MERGERS AND ACQUISITIONS

MERGERS AND ACQUISITIONS

Introduction

Due to the modern dynamic business setting, companies are confronted with strategic development issues. The companies, therefore, get pressure to grow, maximize profits, and stay competitive. Strategic paths that they take to maximize benefits are organic and inorganic, the latter being common. M&A is an inorganic strategy commonly applied as it guarantees immediate profits. A merger takes place when two companies come together to undertake its operations hence become one legal unit. Mergers are common today, though, according to debates and research, mergers can end up in catastrophe (Buono & Bowditch 2003, p. 32). This realization does not prevent companies from undertaking M&A.

To better lay the foundation for understanding M & A progressions in general, the M&A process goes through the pre-merger phase and the post-merger phase (Worthington, 2001, p. 450). Achieving synergies, entry into new markets, acquisition new rare resources, and so forth are some of the M&A motives. The victory of M&A has pinpointed factors of organizational and managerial issues. Examples of the elements are administrative involvement, the comparative size of M&A associates, values, and regulatory structure issues. Decisions on mergers and acquisitions are carried out based on influence, financial analysis and legal positions (Bruner & Perella 2004, p. 45)

Operational and Strategic motives that lie behind M&A activities

Conditions of Markets

Rapid market conditions are changing every day hence the need to capture new markets and consolidate. New markets are coming up and there is a need to fill this gap through strategic mergers that are more striking other than opening up branches. Integration of firms enables the companies reach a wider client base. Globalization has also enabled market expansion through technology hence reaching a wider markets to boost integration. This has made strategic mergers and acquisitions very attractive and convenient and an alternative rejoinder to locate new channels, consequently, a tool to outdo the competitors (Gomes et al. 2013, p. 28).

Growing capital availability

Activities of Mergers and acquisitions have improved since the financial institutions and organizations require capital from external republics due to low interest rates. Businesses require capital to expand therefore mergers assist in raising capital needed to boost a business venture. A financial merger enables business control territories and expand to new markets.

New businesses for sale.

Many companies are listing for sale for some reason, as there is no management to take over once the current ones retire. Family issues like lack of successor inside the family to run the business make the business available for sale. Id, location, cost, qualification

Regulations ease

Unrecognized Psychological Causes

When the CEO is bored and desires to play a game hence creates a merger contest. This is one of the most common psychological causes of takeovers. The need to have an adventure just for the sake of it.

Competition

Competition is the prevailing motivation is the critical motivation for M&A happens in discrete cycles. The need for a company to spontaneously come up with an eye-catching portfolio of resources earlier than its rival results in a feeding fury in searing markets. Examples include Biotech Company in 2012-2014, product and energy producers in 2006-2007, and telecommunications during the late 90s.

Tax Purposes

Companies may take advantage of M&A explicitly or implicitly for tax motives.  The highest corporate tax rate in the world is in the U.S.; hence some companies resort to corporate inversions. This is whereby a U.S. business buys a small overseas rival and moves the merged company’s tax to its home with low tax dominion hence reduce the tax bill.

New market niche

There are various motives for M&A, and one is to develop a new niche, enlarge the product line, or complement the products or services of the acquiring company (Kreitl & Oberndorfer, 2004, p. 54).  Due to the changes in the business environment today, globalization has also influenced M&A. Cross border M&As are common due to globalization, but problems may occur since venturing into foreign markets, foreign cultures, and unacquainted legal structures is challenging (Lehto 2006, p.16).

Value creation

The key drive is to achieve synergy by assimilating two or more businesses to gain a competitive advantage (Coman & Ronen 2009, p. 5685). Synergy is the ability of two entities to work together to deliver significant value or success. Sources of synergy include: saving costs, reducing threats, increased market power, leveraging capabilities, and increased financial strength. An aim of increasing the wealth of its shareholders motivates companies to consider takeovers. Two types of synergies exist, and they include:

• Cost collaborations: Synergies that lessen the business’s cost arrangement. Generally, a successful merger may result in access to new expertise, economies of scale, and even riddance of some costs.

• Revenue collaborations: Synergies that mainly advance the company’s revenue-generating capability.

Expansion

Mergers are mostly undertaken for divergence reasons. A company, for example, may use M&A to diversify its operations offering innovative services or products. Moreover, a merger can be arranged in such a manner that risks are diversified in relation to a company’s operations. Note that stockholders may not always be content with circumstances where a merger is all about risk diversification. A company usually diversifies risks through investment collections since mergers are risky and are transactions that take time. Product-extension, market-extension, and conglomerate mergers are characteristically motivated by change aims.

Acquisition of assets

A merger is driven by the need to possess specific assets that would be difficult to have through other means. During merger transactions, some businesses can organize mergers to access unique assets, which would otherwise take long to grow internally. An example is access to new technologies and is also a significant motive for most mergers.

Increase in economic capacity

All organizations require the high financial capability to run operations, and they can get financing through equity markets or debt. Low financial ability drives a company to merge with a new company. M&A results in will ensure the right financial muscle for business growth.

Tax resolves

Companies may decide to the merger to carry frontward tax loss when a business is generating a lot of taxable revenue. After the merger, the tax liability will be significantly lower for the consolidated companies compared to when they are an independent entity.

Motivations for managers

In other times, mergers are driven by personal gains and goals of the management of a company. In this case, for example, a merger will guarantee more prestige and power hence seen to be highly favorable for managers.  Management ego plays a significant role since they may want to create the largest business in the industry in size. A merger is termed as empire-building, whereby management prefers to have the biggest company in terms of size other than the company’s performance. Managers may support mergers as research shows that the bigger the company, the larger the reimbursement for management in terms of higher pay and bonuses.

Critical success contributors of M&A

For M&A to be successful some vital factors have to come to play, and they include;

• Management has to clearly define the direction and goals of the organization for proper planning and implementation
• Availability of required technical expertise.
• Detailed project action plans/schedule.
• Effective and efficient utilization of resources
• Consultation with clients and communication with both parties.
• Team membership and participation
• Selection recruitment and training of suitable human resources.
• Proper project management.
• Shareholder management.
• Monitoring the project and availing feedback on progress.
• Troubleshooting that is handling problems as they arise

Reasons for M&A failure

Several reasons exist that contribute to M&A botch. They can either be managerial, political, strategic, or cultural.  The main circumstance is whereby one company loses identity within the new organization due to the merger leading to culture conflicts or unworkable probable synergies.

Resistance to change

Social issues and human resources are not given much importance by employees or management as it deserves (Shweiger &Lippert 2005, p. 17). Organizations that prioritize the social issues management do not give it much consideration during the merger hence brings problems. Change resistance by individuals takes a more extended period than expected. This is due to psychological issues like natural fear of the unknown by employees as they are used to a status quo and stability. The resistance to change can be due to the objection of methods of some people. Some behaviors are common during resistance. Proper communication is vital at this level, and an effective action plan structure should be in place.

Culture clash

Culture clashes are frequent during mergers and acquisitions. Domestic culture dissimilarities are mostly noticeable than organizational culture dissimilarities (Buono & Bowditch 2003, p. 45). Cultural issues may break or make a deal. Sharing corporate values makes mergers successful. These values include similar professional principles and social obligations. The new organization ought to deal with cultures clashes carefully to safeguard the identity of the new organization. The identity of employees depends on factors such as being the acquirer or target business; hence the dominant one and takes time though it is suggested that a hundred days is enough. Sophisticated mergers concern culture, value, and employee identity to take time. Communication plays a significant role in impacting employees’ attitudes hence avoid this clash positively. Organizational problems occur mostly in cross-border M&A since it proves challenging to integrate the two companies. Management also plays a role in the final result of the merger.

Compensation process

Failure of M&A is contributed by the effects of the payment process. Excess compensation causes this failure as the transaction may take a long time and maybe complicated.  External problems may cause the failure of the merger and may not be mentioned during the process. Cost should be calculated in comparison to the success of the merger.

The agency concept

Conflicts commonly also occur between management and stockholders of the two merging companies causing the M&A to fail.  Agency motives are the drivers of the mergers hence causing a conflict of interest (Brouthers et al. 1998, p. 350). The drive to build an empire motivates the management and shareholders to merge and increase the size of the business. There is a tendency to be over-ambitious about the merger and predict great success, which may not be practical in the long run. The over ambitiousness makes the management exaggerate and overprice the compensation leading to failure. This inflated over-optimism originates from over-ambition of capabilities and specialized skills, known as managerial hubris (Brunner and Perella 2004, p. 272).

Forms of takeovers that can happen

M&A agreements can also be categorized as “friendly takeovers,” if the administration of both businesses settle the deal, or else as a “hostile takeover” if the target firm is not looking for a merger or the supervision contests the procedure. A hostile takeover is now famous as they take advantage of industries in times of crisis (Schnitzer 1996, p43). Moreover, M&A deals can also be illustrious as complementary or supplementary. The integral M&A help reimburses for some weaknesses of the acquiring firm while supplemental contracts reinforce the buying the industry (Schweiger & Lippert 2005, p. 17).

To better understand takeovers/mergers, different researchers have come up with different classifications. According to (Walter & Barney1990, p. 90), mergers are divided into five categories: horizontal merger, vertical merger, conglomerate merger, product-extension merger, and market-extension merger.

Horizontal takeovers

In a horizontal merger, the acquiring and targeting are rival firms in the same supply point. Industries that deal with similar products and markets use this strategy with an aim of monopolizing the marketplace. Research indicates that in recent years, horizontal M&A has grown considerably owing to the restructuring of many companies owing to changes in technology and liberalization. Horizontal mergers thrive in industries with fewer businesses, for example automobile industry, pharmaceuticals industry, and petroleum industries. An example of a horizontal merger in the pharmaceutical industry is SmithKline Beecham and Glaxo companies (Randles 2002, p. 357). Two organizations come together and not lose their identities hence create a large organization to reach new markets. This in turn leads to increasing revenue since market interaction and synergy is more significant.

Horizontal takeovers have various advantages. One of the pros is that the two merged companies benefit from economies of scale in that production costs of products reduce. The companies share available resources hence reducing redundancies. Cost of advertising also reduces since they can advertise two products as one. Another example is the takeover of Pepsi by CocaCola. The second advantage is the ability to control market through monopoly creation. This will enable them have power downstream by controlling the price and supply of their products. The third advantage of horizontal takeovers is allowing market consolidation as companies are able to merge therefore pushing other small businesses out of business.

Lastly, the fourth advantage is that companies are able to enter foreign markets openly through horizontal integration. They will be able to produce products and trade in these markets easily.

Disadvantages exist in horizontal takeovers. One disadvantages is the risk of erroneous synergy. Synergy formation is a vital goal of horizontal assimilation. However, from time to time companies fail to actualize the projected achievement since they do not concentrate sufficiently on building commercial collaboration afore incorporation. The second disadvantage is double expense on a sales group. Both organizations come to the takeover with their sales people and each of them has knowledge on the products they sell but have no understanding of the other products. Duplication is created as each product has to have their sale persons. The third disadvantage is lack of familiarity with the products of each company. They will not have information of customer inclinations, marketing techniques, locality and likings. The last disadvantage is there is a risk of mismatched business hence the businesses will not complement each other making the takeover inadequate.

Vertical takeovers

In vertical M&A, companies that produce different goods and services for one precise end product merge processes. A vertical merger happens when two or more firms, operating at diverse ranks in a business’s supply chain, buyer-seller correlation, combine operations.  The logic of the merger mostly is to escalate synergies formed when the firms merge and become more efficient functioning as one. An example in the automobile industry is when an automobile company mergers with a spares company; therefore, they don’t compete. Both companies benefit from economies of scale. They avoid transaction costs and uncertainty through downstream and upstream linkages. Vertical mergers are divided into forward and backward integration.

The advantages of vertical takeover is a company is able to control disruption of supply as they deal with supply alone. The second advantage is that streamlining is achieved. Company is able to realign its workforce to fill gaps of dwindling venture. The company is able to benefit from economies of scale by reducing resources used in production. A third advantage is vertical takeovers also enables a company avoid suppliers with market control who decree price and availability of products. The fourth disadvantage is the company is able to know its competitors in a vertical merger, especially when the manufactures integrate with retail businesses. The last advantage is application of lesser valuing tactics is possible. The costs reserves can be shifted to the customers in the vertical merger. A good examples is Walmart and Best Buy retail stores.

There are various disadvantages of vertical takeovers. The major disadvantage is it can be very capital intensive. Cost of the takeover can be quite expensive especially in purchasing or setting up factories. The second disadvantage is focus is easily lost as these are companies in different supply levels. Skills needed to run a retail business are very different from the skills needed to run a factory therefore focus is lost. The last disadvantage of vertical takeovers is culture clash is predictable among the employees. A factory and a retail shop has focus on different aspects therefore leading to conflicts and misunderstanding and in the long run reduce productivity.

Conglomerate takeovers

For conglomerate takeovers, diversification strategy is followed by the expansion of product types (Ray 2016, p 10). Conglomerate or Diagonal M&A is divided into pure and mixed mergers. Pure mergers involve industries with nil in common, while diverse mergers involve companies with products in common that aim to expand their markets. An example is Facebook that acquired whatsup in 2014.

Product-extension takeovers

This takeover takes place between organizations that deal with related products within the same markets. The industries group together their products to attain a more extensive customer base. An example is the Mobilink Telecom Inc. acquisition by Broadcom. Mobilink Telecom Inc.  Mobilink manufacture product designs intended for phones and furnished with the Universal System for Mobile telecommunications technology. The products of Mobilink Telecom Inc. would probably be completing the wireless merchandises of Broadcom.

Market-extension takeovers

Lastly, the market-extension merger is the final example of M&A. It happens amid two businesses dealing in similar products but detached marketplaces. The primary determination of this merger is to guarantee the merging companies get entree to a more significant market, thus ensuring a bigger customer base. An excellent case of a market extension merger is the acquisition of Eagle Bancshares Inc by the RBC Centura. Eagle Bancshares has its headquarters in Atlanta, Georgia, and has a total of 283 employees. It has assets close to the U.S. $1.1 billion and around 90,000 accounts.

Implementation of M&As

Launching an M&A is a deliberate operation and obligates the enterprise in the long term (Cefis 2010, p55). There is no harmony in the issues of pre-merger and post-merger procedures. Four major phases may or may not be necessary to follow. The first stage is the strategic stage, where ab organization decides if to choose organic progress like a partnership or inorganic growth like M&A. (Hammer et. al 2014, p.44). A company has to do a thorough analysis of market potential and target clientele. It is followed by the presentation of the resources needed then risks at hand. Proper diagnostic representation of the company is crucial that includes the strengths, weaknesses, opportunities, and threats (SWOT) analysis (Coman, & Ronen 2009, p. 5682). The acquisition strategy is set up here. The second phase of M&A involves the choice of a strategic partner. Objectives of the M&A drive the choice of strategic partners. The goals have to be compatible with their targets and projected premium. Compatibility is vital between both parties to create value that the initiator anticipates to make.

The negotiation phase is the third stage. This stage entails a cautious valuation of the target. All through this phase, the choice of strategy by the buyer takes place. The approach may either be hostile or friendly operation. Due diligence is essential (Roodman 2012, p.12). The financial package should be appropriately formulated by the buyer for the settlement of the purchase. It may be done in many ways, such as the issuance of shares exchange of shares and issuance of bonds and cash.

The last phase is very critical. This is the post-acquisition incorporation process (Angwin 2004, p.67). This phase involves executing the merger at all levels, the drive being to create the value formation perspective as fast as possible. Essential in this phase is timing, as spending time with the other entity helps in knowing the differences between cultures and approaches.

There are distinctive steps taken during the M&A process and includes:

1. Developing an acquisition plan –this first step involves an acquirer getting a clear picture of the expectations they hope to achieve from the acquisition and the reasons why they want to acquire the company targeted. Examples are gaining new markets or product positions expansion.
2. Setting search standards for M&A – Defining some critical factors to consider when choosing target businesses.  May include looking at issues like clientele base, profitability, and the physical location.
3. Examine possible acquisition goals – Buyer uses search standards set to identify and examine the target business.
4. Initiate acquisition preparation – The buyer contacts several target companies that meet set standards and seem to offer true value. Acquirer seeks to know how the target company will respond to the merger request.
5. Execute valuation breakdown – If step four goes well, the acquirer will ask for substantial records like financial reports, from the target company for evaluation purposes to determine if the target company is suitable for the merger.
6. Talks –  once acquirer is satisfied that the target company meets evaluation criteria, the target company gives a realistic offer and henceforth negotiate terms in more detail
7. M&A due diligence – this is a thorough process and begins after an offer has been acknowledged. The buyer assesses all aspects of the target company by analyzing its operations like assets, financial transactions, liabilities, clienteles, and workforce.
8. Acquisitions and sale agreement – once due diligence is done with no complications, the final deal is made, and both parties agree whether to purchase shares or assets.
9. Funding plan for the acquisition – The buyer executes the purchase once the signing of a sales and purchase contract is done.
10. Concluding and incorporation of the acquisition – the deal is completed, and both management teams work together with two businesses (Rouse& Frame 2009, p. 43).

Advantages and disadvantages of M&A

The pros and cons of mergers and acquisitions are dependent on the organizations’ extended, short, and permanent plans and determinations. Therefore, merger and acquisition have the following advantages and disadvantages

Advantages include;

• Companies that merge can control markets through a combination of their powers.
• Synergy for value creation and addition hence enrich these companies to realize the cost profits.
• The financial risk decreases due to the use of various techniques of innovation.
• Sharing services and resources used decreases due to economies of scale.
• Expansion and preservation of competitive advantage are achieved.
• Financial gain through tax benefits will also be achieved.

Disadvantages include;

• Companies will lose experienced employees with the worry of replacement.
• Employees of the small merging company may require retraining.
• Friction will occur among employees, and the company will be affected as there will be some difficulties in coping with new changes.
• Duplication will occur when two industries performing the same activities are merged, leading to retrenchments.
• The high cost of merger implementation affects a company.
• Uncertainty is high concerning the merger agreement.

Conclusion

One size cannot contest all. Many organizations think that merging will help them get ahead and improve their business effectively. It is evident that mergers improve economies of scale and create synergies and cut costs, therefore increasing industry restrictions. Shareholders take advantage of the merger theory to boost market size and power. An example is the U.S. company merger of Time Warner and AOL. The misconception of the merger was that it would be helpful but proved catastrophic for both of them.

Failure of these two companies to merge made Europe restricts mergers with American companies to stabilize their markets. Problems like culture clashes and die-economies made Europe restrict mergers with American companies.  European Commission percentage (E.C.) makes stringent rules to restrict M&A of American businesses with the Euro Zone corporations. M&A has gradually become a broad-based spectacle, and figures have relatively grown in the U.S., Europe, and elsewhere globally (Weber 1996, p. 1195). Current research indicates that 50% of mergers are successful. Still, scholars suggest that it is an opportunity for businesses to review M & A’s impact in the contemporary technologically dynamic business world.

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