Business Mergers and Acquisitions - Essay Example

Introduction Over the years the main objectives of a firm has been to make profits and create shareholders wealth, return investment has remained the primary and of essence to any business. Growth of many business ventures has been realized through establishing fresh products or services. Similarly, this is obtained by intensifying current operations on the already accessible products or services. Megginson (2008) argues that recently witnessed business mergers and acquisitions, are typical business strategies aimed at expanding the business. This has been evident for the last four decades due to the increased deregulation, privatization, globalization and liberalization that has been effectively adopted by several countries worldwide. Merger and acquisitions have become important means to expand products assortments, while entering new market, gaining way into examining, developing as well as increasing obtaining resources that enables the business to battle out rivals internationally (Straub, 2007). On the contrary, there are reports pointing out cases where business mergers or acquisitions with other objectives other than investors value maximization motives, with an aim at building the company’s profile and prestige. Business consolidation commonly referred to as merger and acquisitions are reported to have developed in all business sector internationally (Stowe, 2007). Over the years a number of investigations have been done in economics as well as strategic aspects in businesses, identifying different payback elements that were consequential achieved out of merger transactions, business acquisitions and Target Corporation, the consumers and the world at large. However, one of the widely evaluated business elements can be identified as the share investor wealth maximization out of mergers and acquisitions. According to Peck and Temple (2002) argument, news of mergers and acquisitions proved to be sensitive, and it can steadily influence the price of business shares several months to the real merger. The reports as well as news flowing affects either positively or negatively and may create an increase or decrease of companies’ share price as well as the investors wealth. Awareness information concerning mergers is developed in a manner that attempt to predict upcoming rise or fall in flow of cash resulting from grouping (Oum et al, 2000). The table below gives a typical example of what took place when it concerns changes in the price when obtaining business when the merger as well as acquisition is declared. Booming market share at highest share valuation has made it simpler for firms to takeover other firms, given the increased market capitalization many firms in UK for instance Vodafone are part of the firms involved in takeovers (BBC, 1999). Table on Acquiring Company’s Change in Stock Price Source: BBC, 1999 It is essential to understand that business mergers as well as acquisitions often do not create investors value. There are cases where business mergers and acquisitions are reported to have failed. This reported failure is experienced through decline in investor’s wealth by integration process of mergers together with acquisitions as they fail to work along. According to Schweiger (2003), consulting businesses approximate that more than two thirds of the reported business mergers were reported to have failed. Large Mergers and Acquisition in the World Mergers and acquisitions have been taking place since last 100 years. In 1895 to 1905, over 1800 mergers have been reported to take place in US alone. Malatesta (1983) reveals that this phase was named the ‘The Great Merger Movement.’ However, large sized billion dollar mergers deals have been witnessed in the last two decades, between 1991 and 2000. According to CNN reports in (2000), some of the top mergers and acquisitions during this period have been Vodafone Air touch PLC and Mannesmann which is valued at $183 billion. In the pharmaceutical industry the merger involving Pfizer and Warner-Lambert is reported to cost an estimated $ 89 billion. There other mergers like the Exxon combining with Mobil a deal that was valued at $ 77 billion (BBC, 1999) there are many other mergers that that involved Citicorp merging with Travelers Group, the other merger being WorldCom verses MCI Communications and Bp verses Amoco. In 2000, bigger such as the America Online Inc were reported, as they consolidated Warner at an esteemed value of $ 164 billion, while in 2004 merger between Royal Dutch Petroleum and Shell Transport were reported to be the biggest merger (BBC, 1999). Business Strategies Industrial Diversification In general, firms tend to create mergers or acquisitions with firms that are within similar connected trade- line aimed at diversifying its investment and get engaged into businesses in which the firm lacks experience. Companies which are reportedly to have been involved in the mergers with diversified firms exploring various advantages which are not available with undiversified firms, this involved firms gaining interest in operating businesses in different industries in a manner that persuades the firm’s value while improving investors value (BBC, 1999). The main objective for firms opting for diversity was to spread the risk across industries in which the businesses do operate. In addition, these kinds of mergers and acquisitions were aided at welcoming the multilevel actions that were reported through diversification route which resulted to business expansion and increased investment returns. On the contrary, danger lies in the mergers and acquisitions because it is supposed to conduct its own test identifying the strength as well as the weakness before expanding business wings across other industries. Inter-country mergers and Acquisitions is also one of the important strategies that are reported to have been adopted by these kinds of business in spreading its operations in foreign countries. Many of firms involved in cross border mergers and acquisitions, is believed that many of these firms opt for these kinds of mergers understanding the difficulties witnessed as the process and time needed to make entry in the foreign markets and build up business operations in oversea country is unproductive(Sudarsanam, 2003). Mussati (1995) argues that much of time and transactional cost is achieved in build its business infrastructure and develop the supplies chain. Similarly, there are various studies that have shown that cross border acquisitions have resulted into positive gains for the shareholders. Mergers and Acquisitions within Banking Industry As from 1991, the global financial systems embraced banking business liberalization. This stimulated the business innovation by ensuring that is steady but perfectly synchronized. The Indian banking position for instance, when compared with other financial institutions worldwide is reported to have achieved immense development. Since 2009, an estimated sum of 171 planned financial institutions across this country, in which 80 of the serving institutions were reported to be serving rural parts of the nation. In addition, it was until 2009 that over fifty thousand branches countrywide of the planned financial institutions merged to an estimated 27000 ATMs supporting the banking business within the nation. The Indian financial institutions increased their presence on the global markets through business mergers and acqusetion. As from 2008 to 2009, part of the Indian financial institutions began with over 20 delegate working stations and oversea investments in abroad the market by 2009 only 32 overseas institutions those were operational in India which is reported to have more than 290 serving branches. HDFC and Centurion Financial Institutions HBFC reported to have been developed in 1994 instantly after the Indian government had opened up the industry for international trading, at that time the bank had over one thousand operating branches across India with over three thousand ATMs in more than five hundred cities within the country. This was considered a win-win situation for all stakeholders who included customers, shareholders, employees and the bank. The combined resources among the two firms would build a branch network covering all potential target markets. The strategy employed benefits HDFC as the bank gains from being the largest private sector in the region when compared to its immediate rival ICICI bank that owns over nine hundred branches in the market. The merger gives the acquiring bank build a combined asset size and similarly, the deposits increase an element that creatively makes the balance sheet size of the acquiring bank grow. However, there case where the merger encounters nonperforming loans on the books of the selling bank which may differ from the acquiring institution. In china for instance, the mergers and acquisitions have been increasing significantly (EconomyWatch, 2010). Predictably, foreign investors have taken a leading path making entry in to the Chinese market; this has been boosted by the existence of Greenfield route. In the previous decade ending 2010 merger and acquisition path have become more popular and China has been well involved. The Worldwide Financial Turmoil 2008/09 There are existing cases of mergers and acquisitions resulting from crisis when most of the upscale financial institutions went bankrupt. Most of this institutions opted for a sellout or merger in recovering from the devastating experience in the middle of 2008 to early 2009. The merger and acquisition process influenced policy making in many countries while strategizing to handle global financial turmoil while ensuring that the witnessed international recession is shifted from having increased contagion of exact action aimed at encouraging revival and altering policies in preventing recurrence of the problem (Mantravadi and Reddy, 2008). In all aspects, the financial system is more regulated and supervised compared to any other industries (Moeller, 2003). On systemic and consumer protection grounds, it is almost universally accepted that this should be fulfilled and uphold. Over the last decades it has become abundantly clear that regulatory arrangements for instance GAAP and IARS have had a powerful influence of the size, structure and financial system. Prabhudesai (2008), the regulatory principles have remained the main source of guidance in mergers and acquisitions of businesses and providing influential control on operational and financial practices of merging businesses. The competitive conditions both on overall and between subsectors of the system, depends upon how objectives of regulations are defined and how efficiently these regulatory arrangements are related to their objectives of the mergers and acquisition arrangements. The effects of this regulation are either malignant or benign. The financial system on overall and banking industry particularly has witnessed extensive structural transform since 1980s, which often concerns adapting in to different countries accounting practices and business structures (Moeller, Schlingemann and Stulz, 2003). The changing business environment has altered financial regulatory systems forcing them to adapt to these changes. The skilled applied in mergers and acquisitions, therefore seeks to regulatory institutions, structures and mechanisms to maximize the explicit objectives of transactions costs incurred. In particular, the merger and acquisitions impact on the economy as a whole and cost imposed considered. Devising effective regulation is comparatively easy when certain conditions are met. This may involve competitive pressures in the financial system. The moral suasions of the regulatory agencies are universally accepted or even in a case of the business financial firms are predominantly domestic in nature (Lipczynski and Wilson, 2004). Conclusion Mergers and acquisitions are viewed as the prime cause by which firms across the globe developed increased growth over the years. The inorganic route is one strategy that is well adopted by companies forced by immense rivalry, need to penetrate newly identified markets, dispersion in both domestic and oversea marketplace, drive to develop bigger and exploit on investment returns for investors (Moeller, 2003). Over the years, the market scenarios have steadily changed elements that has be the force behind firms maximizing wealth for shareholder. Thus far, more firms have given in to these calls by involving in business Mergers and Acquisitions seeking to diversify and spread risks across a number of business industries. For some studies that have been carried out in different countries, aimed identifying whether mergers and acquisitions create wealth maximization for shareholders however, this remains a contested ideology as there are part of the existing business mergers that have gained from this transactional idea while others are reported to collapse sellout their business. Read More