Merger and Acquisition Processes - Term Paper Example

Merger and Acquisition as Development Strategy Introduction Competition in the business industry proves to increase day after day. People participating in the business industry employ different methods to improve and develop their businesses. Business development entails many activities and methods aimed at ensuring their development. Many business practitioners have turned to applying the mergers and acquisition as a development strategy of their businesses. The essay that follows defines what mergers and acquisition are, the factors triggering application of the methods by industries, and the purpose companies have in using the method. It will also discuss the possible problems that can occur during merger and acquisition processes, and the possible means of solving them. Mergers and Acquisitions A merger is the combination of two existing companies with a new one where the two never operate as an individual again (Sherman, 2). Companies merge with reasons towards creating shareholder value, among other reasons. A merger occurs when two organizations or companies of almost the same size agree to come together and form a new company that is different from the previously existing two companies (McClure). The stock from each of the two companies is surrendered to form a new stock for the new company. However, the most common mergers are when a company buys another when the CEOs agree that they have the interest of joining together. An acquisition is a purchase of a small company by a bigger one especially when the small company senses there is a possibility of not surviving alone (Sherman 3). It occurs when a company buys another company or business (Sherman and Hart 11). Acquisition can be asset acquisition or share acquisition. Asset acquisition occurs when a company buys all or part of the other company and the latter still remains a legal entity. A share acquisition is when a company buys a certain share of stock so as to participate in the management of the target company. In this transaction there is no formation of a new company. The bigger company resumes the operation of the smaller one, and may operate it as a branch or incorporate it in the bigger company. Unlike in mergers, acquisition involves a company’s purchasing another. The two companies do not exchange stock or consolidate to a new company, but the deal between the two companies satisfies both (McClure). Factors triggering mergers and acquisition by industries There are a number of reasons why companies engage in mergers and acquisitions. However, the most common reason for mergers and acquisition is the company’s need for expansion either horizontally or vertically (Ray 14). In other words, companies engage in business governed by one rule of either flourishing or dying in business. Most companies use mergers and acquisitions as a development strategy aiming at growing in the market where they plan to take away market share from their competitors, look for the creation of economic profits and provide returns to shareholders (Sherman and Hart 1). Companies that lack development strategies lose customers and the shareholder value. Many companies have turned to suing mergers and acquisition as a development strategy because it applies in both of the above conditions. Mergers and acquisition help the established company to have faster growth than competitors and helps acquire the weaker ones (Sherman and Hart 1). Companies engaging in mergers and acquisitions have three motives namely; Financial, Economic, and managerial, all of which differ depending on the ideas behind them. Economic Motives This is where companies are triggered by the need to economically benefit shareholders and managers of the acquiring company. Through planning and execution, companies use mergers and acquisition to achieve financial, managerial and operational synergies. Companies also use mergers and acquisition to develop their monopoly power in the market. When another company seems like waging competition, the company intending to maintain monopoly may acquire or merge with the upcoming company aiming at fetching new customers. Managerial Motives Companies can engage in mergers and acquisitions at the benefit of managers. Managers with this motive aim at maximizing their personal utility instead of value of shareholders. They also engage the company in mergers and acquisitions because they want to develop them for their own reputation. Another managerial motive is the need to transform to a corporate identity or recognition where companies merge to gain popularity (Sherman and Hart 13). Financial Motives Motives on increasing finances can lead companies to engage in mergers and acquisition as a strategy for their development. This may result from economic disturbances, which cause changes in individual expectations increasing uncertainty level. It leads the acquiring company to place a higher value on the assets than their owners. A company can reduce risks by holding a collection of assets which are not perfectly related (Sherman and Hart10). Engaging in Mergers and Acquisition, under this theory, helps the acquiring company to diversify its activities and reduce the volatility of cash flows at a group level while it still maintains the same level of returns. Reasons for using mergers and acquisition as a method of business development strategy The business industry is currently experiencing a changing competitive environment and business growth, and that is why many businesses look for ways of challenging these changes. One main cause of the changes is globalization (Akgobek 108), which forces companies in the business industry to look for new ways of keeping pace with the market competition. Changes brought about by communication and information technologies also contribute to the development of companies. Globalization contributes a lot to international relations where different countries develop dependence on each other for goods and services, and that is why businesses seek to boost their development. Causes of globalization There are three factors that have contributed to globalization. They include technological factors, ideological factors, and economic factors (Akgobek 109). Information technology nowadays shows a serious advancement due to its cheap exchange between nations leading to global transformation. Communication and explosion in computer technology accelerates global financial market’s power. This is one reason why businesses are turning to use mergers and acquisition strategically to meet this change. Ideological factors deal with free trade across the globe, which cause a wide interaction between businesses in the world. It is through globalization that businesses can enjoy free trade within all countries around the world which support the free market (Akgobek 109). This free trade gives companies an opportunity to merge with and acquire a business room around the globe, giving it a chance to grow in the market. Economic factors help a business in expanding its operation with foreign countries, which is made possible through globalization. The purpose of many companies using mergers and acquisitions is aiming at opening foreign markets after removal of boundary limitations due to globalization. Due to globalization, businesses may not be in a position to conduct businesses outside their region. Therefore, as a result of the motives of financial or managerial gains, companies may choose to merge with others outside the region with the aim of fetching new customers from those regions. Digital growth or development of an organization is the ability to utilize its capacity in production quantity, revenue from sales, diversification of the products, the number of employees and capital, and investment size (Akgobek 109), but business growth relates to development on the quality of business elements and economic activity the business is able to provide. Just as growth is a natural to the development of human beings, naturally businesses too need to grow. The purpose of using mergers and acquisitions as development strategies is that the organizations need to provide opportunities of the business before their competitors. Businesses can grow by purchasing other enterprises within their own internal facilities or by combining forces with other operators (Akgobek 109). Companies merge with others purposely because they want to enlarge their operation in the market. The company that acquires another through buying resumes the legal nature of the company bought (Akgobek 110). When a company merges with another, it aims at keeping pace with its competitive conditions and changing market so that it can feature in the global market. All mergers practiced by companies target the consumer of the products. The companies study consumer tastes and consumption behaviors in the market. These tastes and preferences cause competition between various companies existing in the market where they make considerations on consumer behavior, which leads to all efforts made in ensuring business growth (Akgobek 111). In other words the main purpose of businesses using mergers and acquisitions as a development strategy is to win the consumer’s purchasing behavior and preference. Problems occurring during merger and acquisition processes Different companies have used mergers and acquisitions as a strategy for their growth; however, reports published show more of a failure of the method than its success. The main reason is that the companies fail to put into consideration very vital factors that contribute to the success or failure of the process. Failure to consider these factors causes failure in the development aimed at by the company, and renders the use of merger and acquisition irrelevant in business development. These factors include human factors and cultural compatibility and integration, among others. Studies have found out that many companies fail to reach their intended financial goals when doing merge and acquisition for development because they fail to put into consideration the human factors (Kusstatscher and Cary 17). Company problems with employees have borne responsibility for between a third and a half of all merger failures. This happens because the managers fail to consider the fate of employees when merging with other companies. Given that the most common mergers nowadays are the horizontal types, most employees lose their jobs because the potential for synergies is larger leading to frequent redundancies and power games, which put the employee at risk (Kusstatscher and Cary 18). Lack of understanding between the merging companies leads to lack of proper dispensation of capabilities by the employees, thus affecting the business growth. Despite studies on the impact of human resource in merging companies, consideration of human factors still lacks and causes most of the failures that companies pass through. To solve this problem, merging companies should embrace proper and informative communication to create a favorable communicative atmosphere that allows transfer of capabilities. The transfer can only be successful if both companies understand and respect each other’s organizational structure, corporate culture, processes and emotions (Kusstatscher and Cary 18). This will ensure that even employees are put into consideration and ensure that they do not lose their job opportunities, and this definitely boosts the company’s development. The other problem that occurs during merger and acquisition is failure to consider the organization’s culture. Some people feel that certain emotions related to their organizations cannot adapt being integrated with other organizations or changing their identity to house another organizational culture (Kusstatscher and Cary 19). Just as personality is important to an individual, so is the culture of an organization. Scholars have found that problems in organizational culture contribute a lot to failures in use of merger and acquisition as a development strategy (Kusstatscher and Cary 20). It is therefore wise to consider organizational cultures of each organization that seek to use merger and acquisition for development. The issue of equal culture between merging organizations has greater importance than the strategies they lay down for their operation (Kusstatscher and Cary 22). Thus, to solve problems and ensure successful merger and acquisition processes, both organizations should be willing to fit into the other’s culture and promote quick adoption. This will benefit and help the organization achieve its development goals through merger and acquisition. Work Cited Akgobek, Ibrahim. Mergers and Acquisition as a growth strategy. International Conference on Business, Economics, and Behavioral Sciences. 13-15. April. 2012. Web. 29. November. 2013 < http://psrcentre.org/images/extraimages/412031.pdf > McClure, Ben. Mergers and Acquisitions. Investopedia. 25. February. 2009. Web. 29. November. 2013. Ray, Kamal G. Mergers and Acquisitions: Strategy, Valuation and Integration. New Delhi: Prentice Hall of India, 2010. Print. Sherman, Andrew J. Mergers & Acquisitions from a to Z. New York: American Management Association, 2011. Print. Sherman, Andrew. J., and Hart, Milledge. A. Mergers & acquisitions from A to Z. New York, AMACOM, 2006. Print. Read More