Purchasing and Acquisitions Management - Research Paper Example

 An acquisition is a transaction that occurs between two parties based on the terms set by the market where each company acts in its own interest (Publishing Oecd, 2009). Over the pat two decades, purchasing and acquisition have assumed immense significance. Giant corporations and big multinational entities are always on the search for taking control of big or small companies to increment their wealth and to gain an even greater portion of the market. There are new mergers and acquisitions or an analysis of whether they are feasible or not being reported in the news almost everyday. The media reports in full details whether the acquisitions have been successful or have fallen through. Moreover, there are comments by politicians, industrialists and businessmen that are an attestation to the importance being placed on purchasing and acquisitions. The increasing importance being given to purchasing and acquisition is also because of the risky nature of the act. Talks about mergers and acquisitions create uncertainty about the future of the employees whose company is going to be acquired. The administrative and management divisions of the merging companies justify themselves by stressing upon the advantages of the acquisition; however the effects of the acquisition are not limited to the employees only. Stock exchange is also affected by the decision and may respond to it either negatively or positively (Ray, 2010). Hence there is a direct impact on the stakeholders. In order to comprehend the dynamics of the process of purchasing and acquisitions, it is necessary to review the causes that might lead to it. Preparing for acquisition offers an opportunity to revisit the corporate strategy and the components forming it (Triantis, 1999). Causes of Purchasing and Acquisitions So what motivates companies to purchase and acquire other companies in the contemporary world? One of the chief reasons is survival. The world market is expanding at a fast rate, and the increasing number of cross-border deals are illustrative of the need to stay at par and to compete with other companies. Moreover, the consumer markets that are emerging in different parts of the world like Asia Pacific due to developments in the industries attract giant corporations to consolidate their holdings and to form joint ventures or acquisitions with companies in those areas in order to gain a share in the market. Also, commercial exploitation had been on the rise in areas that were earlier aloof from it such as India and China (Ray, 2010). In certain companies, there is relaxation in trading policies and foreign companies can now penetrate the markets in these countries without much hindrance. Due to growth and improvements in communications in the worldwide market, many product markets have assumed an international role and have motivated many companies to expand across the border to increase their international consumer base. Purchasing and Acquisitions from a Theoretical Point of View Experts have different opinions for understanding the intentions behind and potential benefits of acquisitions. Purchasing and acquisitions are the product of rational business decisions which benefit the synergies that are attached to the Efficiency theory, attaining economic power via the Monopoly theory and profit as a result of gaining of information via the Valuation theory (Ray, 2010). The prime objective of mergers and acquisitions is to create synergy. After the merger, the company should be able to improve the efficiency of its production processes which could not be achieved before the acquisition. This efficiency is attained by depending on the assumption that the acquisition will mitigate the costs of the production processes when both the companies are making use of the same resources. Synergies can be gained through three ways. Financial synergies not only promote the financing prospects of the company that has taken control but also help to spread the risks of investments over the extended business. Operating synergies emerge from the union of separate functional departments into one. The combination of two companies also serves to increase the overall performance of the company due to the addition of more staff with their individual competencies and knowledge. Innovation power of the company will also be boasted as company experts work together in concert to achieve the aims and goals of the extended company. There are also several management synergies that arise from acquisitions. The management of both the companies can work in a mutually beneficial relationship with each other and can play a part in the resourceful organization and management of both the companies. The Monopoly theory states that horizontal mergers are beneficial to companies since they provide market strength to them, help them surpass their competitors and make it more difficult for competitors to gain control of the market. Ray (2010) asserts that amongst the advantages that arise are cross-subsidization of acquired business lines, introduction or strengthening of entry barriers in certain markets and a limitation of competition in markets where a company becomes a participant via the process of acquisition. The Valuation theory helps to make an estimate of the benefits of the business ownership; also the principle of future benefits states that economic values should aim to reflect the anticipated future benefits (Hekman, 2008). Acquisitions occur because the company sees corporate benefits embedded in the act. Companies usually purchase companies who products are selling at a lower price than they true value and intend to increase the value of the products. Moreover, acquisition aims to adjoin more significance to their targets. Shareholder value id defined as the value that the stakeholders assign to the company and is used as a criterion for assessing the performance of the company. Considering this point of view, the acquisition is regarded as an investment decision through and through and must mirror the expectations of the shareholders while attempting to increment the shareholder value. Stakeholders In the current world, the role of stakeholders in a business cannot be overstated. The management of the company should take into consideration the expectations of the stakeholders, as well as their interests and objections. This is essential for sealing the acquisition smoothly without any political disturbances. Since a stakeholder is defined as a company or an individual that can impact the goals and operations of a company, it is pivotal to give stakeholders prime importance. There are many stakeholders that can influence a company (Ray, 2010). The public is one of the most influential stakeholders since it asks for information regarding the future of jobs and employees after the acquisition. The shareholders own the company and aim to see an increase in the economic and corporate value of the company (Ogilvie, 2005). Board of Directors is also a relevant stakeholder since it is in charge of the management of the business and supervises various activities. Customers and employees of the company are also influential stakeholders as customers would expect the company to offer reasonably priced, quality goods whereas employees would be concerned with the work that they get after the acquisition. Selling a Business There are many reasons that may make a company to sell itself. If the company is indebted or is planning to raise money for potential acquisitions in the future, it would be willing to sell itself. Also companies would agree to an acquisition if the company proposing the acquisition is providing a very good price for purchasing. A company may regard a certain part of it as unprofitable and may be willing to sell it away. Also if certain activities of the business do not complement the strategies and aims of the business, they would not feel it feasible to keep that aspect of the business and hinder their performance. At times, there is more benefit gained from the perspective of the stakeholders by selling off the business rather than keeping it and so may be a motivation for the business to be acquired by other corporations. Another reason that might compel businesses to agree to be purchased by other companies is that the business is short on capital to invest. It could not raise enough cash to invest in the business and meet the requirements that allows the business to function smoothly. Also, banks can be a cause of acquisition. A company that is low on funds might seek help from banks, which might place a condition for the company to merge with another company to generate cash for paying off its debts. Purchasing and Acquisition Process The purchasing and acquisition management entails several concepts. This includes not only planning out the acquisition process but also to solicit, prepare bid and proposal, determining the right sources as well as making up a contract and negotiations. The six steps in the government acquisition process include requirements determination, acquisition planning, negotiation, contract award, performance after contract award and contract closeout. Requirements Determination and Acquisition Planning The word requirement is defined as a need in contrast to a product or type of service. Services and products are itineraries that emerge in response to a need. Before acquisition can occur, a need is to be present to initiate the process of procurement. The need is converted into products and services which seek to fulfill the demands of the consumers. Acquisition planning not only encompasses the decision of what to purchase and at what time but also other aspects that can impact the acquisition decision. These elements include the technical, commercial and managerial aspects of the business. Amongst the factors that are considered in acquisition planning are deciding what products are to be produces in-house and which ones are to be brought in from the outside. Hence acquisition planning requires the concerted efforts of all the staff that is involved in acquiring products and goods for the organization. The importance of acquisition planning is great; it can be estimated by a research that concluded that the reason for the failure of a contract was the lack of adequate planning and organization being undertaken at the start of the purchase and acquisition process (Engelbeck, 2001). The process of acquisition planning begins with the definition of requirement or a need for a good and ends with the procurement of that good. Moreover, it is during the planning of how to procure the goods that the business makes an assessment of the risks and opportunities involved in the process. Engelbeck (2001) asserts that procurement planning is in effect a subset of overall acquisition planning. Therefore the procurement plan should encompass details about the technicalities involved as well as other contracting, monetary and business management aspects that impact the acquisition. Also, the degree of detail the matter is probed in, as well as the scale of the acquisition plan should be mould according to the situation. Acquisition planning refers to the coordination of activities of the staff involved in the acquisition (“Acquisition Planning”, 2010). The phase that involves determining the requirements of the acquisition plan includes tasks such as predicting the requirements, doing market research, assessing the risks and opportunities, making an initial acquisition strategy and making an estimate of the budget needed the process (Engelbeck, 2001). Since acquisition “implies the buying out of a whole composite system, that includes its design and development, ramp-up and production”, the acquiring plan should integrate the various facets of the business (Nicholas & Steyn, 2008). Solicitation Solicitation is the next step in the management of acquisition. It is the document that is sent by an agency to prospective contractors asking for the submission of offers or information (Engelbeck, 2001). The ways through which it can be carried out include Invitations for Bids, Requests for Proposals and Requests for Quotations. Therefore, solicitation means the process which issues these documents and receives the responses that come for them. Solicitation has three main reasons. Firstly it serves to inform the contractors of the needs of the buyer. Also, it gives details about the specifications of the sale; although these conditions may be liable to change. Lastly, the solicitation document requests prospective contractors to submit in an offer. Procurement that is successful depends highly on the quality of the solicitation. It is of great importance to the success of the buyer. Solicitations that are successful have many effects on the future process of acquisition. Good solicitations have many benefits for the buyer such as better bids, quotes, proposals and tenders, which are handed in by the seller in a more timely and organized fashion. In contrast to that, solicitations that have not been drafted with thought and planning and do not effectively reflect the interests of the buyer, can create a number of problems. Solicitations that are poorly communication can cause undue relapses in time, confusion regarding the conditions, lesser bids and proposals, and responses that are not of high value. Engelbeck (2001) assert that “solicitation is one of the most revealing reflections of the procurement and technical professionalism of any agency”. Consequently, effective management of the acquisition process is necessary in order to make a deal that is of benefit of both the buyer and the seller. Contract Award Effective management of the acquisition process also entails drafting an appropriate contract. In this phase, the type of contract is decided upon and the contents of the contract are considered and incorporated into the contract. A contract is an agreement that is enforceable by law (Tulsian, 2006). The importance of a well-defined contract is that it helps to clear away any misunderstandings that might emerge in relation to the acquisition. Moreover, a well-organized and defined contract plays an essential role in building a pleasant association between the acquirer and the seller. The role of management and the competence of the managers of the company going for an acquisition lies in how well the contract is formulated since this would help avert a lot of managerial and employment problems that might emerge after the acquisition. The annals of history are illustrative of the fact that contracts that are not unclear and explicitly explains the roles and duties of the involved parties play a decisive role in preventing any arguments that may occur regarding performance requirements. Also effective management of the contract entails that it should be take into regard the strengths and weaknesses of the seller. In making a contract, certain aspects need to be included such as acceptance criteria, performance and subsequent requirements of the involved parties, potential costs and schedule. There are different types of contracts that are available and some of them are explained in the following paragraphs. All of these have their own respective benefits and disadvantages associated. The management of the acquirer should choose the contract that best suits it. Fixed-Price Contracts: such contracts are suitable where the performance requirements can be defined with relative ease. The advantages of such a contract is that it gives firms assurance of the cost, requires minimal auditing by the acquirer, gives most incentive for fastest completion at the least cost and allows quick notification to acquirer of delays (Hunt & Westfall, n.d.). The disadvantages include that it requires precise knowledge of what is needed before the contract award, may lead to an increase in the costs due to managing high-risk work, seller can regard all requirements changes as irrelevant and is time consuming when it comes to soliciting and assessing bids. Cost-Reimbursement Contracts: they are mainly used when an estimate of the costs cannot be made. Therefore these contracts propose an expected figure of the expenditures that might accompany the acquisition process. The advantage of the contract lies in the fact that it does not need details of what is needed before the contract award. Also the contract mandates the consent of the acquirer if the costs rise beyond the estimated values. The disadvantages of the contract are that there is no predefined knowledge of the costs that accompany the process. Also, there is no financial benefit given that may reduce the time and cost associated with the process. Incentive Contracts: such contracts link the fee of the supplier with that of the profit generated with the performance of the seller. An increase or decrease in the incentives is given on the basis of how well the performance targets have been met rather than meeting the minimum performance standards. Incentive contracts prompt the seller to manage the costs in a better way. Also, such contracts tend to improve the overall performance by mitigating inefficiency. On the other hand, people might take shortcuts for achieving efficiency in a shorter period of time. This may cause the quality to be affected negatively. Indefinite-Delivery Contracts: these contracts make allowances for flexibility in the delivery of goods and services; also, they enable the contract to be issued without any commitment to carry it to the end stage. However the production lead-time may cause the delivery of goods and services to be late. In procurement, it may take so long that when an order is issued on the contract, it becomes necessary to review the seller. After the contract and the agreement terms have been decided upon the contract is awarded. Also after the contract is awarded, negotiations can be done further. The concept of leverage encompasses that the information that has been collected on the seller is used to the advantage of the acquirer. There are different aspects that should be considered regarding leverage. These include potential future sales, information that has been acquired on the strengths and weaknesses of the supplier and to be able to choose another seller by terminating business relations with the current one. The seller also has leverage and management of the acquisition process needs to consider these leverages. Amongst these are domain know-how and superior process capability as well as part of the market that is in control of the seller. Also, successful management of the purchase and acquisition process makes it a binding that the involved parties discuss the risks in depth. These risks fall under cost, schedule and performance. Conclusion There are various motivations that may cause a business to seek for an acquisition with another business. The stakeholders play an important part in determining the acquisition. Also, a business might be willing to sell itself because of debts or other expandable options. The process of purchase and acquisition has many aspects attached to it. It requires not only proper planning of the acquisition, but also defining the needs and requirements of the process. An analysis of the risks of the process is pivotal to the successful management of the process. There exist various forms of contracts, which may be utilized from time to time. Thus the effective management of purchase and acquisition requires competent decisions and planning tailored according to the situation. Reference List Acquisition Planning (2010). Retrieved from http://www.businessdictionary.com/definition/acquisition-planning.html Engelbeck, R. M. (2001). Acquisition Management. Virginia: Management Concepts. Hekman, K. (2008). Buying, Selling & Merging a Medical Practice. Lulu.com. Hunt, T. & Westfall, L. (n.d.). Software Acquisition & Supplier Management: Part 1 – Product Definition & Supplier Selection. Retrieved from http://www.westfallteam.com/Papers/Software_Acquisition_1.pdf Nicholas, J. M., & Steyn, H. (2008). Project management for business, engineering, and technology: principles and practice (3rd ed). Butterworth-Heinemann. Ogilvie, J. (2005). Cima Study Systems 2006: Management Accounting-financial Strategy. Oxford: Butterworth-Heinemann. Publishing Oecd (2009). OECD Benchmark Definition of Foreign Direct Investment 2008: Fourth Edition (4th ed). OECD Publishing. Ray, K. G. (2010). Mergers and Acquisitions. New Delhi: PHI Learning Pvt. Ltd. Triantis, J. E. (1999). Creating successful acquisition and joint venture projects: a process and team approach. Connecticut: Greenwood Publishing Group. Tulsian, P. C. (2006). Business Law For B.Com Hons. Tata McGraw-Hill. Read More