Do Mergers Create Value for the Offeror and Offeree - Coursework Example

Table of Contents Introduction 2 Definitions 2 Motives behind Merger 2 Mergers A Critical Analysis 4 How Mergers Create Value 5 Example 5 Failure Mergers 7 Conclusion 8 References 9 Introduction Mergers and corporate takeovers are on a rise as organizations through this mechanism are looking towards consolidating their positions. Different motives makes organization look towards mergers and could be anything like consolidation of position, to ensure revenue stability through diversification, ensuring economies of scale that helps to save cost and similar other reasons which makes organizations look towards mergers. Mergers help to create value as it increases the size of the organization and consolidates the position. The paper thereby looks into the manner in which mergers helps to create value for both the offeror and offeree by looking to examine various real life examples. Definitions Before moving on it is important to understand what merger actually is. Merger means when two or more companies agree to combine their resources so that they can ensure consolidation in their position. While entering into an agreement it is ensured that the stakeholders are offered shares of the acquiring company as the shareholders have to surrender their share (Mergers, 2010). Mergers threeby ensure that they are able to create synergy and extra value for both the offeror and offeree. Motives behind Merger Organizations look towards mergers for different reasons as it helps the organization to consolidate its position and ensure that they are able to perform better. Some of the motives behind mergers are as follows Synergy: Organizations look towards mergers because it helps to create synergy for the organization as the combination of value both for the offeror and offeree is more than the sum of two individual companies. This thereby helps to increase the power and increases the size of business leading towards cost efficiency and achieving economies of scale. Diversification: Mergers help organizations to diversify the risk as having different businesses under the same ensures a regular source of revenue for the business and cuts down the level of risk. This is substantiated by a study which states that having a merger with a company which is unrelated to the business ensures increase in the correlation earning for both the offeror and offeree. Economics: Mergers help in creating economics as vertical integration ensures that the suppliers and production units come together thereby helping to improve the market share and increases the value for both the offeror and offeree. Similarly, horizontal integration helps to ensure economies in production process as it helps to dilute the risk and controls cost. Tax: Mergers help the organization to save on taxes as the acquirer company can pass on the loss of the acquired company thereby showing loss in the business. This helps business to save on taxes and helps to enhance the value for both the offeror and offeree Inefficient Management Hypothesis: This hypothesis states that during a merger the acquired company which doesn’t have an appropriate leader finds one which thereby ensures better productivity. This leads to a creation of value both the offeror and offeree which is more than the individual value of both the organization. Undervaluation Theory: This states that the acquirer company looks to conceal certain information which are of material value and discloses it after the merger which only helps to increase the value for the acquirer and has little effect on the value of the offeror. Thus, there are several reasons which leads to mergers and helps to create value for both the offeror and offeree on paper. This aspect of merger has to be looked into to understand whether mergers actually help to create value for both the offeror and offeree. Mergers a Critical Analysis Mergers are believed to consolidate the position of an organization and ensure that they are able to ensure better structural and operational advantage which will help to ensure that the business is able to generate value for both the offeror and offeree. An example in this direction would be Daimler Chrysler which before merger was called Daimler Benz. Merger helped in creating value for the organization thereby helping the business to ensure better efficiency and the advantage to work as a bigger conglomerate (Sharma, 2011). How Mergers Create Value Mergers are usually associated with the fact that it helps to increase value for both the offeror and offeree as seen from a study which shows that the acquisitions and mergers made over the last 30 months highlighted that they outperformed by 7.8% especially when the deal involved 2 or more such mergers but when the number of mergers was 1 the gain was for 4.5% (Denham, 2011). This highlighted that mergers helps to create value for both the offeror and offeree as the shareholders are able to gain more value for their investments. Mergers involve various stakeholders associated with the company and is done with the intention to ensure better return for both the offeror and offeree. This has been seen that out of the mergers happened between 1992 and 2006, 58% of the mergers have failed resulting to a loss of over 1.2% for all the mergers entered into (M & A, 2011). This thereby creates a situation where the value generated for the stakeholder gets limited and both the offeror and offeree don’t gain synergy from the merger Example The merger between Tata Chemicals & UK’s British Salt will help to identify the manner in which mergers create value for both the offeror and offeree. Tata Gropu which brought 100% stake in UK’s British Salt also saw synergy being created in its stock prices. The news of merger between the two giant resulted in the prices of Tata to trade by 2% more than its price. Similar was the case with UK’s British Salt which has 125 employees before the merger being converted into a company with more value thereby resulting in creating value for both the offeror and offeree (Chanchani, 2010). This is seen from the financial figures below The above financial shows that the merger between Tata Chemicals & UK’s British Salt helped to create synergy as seen from the fact that the consolidated value increased compared to a stand alone basis highlighting the fact that mergers help to create value for both the offeror and offeree. The value of the offeror and the offeree has grown for the company but over a long period of time the value of the company will help to understand whether the company is able to create value both the offeror and offeree. The value that the merger had created can be further seen from the fact that the merger between Tata Chemicals & UK’s British Salt resulted in the profits after tax to grow by 5% and 6% on a stand alone basis but when the consolidated performance was witnessed it shows a growth of 18% highlighting that the merger has helped to create value both the offeror and offeree. Failure Mergers Despite the above example highlighting that mergers help to increase the value for both the offeror and offeree over a period of time the value detoriates. The merger in theory looks to create synergy of 1 + 1 = 3 but it is not actually the scenario. It has been identified that two third of the merger which seems sound shows growth for a certain period of time but then results in decrease in the share value thereby making the investors loose money. These results to create a scenario where both the offeror and offeree tend to loose the synergy that the merger has created (Ojha, 2008) The problem of merger compounds especially when the motive behind the merger is flawed and instead of helping to achieve economies it pushes the cost thereby making the organization pay and loose vital resources. The magnitude of the problem multiplies when the merger between two unassociated companies take place. Also, the manner in which the top management deals with the merger reflects on the stock prices. This creates a scenario where the entire movement of the share prices and the vale the merger has been able to create gets reflected. This thereby results in creating a scenario where the merger leads towards creating a situation where both the offeror and offeree are unable to gain from the merger. Conclusion The report shows that mergers do help to create synergy to a certain level and there are various reasons which makes corporation to look towards mergers. This helps in creating synergy between for both the offeror and offeree but the degree and the magnitude of value gets reduced over a period of time. This is also reflected through an example which highlights the manner in which synergy is created through mergers and the manner in which it looses the value over a period of time. Thus, mergers look towards creating value when the reason for which it is created is ascertained correctly. References Chanchani, M. 2010. Tata Chemicals Buys UK’s British Salt for Rs 673 Cr. Retrieved on November 26, 2011 from http://www.vccircle.com/500/news/tata-chemicals-buys-uks-british-salt-for-rs-673cr Denham, R. 2011. Experience Counts: Market Favors Frequent Fliers. Retrieved on November 26, 2011 from http://www.towerswatson.com/press/3632 Ojha, N. 2008. Failure Mergers. Retrieved on November 26, 2011 from http://jurisonline.in/2008/11/failure-mergers/ M & A. 2011. Overcome the Risk Inherent in Mergers & Acquisition. Retrieved on November 26, 2011 from http://www.informatica.com/solutions/mergers_aquisitions/Pages/index.aspx Mergers. 2010. Mergers & Acquisition. Economy Watch. Retrieved on November 26, 2011 from http://www.economywatch.com/mergers-acquisitions/ Read More