et al., 2003). The major aim of this paper is to investigate the context of M & A rather than the characteristics of merging companies. The objectives of this paper are: To assess the role of recession in causing increased rate of M & A in recent times To evaluate the different factors that motivate companies to go for M&A. Hypothesis Recent recession plays a direct role in increasing the merger and acquitions activities in the present business world Research question Do financial crises trigger cross border mergers and acquisitions? Literature review Recession Recession is said to be taking place when a country faces two consecutive quarters of negative economic growth as measured by a countrys gross domestic product (GDP). At the time of recession, a country may face all types of financial problems in various areas such as industries, employment, income etc. America and Europe were the worst hit regions as far as the negative impacts of recent recession are concerned. Many European and American companies collapsed and many of them are still struggling. For example, Land Rover and Jaguar were two of the prestigious automobile manufacturers in UK. India’s automobile manufacturer TATA has acquired these firms recently (TATA, 2008). In other words, Land Rover and Jaguar failed to counter the recession problems properly. Inman (2009) mentioned that ‘the unemployment in UK may cross more than 3 million in near future itself as Britains manufacturers, retailers and service industries feel the full effects of the downturn. Merger and acquisition According to Moeller and Schlingemann (2005), M&A activity has increased significantly over the last few decades. Nocke and Yeaple (2007) mentioned the two major options available for serving foreign markets: exporting and producing locally or FDI. If the firm decides for FDI, it should either build its own establishment or acquire an existing firm (cross-border merger and acquisition (M&A) (Nocke and Yeaple, 2007). Motives of merger and acquisition are explained differently by different scholars in the past. As per the views of Sevenius, (2003), M & A is caused by a company’s desire to achieve additional market share. On the other hand, scholars such as Walter and Barney, (1990), Porter, (1998), Schmitz and Sliwka, (2001) and Ansoff (1984) believe that the attractiveness related to synergies are the major reason that motivates companies to go for M&A. According to Scholes and Wolfson (1990) and Servaes and Zenner (1994), the major motives for cross border M& A are the ability to gain tax incentives, remove market inefficiencies, and better control over labour and market resources. Martynova and Renneboog (2008) mentioned that the major motivation for cross-border M&As may be the possibility of improvements in the governance of the bidding and target firms. Gaughan, (2001, p.5) mentioned that the value of the combined firm after the merger deal will be more than the sum of the value of the individual firms before the deal. In other words, Value (A + B) > Value (A) + Value (B). 1+1 = 2, in mathematics. But in business, 1+1 > 2. It should be noted that the combined firm will be able to achieve more market share, lower production cost, higher competitive power, better technologies and patents and financial leverages because of the merger deal. For example, a merger deal between a Chinese firm and an American firm would help the combined firm to exploit the cheap labour power in China. As per the views of Gugler et al (2012), mergers come in waves that are correlated with increases in share prices and price/earnings ratios. When a country’s economy grows, share prices will also be increased naturally. At the same time, when a country faces economic crisis or financial crisis, majority of the organizations in that country may face problems. On such occasions, struggling firms will think about merger with another firm. Harford (2004) supported the findings of Gugler and mentioned that economic shocks such as recession could have many impacts upon firms and the possibility of large absolute changes such as merger cannot be ruled out. Duchin and Schmidt (2013) also supported the arguments of Gugler. As per their views, high rate of merger activities occur when greater level of uncertainty prevail in the market. In short, struggling firms usually look for options such as merger as a measure for survival. Udin and Boateng (2011) conducted a study among some UK firms and concluded that GDP, exchange rate, interest rate and share prices have major roles in causing outward UK CBM&As. In other words, these findings are in line with the findings of the other researchers such as Gugler et al (2012) and Duchin and Schmidt (2013) “Cross border mergers make it easier and cheaper for individual investors to buy and sell foreign shares” (DePamphilis, 2009, p.77). Investors normally welcome cross border mergers or alliances because of the opportunity it provides to exploit investment opportunities in foreign countries. Investors or shareholders are not much bothered about the nature of the cross border merger deal. As a result of that companies that are struggling in domestic markets are looking for opportunities in the foreign markets now. Miller (2008, p.12) mentioned that Edwin L. Miller (Author) › Visit Amazons Edwin L. Miller Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central Mergers and Acquisition (M&A) will help organizations to diversify into other areas. In many of the cross border deals, the primary objective is the diversification of business. For example, consider the recent merger deal between two telecommunication giants, India’s Bharti Airtel and South Africa’s MTN. According to this cross border merger deal, “MTN and its shareholders would acquire around 36 per cent economic interest in Bharti Airtel, while Bharti Airtel would acquire a 49 per cent stake in South African telecom giant MTN” (Indias 11 largest M&A deals, 2009). This deal helped MTN and Bharti Airtel to expand their business to two culturally different markets in order to reduce the recession problems. At the same time, Huyghebaert and Luypaert (2010) have expressed slightly different opinion. As per their views in concentrated industries where firms are operating at a lower scale, the chances of M & A are larger. They argued that instead of industry deregulation, industry growth, and financial market conditions M& A decisions triggered by factors such as a firms cash position and intangible assets. Sudarsanam (2003) pointed out that cross border merger deals did succeed only in half the cases. The major reason for the failures of the merger deals is the inability of the combined entity to produce the desired shareholder value. “If a merger does go wrong, it is difficult and extremely expensive to unwind” (Watkins, 2001, p.99). Methodology Positivism and naturalism are the research philosophies used for the current study. Researchers who make use of quantitative tools are called positivists whereas researchers who prefer the qualitative tools are called naturalists (Saunders et al., 2009). Positivists use scientific methods to make conclusions while conducting a research study. They accept only facts that can be proved with the help of scientific methods (Gabriel, 1990). On the other hand, naturalists are not bothered too much about facts or scientific methods while making conclusions. They rely more on probabilities for making judgements. Only secondary research is conducted as part of this study. Since both qualitative and quantitative data were used, it can be said that a mixed research method is used for the current study. Secondary data for the current study were collected from books, journals, articles, newspapers and websites. Secondary data are capable of providing data from the past (Sykes, 1990). Moreover secondary research methods can be used to collect data from a wider population (Jackson 1994). It should be noted that most of the secondary sources are available on internet and a researcher can collect necessary information with the help of a computer with internet connection. At the same time, the major drawback of secondary research is its inability to provide current information. Only primary research is capable of providing current data. Data analysis for the current study has been done with the help of deduction and inductions methods. Deduction is the process of collecting data for supporting an argument whereas induction is the process of making arguments or theories from collected data (Bryman and Bell 2007). At the same time deduction always gives 100% accurate results since it uses facts and scientific methods for analysis whereas induction may not give 100% accurate results all the time since it works on probabilities rather than facts. In academic research works like this, induction is necessary to analyse or interpret unexpected data since the researcher may come across many unexpected results at the time of actual study. The major limitation of this study is the absence of current data or primary data. Only primary research is capable of providing current data. However, the present study has not conducted any primary research. Plagiarism is an ethical issue that can happen in academic research projects like this. Serious attempts have been made by the researcher to avoid plagiarism issue. All the information collected from external sources was cited in Harvard format in this paper. Findings and Discussion Merger and acquisition deals are increasing rapidly in recent times. Globalisation has given momentum for the M & A activities. The following illustration substantiates this argument. (Gaughan 2007, p.12) 1980s and 90s were the periods in which globalisation principles started to establish in this world. From the above illustration, it is evident that the merger deals in the US in the year of 1980 were below 2000. At the same time, such deals were increased to around 10000 in the year of 2000. The ratio of the value of global cross-border M&A to the value of global FDI ($865bn in 1999) is about 80% (UNCTAD, 2000). It is evident that globalisation should have acted as a catalyst for merger deals. Cross-border mergers and acquisitions (M&As) accounted for around $720 billion in 1999. The value of all M&As, amounted to an equivalent of 8 percent of world GDP in the same year, compared to 0.3 percent in 1980 (Hijzen et al., 2008). The recent financial crisis has acted as another catalyst for merger deals across the world. The following graph gives a rough idea about the size of global merger deals between 2005 and 2007. The size of global merger deals between 2005 and 2007 (Mergers and acquisitions, 2008) It should be noted that the recent financial crisis has started in 2007. From the above graph, it is evident that the global merger deals in 2007 were more than that in the previous years. The views of the struggling companies is such that it is better to opt for merger deals rather than closing down the business fully. It is possible for struggling companies to protect the interests of the employees and the shareholders while merging with another company. On the other hand, complete close down would cause loss of jobs for the employees and financial losses to the investors. Therefore, merger is identified as the right option by many companies during the period of financial crisis. Different factors motivate companies to opt for M & A deals. For example, after the merger deal, the new company gets higher market power, economies of scale, entry to new markets, tax advantages, risk diversification opportunities etc. The share value of the new company will be increased since the bargaining power and reputation of the company will be increased after the merger deal. Larger size helps the new company to lower the cost per unit of output. Moreover, the new company will get more benefits in areas such as manufacturing, marketing, administration, purchasing, research and development etc, after the merger deal. At the same time, the stakeholders in acquiring firms do not seem to share the same enthusiasm as that displayed by the bidding firm since the stock prices of the bidding firms decline on the takeover announcements (Damodaran, 2001). As a result of that the investors in the acquiring firms may lose money at least for a temporary period. At the same time, the share value of the biding firm may increase in coming years because of the increased market share and capabilities received by it as part of the acquisition. Conclusions Merger and acquisition deals take place frequently in the global market after the recent recession. Opportunities in domestic market are almost saturated for many companies. The recent financial problems have caused more problems to such companies. At the same time, opportunities in international market are growing day by day because of globalisation and liberalisation. Therefore, companies in recession hit countries started to look for opportunities in overseas market as a measure to survive in the market. Compared to direct entry, other mode of entries such as merger and acquisition is highly preferable for companies that are looking for opportunities in foreign countries. Since different countries have different culture and market conditions, it is necessary for a company to learn more about these things before entering a foreign market. M and A helps companies in this regard. It enables companies to exploit the local knowledge of their partner companies. In short, cross border merger and acquisition is definitely increased a lot in the recent past because of the recent financial crisis. References Ansoff H.I. (1984). Implanting strategic management. Prentice Hall International 1984. Anderson, H., Havila V. and Holtström J. (2003). Are customers and suppliers part(icipants) of a merger or an acquisition? — a literature review. 19th Annual IMP Conference. Switzerland: Lugano; 2003. Bryman, A. and Bell E. (2007), Business Research Method’, Oxford University Press: New York, 2nd edition Duchin, R and Schmidt, B (2013) Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions Journal of Financial Economics 107 (2013) 69–88 DePamphilis, D. (2009). Mergers, acquisitions and other restructuring activities. Publisher: Academic Press; 5 edition (September 9, 2009) Gulgler, K., Mueller, D.C. and Weichselbaumer, M. (2012). ‘The determinants of merger waves: An international perspective’, International Journal of Industrial Organization, 30 (2012) 1–15 Gabriel, C. (1990). The Validity of Qualitative Market Research. International Journal of Market Research Vol. 32, No. 4, 1990 Gaughan, P. A. Ph.D. 2007, Mergers, Acquisitions, and Corporate Restructurings. Publisher: Wiley; 4 edition (February 2, 2007) Harford, J (2004). ‘What drives merger waves?. Journal of Financial economics, May 2004. Huyghebaert, N and Luypaert, M (2010) ‘Antecedents of growth through mergers and acquisitions: Empirical results from Belgium’. Journal of Business Research 63 (2010) 392–403 Hijzen A. Gorg, H and Manchin, M (2008). Cross-border mergers and acquisitions and the role of trade costs. European Economic Review 52 (2008) 849–866 Inman P. (2009). ‘Unemployment will soar above 3 million in 2009, say chambers of Commerce’. The Guardian. 1 January 2009 Indias 11 largest M&A deals, (2009), [Online] Available at: http://business.rediff.com/report/2009/may/29/slide-show-1-indias-11-largest-m-and-a-deals.htm [Accessed 20 April 2015] Jackson, P. (1994). Desk Research, London: Kegan-Paul. pp. 11-35. Moeller, S.,and Schlingemann, F., (2005). Global diversification and bidder gains: a comparison between cross-border and domestic acquisitions. Journal of Banking and Finance 29, 533–564. Mergers and acquisitions. (2008). The Economist. [Online] Available at: http://www.economist.com/node/10431128?story_id=10431128 [Accessed 17 April 2015] Miller, E. L. (2008), Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide Publisher: Wiley (January 9, 2008) Martynova, M and Renneboog, L (2008) Spillover of corporate governance standards in cross-border mergers and acquisitions, Journal of Corporate Finance 14 (2008) 200–223 Nocke, V and Yeaple, S. (2007). Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The role of firm heterogeneity Journal of International Economics 72 (2007) 336–365 Oberg, C and Holtström, J. (2006). Are mergers and acquisitions contagious? Journal of Business Research 59 (2006) 1267–1275 Porter M. E. (1988). Competitive advantage — creating and sustaining superior performance. New York: Free Press; 1998. Sykes, W. (1990). Validity and reliability in qualitative market research: a review of the literature. Journal of the Market Research Society 32, 3, pp 289–328. Saunders, M. N. K., Lewis, P. and Thornhill, A. (2009). Research methods for business students, Harlow: Prentice Hall, 5th edition. Scholes, M., and Wolfson, M., (1990). The effects of changes in tax laws on corporate reorganization activity. Journal of Business 141–164. Servaes, H., and Zenner, M., (1994). Taxes and the returns to foreign acquisitions in the United States. Financial Management 42–56 Schmitz P.W and Sliwka D. (2001). On synergies and vertical integration. Int. J Ind Organ 2001;19:1281–95 Sevenius R. (2003). Företagsförvärv — en introduktion. Lund: Studentlitteratur; 2003. Sudarsanam, S. (2003). Creating Value from Mergers and Acquisitions. 1st Edition 2003 FT Prentice Hall  TATA (2008), Tata Motors completes acquisition of Jaguar Land Rover. [Online] Available at: http://www.tata.co.in/article/inside/mCgnlgckTZw=/TLYVr3YPkMU=[Accessed 17 April 2015] Udin, M and Boateng, A (2011). Explaining the trends in the UK cross-border mergers & acquisitions: An analysis of macro-economic factors. International Business Review 20 (2011) 547–556 UNCTAD, (2000). World Investment Report 2000. United Nations, New York. Watkins, M.D. (2001). The Harvard Business Review on mergers and acquisitions, Published June 1st 2001 by Harvard Business Press Walter G, Barney J. (1990). Research notes and communications: management objectives in mergers and acquisitions. Strateg Manage J 1990;11(1):79–86. Read More