Mergers and Acquisitions
The trade that takes place across the political boundaries of different nations is called as International trade or International business. The trade is made up of transactions in goods or exchanges of goods or purchase & sale of goods between countries. The enterprise or organization which performs international business is also known as multinational organizations. Multinational companies collectively perform a wide range of operations and services globally. The different entry modes which are used to perform this international business are
- Imports and Exports
- Contractual entry
- FDI (foreign direct investment) entry
FDI is a driver of international business and many companies use FDI as a key to establish footholds in the world marketplace by setting up operations in foreign markets. FDI provides a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing (Jeffrey, et.al, and 2005). Companies perform FDI by various forms, such as Greenfield, direct acquisition of a foreign firm, construction of a new facility (wholly owned subsidiaries), or investment in a joint venture or strategic alliance with a local firm with attendant input of technology and licensing of intellectual property. This essay deals about the various merits of M&A which are reasons for the organizations to choose M&A (Merger & Acquisitions) as an optimal mode of entry to international markets. Also various de-merits of M&A which adds reasons to the failure of organizations.
M&A (Mergers and Acquisitions)
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As the marketplace is becoming more and more global the niche players and mainstream corporations must develop globally in order to sustain and develop their strategic positioning, as well as to renew their sources of competitive advantage. Organizations expand internationally for various reasons though the ultimate fact is profitability. The common factors are they need to acquire factors of production that are more efficient than those obtainable in the firm's home economy (such as cheap labour and natural resources).- They seek new markets for their products with the aim of increasing revenue as well as to increase efficiency by exploiting economies of scale and scope (lower costs).For example, Indian business giant TATA firm acquired Corus steel of UK there by entered in to European market, also becomeÂ world fifth largest steel maker ( Thillaivarothayan, 2007) .
In this context, foreign expansion, and in particular the identification of the most appropriate market-entry strategy has become a priority of most management agendas. Once the organizations have decided to enter a market, they have several options available. These are green field investment, merger and acquisition and strategic partnership.
In a merger, two companies come together and integrate their distribution lines, brands, work forces, management teams, strategies and cultures however; the merging companies must also integrate the legal system of their countries of origin. (Bris et al, 2006). "The term merger and acquisitions are usually used indistinctly, but there are some differences between both terms. An acquisition occurs when a company buys another company and establishes itself as the new owner to the acquired company. The acquired company legally disappears and its stocks are not anymore in the market. In a merger, two companies decide to create a new company". (Sudarsanam.P.S, 1995)
The key strategy behind buying a company is to create share holder value greater that of the sum of the two companies' individual company's shareholder value. In an international context, firms use acquisitions as a means of entry into foreign markets or a means of obtaining a competitive advantage (Shan & Hamilton, 1991). "Two companies together are more valuable than two separate companies and to create a great value by expanding its business in a new market to take over the competitors or to recover from loss "(Sharma,2007).
The goal of acquiring firms would be to enhance the resources and capabilities of the firm to the maximum level which creates synergy in terms of its market position, asset turnover, and financial returns, post -merger performance (Seth, 1990; Markides, Ittner & Oyon, 2001). According to Buono & Anthony (1992) Growing number of M&A and predictions to a resultant of increase in profit of the companies merged, their share prices tend to rise or fall. Also the other common idea which involves the international firms in M&A is starting a business from the scratch in the new market is tough compared to manage the existing business and thereby expanding their business in the new market. Likewise there are several benefits a firm acquires through M&A. Few potential advantages of mergers include achieving economies of scale, combining complementary resources, garnering tax advantages, developing high synergy and eliminating inefficiencies (Patil, 2006).
There are several examples in the real time for the success and failure of organizations which undergo M&A activities. Firstly examples of merger in the past like Mahindra & Renault (India), Wall-mart & ASDA (UK), Sanyo and BPL (INDIA) Maruti and Suzuki (INDIA) etc. Secondly, examples of acquisitions are Incat International (UK) by TATA Technologies (India), Compaq by HP (Hewlett -Packard) USA, AirTouch communications by Vodafone group etc. have been the some of the many companies that have undertaken M&As' and have been an advantage and a disadvantage.
Regardless of category and structure, all M&A's have one common goal: they are all intended to create synergy that makes the value of the combined companies greater than the sum of two parts. There are several circumstances for M&A activity to take place (discussed below), which are all deemed to create a synergy between the two partners.
1. Reasons for M&A
Child et.al (2001) suggests that MNC's (Multinational Corporation) are mainly concern about its competitive position within the global economy. MNC's are looking to capture most market and wanted to have more customers. "Corporations are now scrambling to establish themselves as global oligopolists" Child et.al (2001, p.15). "In condition of rapid change, high innovation costs and scramble for strategic position in many sectors" For example Santander Spanish bank took over Abbey National, Bradford & Bingley and Alliance & Leicester (UK) which are well known banks in UK. This acquisition would make Santander the UK's second biggest mortgage lender and third largest savings bank. (Olinka.K, 2009) This activity of Santander leads to high competitive position within the banking industry. Thus M&A activities have become one of the reasons for firms to gain competitive advantage. The circumstance which made Santander to acquire these UK's historical banks is global financial crisis which the Spanish bank grabbed as an opportunity to enter the UK market. Santander is very clear that only through M&A it's possible to expand in UK market easily in short span of time.
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A good M&A deal creates a competitive advantage; a great deal can help a company to achieve decisive advantage, enabling it to lock up critical assets or build superior economics, making the company almost indestructible.(Stalk et.al, 2004)
A competitive advantage can be developed by creating a strategy that is grounded in resources which are valuable, rare, new imperfectly imitable and non substitutable and resources are valuable `when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness (Barney, 1991). Example of acquiring competitive advantage through M&A is merger between Exxon & Mobil. ExxonMobil focuses on "operational efficiency, margin improvement initiatives, and prudent capital management" (Raymond 2004). The ability and flexibility to continuously change in this volatile industry is a competitive advantage over the other companies in terms of resources, technology and wealth.
Each company is a collection of unique resources that provides the basis for its M&A strategy and the primary source of its returns. Resources, tangible and intangible, are company's inputs, such as capital, equipment, the skills of employees, patents, and talented managers.(Bertoncelj, 2008) Barney (1991, p.105) suggests that a resource is valuable to the extent that it exploits opportunities or neutralizes threats in a firm's environment. Combining the resources helps firm to reduce maintain a cost advantage and increase the economics of scales. Resource dependence is a theory rooted in an open system framework, which argues that organizations must engage in exchanges with their environment to obtain resources (Scott, 1987)."Operating economies occur due to indivisibilities of resources like people, equipment and overhead." (snith, 2007) Based on the above literature, it is evident that search for resource is major factor for M&As' to occur.
The other main advantages for firms under M&A are technology innovations. Technology is one of the means for a firm to stay in top of the tree comparing to its competitor. Firms achieve this by M&A activity i.e. buying or merging with companies with distinctive technologies. Example HP acquired EDS which was highly skilled in Mainframe service and HP made use of its technology to compete against its rivals like SUN and IBM (ALTO P, 2008). The study on acquisitions generating enhanced innovative activities (Ahuja and Katila, 2001) talks about the importance of growing the firm's knowledge base, (Granstrand and sjolander, 1990; Gerpott, 1995; Vermeulen and Barkema, 2001), and obtaining technological know-how and developing technical capabilities, which are increasingly important motives for acquisitions.
R&D is other circumstance which motivates M&A activities within firms, which in turn resolves finance and technological drawbacks within each party in the M&A activity. "For instance, when a firm, whose core competence is in R&D merges with another having a strong marketing strategy, the two businesses would complement each other."(Snith, 2008, p. 3). According to Roller, Stennek and Verboven (2006), an acquiring firm may see a high R&D target as a faster mean of investment on R&D than internally expending on it. Indeed, often merging firms claim that by integrating their R&Ds they will faster introduce new or better quality products and innovate in cost reducing processes. In the case of automobile industry, TATA recently introduced jaguar and Land Rover in Indian market because as there is demand for luxury cars (Kumar, S, 2009).Â
The other motive for M&A in developing countries like India and other Asian countries is tax benefits which reduces the capital cost there by increasing the profit of the company to few extents. Gu (2004) emphasis on the tax benefits that is available to the M&A companies. According to Auerbauch and Reishus (1988) the tax considerations probably do not play a significant role in prompting companies to merge. In developing countries the government encourages FDIs so as to generate employment, create value, and improve the economy. Hence, the M&As are being preferred by companies not only to gain tax benefits in those countries but also to generate revenue or save manufacturing costs, etc. If a company manufactures and sells its product in the parent country then it will save cost on transportation, and other import and export duties for goods and services. (Orit , 2004)
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Corporations may pursue mergers and acquisitions as part of a deliberate strategy of diversification, allowing the company to exploit new markets and spread its risks. AOL's merger with media giant Time Warner, for example, saved it from being affected quite so disastrously as many of AOL's Internet competitors by the 'dot com crash' (Henry 2002) "Also active investing can, and often does, add value" (Gadiesh 2001 et.al). Also to make effective cash flow in the business company goes for amalgamation. In case of TATA groups they go on on investing into new business by acquiring different companies from different sectors. Examples like TATA-Tetley, TATA-Corus, and TATA-Jaguar merger.
From the above literature support it is inferred that M&A acts as an optimal mode of entry to international market as they are beneficial and deemed to create synergy for the organizations in various ways, while it does have a few disadvantages, below paragraphs will explain the other side of the M&A which affects the business processes and lead to failure of many organizations through its M&A activities.
2. Risks Involved and Failures of M&A
M&A's fails quite often and fails to create value or wealth for shareholders of the acquirers. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market (OJHA, 2008). According to Ojha (2008), a failed merger can be understood in two ways: Qualitatively, whatever the companies had in mind that caused them to merge in the first place doesn't work out that way in the end. Quantitatively, shareholders suffer because operating results go down instead of improve.
A definite answer as to why mergers fail to generate value for acquiring shareholders cannot be provided because mergers fail for a host of reasons. Some of the important reasons for failures of mergers are discussed below:
The M&A will yield the desired result only if there is strategic fit between the two companies. Companies performing mergers using different strategic fit can improve profitability through reduction in overheads, effective utilization of facilities, the ability to raise funds at a lower cost, and deployment of surplus cash for expanding business with higher returns however, most of the M&As are unsuccessful as companies don't take into consideration the smallest aspects of business such as culture, working patterns and synergies this results in merger failure. Sudarsanam, Holl and Salami find that marriage between companies with a complementary fit in terms of liquidity slack and surplus investment opportunities is value creating for both groups of shareholders. The absence of strategic fit between the companies may destroy the value for shareholders of both the companies which in turn results in devastating effect to the organization.
P&G -Gillette merger in consumer goods industry is a unique case of acquisition by an innovative company to expand its product line by acquiring another innovative company, was described by analysts as a perfect merger. (Chaturvedi, et al, 2005)
The financial and customer capital aspects were given much focus while lack of attention is given to aspects of human capital and cultural audit.Human Element are the key forces to drive towards success, but most of the failed Mergers did not understand the key factor and few reasons like lack of top-down communication limited involvement from the HR department, lack of training, loss of talented employees, cultural differences, inadequate planning and rapid implementation. Not giving sufficient attention to people issues during due diligence process may prove costly later on. "The people issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor syndromes, stress on the workers, information system issues etc".(Pande, 2008 p.no:5).
As a culture arises and gains strength in a newly maturing organisation, 'it becomes pervasive and influences everything that the managers do' (Baird, Post & Mahon, 1990). In order to avoid this top Human Resources (HR) executive must be involved in the negotiations before a merger deal is finalised. HR managers usually enter much later, to deal with issues like compensation. Instead, if they join the discussions at an early stage and conduct a cultural audit, potential trouble spots can be identified, very early on. Example for this people issues are most of the failure companies which undergone M&A activities like Alcatel/Lucent, National Semiconductor/Fairchild Semiconductor and Borland/Ashton Tate etc. A merger of equals often compels the two companies to share in the staffing implications, whereas a merger of unequals results in the staffing implications being shared unequally (Kay and Shelton, 2000). "Employee problems are considers as the responsible factor for one third and half of all the mergers failures, adapting to new cultures of the new organisation and evaluate the attractiveness of their own" (Davy, et.al, 1988. p.no:58).
Cross Border M&A are more complex compared to domestic because of their differences in national culture between the firms (Peter, 2002, pg: 103). One survey found that one-third of all acquisition failures were because of integration problems (Shrivastava, 1986). If the business cultures of the companies in M&A activity are different, then the problem is on integrating the management and its core capabilities.
Cultural fit has a major effect on post-merger performance and that companies that allow multiculturalism and prevent too much control perform better than less permissive firms and poor cultural integration have a huge impact on the financial success of M&A (Chatterjee, et.al, and 1992). An example of a integrating two different cultures can be discussed with VOLVO and FORD mergers, where complete challenge between the centralised and decentralised firms where Volvo's type of operations where high individualism and team work related and less power distance but Ford an organisation which is centralised and hierarchical with high power distance and the major challenge was with the difference in business practices (Salama, 2003).
The other example for cultural clash that led to failure is merger between Daimler Benz (Germany) and Chrysler (USA).There was a lack of "equals" integration between Operations and management because of the entirely different ways in which the Germans and Americans operated. Daimler-Benz's culture stressed a more formal and structured management style, while, Chrysler favoured a more relaxed, freewheeling style (OJHA, 2008). Mergers can fail for many reasons apart from cultural issues like lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations. However, the every bit of cultural due diligence is as important as careful financial analysis. Without it, the chances are great that M&As' will quickly amount to misunderstanding, confusion and conflict. Cultural due diligence involve steps like determining the importance of culture, assessing the culture of both target and acquirer.
The other important reasons forÂ M&A failuresÂ apart from the causes mentioned above include: cash acquisitions resulting in the acquirer assuming too much debt (Business India ); mergers between two weak companies; ego clashes between the top managements of the companies to the M&As and subsequently lacking coordination especially in the case of mergers between equals; inadequate attention to people issues while the due diligence process is carried out; failure to retain the key people and best talent (Zainulbhai); Failure of Leadership Role (Prayag); lack of proper communication(Schweiger) ; growth in strategic alliances as a cheaper and less risky route to a strategic goal than takeovers; loss of identity of merging companies after the merger; expecting results too quickly after the takeover; and spending too much time on new activity neglecting the core activity.
It would not be correct to say that all mergers and acquisitions fail. There are many examples of mergers that have boosted the performance of a company and addressed the well-being of its shareholders. The primary issue to focus on is how realistic the goals of the prospective merger are. Making the mergers work successfully is a complicated process which involves not only putting two organizations together but also involves integrating people of two organizations with different cultures, attitudes and mindsets. However, meticulous pre-merger planning including conducting proper due diligence, effective communication during the integration, committed and competent leadership, and speed with which the integration plan is integrated, together will pave for the success of M&As.
Simillarly, Post merger integration research is a key factor to be considered before any M&A activities. Change management should be followed with appointing the right top team, structuring it appropriately, defining its agenda, and building the trust that enables its members to work well together (David, et al 2006). Size and global reach can be advantageous, and strong managers with effective leadership can often squeeze greater efficiency out of badly run rivals.Â
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