Takeovers & Acquisitions - Coursework Example

It has been seen through various studies that bidders and acquires suffer by taking new companies as the suffer due to over payment made during take over or post acquisition problems are regularly dealt making it difficult for the bidder to carry out the normal operations. This can also be termed as a winner cause which happens despite the bidder being able to acquire the company due to the fact that the bidder normally over pays compared to the gains made. This is matched by the different failures being witnessed in different acquisitions as highlighted in the newspaper and magazines. This paper thereby looks towards discusses the different risk that bidding and acquiring companies face during the takeover and acquisition process. Despite, the different risk that the bidder and acquisition companies face it is clearly visible that more and more takeovers and acquisitions are taking place all around the globe. This is witnessed by the fact that the world economies had witnessed over 21,000 deals of value $2.1 trillion in 2001 alone (M&A, 2011). This clearly highlights that the acquisition process is increasing despite the different risk that the process encounters and clearly displays more and more acquisitions and takeovers. This is also evident from the fall witnessed in mergers and takeovers which accounts for 85% of the deals (M&A, 2011). This brings forward to the various risks that the bidders face during the acquisition and takeover process. One of the major risks that the process raises for the bidder is the asymmetry of information. Since, during a merger or a takeover company’s look towards gathering information about the acquiring company but it is not possible to gather all material information. This results in asymmetry of information between both the companies as a certain company has more information with regard to the other company resulting in lack of complete information. This has a bearing on the final outcome of the merger of takeover as such a stance would mean a company gains whereas the other looses (Gadiesh, Ormiston, Rovit & Critchlow, 2001). This also makes the bidding company to either over pay or underpays the merger resulting in the company either gaining or loosing on certain areas. The problem due to this can be such extent that incomplete information might result in a wrong bid. This will greatly have an impact on the performance of the bidding company as the objective due to which the company has looked towards the merger or takeover is defeated and the bidding company as a result looses both on brand equity, performance and profits which ultimately has an effect on the share prices (Galpin and Herndon, 2000). The other issue which seems to arise in different mergers and takeovers is the underlying motivation which has made the company bid or takeover another company. There could be situation where the merger or takeover results in the creation of more or less of a monopoly but the actual situation is highlighted differently. This will result in the society loosing a vital share of their business but might have been highlighted in a manner where the society seems to gain. Also, the manager might be guided by personal motives which might make the merger or takeover bid to go through (Gardiner, 2005). This all stance will result in the bidding company loose vital resources as it will greatly have an effect on the final performance of the companies’ performance. This increases the role of having an agent so that they are able to ensure that the merger or the takeover process passes smoothly without any hiccups. This will require the services of an agent who acts for a larger interest of the stakeholders and is paid a commission for it (Akdere & Ross, 2005). This will help to reduce the level of risk and will also act as a strategy where having agents who are external to both the companies ensure fair value which thereby leads towards reduced level of risk for the bidding company (Bonazzi & Islam, 2007). The problem can also be looked through is the stakeholder theory which propagates that business and organizations should look towards taking decisions and strategies which helps to improve the present condition of the business and is aimed towards the society at a large (Donaldson & Davis, 1991). This involves the role of the shareholders who are the actual owner and their interest has to be protected (Dicke & Ott, 2002). This is backed by a study which suggests that the business through this theory looks in the well being of all companies and takes decision which supports the corporate governance aspect of the business (Corfield, 1998). A study demonstrates that since stakeholder theory “doesn’t specify the trade off between the decisions taken by the manager is correct or wrong and doesn’t hold him accountable for it so the manager might take decision which benefits him instead of all the stakeholders” (Jensen, 2004) which will thereby help to reduce the amount of risk that the bidder faces. Even questions are raised on the accuracy in relation to the value of the bid both in the acquisition and takeover process. It has been noticed through previous mergers and acquisitions that the correct value is not ascertained by the bidding company. Since, this process requires that the bidding company based on the past and future of the acquiring company puts a fair value on their stock prices which accumulates to the value at which the company will be taken over (Gardiner, 2005). It is seen that the money which has been bidded often proves incorrect as the bidding company based on certain factors looks towards determining the price but the actual situation turns something else. This has a deep impact on the share price of the bidding or acquiring company as after the merger the price of the acquired company gets reflected in the price of the bidding companies’ chare which results in a downward movement of the share prices (Gaughan, 2002). This problem is matched with the post acquisition implementation and cultural fit as organization that have bidded for the other company finds it difficult to match the culture requirements of the company. This results in differences between the cultures of both the countries which make it difficult to have a cultural mix (Gaughan, 2002). This also results in the bidding company facing additional risk as the bidding company has to deal with the cultural differences and find out a mid path which will help in cultural integration and ensure that both the business benefits and ensure better opportunities of productivity for each other. The bidder during this process of acquiring or takeover also has to deal with the differences in agreeing for the price of the takeover. Since, the bidding company has to ensure that the correct bid price is ensured so that a situation is created where both the companies win it becomes a difficult proposition. Agreeing to a price which is fair is difficult as the bidding company looks towards a lower price but the acquired company looks towards a higher price. This creates differences between the price that both the company agrees to pay and makes it difficult to come to a final price which is agreed by all. This makes it difficult for both the companies to agree to a bargain price and thereby results in creating differences between agreeing price for both the company. Thus, a company which is bidding for the other company has to deal with a lot of risk and needs to develop strategies to combat those. This is a difficult proposition as both the acquiring and the acquired company looks towards their mutual benefit and it becomes difficult for the bidding company to reduce the risk they are facing. Further, it is important that the bidding company takes the help of external agencies so that the actual condition of the acquiring company can be found out. This will thereby help to control the manner in which the acquisition or takeover takes place and will help to identify the true materials facts based on which the fair value of the company can be gauged. This will thereby help to determine a fair price and ensure that the risk that the bidding company faces reduces to a large extent. Thus, the paper presents the different risk that the bidding company faces when it looks towards a takeover or a merger. This also presents the manner in which the historic mergers and takeovers highlights the risk as seen from the different failures that exist. This thereby makes it important that the bidding company looks towards different theories like the agency theory and stakeholder theory so that the company looks towards the interest of the larger section of the society and helps to reduce the magnitude of task that they face to a large extent. This will ensure better process and help to deal with the risk in a better way. References Akdere, M. & Ross, A. 2005. Agency theory from the perspective of human resource development. International Journal of Human Resource Development & Management, 5 (3), pp. 318-332 Bonazzi, L. & Islam, S. 2007. Agency Theory and Corporate Governance: A study of effectiveness of board in monitoring of CEO’s. Journal of Modelling in Management, 2 (1), pp. 7-23 Corfield, A. 1998. The Stakeholder Theory and its Future in Australian Corporate Governance. Bond Law Review, 10 (2), pp. 213 Donaldson, L. & Davis, J. 1991. Stewardship Theory or Agency Theory: CEO Governance & Shareholder Return. Australian Journal of Management, 16 (1), pp. 49-64 Dicke, L. & Ott, S. 2002. Can Stewardship theory serve a second conceptual for accountability in human resource functions. International Journal of Public Administration, 25 (4), pp. 463-487 Gadiesh, O., Ormiston, C., Rovit, S., Critchlow, J, 2001. The ‘why’ and ‘how’ of merger success. European Business Journal, 13(4), 187-193. Galpin, T. J., and Herndon, M., 2000. The complete guide to mergers and acquisitions. San Francisco: Jossey-Bass Publishers. Gardiner, P., 2005. Project Management: A Strategic Planning Approach. New York: PALGRAVE MACMILLAN. Gaughan, P. A., 2002. Mergers, Acquisitions, and Corporate restructuring. 3rd ed. New York: John Wiley & Sons, Inc. Jensen, M. 2004. Value Maximization, Stakeholder Theory & Corporate Objective Function. Harvard Business School, Research Paper No 01-01 M&A. 2011. Mergers & Acquisitions: Examining the M & A Eco System. Retrieved on July 22, 2012 from http://www.methodframeworks.com/article/mergers-and-acquisitions-examining-ma-ecosystem/index.html Read More