Mergers and Acquisitions: Merits and Demerits - Term Paper Example

 Mergers and Acquisitions: Merits and Demerits Table of Contents I. Introduction ………………………………………………………… 3 II. Definition of Merger and Acquisitions …………………………. 3 III. Theory of Merger and Acquisitions …………………………….. 4 a. Benefits Gain from Merger and Acquisitions …...… 4 b. Consequences of Merger and Acquisitions ...…….. 4 IV. Impact of Merger and acquisitions on UK Labour Market ….. 7 V. UK-Based Real Life Example of Merger and Acquisitions …. 8 VI. Conclusion ………………………………………………………….. 10 References ………………………………………………………………… 11 - 12 Introduction Merger and acquisitions is a corporate strategy used by most business owners when dealing with the buying, selling, or combining with another company to ease their finances or expand the business in order to grab more of the local or global market shares. The problems related with the merger and acquisitions are often the shareholders that belong to two or more different companies. Basically, the cultural differences between the companies who have decided to merge or acquire another company are the common factor that could trigger more serious management problems. Based on a survey study, approximately 83% of the responders agree that entering into a merger and acquisition could become unsuccessful when it comes to generating business benefits related to the shareholder value. (Kelly, Cook, & Spitzer, 1999) Many people are often confused by the phrase merger and acquisitions. Basically, merger is totally different from acquisition in so many aspects. In order to give us a better insight with regards to mergers and acquisitions, it is best to first define each of the term used in the phrase followed by discussing the theory of merger and acquisitions; the types of merger and acquisitions; and the impact of merger and acquisitions on the UK labour market. Prior to the conclusion, the researcher will also provide several UK-based real life examples of companies that have entered into a merger and acquisitions contract. Definition of Merger and acquisitions Acquisitions – the act of acquiring control over a corporation by purchasing stocks or exchange in order to receive the right to takeover. (InvestorWords, 2008a) Merger – combination of two or more business entities into one via purchase acquisition or a pooling of interests (InvestorWords, 2008); A corporate law on joinging togather of two corporations wherein one corporation transfers all of its assets to the other. (Hill & Hill, 2005) Theory of Merger and Acquisitions With regards to the benefit attached with the merger and acquisitions transaction; the offeror1 and offeree2 companies should develop a fair value for each of the company’s shareholders. The company shareholders are not limited to the owner of the business but also its existing employees and stock holders. Benefits Gain from Merger and Acquisitions Transaction When a company decides to expand its business operations either through acquisitions or merger, the company is able to gain the benefits of having better economies of scale in order to meet the market demand. Economies of scale is necessary in the profitability strategy of the company since it will enable them to save more money in line with the fixed operational cost. By doing so, the company will be able to produce their products and services at a much affordable market price. In the process of entering merger and acquisitions, the company is expected to earn more profit since their products and services will become more competitive in the global market. (Gugler & Mueller, 2003) Considering the tight competition in the global market today, merger and acquisitions will also enable companies to acquire new assets and technology needed to improve their products and services to make them have a better competitive edge against their competitors within the same industry. Consequences of Merger and Acquisitions Transaction Despite the promise of good profitability that merger and acquisitions transaction brings to the business owners, not all companies that enter into merger and acquisitions contract was able to experience a benefit in terms of profitability. Let us take a look at the past merger and acquisitions experience of Mercedes when the company decided to acquire Chrysler. At first, Mercedes declared that they would generate as much as $1.3 billion operational cost savings within the first year of the merger. However, it did not turned out the way Mercedes has projected the case would be. (Cooke, 1986: p. 27) According to the Department of Trade and Industry, approximately 50% of the companies that enter into merger and acquisitions transaction fail in the end due to the evidences that merger and acquisitions could decrease the productivity level of the company or may only result to a break-even profitability on those who purchase another company. (Cartwright & Cooper, 1992: p. 22) Many businessmen finds merger as a solution to its current business crisis. Most of them believe that entering merger and acquisitions transaction could help them cut the operational cost needed to increase the company’s revenue without realizing the negative consequences of merger and acquisitions. Studies show that the common failure behind merger and acquisitions lies behind the problem related to proper integration of the two companies. One of the most common factors that may contribute to the integration problem is the differences between two cultures present within the two companies involved. (Hopkins, 1999) The miscommunication between the shareholders of both companies often results to transactional errors related to production and delivery of goods. For example: Air Liquide acquire approximately two-thirds of the Messer Griesheim shares of stocks. (Financial Times, 2006) The management of Air Liquide did not give much importance to the cultural differences between the employees within Air Liquide and Messer Griesheim. In the end, the managers and employees from both companies grew an ill-feeling towards one another causing major problems with the company’s business flow. When we talk about merger and acquisitions, we are also discussing the opportunities attached with the company diversification by constructing a portfolio of stocks and bonds. (Investorama, 2008) However, many businessmen fail to recognize the high risk attached to diversification. In line with this matter, Hopkins (1999) states that based on some empirical studies, there is a high possibility that diversification through mergers could reduce the wealth of the shareholders especially when merger took place between two companies from different geographical locations. Impact of Merger and Acquisitions on UK Labour Market Mergers and acquisitions could affect the labour market in two different ways. First, a merger and acquisitions could lead to a decrease in the total output of a manufacturing company because of the sudden increase in a company’s output capacity related to the added technologies and machineries via acquiring or merging with another company. (Gugler & Burcin Yurtoglu, 2004) This happens when there is an increase in the company’s output capacity without increasing the demand for its goods and services. There is a very strict employment protection law in UK. (OECD, 1997) However, a company may be forced to find a strategic way of implementing a collective dismissal3 or a massive lay-off in case the profitability of the company suffers due to excessive man power. Laying-off excess human resources could cut down on its fixed operational cost in order to make the company survive financially. On the other hand, it is also possible that merger and acquisition could lead to the increase in the efficiency of its production output. (Gugler & Burcin Yurtoglu, 2004) Considering the case where in the combined company increases the demand for its goods and services, the company may end up increasing the number of its current employees in order to meet the market demand. There are cases wherein a company has already employed excessive labour. Considering the strict UK employment protection law (Gugler & Burcin Yurtoglu, 2004), some companies end up using merger and acquisitions as a restructuring strategy to make them easily get loose from upholding the past contracts with its stakeholders including its employees. (Shleifer & Summers, 1988) This way, the company could retain competitive employees and lay-off those who are no longer productive in meeting the goals of the company. It also offers the company the privilege to renegotiate its existing labour contracts. (Shleifer & Summers, 1988: 42) For example, the company may simply decide to cut down their wages instead of implementing massive lay-offs. Evidences show that between the years 1967 to 1996, the merger and acquisitions in UK has lead to a significant reduction in the demand for labour a few years after the said strategy has been made. (Conyon et al., 2002a, b, c) UK-Based Real Life Example of Merger and acquisitions In February 2006, Morgan Stanley acquired Goldfish from Lloyds TSB Group Plc for $.168 billion. Goldfish, which includes MasterCard and Visa, is one of the largest credit-card businesses in Britain. (Stempel, 2007) In line with the huge disruption in the UK financial markets, the expected 35 cents per share increase during the fourth quarter of 2007 fell by 78 cents or roughly 4.5% down to $16.59 per share in the New York Stock Exchange (NYSE). With regards to the huge amount of money that Morgan Stanley has invested by acquiring the Goldfish from Lloyds TSB Group Plc resulted to a huge financial loss on the part of Morgan Stanley. The acquisition made by Morgan allowed them to control over Goldfish to the point that they had to sacrifice the decline of its stock value. Despite the fact that the stock value of Goldfish has declined by as much as 4.5%, it does not literally mean that the company is not gaining a good annual profit. Conclusion A merger and acquisition normally creates a major disruption in the flow of a business within an organization. (Bourke, Laidlaw, & Woods, 2001) For this reason, selecting a competent management team that could resolve the cultural issues that may arise from the merger and acquisitions is necessary to the success of a newly merged or acquired company. In line with this matter, an open two-way communciation could increase the success of the two-company ventures. Although there are a lot of theoretical studies that merger and acquisitions could increase the economies of scale and market value of a company (Gugler & Mueller, 2003), deciding on merging with another company or acquiring the majority shares of another company may not always be the best option to increase the market value of a company or even to make a company more competitive in the global market since fifty percent of the company that entered into such arrangement did not really succeed with their main goal in the end. (Kelly, Cook, & Spitzer, 1999; Cartwright & Cooper, 1992: p. 22) Despite all the negative stories behind merger and acquisitions, it is still possible for merger and acquisition to improve the profitability of a company if only proper management on all business aspects including the cultural differences between the employees from both companies can be handled properly. With regards to the tight competition that globalization has created in the market, being able to properly manage a company that has gone through merger and acquisition could help the company grab the biggest market shares within a given industry. Aside from using merger and acquisitions as a strategic way of restructuring the shareholders of a company, merger and acquisitions also enable a company to monopolize a given industry. In case a newly merged company could monopolize the market within a specific industry aside from increasing its liquidity, the company could easily compete with the rest of the smaller players within the industry. In the end, the smaller players within the same industry will not be able to tolerate producing its products and services at a much high operational cost versus the low market price. When smaller companies decided to declare bankruptcy, the competition within the domestic market will be less on the part of the bigger company. References: Bourke, E., Laidlaw, G., & Woods, I. (2001). Achieving Post-Merger Integration. Financial Services , 10 - 13. Cartwright, S., & Cooper, C. (1992). Mergers & Acquisitions: The Human Factor. UK: Butterworth. Conyon, M., Girma, S., Thompson, S., & Wright, P. (2002c). Do Hostile Mergers Destroy Jobs? Journal of Economic Behavior and Organization , 45:427 - 440. Conyon, M., Girma, S., Thompson, S., & Wright, P. (2002a). The Impact of Mergers and Acquisitions on Company Employment in the United Kingdom. European Economic Review , 46:31 - 49. Conyon, M., Girma, S., Thompson, S., & Wright, P. (2002b). The Productivity and Wage Effects of Foreign Acquisition in the United Kingdom. The Journal of Industrial Economics , 50:85 - 102. Cooke, T. (1986). Mergers and Acquisitions. UK: Basil Blackwell, Ltd. (2006). Financial Times. In A Good Merger is all in the Mind. Gugler, K., & Burcin Yurtoglu, B. (2004). The Effects of Mergers on Company Employment in the USA and Europe. International Journal of Industrial Organization , 22:481 - 502. Gugler, K., & Mueller, D. (2003). The Effects of Mergers: An International Comparison. International Journal of Industrial Organization , 21(5):625 - 653. Hill, G. N., & Hill, K. T. (2005). Farlex. [Online] Retrieved January 21, 2008, from Merger: http://legal-dictionary.thefreedictionary.com/merger Hopkins, H. (1999). Cross-Border Merger and Acquisitions: A Global and Regional Perspective. Journal of International Management , 5(3): 207 - 239. Investorama. (2008).[Online] Retrieved January 21, 2008, from The Improtance of Diversification: http://finance.yahoo.com/education/begin_investing/article/101163/The_Importance_of_Diversification InvestorWords. (2008a). [Online] Retrieved January 21, 2008, from Acquisition: http://www.investorwords.com/80/acquisition.html InvestorWords.com. (2008b). [Online] Retrieved January 21, 2008, from Merger: http://www.investorwords.com/3045/merger.html Kelly, J., Cook, C., & Spitzer, D. (1999). Unlocking Shareholder Value: The Key to Success. Mergers & Acquisitions A Global Research Report , 1 - 22. OECD. (1997) In Employment Outlook (p. p. 163). Shleifer, A., & Summers, L. (1988). Breach of Trust in Hostile Takeovers, in: A. Auerbach (ed.) 'Corporate Takeovers: Causes and Consequences'. Chicago, IL: University of Chicago Press,. Stempel, J. (2007, December 3). Discover to Take Big Charge for UK Card Business. [Online] Retrieved January 21, 2008, from Reuters UK: http://uk.reuters.com/article/mergersNews/idUKN0338973820071203?pageNumber=1&virtualBrandChannel=0 Read More