Legal Aspects of International Mergers, Acquisitions and Takeovers - Essay Example

Legal Aspects of International Mergers, Acquisitions and Takeovers Strategic collaborations rather than acquisitions are increasingly used as an alternative to acquisitions or mergers Introduction Strategic collaborations and mergers and acquisitions (M&As) are fundamental components of growth strategies. For decades, they have been used to further corporate goals and objectives by aiding expansion, capital growth, and greater market share.1 Unlike mergers and acquisitions, which involve partial or total control over targeted firms, strategic collaborations accord each partner complete independence and do not infringe on their management. Over the years, strategic collaborations have become more common than mergers or acquisitions. It has also become clear that strategic collaborations are a viable, standalone option in case mergers and acquisitions are not feasible.2 This paper will examine the dynamics involved in the strategic collaboration versus mergers and acquisitions debate. Are strategic collaborations usurping M&As, or are they simply a new corporate trend that will die in the near future? Also, what are the factors involved in choosing between strategic collaborations and M&As? Do they justify inclinations towards either approach? Thesis Statement: Strategic collaborations are not adequate substitutes for M&As because their applicability depends on organisational objectives. Discussion Different theories have been presented for and against strategic collaborations. However, based on recent developments in global business, it is safe to infer that strategic alliances are becoming more favourable to corporations. In spite of this, preference for strategic alliances is based more on the fact that they are advantageous in specific ways that M&As, are not, than the fact that they are worthy substitutes to mergers and acquisitions.3 In addition, M&As are not worthy substitutes to strategic alliances because the intentions are so markedly different that mixing them would create enormous challenges following the completion of the alliance or the M&A. In summary, strategic alliances and M&As serve different and highly specific purposes and their effectiveness varies depending on numerous factors. It is misinformed and erroneous to suggest that either approach is an alternative to the other.4 Airline alliances are a good illustration of the different dynamics involved in strategic alliances that dispel the notion that strategic collaborations are being used as alternatives to mergers and acquisitions.5 If airline A strictly wants to expand, increase shareholder value and grow its market share, it is more likely to prefer a merger or an acquisition to a strategic alliance. In addition, if its growth plans are reliant on taking over other companies then an M&A is favourable.6 However, if airline A simply wants to boost its industry profile and to improve specific aspects (human resource management, knowledge management, innovation, etc.), then it has no business merging or acquiring another airline. It would be more logical to collaborate with an airline that is superior to it in these aspects and then, depending on the results, extend or terminate the alliance. Merging or acquiring another airline when its short and long-term objectives do not call for that would be a huge strategic mistake that will be costly in short and long terms. 7 For target airline B, if the firm is struggling to raise capital, its shareholder value is plummeting, it lacks a growth plan, cannot expand its routes, and is bogged down with debt, then it would be strategically appropriate to accept a partial or complete takeover by another airline.8 However, if it is successful enough to thrive in the industry and wants to break into a market, or wants to enhance performance in specific areas then it is best to enter into a strategic alliance than to accept a partial or complete takeover or merger. That would betray its objectives, negatively affect its shareholder value, and dilute its autonomy.9 These examples reveal two things. Firstly, strategic alliances and M&As are two completely different strategies whose objectives markedly contrast each other. Secondly, neither strategy is an adequate substitute for the other. In spite of this, it is worth noting that both strategies are affected by almost similar factors (e.g., regulation and shareholder value) during planning and execution. However, that is where the similarity ends. A company in a strategic alliance simply exploits the core strengths of its partners. These may include intellectual capital, market share, proprietary functions, research and development (R&D), distribution networks, and manufacturing capabilities.10 In the 21st century business environment, companies have simply realized that it is better, depending on their goals, to enter into strategic collaborations rather than mergers and acquisitions. Contrary to popular opinion, they have not phased out M&As, and neither have they ruled out the possibility of engaging in them.11 Both strategies serve specific purposes at particular times; they are not even in direct competition with each other. In the last decade, there have been examples where corporations have formed strategic alliances and then gone on to participate in M&As. It is important to note that strategic alliances are temporary while mergers and acquisitions have, to a degree, a permanence to them that is better for long-term growth and sustainability. It is not practical to enter into a strategic alliance that will last 2 years, when all indications are that it would be better to acquire or merge with the other firm to create a vehicle for facilitating the attainment of 10-year growth plans.12 At the same time, it is futile to merge with or acquire a company when all focus is on having an open-door relationship with other firms, remaining autonomous, and working with other corporations on contractual terms rather than as a legal partnership.13 While choosing between M&As and strategic collaborations is a privilege that is enjoyed by company boards and managers only, practice shows that the decision is complex and that the basis on which organisations find themselves overshadows the process with its significant influence. The overall behaviour of businesses making strategic collaboration versus M&As decisions indicates the influence of market-level forces. Companies’ decisions concerning strategic collaborations versus M&As always vary across sectors. Although industry-level forces affect companies’ choices between collaborations and M&As, it is important to acknowledge that the dichotomy between the two strategies is probably simplistic. The purpose and objectives of different collaborations vary. In addition, the relativity and intricacy of collaborations may vary according to unique market conditions. With ingenious contracting, it is possible to prepare a contract that enables a collaboration or joint partnership to ape a takeover in the extent of control offered.14 Interestingly, however, the very sectors where such joint partnerships would occur, such as car manufacturing, also appear to be the same ones where more acquisition opportunities may be few because of market competition and antitrust regulation. Although this seems to be a contradiction to most scholars’ reasoning, it is actually an endorsement of it and, without market limitations, an acquisition could well occurs instead of an alliance. In previous decades, strategic collaborations were viewed as inadequate alternatives to M&As. However, technological advancement, shareholder engagement, and market forces have compelled corporations to consider strategic collaborations as adequate methods for pursuing a growth strategy.15 This is not to say that mergers and acquisitions are less desirable or effective, but strategic collaborations have emerged as strong candidates in any growth strategy plans. A company can implement both strategies at different stages of its existence and achieve completely different results. Why Strategic Collaborations have increased in the past Decade Research has shown that CEO wages are considerably lower in companies that participate in strategic alliances than those that are involved in mergers and acquisitions. On the other hand, executives of acquiring companies have considerably lower equity levels in their wage packages than in other companies.16 The depressed equity levels could be a sign of more agency concerns in mergers and acquisitions, which allows them to contemplate risky moves like takeovers. The contrasts in liquid and R&D budgets are encouraging and vital, indicating that companies involved in strategic collaborations have bigger average R&D budget and liquidity.17 Bigger R&D budgets are congruent with the findings of current literature, especially considering the volatile nature of strategic collaborations.18 More liquidity shows that firms in strategic collaborations might not be financially handicapped. However, this simply shows that strategic collaborations lead to bigger R&D budgets and more liquidity; it does not prove that they are better than M&As or that they are replacing M&As. Strategic collaboration companies have inferior share price volatility. In addition, ROA variables show that firms engaged in strategic collaborations have superior levels of operating performance. However, this simply explains the benefits of strategic alliances; it does not prove that they qualify as substitutes for M&As. Research has also shown that strategic collaborations increase companies’ innovativeness.19 There are some factors that magnify this effect, such as the partners’ identical information backgrounds, more sound relationships, and a higher degree of alliance potential. Alliances that involve public backing or public collaborators do not enhance innovation, although they reduce the cost of innovation. A huge gap in current literature is linked to market differences. In addition, contrasts among most nations are yet to be accorded enough attention. It makes little sense to group all alliances. There are many types of collaborations (e.g., joint ventures, state-sponsored partnerships, and licensing) and they should be differentiated in order to effectively explain the innovation impact of alliances.20 The most encouraging platform for research seems to be in the area of networks. Studies on networks have revealed that participating in more and stronger collaborations is not often better. Some network types could have a neutral or even an adverse effect on innovation. As of now, definitive inferences cannot be drawn. In spite of this, current research poses the question whether it is necessary to examine the impact of individual collaborations on innovation.21 Concluding from the network view has created a brighter image of the innovative capabilities of collaborations than necessary. While some scholars argue for the innovative potential of alliances, others have shown that M&As can also create scale economies and reduce the cost of innovation. The Case for M&As: Why they are still dominant In the past three years, the business world has been treated to some of the largest and most audacious M&As in 21st century commerce. Verizon’s buyback of Verizon Wireless from Vodafone, Kraft Foods’ acquisition of Cadburys, and DHL’s recent acquisition of Dutch logistics company TNT have served to remind doubters that M&As are still the dominant and preferred growth strategy for companies that want to expand and compete in global business.22 Not one benefit of these transactions could be provided by strategic collaborations. Strategic collaborations do not support expansion and grow market share like M&As. M&As also have a greater impact on business compared to collaborations; they are often game-changing and groundbreaking.23 They alter the dynamics of the industries in which they are implemented as well as industries associated with them. In recent times, cross-border M&As have grown in stature because they enable aggressive global expansion and dominance. Strategic collaborations cannot facilitate these objectives, and their impacts are often muted in comparison to M&As’. Strategic alliances are appropriate in industries where competition is low to moderate. In highly competitive markets businesses prefer to participate in mergers and acquisitions. For example, in the computer industry it is hard to envisage Apple and HP forging a strategic alliance because competition is so cutthroat that it is better to challenge rather than partner with each other.24 However, it would not be surprising to find either company wanting to acquire the other in case any opportunity presents itself. Are Strategic Alliances replacing Mergers and Acquisitions? In spite of the numerous publications on M&As and strategic collaborations, few studies have consistently juxtaposed the impacts of the two strategies on innovation and other strategic elements. However, past and current researches reviewed in different contexts reveal a very consistent and clear inference: collaborations are outperforming mergers and acquisitions with respect to their impacts on innovation.25 Apart from the capabilities provided by M&As to create economies of scale in research and development, alliances are outperforming mergers and acquisitions in a majority of strategic considerations. However, does this prove that strategic alliances are replacing M&As? Current corporate data shows that replacement is still overambitious. In the past year, more Fortune 500 firms have been involved in M&As than strategic alliances. More importantly, those M&As have been more influential than the strategic alliances, indicating that M&As still have more strategic value than alliances, and that is why they favoured by large companies.26 That strategic alliances have become more vital and common is beyond dispute. However, that they are effectively usurping M&As is farfetched to say the least. When stock market sensitivities are measured, the failure percentages of M&As are almost 70 percent. At best, M&As have a neutral impact on innovation.27 The precise reasons for this are vague. Of the conceptual justifications for M&A failure, few are actually subjected to thorough testing. As a result, it is premature to conclude that they are failing, and alliances are flourishing. There is still no study that proves that effective post-alliance integration guarantees merger success. The success of collaborations in promoting innovation is surprising, especially considering that they also have high ratios of failure. However, their average ratios of success are higher than M&As’, although with a margin of just 10% (50/60).28 When comparing alliances’ impact on innovation to that of M&As, it is worth bearing in mind that alliances are also different. R&D collaborations are more rewarding than other types of strategic collaborations. In addition, collaborations that include learning as an objective perform better than other alliances. If the same logic were to be applied to M&As, chances are that the results would be similar. This is mean to dismiss blanket inferences that alliances are better than M&As or are replacing them.29 A study establishing a positive link between collaborations and innovation could still be informed by a dataset in which forty percent of the collaborations fail. Although this rationale may be valid, it is highly unlikely. With failure ratios of fifty percent and higher, it is only logical to anticipate more negative results. In addition, this justification does not offer explain the gap between results on collaborations versus those on M&As. There is no consensus in the current tome of literature on the rationale for these widely contrasting findings on the success of strategic collaborations and M&As. An evaluation of the conceptual explanations for success and failure of M&As versus collaborations shows that the indigestibility logic is standout justification that could be important in rationalizing this contrast in performance.30 Scientific investigations of this pattern have yet to be conducted. Strategic collaboration companies exhibit higher wages and equity but lower options. Gaps in wages are congruent with the concept that higher levels of basic wages are favoured by firms that are averse to risk. Considerable gaps in equity, on the other hand, support findings that reveal that the equity wage lowers agency conflicts and the chances of management implementing a risky investment decision. Differences in options are complimentary to findings showing that options inspire companies to pursue risky processes like M&As. There is a positive and critical gap in h-index between alliances and M&As, insinuating that companies involved in M&As are in more competitive markets.31 Differences in SARB variables show that strategic collaborations are now favoured after the introduction of legislations that are compatible with its preventive impact on volatile processes. In other studies comparing strategic alliances and M&As, findings have revealed the existence of a positive PREV variable.32 This shows that companies involved in collaborations are likely to perform better than those in M&As. The choice of mergers and acquisitions over collaborations stems from a need to reduce the impacts of environmental risk on a process, particularly impacts resulting from the opportunism of allies owing to industry weaknesses. Strategic collaborations have helped businesses lower dependencies.33 Collaborations are more flexible and the options to increase or reduce investments depending on the preliminary outcomes of an alliance. In spite of this, collaborations also offer less influence over shared resources than M&As. This has resulted in large businesses shunning them in favour of M&As. This is also a major reason collaborations are yet to overtake M&As. This results in management challenges since partners should collaborate to attain performance objectives.34 As alliances expand and become more complex, particularly when joint entities demand new governance frameworks, these issues also increase. Although M&As are more permanent and engaging compared to collaborations, they are less flexible. Over the years, collaborations have been preferred in markets that do not need large outlays or that involve so much unpredictability that large outlays are too risky. Businesses have realized that M&As differ principally from strategic collaborations only in the extent of ownership, although other differences are also influential when deciding which strategy to adopt. While strategic collaborations are becoming more popular, M&As are still preferred because they result in a majority or controlling stake whereas collaborations do not.35 Mergers and acquisitions are preferred in cases where joint ownership control rights support more intensive exploitation of unified company resources than would otherwise be feasible. For most transactions, it might not be obvious whether the joint control of mergers and acquisitions is favoured over the agility, decentralized control, and flexibility of collaborations. This is what results in the two strategies being viewed as substitutes, but in normal circumstances such a perspective is rare.36 This, in turn, explains why it is fallacious to claim that strategic collaborations are replacing M&As or that they will replace them in future. As previously stated, the two strategies are inherently different and should not be thought of as alternatives to each other. Attempting to substitute one with the other is not only myopic but also impractical. A large strategic collaboration could start with numerous partners who find out, through experience, that joint ownership and centralized control are needed for the alliance to succeed. Upon the exit of enough allies, the collaboration has morphed into a merged company. However, there is no point in the transition that one entity serves the purpose of the other. It is either an alliance that can lead to a merger or acquisition and vice-versa. This proves that it is mistaken to argue that strategic alliances are being used in place of M&As; companies understand that such a move is illogical and impractical.37 An alliance is pursued when organisational objectives demand the creation of an alliance, and the same applies to an M&A. In high-tech settings that demand flexibility and learning, strategic collaborations are favoured as proxies for developing innovative capabilities. On the other hand, in low-tech industries with limited technological advancement, mergers and acquisitions are favoured for developing innovative capabilities. What does the future hold for Strategic Collaborations and M&As? Currently, despite evidence showing that strategic alliances are on the rise, it is still too early to suggest that strategic collaborations have or are replacing M&As. As markets become more dynamic and resources become more available, chances are that businesses will begin an irreversible shift to strategic alliances.38 This will be driven primarily by rapid growth in leading global industries, rapid technological advancement, and equal access to technologies and opportunities. However, M&As will remain the best strategy for large companies and smaller companies with a propensity for expansion. The shift has only just started and is evident in a number of sectors. In the computer industry, for example, the number of M&As has declined considerably owing to the changing conditions that have necessitated a newfound preference for strategic alliances. Currently, smaller portable computer (PC) manufacturers like ASUS and Acer would rather form strategic collaborations with direct rivals or affiliate companies than pursue mergers and takeovers. This is largely owing to greater market liberalization, an almost universal access to technology, and declining PC prices. It is difficult to put Apple or HP’s technology beyond ASUS, for example, so despite being small, the company still profits from its innovations. For large companies, M&As will remain the preferred growth strategy because it aids expansion and market domination more than strategic alliances.39 It also gives large firms more control than collaboration can allow, something big companies always have an affinity for. M&As are still more practical and appropriate in many organisations’ growth plans compared to strategic collaborations. On the other hand, alliances are also evolving into ideal options for companies whose needs are highly specific and short-term. Their contractual nature means that they can be fashioned and terminated at will, unlike M&As that are more intensive, involving and comprehensive in nature.40 Recommendations As evidenced in this paper, alliances and M&As achieve different objectives. Before boards and managers decide which of the two strategies to employ, it is better to determine the direction to which a company is heading. Long-term goals are better realized using M&As while short-term goals are better attained through alliances. However, strategic alliances create more stability because they involve fewer upheavals than M&As. In light of this, companies must first formulate and understand the nature of their goals before they can choose which strategy to employ. Secondly, managers must also determine how much risk they are willing to take in adopting either of the strategies and whether they have adequate resources to manage any potential risks. M&As carry more risk compared to alliances and are more involving and costly. Thirdly, companies should conduct appraisals (e.g., cost-benefit analysis) to establish which of the two strategies guarantees more benefits in accordance with their corporate strategies. Finally, it is important to consider industry trends to determine what market dynamics indicate and how each strategy can help in exploiting current and future industry developments. There are industries where M&As are very rare while others have attributes that discourage alliances. As such, it would be regressive to participate in a strategic alliance in an industry where M&As are the dominant force, and vice-versa. Taking Conclusion Rather than say that strategic collaborations instead of acquisitions are increasingly used as an alternative to acquisitions or mergers, it is better to say that strategic collaborations are becoming more popular with organisations. Factors promoting the use of strategic collaborations are different from those that favour the use of M&As. For example, it is mistaken to think that Smartphones are usurping laptops because they are becoming more popular and numerous. The two gadgets’ purposes are markedly different, and customers also have different reasons for buying them. The same logic applies to strategic collaborations and M&As. Neither strategy is or can be an adequate replacement for the other. More and more organisations are realizing that strategic alliances are more sensible, depending on their objectives, than mergers and acquisitions. The benefits provided by either strategy cannot be replicated in the other and ultimately, it all comes down to what an organisation wants. However, one certainty is that strategic alliances cannot replace M&As. 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