Causes and Effects of Merger and Acquisition Activities - Research Proposal Example

Proposed dissertation title

Merger and Acquisition are terms that can be used interchangeably since they have a similar meaning to the other. Practically, there is no difference between the two terms. The study will use the terms interchangeably to meet the same thing. Merging and acquisition are common when the strong companies buy the other companies so that they become strong in the competition (Muendler, 2013). Due to the benefits, the targeted organizations will always be willing to form the merger when they consider the fact that they are not able to survive on their own.

Introduction and background

Competition and increased globalization in the economic development have rapidly changed over the past years. The changes have had the challenge to companies as they have increasingly grown more demanding land and difficult to manage. What has resulted from the challenges is acquisition within the borders and across the borders from different organizations. Acquisitions and mergers are a common type on invested in the highly growing economy with the investments at times bringing unexpected outcomes. The thesis is developed with an aim of investigating the effects of mergers and acquisitions on firm performance.

Acquisition and merger have been important in keeping the companies in the pace of the economic developments and the processes have partly replaced organic growth. In the real setting, merging and acquisition rarely occur. In the real setting, a company will buy the other and allow the other firm to proclaim that the activity in the situation is a merger when as in most cases a merger. When there is a purchase agreement, the process will be considered a merger (Hitt, Harrison, and Ireland, 2001).

Whether joining of organizations is through a merger or acquisition, the main consideration is whether the purchase or the joining is friendly or hostile. It also considered the way the purchase is communicated and when the target company agrees to the terms. There are studies that had earlier been done on the topic, but most of them have focused on the international effects or the effects in specific countries or regions. The investigation in the study is however done from different perspectives taking into consideration the individual countries and international mergers.

Theory and prior research

According to the research carried out by Muendler, 2013, the arguments on the effects of merges were mainly on the sixth merge wave. The data used in the research is developed from the sixth merge wave that was between 2003 and 2007. Muendler (2013) also believed that the data used also was obtained from resources before the economic crisis of 2008. Danzon, Epstein and Nicholson, (2004) also supported the claim that the crisis that was experienced in 2008 had a big impact on the world economy and also an impact on the behaviour of firms regarding mergers and acquisitions. The data used in the research is developed from the sixth merger wave that was between 2003 and 2007. The data used also was obtained from resources before the economic crisis of 2008. Muendler(2013) further insisted that the crisis that was experienced in 2008 had a big impact on the world economy and also an impact on the behavior of firms regarding mergers and acquisitions (Fiordelisi, 2009). In the research, the effect of mergers and acquisitions are investigated from different perspectives. The first perspective used in the research is that it focuses on an international difference. The research according to Muendler (2013) also used the current data obtained from 2002 to 2013 making it able to re-examine the data obtained in the past and the current behavior of mergers and acquisitions (Muendler, 2013).

According to Child, Faulkner, and Pitkethly (2001), the beginning of merger wave which was at the end of the 19th century and the beginning of the 20th century. There are other mergers that observed in the 1980s, 1980s, 1960s and the mid-2000s. The research and the data collected from the different countries focus on the activities by the merger, the effect of the activities, determinants of abnormal returns, mergers in different economic periods and magnitude of mergers in different countries (Harvey and Newgarden, 1969).

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Causes of merger and acquisition activities

According to Child, Faulkner, and Pitkethly (2001). the factors that contribute to the wave include the pressure and the quest to grow and being a consolidator. The need to grow and the pressure to growth are the main reasons for mergers and acquisitions. When the internal growth initiatives of an organization are low, and the organization has no other way to growth, the option available to the organization becomes the only way an organization uses to obtain growth (Muendler, 2013). The external pressure can also force the manager of an organization to resolve to and create more transactions. This statement was also supported by Daniel and Metcalf, (2001).

Child, Faulkner, and Pitkethly (2011) further claimed that the external pressures are mainly from the need of double-digit growth from the analyst, and this makes the investors hard to satisfy, the investors are satisfied when there are mergers and the organizations can have more growth. The options that the organizations have are only mergers and acquisitions even when they might have failed in the future. Morris and Blackton (1995) stated that consolidation is another factor that leads the business to merger. Consolidation involves combining of businesses to challenge the position of a company in the market. Some organization mergers so that they can survive as when they are not able to compete effectively when they exist on their own (Morris and Blackton, 1995). There are other organizations that are not able to acquire resources when they operate on their own, and they have no option but to join mergers (Daniel and Metcalf, 2001).

Effects of mergers and acquisitions

According to Morris and Blackton (1995), mergers and acquisitions have effects on the financial position of the organization and their capital structure. The activities of the mergers have a longer-term ramification for entry in the merger. Morris and Blackton (1995) also stated that for a company that is targeted through a merger, the transactions of the merger give the shareholders the opportunity to cash out important premium mainly institutions when the transactions in the organizations mainly deal with cash (Fiordelisi, 2009). Krallinger (1997) also claimed that For the organization that is acquiring a merger, the impact that the merger has on them depends on the deal size and the size of the company. When the potential target is large, there is a higher risk of the acquirer (Geiger, 2010). There are companies that can bear the risks of a small seized acquisition, but when there is a failure of a huge purchase, this may affect the long-term success of the organization (Krallinger, 1997). Krallinger further stated that in determining the profits attained in a merger, most of the transactions are carried out through the stock of the acquirer. This takes the premier acquirer price its shares to use its stock as currency (Harvey and Newgarden, 1969).

From the theories used in the research the data that was developed before, the management of the target company have to be convinced that the deal is great to accept the stock of the acquirer rather than card cash (Morris and Blackton, 1995). The support that the acquirer obtains is also important in the effects they have.

Krallinger (1997) also believed that another effect is to market reaction and future growth of the organizations. The reaction to the market when an organization gets into a merger may be favorable, or it may be unfavorable depending on the participants in the market. In most effects, the shares of the target company will rise until it is close to the offered (Geiger, 2010). In most situations, the shares of the target may trade above the price of the offer. In some situations, the target company may trade below the offer price announced. The claimed was also proved by Hitt, Harrison, and Ireland (2001), who said that the situations mainly occur when the purchases parts are considered to be the shares of the acquirer. The situations also are in situations when the stock of the acquirer is transferred, and they are considered the stock of an organization and not the stock of the merger (Harvey and Newgarden, 1969).

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Merger and acquisition in different countries

According to Hitt, Harrison, and Ireland (2001), mergers and acquisition in different countries vary due to the difference in geographical influences. The different roles that geographical factors play in acquisitions and mergers are discussed with the consideration of an investigation by Beckerman and Lheto. This study by Hitt, Harrison, and Ireland (2001) was mainly in domestic mergers and acquisitions, and they found that the merger and acquisitions occur within different regions (Fiordelisi, 2009). Many organizations prefer merging with the others in their geographical boundary, and the mergers also are likely to occur in areas that have many industries (Fiordelisi, 2009).

The data shows that the effects of mergers and acquisition in the UK correspond to the effects that are in the United States (Harvey and Newgarden, 1969). In the two nations, there are mergers that have experienced a reduction in profit after them merger. International mergers have different results since studies have found different effects in the results. Hitt, Harrison, and Ireland (2001) also found out that there are countries where mergers have been found to be insignificant while in other countries, the mergers have been profitable than when the organizations operate independently.

Research Aims and Objectives

Aims

• To find out if economic factors affects mergers and acquisitions in a firm.
• To determine how mergers and acquisitions impacts a firms.
• To determine the possibility of detecting performance from mergers and acquisitions.

Objective

• To make an estimation on the returns and the profits that organization have acquired through the merger through the use of data obtained before the economic crisis

Hypothesis

• Economic factors have a stake in the mergers and acquisition of a firm.
• Mergers and acquisitions affects the management, financial standing and operations of a company.

Methods and data

The research problem and the objectives are investigated through two main approaches; performance of firms measured through profit consideration and firm performance measured through consideration by stock prices. The result obtained from the first approach shows that merger and acquisition has a positive effect on the prices of stock. The data obtained and analyzed between 2002 and 2013 shows that the announcements of mergers and acquisitions made the stock returns higher than the mergers that are announced in non-crisis periods.

The results obtained from the second approach shows that merger and acquisitions are most profitable in the first five years the mergers are formed. For the approach, the most positive results are obtained in the times when there is no crisis than when there is a crisis in a country. The effects are same in different countries, but the magnitude was determined to vary between countries due to the difference in economic setup.

For the two approaches that are used in the study, the assessments meet different needs. Only the domestic transactions between the merger rates is taken into account. The transactions were found to constitute 82% of all the deals that are publicly made in the whole world. The data that was used was data from 2002-2013 shows that in many mergers, the firms that are acquiring control less than 50 percent of the shares of the target (Hitt, Harrison, and Ireland, 2001).

Methodology of the study

The study will use both the secondary and the primary sources of data. The collected data will be on some of the economic factors that affect the mergers and acquisitions, various ways in which mergers and acquisitions affects the firm and the data on how to detect the performance of mergers and acquisition in the merging firms. The data will be collected from online searches, personal interviews with the management of the firm, and also issuing of questionnaires containing questions oriented to the research questions. The collected will then be analysed and presented in form of graphs, tables, and other forms of pictorial representations. The collected data will then analysed using the SPSS and also excel. The effects of the firm will be tested by the event study approach and testing the profit of the company after the merging and acquisition.

The first approach used in the study was an event study that focused on the prices of stock around the dates that the organizations announce to merger. The method was used since it is effective in the determination of the effects of merger and acquisition on the price of stock. The effects in the study will be measured through the consideration of cumulative average abnormal during the period of the events. In areas where the cumulative average abnormal returns have a positive value, it indicates that the performance of the firms are positive and in situations when the cumulative average abnormal returns have a negative value, it shows that the mergers and that acquisition have a negative effect on the firm.

In the study, the abnormal store returns are determined for the acquired and the targeted firm. This is made the main selection criteria to be based on standard event study.

Research ethics

There are different ethics and codes that will be considered in the research. In determining the facts and obtaining the correct data for analysis, one needs to apply the ethics of honesty, objectivity, carefulness, integrity, respect for the intellectual properties, openness, confidentiality, respect to colleagues and responsibility publication.

In objectivity, there will be striving in avoiding in the experimental design, peer review, decisions by the personnel and data analysis. In the research, there will be avoiding and minimizing bias. The research tends to disclose the financial interest and the personal factors that may affect the research. Integrity in the research will involve keeping promises and agreements to the organizations. Openness in the research will involve sharing the right data obtained from the organizations, the resources needed and the tools that will be used in the research.

Confidentiality entails keeping the data of the organizations undisclosed to others such as the competitors that might use the data otherwise for the intended purposes. The papers taken from publication and the personnel records should also be kept confidential. Competence also is an important ethical consideration since it is through the competence that the right and quality data will be obtained for the analysis. The study will take the right time and the right strategies to promote competence in the organizations and the fields.

Time scale and resources

The time used in the research to collect information from the relevant resources was 12 weeks. After 12 weeks, the data obtained was enough and the analysis was done in two weeks to come up with the right result through which conclusions could be made. Many of the resources that are used in the research were written in the new millennium and most of the data used are also based on periods of observation. Some of the primary resources used are five to ten years old since most research of the topic was done at the period.

There are activities that need to be concluded before the others are done. For effective research, the study will first collect enough data for the first twelve weeks before analysing the data in the next two weeks. The key activities that will be done in the research include collecting data from the websites of the companies and from other primary sources, analysing the data and making the right conclusion in regard to the research objective.

The selection of the literature used is based on the academic resources on the research topic. Many of the resources that are used in the research were written in the new millennium, and most of the data used are also based on periods of observation. Some of the primary resources used are five to ten years old since most research on the topic was done at the period

The empirical review of the evidence was based on fifteen academic reviewed sources performed over an extensive period. The resources that were collected were effective since the studies were performed with high academics, effective in providing the foundations for discussing the results obtained from the study and the studies being comprehensive due to their content. Many of the resources used in the study were performed in an event study, and they are examinable.

There is varied information in the websites of information on the websites of the company though it is important in recognizing the fact that the information is characterized with a high degree of subjectivity. Getting the data directly from the organizations would have been a great method and would have made the data be of high quality though the information obtained from their websites together with the external information was found to be sufficient in getting the desired outcomes.

Conclusion

To conclude on the research, there are two approaches that were used in the research. The first approach measured the performance of the mergers with the consideration of stock prices and the second approach being changes in the profits. Both the approaches were mainly based on the different organizations in different parts of the world. The approaches determined that through mergers, organizations have been able to have better performance than when they operate independently.