My Dilemma (acquisition, merger and initial public offer) - Research Paper Example

?My Dilemma Overview As a final year I was man d to have an internship program to enhance my academic and professional knowhow as a Business Management student. Indeed the internship program was also to give me practical experience as far field work was concerned. This is because apart from the theoretical studies done in school, I had not had any practical professional experience in my field of operation. The internship program was therefore an all-good program for me. Upon reporting to my post, I was assigned to the Growth and Expansion department of the company. The company in question was an advertising firm whose business had to do with public and media advertisement. The company’s task was also to publicize events and activities; as well as personality management. The company has several clients and customers including telecommunication firms, automobile companies, music artistes, movie stars and a number of hotels. My role as a member of the Growth and Expansion department therefore meant that I was supposed to work in consultation with other officers to come out with programs and activities that were focused on making the company more popular and large. This was like saying publicizing a publicity firm. Our department was however not the last resort as far as decision making on growth and expansion was concerned. We were to either come up with proposal for management to approve or conduct research into proposals brought forward by management. How the Dilemma came about One Monday morning when I got to the office, something strange and out of protocol happened. Hitherto, I rarely had any say on proposals for growth and expansion. I was more or less a passive observer who was around to learn from his superiors. This time round I was not even asked to give contributions towards a proposal to be sent to management but to select one of three choices management had taken on a long term growth and expansion move. Most of the time, proposals from my department to management were discarded but when proposals came from management to my department, it meant that the proposal was certainly going to be implemented. This means that the choice I made was going to be implemented. For a student on internship to decide the long term growth and expansion program for the multi million advertising company was indeed a herculean task. The dilemma was also with the fact that I had to choose among options given by management. The options were acquisition, merger and initial public offer. The company was considering either purchasing an events organization company or merging with the events organization company or putting its shares on public offer as a means of expanding the existing company. This was a dilemma because all three options had their own advantages and disadvantages. It was indeed difficult pointing out which of the options was going to be better than the either. Meaning of the three options Merger has been explained by Farlex (2011) to be “a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm.” It continues to posit that in the event of merger, there is a “decision by two companies to combine all operations, officers, structure, and other functions of business” (Farlex (2011). To this effect, it meant that if I chose the option of merger, my company would have been tagged as the buying firm. It also meant that by merger, our company was going to combine all its operation, staff, structure and organizational culture with the selling firm. The new company that was going to be formed out of the merger was not going to be under the outright ownership of our firm but then ownership shared by the two companies in question. The Investopedia (2011) on the other hand explains that “when one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition.” The implication of this definition is that if this choice was chosen by me, our company was going to undertake a complete purchase of the new company in question. The new company that was going to be formed out of the purchase was going to be the outright and legal property of our company. The last option which is initial public offer, which is commonly called IPO, has been explained by Farlex (2011) to be a business action whereby businesses “raise capital for its enterprise through the sales of securities, which include stocks, bonds, notes, debentures, or other documents that represent a share in the company or a debt owed by the company.” This meant that our company had to announce for public participation in the company by selling securities if I chose this option. After understanding into detail what each option meant, I went ahead to research into the advantages and disadvantages of each option and weigh out the pros and cons to aid me in my decision making. Advantages associated with each option 3 share of common customers Going for merger with the event organizing company would yield a number of benefits for our company. In the first place, the company would experience an overnight expansion in size, asset, personnel, and innovations. This is because in the event of a merger, though our company would not be wholly owned by our current owners, our current owners would be legal co-owners, who would have the right to share in any benefits that comes out of the new company that will be born. The second and perhaps the best advantage is that the purported overnight growth will involve little or no capital injection. This is because all the two companies are already well established and functioning. As pertains in most circumstances, the establishment of companies demands very large capital that is not easy to raise. With the current economic meltdown, any business expansion that would involve very little capital injection or no capital injection at all is welcoming news to business owners. Finally, merger has the potential of bringing onboard rapid growth in profits. This is likely to be so because of the general expansion that will be recorded at the end of the day. With merger, our company will be making little or no expenditure and so any cash inflows will automatically become profits instead of income. Acquisition of the new company also brings on board a number of advantages. Firstly, just as it is in the case of the merger, there will be an overnight expansion of the company. The reason why this can be regarded as a major advantage is that for our company to decide on starting a new business for it to grow to the level of the selling company would as a matter of fact take a lot of time. The success or otherwise of such a move can also not be guaranteed. Purchasing a ready-made company is therefore going to be a huge advantage. Secondly, with acquisition of the selling company, our company would gain total ownership and control of the new company that will be formed without having to share with anyone in profits and other benefits. In such situations where our company is given the opportunity to man its own affair, the organization structure, mission, vision, leadership style, organizational culture and general working climate of the company can be maintained or guaranteed. Finally, Disadvantages associated with each option The major disadvantage associated with merger is the fact that in the event of a merger, our company would have to share the liabilities of the selling company. Most often than not, companies have succeeded in forging lucrative account sheets in events of merger, only for the merger to be complete for the buying company to realize that the finances of the selling was not as lucrative as was made to appear from afar. In such situations, the buying company becomes disadvantaged if it has a very sound financial stand. In such instance, the buying company could be crippled in its attempt to fight the liabilities. This scenario given has empirical occurrences the world over. One common reference that can be made to this effect is the story of Enron Corporation. The second disadvantage with merger is the legal processes that the company would have to go through in its quest to merge with the selling company. Writing on the problems associated with merger, William (2008) notes that “typically, two-thirds (or even more) of the share votes are required for approval. Obtaining the necessary votes can be time-consuming and difficult.” This confirms the cumbersome bureaucracies that need to be the event of a merger. Finally, there is the problem of personnel control. Since the option of merger will not give our company outright ownership, the company would have to maintain workers from the selling company. This can cause serious personnel problems in the sense that staff from the selling company may not be familiar with the organizational culture that prevails in our company. However, our company will still be tasked work with them. This situation is likely to promote organizational unrest and conflict, which may hamper the growth of the company. Acquisition also has similar disadvantages as in merger. The issue of bureaucracies and legalities in getting the decision of merger finally approved also applies with acquisitions. Apart from this, acquisition of a new company demands a very large capital base. This is to say that our company would have to have very huge financial grounds to make the purchase. There are records of companies who actually spent all their savings on acquiring a new company, only for the acquired company to record losses. Certainly in such an instance the company would totally collapse because it may not have any more capital to operate on. Finally, Courtney (1994) observes that “Often, sellers become too emotionally attached to let go of the venture. Yet, you have spent considerable time and money performing due diligence, doing research, securing financing and negotiating the deal.” Courtney’s view is a very big threat that deters a lot of companies from undertaking acquisitions. Though it may seem rare, it is impossibility. This is because executives of some companies do not wait till they seek final approval of their shareholders before looking for prospective company buyers. Some of these executives have on most cases succeeded in covering up the fact that they have not received final approval until the eleventh hour. Writing on the disadvantages of initial public offer, the Public Company Management Corporation, (2011) notes that “After the typical IPO, about 40% of the company remains with insiders, but this can vary from 1% to 88%, with 20% to 60% being comfortably normal.” This means that IPO creates a situation where the profits of the company would be shared by the public. Though the initial offer may seem very huge and lucrative, profits thereafter would be marginalized. There is also the problem of organizational control. Since public offers would bring a lot of shareholders on board the ‘ownership’ of the company, the present management of the company would loss control over the company. With such loss of control, it is likely the company’s organizational culture, principles mission and leadership style would be affected. Finally, in the event of initial public offer, the rate of growth of the company in terms of the in and out flow of capital will be determined by external factors hat management and shareholders will not have control over. Some of these external factors include economic factors such as inflation rate, currency exchange rate, and the overall economic climate of the country. In general, the better the economic indicators in the country, the brighter the chance having share prices going up. The inverse is true when the economic indicators are not good. Factors to consider in implementing each option 3 Option of implementation 2 Clearly, choosing any of the three options would have resulted in the outright growth and expansion of the company. However, it was very prudent to make a decision basing my selection on a number of factors that centered on our company. That is, the selection should be one that addresses the company’s present state and meets the company’s present condition. So upon careful consideration, I chose merger as the most suitable option for my company. Reasons for choosing merger have been discussed as follows. Firstly, Conclusion Later after I forwarded my proposal, I was informed that I was specifically chosen because of the level of intellectual competence I had shown since my internship began. I was also informed that every student who came to the company for internship was single handedly asked to make similar decisions to be a mark they left in the business. My decision was however that large because of the competence I had shown at post. It is my hope that my decision works perfectly for the company because I really researched deep and considered all the merits and threats associated with all three options before making the decision. It must however be reiterated that deciding on the kind of business expansion option to take and researching into it alone does not make a company grow. Rather, there must be a conscious effort to implement all the factors discussed as salient factors to consider when implementing the expansion decision. Management must attach special importance to following the factors to the latter. They must also vote into the implementation, all resources needed to make the implementation successful. Furthermore, staff and all employees of the company must play their individual roles in ensuring that the expansion plan succeeds. There should be no room for apathy whatsoever among workers. Finally, management must not consider the merger as the end but as the means to an end. This means that other factors such as employee motivation, employee morale and adherence to basic organizational ethics must be duly followed. REFERENCE LIST William, P., 2008, ‘Advantages and Disadvantages of Mergers’, Retrieved February 12, 2011 Courtney, P., 1994, ‘Pros and Cons of Buying a Business’ retrieved February13, 2011 Public Company Management Corporation (PCMP), 2011, ‘Disadvantages of going public’ retrieved February 12, 2011 Investopedia,2011, ‘Mergers and Acquisitions: Definition’, retrieved August 8, 2011 Farlex. The Free Dictionary, 2011, ‘Public Offering: Legal Definition of Public Offering’, retrieved August 8, 2011 Farlex. The Free Dictionary, 2011, ‘Merger Financial Definition’, retrieved August 8, 2011 Read More