Business Environment: Mergers and Acquisitions - Essay Example

?Mergers and Acquisitions Introduction We have always learnt about the companies taking over other companies to expand their business or coming together with other companies to form their business. In the past 5 years, there have been a lot of corporate restructuring taken place as a result of recession 2008. Several companies have been taken over by giant companies and many other have undergone little restructuring however some companies found it useful to merge with other companies of similar industry. In this context, it is important for us to understand the concept of corporate restructuring, mergers and acquisition. Every other day in newspapers we see the news about spin off, takeovers, mergers and acquisition. For a successful development of a product or service, at some stage, it is essential to undergo mergers and acquisition. Many experts believe that mergers increase the efficiency and values of a firm and in this way, resources can be utilized in the best possible way, thereby increasing the overall value of shareholding. (The Basics of Merger and Acquisition, 2010) 1.1 What is a Merger? Merger is defined as amalgamation of two or more companies in order to form a single company where only one company survives and the amalgamated one lose their corporate existence. The company that intends to survives take overs all the assets and liabilities of those companies which have been merged. In merger, all the shareholding, assets and liabilities of one company is transferred to the company that has to survive in the form of: Debentures Equity share Cash Or mix of all of the above. (The Basics of Merger and Acquisition, 2010) 1.2 What is Acquisition? In general, acquisition is defined as acquiring the ownership of a company. In the context of business, acquisition is a purchase of a company where the buyer purchases the shareholding, assets and liabilities of seller. (The Basics of Merger and Acquisition, 2010) 1.3 Purpose of Merger and Acquisition The basic purpose of merger and acquisition is the fast growth of businesses after getting merged or acquired. After merger or acquisition, fast growth usually results as a competitive position and product improvement. The other meaningful reasons of merging or acquiring include: i. Procuring Supplies Saving cost of transportation, economizing the purchases by receiving discounts, reducing cost of overhead in purchase department ii. Renovation of Product facilities Mergers and acquisition helps in intensively utilizing resources and plants, achieving economies of scales through expanding and efficiently utilizing production facilities. It also helps in after sales services and thereby improving customer satisfaction. iii. Market Expansion The most imperative advantage of merger and acquisition is that it helps in expanding the market and boosts growth of business. Mergers and acquisition helps in eliminating competition and offers new products and diversification strategies to the merged or acquired companies. iv. Financial Strength In history, many mergers and acquisitions have failed but in most of the cases, financial strength of companies after getting merged or acquired has increased. Mergers and acquisitions help in improving liquidity and provide access to the cash resources. Greater backing of assets is provided and gearing capability gets improved. By being merged or acquired, companies are in better position to avail tax benefits and the EPS (Earning Per Share) also gets improved. (Sobek, 2000) v. General Gains After merger and acquisition, a company gets in a position to improve its public image and it also attracts experienced managerial talents to look for its managerial affairs. M&As (Mergers and Acquisitions) help in offering better satisfaction to the users or consumers of its products. vi. Strategic Purpose The company which is going to acquire the other one looks for all the available alternatives including product expansion, market expansion, vertical expansion, horizontal expansion etc. Thus, the company sets it strategic purpose which is aligned with the decision of merger or acquisition. (Gaughan, 2001) vii. Corporate Affability It happens rarely but it does occur that corporate houses protect each other from hostile takeover and also nurture such situations which help in building goodwill for each other. (Directors & Boards Magazine, 2006) 1.4 Advantages of Merger and Acquisition Mergers and acquisition are those permanent takeovers which provide centralized administration that is not available in the holding company. M&As take place by the support of management, shareholders and promoters of the company. The factors that induce the occurring of M&As include the following points. (The Basics of Merger and Acquisition, 2010) 1.4.1 Shareholder’s Perspective Every shareholder invests in a company to increase the value of its shareholding. Selling share of the shareholders’ of one company to the other company should enhance the value of shareholding. After M&As, shareholding can gain benefits in the following ways: a) Economies of scale (Tajirian, 1997) b) Monopolistic profits c) Diversification of the products offered d) Better opportunities for investments One of the above mentioned opportunities are always present in every case of M&As due to which shareholders’ support this decision. (Mcdougall, 1995) 1.4.2 Managers’ Perspective Managers are always looking for opportunities which can provide chances of growth and expansion to a company and thereby providing managers with better packages, fringe benefits, perks and status etc. Due to this fact, managers are always seeking to avail these opportunities and therefore they often fall in favor of M&As. At the same time, managers fear that the position can be handled by new management and therefore reluctance arises. (Gaughan, 2001) 1.4.3 Promoters’ Perspective M&As offer promoters the increased size of financial structures and strength of a company. They can convert the private limited company into public limited company without losing control and without contributing with large amount of wealth. (Gaughan, 2001) 1.4.4 Consumers’ Perspective The gain acquired from M&As is passed onto the consumers in the form of after sales services and better quality products which are offered at lowered prices. It directly enhances the quality of life and standard of living of the users of those products. (Directors & Boards Magazine, 2006) 2. Change in Banking Industry The core purpose of banks is primarily of borrowers and lenders but in the past two decades, banks have started providing all the retail and corporate financial services to their customers. (Pautler, 2001) a) Technological innovation has provided greater benefits to accountholders than ever before. It has given a new image to the banking sector and therefore, is also very convenient for accountholders and customers of banks. These technological innovations have provided so many changes to the banking sector by inventing new modes of dealing with transactions which include mobile banking, internet banking, ATM systems etc. b) Many banks provide financing for IPOs to the companies and many others have started providing travel loans as well. Apart from that, student loan, housing loan, consumer loan are some other forms of the services which are being offered by the banks nowadays. (Directors & Boards Magazine, 2006) 2.1 Process of Merger & Acquisition It is imperative for everyone to be aware of the process of mergers and acquisitions. The process includes: Start with a deal The response of the targeted company Determining the terms and conditions Negotiating if necessary Find a white knight (alternative company) Closing the deal Public Announcement Setting up an appointment with Commercial Banker Utilizing media for making announcement Determining the time and date of announcement Determining the contents to be included in the announcement Declaring Announcement (The Basics of Merger and Acquisition, 2010) 2.2 Proposed Merger Deal The financial deal and the valuations are of key importance in analyzing the proposed merger or acquisition such that it enables both the acquirer and the acquired companies to sort out their values. Generally the share and market value structure is developed in the events of both pre and post mergers such that the current market values are assessed first. Then the acquirer places a bid to buy the proposed acquired company. If the bid is reasonable for the proposed acquired company, then further negotiations are held which determine some other issues pertaining to proposed new capital structure of the joint company, premium to be paid by the acquirer, the amount of goodwill etc. After that a comprehensive proposal deal is formulated with the joint consent of both the companies that outline all of the financial matters regarding a particular merger. Following is a hypothetical financial deal between two banks namely as ABC Bank and XYZ Bank such that ABC Bank intends to acquire the holding of XYZ Bank. Pre-Merger Dollar Amounts Percentage ABC Bank Compaq Total XYZ Bank Compaq Share Price $25 $20 Shares Outstanding (million) 2,000 1,500 Total Market Value (billion) $50 $30 $80 62.5% 37.5% Exchange Terms 0.60 for 1 Post-Merger No. of Shares (million) 2,000 900 2,900 68.96% 31.04% The above table highlights the proposed deal for the acquisition of the XYZ Bank such that each share of XYZ will be replaced by 0.6 shares of ABC Bank at a price per share of $22. The current share price of XYZ Bank is $20, thus entitling the shareholders a premium of $2 per share. If pre-merger statistics are analyzed it can be observed that currently ABC Bank has 62.5% holding whereas XYZ Bank has the holding of around 37.5%. After the acquisition, 1500 million shares of XYZ would be replaced by 900 million shares.   Cash and Cash Equivalent 4,532   Accounts Receivable 6,545   Financing Receivable 2,343 Tangible Assets Inventory 6,545   Current Deferred Tax Assets 3,426   Other Current Assets 1,232   Property, Plant and Equipment 149   Long-term Financing Receivable and Other Assets 2,422   Amortizable intangible assets     Customer Contracts and Lists, distribution agreements 1,190 Acquired Intangible Assets Developed and core technology, patents 1,533   Product Trademarks 64   Intangible Asset with an Indefinite Life 1,098   Goodwill 15,000   Accounts Payable (2,099) Liabilities Assumed  Short- and Long-term Debt (2,399)   Accrued Restructuring (982)   Other Current Liabilities (6,532)   Other Long term Liabilities (1,908) IPR&D In process research and development 982   Total Purchase Price 33,141 The above table identifies the purchase price of XYZ Bank such that according to the fair value methods, the purchase price of XYZ Bank is computed as 33.14 billion which are in excess of current market capitalization of bank which is around $30 billion. ABC Bank has proposed to acquire XYZ Bank with additional $3 billion or $2 per share premium. The amount of goodwill negotiated between the two banks is around $15 billion. The detailed fair values analyzed in respect of tangible assets, intangible assets, liabilities assumed and IPR&D for XYZ Bank are shown in the above mentioned table. 3. Recommendation & Conclusion Mergers and acquisitions always bring profound changes in the restructuring of businesses. It not only affects the businesses but also impact every stakeholder. Nowadays, almost every other company undergoes such changes in their organizational structures. Therefore, it has become essential to understand the concepts of mergers and acquisitions. This paper has elaborated the concepts of mergers and acquisition in a detailed manner. Every company needs to determine its financial position and the financial position of the company which it is going to acquire or merge with. It has been observed that if a large company acquires a small potential company which has favorable chances of growth and expansion in future then the acquisition gets successful. Same happened with Microsoft and Skype. Microsoft is a large company and acquired Skype for $8.2 billion and hence it is considered as a successful acquisition. However, if two potentially strong companies merge with each other than the case doesn’t seem so strong for instance, the case that was of Deutsche Bank-Dresdner Bank as well as HP-Compaq. It has been observed that to undergo a merger or acquisition, the financial position of both the companies need to be strong. Apart from the financial position, the corporate culture also counts a lot. Many mergers and acquisition have failed due to clash of corporate culture. Therefore, companies must look for those buyer or seller, having similar corporate culture. Keeping in mind these important points, mergers and acquisitions can be successful and can lead to the betterment of stakeholders, employees, customer, shareholders and management. Works Cited After two failed mergers - where next for German Private Banks?, n.d.. After two failed mergers - where next for German Private Banks?. [Online] Available at: http://www2.prnewswire.co.uk/cgi/news/release?id=24447 [Accessed 14 April 2012]. Breuer, R. E., 2000. Spokesman of the Board of Managing Directors of Deutsche Bank AG. [Online] Available at: http://www.db.com/ir/en/download/HVBreuer_e.pdf [Accessed 14 April 2012]. Directors & Boards Magazine, 2006. Boardroom Briefing. [Online] Available at: http://www.directorsandboards.com/BBFall06.pdf [Accessed 14 April 2012]. Dresdner Bank: Integrating Risk into Corporate Strategy , 2004. Dresdner Bank: Integrating Risk into Corporate Strategy. [Online] Available at: http://w3.ualg.pt/~fcardoso/304-133-1S.pdf [Accessed 14 April 2012]. 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[Online] Available at: http://www.ftc.gov/be/workpapers/wp243.pdf [Accessed 14 April 2012]. R Chatterjee and Kuenzi, A., 2001. RESEARCH PAPERS IN MANAGEMENT STUDIES. [Online] Available at: http://www.jbs.cam.ac.uk/research/working_papers/2001/wp0106.pdf [Accessed 14 April 2012]. Sobek, O., 2000. BANK MERGERS AND ACQUISITIONS. [Online] Available at: http://www.nbs.sk/_img/Documents/BIATEC/soban.pdf [Accessed 14 April 2012]. Tajirian, A., 1997. MERGERS & ACQUISITION. [Online] Available at: http://www.morevalue.com/i-reader/ftp/Ch19.PDF [Accessed 14 April 2012]. The Basics of Merger and Acquisition, 2010. Investopedia. [Online]Available at: http://i.investopedia.com/inv/pdf/tutorials/ma.pdf [Accessed 14 April 2012]. Read More