The main dangers of using mergers or acquisitions as a form of market entry - Essay Example

? The Main Dangers of using Mergers or Acquisitions as a Form of Market Entry al affiliation: The Main Dangers of Using Mergers/Acquisitions as a Form of Market Entry Mergers or acquisitions may be defined as an aspect of corporate finance or strategy and management that involves buying, selling and combination of various companies. The objective of combining is to finance or assist a company that is growing to grow fast without forming another business entity. The two terms have a slight difference, on one hand, acquisition may refer to a company taking over another and establishing itself as a new owner. On the other hand, merger occurs when two companies agree to operate as one new company. As suggested by Turner and Johnson (2010), in both cases, that is merger and acquisition the outcome is that one company swallows another and operates as one. For instance in 1999, Glaxo Wellcome merged with SmithKline Beecham creating GlaxoSmithKline as a new company. Practically, equal mergers do not often happen, in most cases a company purchases another and allows it claim that it was equal merger, despite the fact of it being technically acquisition. However merges or acquisitions are said to have several risks when used as the entry to the market. Mergers and acquisitions have the tendency of destroying continuity of leadership in the particular company’s management. This might happen for even over a decade since the starting of the deal. Studies have shown that the targeted companies may lose about twenty percent of their executives prior the acquisition. Mergers and acquisitions in most cases create problems in the brand. One of the brand problems is how to handle overlapping and competition of product brands. This may cause a delay hence minimizing profits and both companies. There occurs a problem concerning decision on what to write off as the brand’s equity. According to Cecchini, Heinemann and Jopp (2003), this decision had up being inconsequential. A danger might occur when making a choice on the brand o merge with. This because the choice has to be carefully made to avoid future complications. Risks may result from the combination of different business cultures and fields. His may endanger market entrance as the integration of the two cultures may take time. The issue different consumer preferences may also be endangered by M&A. This occurs when upcoming company chooses to change the products. Changes may also occur in terms of price of product. One of the motives of M&A is to make the prices higher hence maximizing profits. The risk involved is that the consumer may change their attitude and fall to consume the products. This in turn endangers the growth of the company. The resulting company is faced with the risk of operation after the transaction as suggested by Segal-Horn and Faulkner (2010). For instance the personnel management may become slow because it is either new employees are incorporated or the existing ones become overloaded. The personnel department usually takes long to adapt to the changes thus proofing a slow growth in the progress of the new business. The effect on personnel therefore makes market entry not to be effective. The management of information and risks is also dangerous factor in M&A. The previous ways of transferring information may seem difficulty as a result of new workers or overload. The resulting company may become exposed to many risks due to the merger whilst the method of managing them may take long to devise. The cost of risk management may also be high at the time of market entry. This is dangerous because at this time the company is still trying to cope with the current situation. According to Deresky (2003), cultural differences and barriers proof to be dangerous to M&A in market entry. For instance, the lack of knowledge about the resulting market may be a danger to the resulting company or firm. The market may respond negatively to the merger thus result to poor sales. This will cost a lot to the new company as one of the merger motives is to increase sales. According to Tayeb (2003), M&A results to different regulations and practices since the company gets to be under new management. These practices may take long to adapt and thus minimizing the profits contrary to the merger motives. Different treatment of fiscal and accounting activities pose a danger to market entry. This is because there is an increase in stock and also the issue of extra expenses and income. The reporting requirements may pose a challenge to market entry in that with company expansion workers are answerable to two parties. Any disagreement between the parties involved in the deal will affect the market negatively. Political barriers make M&A dangerous for market entry. In a case where there is movement of one business to new country legal requirements of that country might proof to be a threat to company growth in its market economy. Government regulations and tax legislations to specific companies may become an obstacle to company’s progress. In case of bank mergers and acquisitions, the bank may end up reducing credit supply to its dependent small business enterprises. This danger associated with banks results from large economies of scale from which the larger organization works on. In the banking sector, merger and acquisitions may cause differences in risks across the banking industry. This is partly because increased market rates charged on loans may predict increased default premiums. This causes a risk for lending to the local customers. The dangers of high rates, associated with M&A imposed on liabilities predict relatively great probabilities of bankruptcy in the side of local bankers. If these risks hinder market entry, it could work against the hypothesized indicators on the outputs. For instance on one hand, high rates on loans reduce the chances of entry to the market. On the other hand, high rates reduce the entry probability due to the low power of the market and increased bankruptcy risk. Generally, the following conditions result to dangers or risks of using mergers or acquisitions for the market entry: Successor liability for claims based on discrimination: Any kind of discrimination is prohibited by law in most countries. During merging process the buyer needs to beware inheriting discrimination claims possessed by the seller. These claims may happen as a result of decisions made in relation to the merger and acquisition. The issue of solving such claims in court may cost extra expense to the successor, thus hindering successful market entry. Potential discrimination claims resulting from reduction of workforce: the reductions imply job losses and reality in case of merger and acquisition. This poses a danger to market entry as the employees are likely to file discrimination charges in court. They might claim their separation from the employment. According to Ferenczy (2005), the risk of reduction-in-force results from redundancy that occurs after the transaction. It also results from significant changes made by the buyer to the previous operations of the seller. The issue of excess capacity resulting from merger or acquisition, often results to the closure of entire company. The issue of combining workforce or choosing workers from the two firms basing on performance appraisal may be risky to he buyer. This is because those workers who loose employment ay file discrimination claims against the buyer. Again this slows the business operation. Reducing the risk associated with claims of discrimination: Legal claims may result from integration and selection decisions. This is because plaintiffs argue that mergers or acquisitions activities may be done to mask discrimination. State laws: Apart from the WARN Act obligations to failure to concur with other state laws for workers may imply a serious danger to the mergers or acquisition process. This consequently may affect market entrance. This is because the state laws offer regulations to be followed min such acts; however the process may view them as cumbersome thus risking them. Pre-negotiation agreements: during the merging and acquisition agreements the buyer should be keen because any misunderstanding may pose a challenge to the resulting company. The buyer should particularly pay attention to the seller’s financial terms concerning labor agreements. Credit worthiness of the two firms prior to the merge or acquisition: In this case, the buyer should consider any debts accrued by the seller previously. This is because incase of any claims from the debtors, the buyer is held responsible. This may be a major draw back to the rising company form the transaction. Union issues after the transaction and evolving workforce: After the merge or acquisition, the union still remains as the employee’s representative. According to DePamphilis (2007), the union demands on the rights of employees may pose threat to the mergers or acquisitions. This is because the buyer’s changes in the workforce may directly or indirectly affect the union representation. The union is likely to file a legal charge and this in turn threatens the buyer’s entry to the market. However any terms used to solve this issue may consume a lot of time on the side of the rising firm or company hence causing difficulties in entering the market. Contractual obligations: company merging or acquisition clauses during merger or acquisitions agreements complicate the process inhibiting businesses entity sales. These complications may result to a major drawback in the transaction thus endangering market entry. Conclusion Mergers and acquisitions are a common way for gaining good grounds in business especially when establishing in a foreign environment. This is considering that foreign markets often present numerous challenges to businesses some of which are imposed by the foreign government. In spite of helping to solve some of the problems related to foreign market entry, mergers and acquisitions also are faced with a lot of risks. References: Cecchini, P, Heinemann, F. & Jopp, M.(2003). The incomplete European market for financial services. New York NY: Springer. DePamphilis, D. (2007). Mergers, acquisitions, and other restructuring activities. New York NY: Academic Press. Deresky, H. (2003). International Management: Managing across Borders and Cultures. India: Prentice Hall. Ferenczy, I. (2005). 2005 employee benefits in mergers and acquisitions. New York NY: Aspen Publishers Online. Segal-Horn, S. & Faulkner, D. (2010). Understanding Global Strategy. New York NY: Cengage. Tayeb, M (2003). International Management: theories and practices. India: Prentice Hall. Turner, C & Johnson, D. (2010). ' International Business’. London: Routledge. Read More