Corporate Finance Assignment - Essay Example

Advanced Corporate Finance Mergers and Acquisitions The objective of mergers and acquisitions is to insight the empirical literature in economics as regards the effects of acquisitions and mergers. The subject has far reaching applications for formulation of a policy of competition. The analysis of favorable and unfavorable effects based on the study of stock markets with the reinforcement of accounting on a large scale with studies of data and creating a base for methodology of conduct of interviews or methods with intensive data for ahead of merger as well as after merger performances to study distinctive mergers. Mergers and acquisitions create the potential for strengthening the market as well as technological superiority for developing the overall growth of the company with benefits. The cost of production can also be reduced and operational efficiencies can be improved with an emphasis on enhancement of value of brand bringing more goodwill for an achievement that would be spell bounding and financial feasible as well as it is viable for growth (Pautler, 2003). Value Creation for Offeror and Offeree Company The ideas of mergers and acquisitions (M&A) create an opportunity that would rekindle the companies involved to assess their financial strengths based on an analysis of their products of their money spinners. Some product lines of offering company might be substituted by the divestment of the business involved in that product lines for betterment of turnover because of the offeree company’s strength in the market. This is with certain product lines that would add value addition to the business of offering company. Alternatively, there are circumstances that other big product lines may be pursued by the offering company that contributes nearly 100% of their turnover. Such product lines are strengthened further by the scheme of mergers and acquisitions with the offerree company. Secondly, the advantage in financial terms for a substantial purchase consideration is on the cards while going ahead with the scheme of mergers and acquisitions. For instance, a company with product lines of industrial products contributing less than 15% of the turnover and 85% of the turnover being contributed by real estate in early 1980s could go ahead with a scheme of merger and acquisitions. Such a company after realizing its full potential with realizations of industrial products divested its stake with the scheme of mergers and acquisitions with their real estate arm of business to derive the full potential from both the product lines for a few years. Later when expansion was on the cards for big boom in real estate the company took a decision to spin off its product lines of industrial products. The company devised a scheme for realization of purchase consideration of the whole division of industrial products for a high price. Such a move in mergers and acquisitions add value to the offering company in the above manner. The reason is the high price realized pushes up the profitability thereby paving the way for declaration of higher dividend to the shareholders. It also effects a higher earning per share to the shareholders to realize their full potential of wealth creation in the stock market. The economies of operational efficiencies are fully realized by such an approach. The shareholders of Offerree Company also have the opportunity to gain a certain ratio of offerror companies share in terms of allotment in specified ratios in accordance with the scheme of mergers and acquisitions. The offerree company’s shareholders also have an advantage of increasing their wealth in terms of additional shares that might continue to get quoted at a high price. The value creation is being translated in higher investment as well as higher earning per share based on the dividend rate declared in the preceding years and proposed in the following years. There is strategic relationship of acquiring related firms that can increase the economic value of bidding firms that are successful for bringing about relatedness strategically generating economic profits to benefit bidding companies shareholders. The hypothesis relatedness in mergers and acquisitions has never gone untested. The results also augment consistency that sometimes is far fetched for managerial expectations. Some acquisitions failed to generate adequate returns to bidding firms. In the strategy of M&A the shareholders relating to target companies’ benefit of shareholders to enable them not to lose in bidding firms. The concept of relatedness enhances the values of superior returns of related firms. A financial definition of relatedness is aggregate of the net present values that pave the way for bringing about synergies with greater aggregated cash flow offering benefits that would make the combined firms’ operations more successful and easier to sustain and generate better markets and growth. (Barney, 2007). The Phase of Mergers and Acquisitions The concept of mergers and acquisitions offers opportunities for companies to enable old players who have not been able to continue their product lines to spin off such product line for a good compensation. This would pave the way for their further business growth in their areas of core competence. At the same time it also enables the growth of existing profit making companies to merge with another profit making company to ensure their stupendous growth for creating a marketing and edge in their product lines. Suggested methodologies in strategic planning process make it comfortable for mergers and acquisitions during predictable phases such as aging and growth during which a scheme of restructuring comes to surface. During the next age technological upgrading takes place with scales of production enabling customer base as well as capitalizing on the opportunity of reduction of costs and operational efficiencies. (Richard B.2008). Mergers and Acquisitions Enabling Managerial Power and Employee Benefits Mergers and acquisitions create an opportunity of wielding higher powers during times of M&As enabling managers to use their powers with more discretion for the benefit of the company and its interests to enable more effective functioning. Some top companies also provide opportunities for managerial training that affords an opportunity of higher pursuits of learning and growth for contribution to the growth and development of the company. More powers based on delegation of authority would enable managers to function with more freedom to enable better market quality strategy and creating a market edge befitting the propriety of growth phase after mergers and acquisitions. Managers also have higher freedom for evolution of multiplicity of ideas, technological infusion, new product innovations, creating value addition to the existing product lines catering to the needs of the market and customers by adding more desired features in products. (Vos & Ben, 2001) Employee benefits can also be considered for staging an increase and plans of retention can be developed to make them more secure with a new identity that emerges after the process of M&As is carried out. The present day scenario as witnessed in recent times with many corporate the employees retention is strongly on the cards as well as new recruitments in lines such as software and InfoTech spheres with decent remuneration hikes. This has happened within the broad framework of the companies’ policy and also without affecting their strategic growth plans. The companies have also built trust and through the medium of various training plans assured their bright future after the transition takes place. This happens to be the responsibility of the top management to ensure absorption of employments of both the companies involved in M&As (Sloan, 1988). Globalization of Firms with Investments and M&As Various countries such as India in accordance with their policies invite substantial Foreign Direct Investment (FDI) for bringing in substantial inflow of foreign exchange technology and an edge to complete in world markets. Many FDIs were in manufacturing companies and acquisitions were from industrialized countries. The policy of liberalization and licensing controls were rationalized and diluted to bring about a climate of trouble free investments from foreign countries with less procedural hassles for opening flood gates to many multinationals to approach the country happily for their development as well as extending benefits to such acquisitions. Such M&As provide greater accessibility of funds in international markets including an edge in floating global depository receipts as well as equities and American depository receipts in a proper form globally and can be listed in New York, London and Luxembourg as well as Tokyo stock exchanges. (Nayyar, 2008). Example of a Merger and acquisition For example, the merger which formed DaimlerChrysler was largely motivated with the fact that the production capacity of motor vehicle was no more than it was needed, so the management of both the companies felt that their efficiency will improve, if some plants are shut off and workers are laid off. Also realign which models to be produced at which plant, combine supply chain activities, and make use of efficient product design and administration. Many of the acquisitions are made with an objective of combining two or higher cost companies into one company with an average or below average costs. Conclusion The concept of mergers and acquisitions emerged successfully to create better cash flow technological prowess, strategic alliance, cost advantages as well as value creation for the shareholders of the companies involved. It is pertinent to note that the benefits of value creation also reach various other stakeholders of both the companies only to some extent. The concept of mergers and acquisitions create a strategic and market edge for giving a fillip to various companies either to plan becoming a leader in the market or to spin off its divisions based on viability with many players and cost advantages looming large in spinning of such divisions. Foreign direct investments are also welcomed in the efforts for globalization of business and markets for generating world class products with similar technology and creating an edge in the market to remain playing a dynamic role in the corporate history. Some companies when they take such a decision to consult management consultants who advice based on Boston consulting group matrix and general electric model to enable them to take a decision for mergers and acquisitions or for hiving or spinning off their existing divisions to create better cost advantages and profitability. There are many arguments that go against M&As depending on the commencement cycle or the competition cycle based on the technological superiority and low cost but qualitative production capabilities to withstand competition. In case such a situation does not prevail in competition phase the best advice would be to go in for mergers and acquisitions. In this treatise the case of Larsen and Toubro has been considered for the test of real life examples for the purposes of utilization of Boston consulting group matrix of hiving of a division. References Barney, J. B. (2007). Resource-based theory: creating and sustaining competitive advantage (pp. 205-206). New York: Oxford University Press Nayyar, Deepak, (2008). The Internationalization of Firms From India: Investment, Mergers and Acquisitions. Oxford Development Studies, 36(1), 111-131. Pautler, Paula A, (2003). Evidence on mergers and acquisitions. Antitrust Bulletin, 48(1), 119&103 Richard, C. B. (2008). Why Companies Do Not Pursue Attractive Mergers and Acquisitions (pp. 375-376). New York: Cambria Press. Sloan, Kathleen Hunter, (1988). The Effect of Corporate Mergers and Acquisitions on Employee Benefit Plans. Benefits Quarterly, 4(3), 44-56. Vos, Ed, & Kelleher, Ben, (2001). Mergers and Takeovers: A Memetic Approach. Journal of Memetics - Evolutionary Models of Information Transmission, 5(2), 10&14 Read More