The Deal between Penguin and Random House - Case Study Example

Abstract The study explores the deal between Penguin and Random House and highlights the manner in which the merger helped to deliver positive synergy. It also presents the manner in which the different stakeholders look towards different association based on which they will be able to develop positive vibes which will get reflected in the share prices. Th report shows the manner in which the merger between Penguin and Random House will help to reduce cost due to the fact that the resources are used together and will help to invest in other areas of digital publishing. This thereby helps to understand the manner in which the overall benefit is gained through the process acquisition and helps to develop positive synergy in the market. Table of Contents Introduction 3 Reason for merger 3 Macroeconomic Effect 5 Analyst Expectations 6 Management Expectations 6 Media Expectations 7 Target Price 7 Effect on target Company Prices 8 Bid Price 9 Result 10 Conclusion 10 References 12 Introduction The last decade has witnessed a growth in the topic of merger and acquisition as it has gained relevance in both the academic and practitioner oriented field. The importance of this aspect has grown because of the increase in mergers and acquisition that the world is witnessing and is primarily due to the different benefits that organization look towards achieving towards it. It has also been seen that most of the mergers have taken place primarily due to the fact that strategic and financial goals are achieved and the chances of financial shock reduces (Harford, 2005). It has also been identified that self interest has led towards the growth in mergers and acquisition (Roll, 2006). There are various reasons which have been attributed towards the increase in mergers and acquisitions. This report thereby looks towards identifying the different reasons for mergers in UK. In addition to it the paper also examines a recent merger and acquisition that has taken place in UK and the manner in which the effect of the bid prices had an effect on the entire process. The merger that is being considered has taken place between Penguin and Random House which was a deal and was done with the purpose of achieving maximum benefit for the organization and the society. This thereby looks towards presenting the manner in which the overall merger and acquisition got affected and the strategies that organizations look towards adopting while looking to act in that direction. Reason for merger Merger results in a change in risk and return characteristics for an organization and creates a complete outlook with regard to the debt and equity holding (Davis & Stout, 2002). This has made organizations look towards finding out the different underlying objectives which has led towards a merger or an acquisition so that different benefits can be accrued in different ways and are as Operating Economics: The merger of Penguin and Random House highlights that through the merger the company has looked towards reducing competition and consolidating their position with regard to finance, marketing and operating activities so that they are able to stay ahead of their competitors. This has ensured that their running cost has come down and has consolidated their market share. Gain Access to Liquidity: The merger also ensured that the organization was able to use the liquidity position that was present and ensured that certain direct and indirect expenses were reduced. This is because they are able to use the same resources and cut down cost which can be used to finance new projects in the digital industry. Product Standardization: The merger also helped to ensure standardization as the process looked towards ensuring that the products and services that were developed were better standardized which will help to compete with the competitors in a better way. Asset Booster: The merger also helped both Penguin and Random House to boost their asset holding as it strengthened the asset base and ensured that the organization was better placed to handle the different business requirements and was able to overlook the entire process of carrying out their operational activities in a better way. Taxation: The merger will also help both Penguin and Random House to take benefit of the taxation policy as they will be able to ensure that they are able to save on taxes. This will also ensure that the company is able to take benefit of the taxation policies and will be able to make changes in their working scenario. Expansion: The merger has also taken with the objective of consolidating and expanding their position. This will help to ensure that both Penguin and Random House will be better placed and will be able to deal with the entire situation in a better way. This will help them to take expansionary policies as they will be able to look towards adding new products or services and can also look towards a new destination for their business. Macroeconomic Effects Macroeconomic factors and the rate at which an economy is growing have a huge role in shaping the merger and acquisitions that are taking place (Clarke & Ioannidis, 2006). It has also been witnessed that when an economy is in an expansionary phase more and more mergers take place during this phase as compared to the number of mergers that place during recession (Becketti, 2006). This was also witnessed in the merger for Penguin and Random House where the merger ensured that the cost of equity reduced relative to the cost of debt and resulted in increase cash flow. The Penguin and Random House ensured that Penguin will control 53% of the market share where as Random House will control 47%. It ensured that both the companies were better placed and have ensured easy financing which has made it possible for the company to develop policies that have ensured that the merger and acquisition deal was better achieved and has thereby ensured that the overall liquidity and the efficiency of the system was developed. This will help them to control cost with relation to the 10,000 books which Penguin publishes and 4000 books which Random House publishes each year. Analyst Expectations The Penguin and Random House deal highlights that the merger took place because an overvalued stock looked towards purchasing the share of the company which was of lower value as highlighted by Rhodes-Kropf and Viswanathan (2004). This arises due to imperfect market information and the rational manager looks towards targeting the lower valued shares so that they are able to ensure that the value of the share highlights the correct prices. Since, the market price of the share is overvalued it resulted in reducing the target expected value of the offer so that the correct average of the stock can be valued. Thus, the over valuation has resulted in triggering the market response where they looked towards purchasing the underlying stock of the company so that proper stock prices can be determined. Management Expectations The management while making the Penguin and Random House deal has looked towards ensuring that the deal will get reflected in the price of shares and will ensure that the amalgamated company is able to perform better. The management based on the synergy expectations looks towards engaging into an agreement with the merger between where the synergy helps to generate some positive returns and ensures that the organization is able to perform better in comparison to others. This has been backed by March & Shapira (2007) which highlights that the perspective of taking risk for both Penguin and Random House arose so that they are able to ensure that it will help to generate value for the business and will show that the confidence is reflected in the market. The management with the Penguin and Random House deal also looks towards dealing with the differences which could arise due to stock price movement and the expectations about the future which thereby requires that proper mechanism is developed and strategies made so that the management looks towards ensuring maximum synergy is developed which will thereby help to add positivity towards the growth and well being of the organization. Media Expectations The media expectation from the deal between Penguin and Random House can be visualized from the fact that diffusion and legitimization of ideas which led towards development of management ideas and practices ensured that the media highlighted the expected stock market movements and the manner it will bring positivity towards the market. The media also looks towards transforming the market by highlighting the manner in which the bidding process will provide the required dimension and based on it the share prices that will be prevalent in the market will be determined. Target Price 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). This has made the bid between Penguin and Random House to be slightly different where the merger was aimed at consolidating the position of both Penguin and Random House. This resulted in 53% market share being controlled by Penguin and 47% being controlled by Random House. Effect on target Company Prices 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. 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. Bid Price 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 prices 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. Result The overall process thereby has created the bidding process to go through and has resulted in 53% market share being controlled by Penguin and 47% being controlled by Random House. This will thereby ensure that positive synergy is developed based on which the market will be able to visualize the gains and ensure that the company is able to perform better. Conclusion The deal between Penguin & Random House where 53% market share being controlled by Penguin and 47% being controlled by Random House helped in the development of positive synergy. This merger ensured that the market share improved and provides an opportunity to move into digital media where better opportunities can be provided to the customers. This has resulted in improving the share prices of both the company and reduced the cost thereby improving liquidity. The overall effect of the merger between Penguin & Random House has been positive and has resulted in creating a positive vibe among the investors regarding the future prospects of the company. References Becketti, S. 2006. Corporate mergers and the business cycle. Economic Review 71, 13-26. Clarke, R. & Ioannidis, C. 2006. On the relationship between aggregate merger activity and the stock market: some further empirical evidence. Economics letters 53, 349-356 Davis, G. & Stout, S. 2002. Organization theory and the market for corporate control: A Dynamic analysis of the characteristics of large takeover targets, 1980–1990. Administrative Science Quarterly 37(4), 605-633 Fiegerman, S. 2012. Random House & Penguin Merge to take on Digital Publishing Market. Retrieved on Nov 24, 2012 from http://www.allwriting.net/index.php?op=cp_completed_read_full&id=409810 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. Harford, J. 2005. What drives merger waves? Journal of Financial Economics 77 (3), 529-560 March, J. & Shapira, Z. 2007. „Managerial perspectives on risk and risk taking‟. Management Science 33 (11), 1404-1418. Roll, R. 2006. The hubris hypothesis of corporate takeovers. Journal of Business 59, 197–216 Rhodes-Kropf, M. & Viswanathan, S. 2004. Market valuation and merger waves. Journal of Finance 59, 2685–2718. Read More