How Merger and Acquisition Could Help the Financial Institution for both Companies - Research Proposal Example

How merger and acquisition could help the financial for both companies Executive Summary Mergers and acquisitions (M&A) are an integral part of the corporate finance sector. Deals can be worth hundreds of millions, or even billions, of dollars. They can dictate the fortunes of the companies involved for years to come. For a CEO, getting involved in an M&A can be a main land mark in his whole career. These types of transactions happen very often in the finance sector. Firms purchase other firms for a number of reasons. Whatever reasons prompt a particular deal, M&A are thought to be successful when multiple synergies are achieved and when the business combination increases the net cash flow of the merged business more than what each firm could have achieved on its own. This proposal considers the factors that drive firms to buy or merge with others, or to split-off or sell parts of their own businesses and the resulting tax consequences for firms and for investors. The main motive behind buying a firm is to create shareholder value above and over that of the sum of the two companies. The main assumption behind merging two companies is that two companies together are more productive than two separate companies. This underlying principle is particularly attractive to firms when the going is tough as has been the case for some of the companies in the prevailing economic crisis. Strong firms will opt buy other firms to create a more competitive, cost-efficient firm. The firms will merge with the intention of gaining a greater market share or to achieve greater efficiency. Due to these potential advantages, target firms will most of the time agree to be purchased when they are aware that they cannot survive alone. In fact merging or being acquired may be the only way for some smaller and less established firms to survive this prevailing economic crisis. 1. Introduction A merger occurs when two companies, most of the time roughly the same size, agree to proceed as a single new firm rather than be separately owned and operated. This sort of procedure is more accurately referred to as a "merger of equals". The stocks of both the firms are surrendered and novel company stock is issued in its place (Tibergien, 2006). For example, both Daimler-Benz and Chrysler ceased to exist when the two companies merged, and a new firm, DaimlerChrysler, was born. Although most of the time they are used in the same context and used as though they were synonymous, there is a slight difference in meaning the terms merger and acquisition. When a firm purchases and clearly establishes itself as the new owner, the taking over is called an acquisition. From a legal perspective, the target company ceases to exist, the buyer company takes over the business and the buyer's stock continues to be traded. In real world however, actual mergers of equals don't happen that regularly. Usually, one firm will buy another and, as part of the deal's terms, simply allow the acquired firm to declare that the action is a merger of equals, even though technically it's an acquisition (Donald, 2008). Being bought out most of the time has its negative implications, as a result, by defining the deal as a merger, deal makers and the top management attempt to make the acquisition more pleasant. A purchase deal will also be called a merger if both CEOs agree that joining together is in the best interest of both of their companies. But when the target company does not want to be purchased-that is when the deal is unfriendly - it is all the time considered as an acquisition. Whether a purchase is regarded a merger or an acquisition actually depends on whether the purchase is friendly or hostile and how it is announced. That is the actual difference is in how the purchase is communicated to and received by the target company's top management, other workers and shareholders. The economic crisis and anticipated slowdown in spending has made a number of firms that have great technology but weak balance sheets seek the shelter of a merger or an acquisition. Synergy is defined as "the idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts" (www.investopedia.com). Synergy is the magic recipe that allows for greater cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies could hope for the following advantages: Acquiring new technology - By buying a smaller firm with unique technologies, a large firm could have or develop a competitive edge, because to remain competitive, it is imperative that firms stay on top of technological developments and their business applications. Economies of scale -Size does matter. The idea is that mergers mean that the resultant company becomes larger thus this turns out to improved purchasing power when placing large orders whether to buy office supplies or equipment or a new corporate IT system. Improved market reach and industry visibility -Firms can reach new markets and grow revenues and earnings by buying other companies. A merge could help expand two firms' marketing and distribution, providing them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones (Enderwick, 2009). Staff reductions - Generally mergers tend to bring about job losses. Think about all the money saved from cutting down the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who normally leaves with a compensation package. In spite of the above said benefits achieving synergy is not such an easy task - it is not automatically reached when two companies merge. There should to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. From the viewpoint of business structures, there are different types of mergers such as horizontal merger, vertical merger, conglomeration, product-extension merger, market-extension merger. There are two types of mergers that are differentiated by how the merger is financed (Andrade, & Mitchell, 2001). Each has certain implications for the firms involved and for investors such as Purchase Mergers and Consolidation Mergers. In the first instance Purchase Mergers takes place when one firm buys another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can decrease in value annually, reducing taxes payable by the acquiring company. Secondly, Consolidation Mergers takes place when a brand new firm is formed and both firms are bought and combined under the new entity. The tax terms are the same as those of a purchase merger. The difference between an acquisition and a merger is very small. In fact, it may be different in name only. Like mergers, through acquisitions firms seek enhanced market visibility efficiencies and economies of scale. Unlike all mergers, all acquisitions involve one company buying another - exchange of stock or consolidation does not take place as a new firm. Acquisitions are most of the time amiable, and all parties involved feel satisfied with the deal. Other times, acquisitions are more hostile. Another type of acquisition is a reverse merger a deal that allows a private company to get publicly-listed in a comparatively short space of time. This happens when a private firm that has strong prospects and is keen to raise financing purchases a publicly-listed shell company, normally one with no business and limited assets (Gupta, & Roos, 2001). The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. Immaterial of their category or structure, all mergers and acquisitions have one common objective: the idea is to create synergy that makes the value of the combined firms greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved. 1.1. Research Aims To establish positive and negative correlations if any between mergers and acquisitions by the companies and survive in the recent global crisis. To identify correlations and regressions between and among strategic policy initiatives at both companies concerning merger and acquisition related outcomes. To find proof, if any, of company's successful strategic management policy orientation to achieve positive organizational synergies, such as cumulative impact of integration of the two systems and diversification of sources. To identify how companies have been managing their business successfully with M&A strategy. 1.2. Research Questions What's the extent to which company has been strategically orienting itself to achieve positive organizational outcomes in M&A and what's the scope of its current strategic operational environment as determined by the complex and diverse implications The primacy and immediacy of company's strategic internal and external environments and their impact on business management have to be determined with reference to its M&A. How companies have been managing their business successfully with M&A strategy Finally the above policy is highly influenced by company's ability to successfully recommend it's invested in business process modeling and reengineering. 1.3. Research Hypothesis Mergers and acquisitions (M&A) often produce positive synergies that can be summed up as the sum total of net benefits resulting from a merger or/and an acquisition. This dissertation looks at those net positive synergies against the backdrop of an evolving complex and diverse M&A paradigm entailed by the current economic downturn (Harwood, 2006). Thus the extent to which those net benefits would enable the merged entity to overcome the negative impact arising from the global recession must be investigated from the viewpoint of strategic operational environment created by the new developments including the merger or/and the acquisition. The primacy and the immediacy of the organizational goals including the corporate objectives would act as the overriding concern for the combined management to seek new vistas in the combined marketplace. This overriding concern might as well impose some restrictions on the operational freedom of the new entity. This paradigm would receive much greater attention in this analysis thus focusing on the dissociation element of positive synergies too. 2. Literature Review Given below is an example of mergers and acquisitions by Unilever's and the impact that it has had on Unilever and the other companies involved in the deals. Unilever's products are used by 150 million people in 150 countries in the world and this is a strategic impetus for a consumer products company with a record level of annual sales revenue amounting to $46 billion. Unilever sells packaged consumer goods to captive consumers who have rarely abandoned the company in preference for another. The logic behind its success is to be found in its mission statement - "meeting the everyday needs of people everywhere". Thus out of every two households in the world one uses Unilever products (Jones, 2005, p.352). It controls roughly 90 subsidiaries in the world. It's the second largest packaged food company in the world just behind Procter & Gamble. Its current expansion programme includes a number of acquisitions and mergers. The addition of Napoca in Romania gave them a grip from which they could launch the ice cream portfolio. The acquisition of Baltimor ketchup in Russia allowed them to fill out their Dressing portfolio (Huang, & Walkling, 1987). The acquisition of the Personal Products brands of Sara Lee, such as Sanex, Radox, Neutral and Dushdas, allowed them to meet consumer needs across a wider range of price points in the Skin Cleansing and Deodorants markets. These were the acquisitions that Unilever made in 2009 and it has helped it reach new markets in the midst of the economic crisis. Its smaller acquisitions like the purchase of Kwality Group's ice cream plants in Delhi, India by Hindustan Lever Limited (HLL) and bigger ones like Japan's Ajinomoto Co. for $381 million. This acquisition gave Unilever the full management control and total sales and profits in seven Asian Ajinomoto owned companies. The strategic significance of these acquisitions has to be examined against the backdrop of their future revenue generating capacities. Above all they have to be considered as part and parcel of the overall Unilever operations in the world. Its organizational structure and culture have augmented this A&M drive despite a number of set-backs that it suffered in some of its operations recently. The strategic competitive environment of the global packaged food industry in particular and the consumer goods industry in general has been characterized by a series of causative factors such as demand-centric and supply-centric influences (Thomas, 2007). Health worries on the part of consumers have taken a particularly worse turn for the packaged food industry while suppliers are going for mergers and acquisitions to achieve scale economies and bigger profit margins. This trend has brought with it a host of other consequences within and without the industry. Such developments have place Unilever in a particularly tight spot with regard to M&A activity. Both causes and consequences of these acquisitions and mergers can be considered on a broader set of strategic management choices and imperatives along with competitive expediencies of time and circumstance (Loderer, & Martin, 1992). Unilever has been operating on a uniformly defined platform of principles of which the corner stone is the strategic competitive edge over its rivals such as Nestle, Procter & Gamble and Kraft. Thus its product/market orientation strategy is based on this principle of widening the choice for the potential consumer. Its global operations are divided into North American, European and Asian segments. Its subsidiaries in countries like the USA and Canada have also gone on a M&A spree with some of the priciest ones such as the acquisition of Bestfoods for a sum of $20.3 billion in 2001. With a diverse portfolio of products including world famous Hellmann's mayonnaise and Skippy peanut butter, Bestfoods could go a long way in the acquisitions of Unilever. Its Asian operations are determined by a relatively peculiar set of circumstances. Though competitive parameters remain the same throughout the world Asia has an inherently different context in which M&A activity is comparably easier and smoother in comparison to North America and Europe. For instance Unilever acquired a further 2.44% stake in Unilever Pakistan Ltd., in October 2008. Though subsequently its share value fell by 6.35%, the company has a clear policy thrust towards strategic M&A drive in which a selected number of food and consumer product investments in different regions have been initiated in the recent past. Unilever's policy of M&A is part of a global strategy that is conducted with utmost care and long term corporate goals on mind. In the process four strategic outcomes are sought to be produced. The first such outcome is the value capturing effort. Though value capture effort as pointed out by Chanmugam et al (2005) is not an easy task because synergy estimations and planning can be subservient to overriding cost considerations, there is an ever growing tendency among managers to ensure cumulative synergies and proper planning in order to significantly alter the post-acquisition (or post-merger) outcomes. Thus value capturing is a process of enhancing the cumulative positive synergies of the acquisition or merger and as such it's incumbent on the management to pursue such policies as would be necessary to create value. Unilever in Europe in particular and in the rest of the world in general has succeeded to a certain extent in capturing value. This is evident in its ice cream business though subsequent divestments also show how other strategic imperatives outweigh those of immediate ones. The second outcome concerns the creation of synergies. Value chain management process and supply chain management are essentially influenced by combined scale economies of the merger. Such synergies in turn produce a series of positive outcomes for the company. For instance strategic management process is fundamentally determined by them despite the fact that the top management would not adhere to formulaic principles that were hitherto followed. Unilever has adopted some of these far reaching changes in its effort to create synergies both at the level of management and technology integration. Such efficiencies often attributed to horizontal mergers have to be merger-specific in order to have any meaningful outcome (Schweiger, 2002, p.60). Unilever's merger with Bestfoods was considered to be such an experience albeit horizontal efficiencies have not been effectively translated into benefits for consumers. This has been attributed to a lack of merger-specificity. In the absence of merger-specificity horizontal synergies are less likely to occur. Unilever after the merger with Bestfoods had a very strong portfolio of global and regional brands. Instead of the breakfast cereal prices coming down, they went up. Thirdly there are economies of scale that would bring down the average cost to a minimum. Horizontal mergers are known to produce efficient outcomes by way of partially scale related operational capacity rationalization and enhancement. X-efficiency as related to management techniques will all the more enhance the new company's management structures thus strengthening the hands of the top management to motivate subordinates towards the achievement of organizational goals. Unilever's M&A strategy has been specifically oriented towards the achievement of these scale economies - technical, managerial, financial, labour-related economies, marketing and strategic. Finally there is the combined demand for the products of two companies. How would the average consumer respond to this new phenomenon depends on the correlated outcomes of the pricing strategy and product development strategy of the new company. Unilever has been able to take into consideration the combined effect of such acquisitions and mergers on price levels. Similarly product development strategy has benefited from a rise in quality. For example its packaged foods including ice creams have struck a chord with consumers after some of the recent acquisitions and mergers in North America, Europe and Asia. Unilever's divestments have also been equally significant both strategically and psychologically. For example a series of divestments that Unilever carried out recently have produced some highly desirable results for the whole company. In 2006 it sold most of its Frozen Foods business under the Birds Eye and Iglo brands in Europe to an array of buyers. It retained only the Italian Frozen Foods business with a view to reorient it towards a more dynamic market-oriented venture. The European operations include France, the UK, Spain, Portugal, Ireland, Italy, Germany, Greece, Austria, Belgium and Ireland. The Netherlands-based wholly owned subsidiary, Unilever Overseas Holdings BV (UOHBV) of Unilever sold much of its stake in Rossel Industries Limited in India to M.K. Shah Exports in 2005. These divestments illustrate how much divestment-specificity could produce reverse positive synergies through horizontal divestments (Loughran, & Vijh, 1997). Global brands not only reach the decline phase of the product life cycle but also tend to disaggregate synergies when the company goes too much on an M&A spree for too long. 3. Research methodology This dissertation presents the research methodology utilised to analyse the research data and describes the various methods used in this study. This research paper basically consists of two data sets - primary and secondary. Primary data set consists of a case study analysis of Unilever. While case study could be analyzed with much more accuracy and detail were sifted and collated to identify significant trends and regressions in the major mergers and acquisitions and divestment strategies. Secondary data was collected through an extensive research effort conducted both online and in libraries. The researcher extensively used the books written on the topic and also studied research journals, reports, graphs, articles, newspaper articles and so on. References were taken from most of the research material available in the field. This study depends mainly on the secondary material, because theoretical analysis is much well facilitated by it than primary material which is basically limited to the Unilever case study (Rezaee, 2001). The available literature has been analyzed with specific focus on the company's mergers and acquisitions strategies which helped them to avoid from losses. This researcher has tried to show the most important aspectual overview of the research in the Literature Review. Also there is considerable reflection on the state and relevance of current research. Future research possibilities in the field are discussed in depth to show how theoretical underpinnings evolve with time and space with specific reference to M&A strategies being designed put in place by modern companies to survive in the global crisis. However the research methodology segment of this paper places emphasis on the qualitative aspect of it rather than the quantitative aspect. As such the available empirical evidence has been greatly utilized by the researcher to delineate the current line of arguments as expounded in the Literature Review of this paper. Conclusions Having said that mergers and acquisitions cushion companies, particularly smaller ones, in periods of economic crisis it also has some drawbacks. Mergers can be prompted by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the situation uncertain are all reasons that could bring about a strong temptation for defensive mergers. At times the management team feels they have no choice but to acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. Coping with a merger could make top managers spread their time too thinly and neglect their core business, spelling doom. The possibility of success is further hindered if the corporate cultures of the firms are very different. When a firm is taken over, the decision is generally dependent on product or market synergies, but cultural discrepancies are often overlooked. It's not correct to presume that personnel issues are easily overcome. Firms most of the time concentrate too much on cost cutting following mergers, while revenues, and ultimately, profits, suffer. Merging firms can focus on integration and cutting costs to such an extent that they neglect day-to-day business, thus driving away nervous customers. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders. The strategic significance of these divestments is attached to the very familiar cash inflow technique. While Unilever was able to increase its cash inflow the company could also shed many of its unprofitable operations in the world. Divestment strategy is not necessarily determined by the need to find a cash flow solution but also by the need to ameliorate Group finances at times of economic trouble. When demand for some of its global brands came tumbling down there was no alternative but to get rid of them so that the rest of its market presence could be defended against competitors. Unilever has had a roller-coaster ride on M&A and divestments so far and these M&A's have helped it survive through the economic crisis. REFERENCES 1. Andrade, G & Mitchell, M 2001, 'New evidence and perspectives on mergers', Journal of Economic Perspectives, vol.15 no.2, pp.103-20. 2. Chanmugam, R & Shill, W 2005, 'The Intelligent Clean Room: Ensuring Value Capture in Mergers and Acquisitions,'Journal of Business Strategy, vol.26, no.3, pp.43-49. 3. Donald, D 2008, Mergers, Acquisitions, and Other Restructuring Activities, Elsevier, New York. 4. Enderwick, P 2009, 'Responding to global crisis: the contribution of emerging markets to strategic adaptation', International Journal of Emerging Markets, vol.4, no.4, pp.358-374. 5. Gupta, O & Roos, G 2001, 'Mergers and acquisitions through an intellectual capital perspective', Journal of Intellectual Capital, vol.2, no.3, pp.297-309. 6. Harwood, IA 2006 , 'Confidentiality constraints within mergers and acquisitions: gaining insights through a 'bubble' metaphor', British Journal of Management, vol.17, no 4, pp. 347-359. 7. Huang, Y & Walkling, R 1987, 'Target abnormal returns associated with acquisition announcements: payment, acquisition form, and managerial resistance', The Journal of Financial Economics, vol.19, no.2, pp.29-349. 8. Jones, G 2005, Renewing Unilever: Transformation and Tradition, Oxford University Press, Oxford. 9. Loderer, C & Martin, K 1992, 'Post-acquisition performance of acquiring firms', Financial Management, vol.21, pp.69-79. 10. Loughran, T & Vijh, AM 1997, 'Do long-term shareholders benefit from corporate acquisitions', Journal of Finance, vol.52, pp.1765-90. 11. McClure, B 'Mergers and Acquisitions: Introduction' Retrieved from, www.investopedia.com , on March 09 2010. 12. Rezaee, Z 2001, Financial Institutions, Valuations, Mergers and Acquisitions, 2ndedn, John Wiley & Sons, New Jersey. 13. Schweiger, D 2002, M&A Integration: A Framework for Executives a Manager, McGraw-Hill, New York. 14. Thomas, S 2007, Reasons for frequent failure in Mergers and Acquisitions: A comprehensive analysis, Deutscher Universitatsverlag, Wiesbaden. 15. Tibergien, MC 2006, How to Value, Buy, or Sell a Financial Advisory Practice: A Manual on Mergers, Acquisitions, and Transition Planning Bloomberg Press, New York. Read More