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Factors to Consider Before Merger and Acquisition

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1.1. Background to the research

According to the Chambers 20th Century dictionary the research could be defined as a “Systematic investigation towards increasing the sum of knowledge”. It was also stated as “An endeavor to discover new or collate old facts by the scientific study of a subject or by a course of critical investigation” in the Concise Oxford Dictionary. (The Concise Oxford Dictionary)

Research can also be defined as the process which helps to find something new or it helps in clarifying certain doubts about the research that was being done already. This research looks in to the factors that encourage business organization all over the world to engage in the process of mergers and acquisitions (M&A). It also examines the factors and incentives on the basis of which the M&A have been a continuous popular strategy for the firms for expanding their businesses. Why and what type of firms will engage in this process.

This research also helps the firms to understand the benefits that they can get from the M&A process. There are various other growth and diversification strategies like franchising, licensing and Joint ventures which are popular amongst the business organizations.

This research also discussed the challenges that firms face while engaging in the process of M&A. M&A is not an easy process because it is difficult for the organizations that are previously competing with each other to join and work together as one new entity.

Organizations have different culture; they are using different management practices. It is very difficult for the employees to adjust to the new culture of the organization. In this research it is also going to be found out that what benefits that a firm can get after a successful M&A process.

Mergers and acquisitions is an issue of great academic interest. There are studies about this issue in the field of industrial economic and strategic management as well as on organizational theories. Especially in the current economic situation, where companies are facing liquidity problems and facing tough competitions from their rivals, M&A is an important survival strategy as well for the organizations. With the globalization and the world is being a global village, the need for companies to join together and to cater the needs of the customers have to work together.

The phenomenon of M&A is equally popular amongst the firms with same kind of business as well as for the organization in different business. The firm that is discussed as a case study in this research is a big pharmaceutical company of the world. After the merger the company became the biggest pharmaceutical company of the world. In year 1998 the volume of business through the M&A process was 2.4 trillion. This increases every year with more and more companies are entering the process of M&A. In this research the case study GlaxoSmithKline (GSK) was discussed. It is going to be evaluated in this research that how the organization benefitted from the merger and acquisition process and whether it was a successful merger or not.

In this research the definitions of M&A given by different authors and the types of mergers were also discussed. The motive that attracted the organization to involve in the process of mergers and acquisition and the benefits that they got from this process was also discussed.

M&A is a complex process that involves two different companies, having their separate identity, so the problem arises in the integration process after the M&A. In order to measure the performance of GSK the financial statements are analyzed.

1.2. Significance of the Study

This research will help in finding out the factors that encourages companies to engage in the process of mergers and acquisition (M&A). What are the factors that firms have to consider while starting the process of mergers and acquisitions? It is also going to be find out in the research that why companies are using M&A as business expansion strategy for the growth of their business both in the International as well as local markets.

This research will help in better understanding of the issues that are involved in the process of M&A. The firms have to look at the human resource aspect of the mergers and acquisitions instead of just considering the financial and business aspect.

Apart from the factors and parties involved in the process of mergers and acquisitions it is also going to be find out that what are the factors that have to be managed in the process, otherwise they will result in the failures of the whole process of M&A. This study will also help the companies who are planning to engage in the process of M&A about the relationship between the parties involved in this whole process.

Globalization has made it easy for the firms to interact with each other, share their experiences about the markets, made strategic alliances to expand their businesses. This study will help in understanding the fat that how firms are using the mergers and acquisition as international business expansion strategy. It is also going to be find out in this study that why companies adopt the M&A to expand their businesses in the international as well as national market when they have other business expansion strategies available to them like Strategic Alliances and joint ventures.

1.3. Statement of Purpose

The purpose of this study was to find out that what were the factors that encouraged firms to engage in the process of mergers and acquisition? This research was going to evaluate the different business growth and expansion strategies that firm are using in order to expand their businesses. As GSK was taken as case study for discussing the mergers and acquisition as a business growth strategy, it was also going to be discusses that why GSK selected M&A as a growth strategy to expand their business.

This research also looked into the factors that encouraged firms in general and GSK in particular to involved in M&A process. It was also going to evaluated that what were the positive points, that GSK would get after their merger and what were the challenges that GSK faced in the during merger and pre merger phase .

In order to evaluate the performance of the GSK in this research the financial statement of the GSK was evaluated so as to saw the performance of the company in the post merger stage. This research looked at the annual turnover of the GSK after their merger so as to see that how much growth company had after the merger. In this report the earning per share (EPS) of the GSK was discussed and compared over few years in order to get the feel of that how well the company was working and how much benefit, the shareholders of the company had of their M&A.

The purpose of doing this research to help the students, researchers and companies to understand that how they can merger and acquisition effectively in order to expand their businesses. This research is really helpful full for the companies who are interested in doing mergers as they come to know through this research that what are the benefits they can get after the M&A process.

They will also come to know through this research that what will be the challenges that they will have to face if they want to be a part of mergers and acquisition process. This research will provide will help the firms who are interested in the process of mergers and acquisition to understand that how they will face with the problem of cultural differences if they are going for mergers with organizations from others cultures. They will also come to know that how important is the proper integration of cultures and integration of different department of the organization in the successful process of M&A.

1.4. Aims and objectives

This research will help the companies who are planning to engage in the process of mergers and acquisitions. They come to know through this research that what factors they have to take into consideration while going for mergers and acquisitions. What are the benefits and what are the negatives of M&A. Who are the parties that are involved in merger and acquisition? The research has several aims regarding mergers and acquisitions of companies, especially Glaxo and SmithKilne. Merger and Acquisitions are never easy as many companies fail in their initial steps but some of them succeeding as well although number of failure is high. They fail because they could not recognize the actual factors on which they are doing mergers and acquisition. There are several factors upon which merger and acquisition takes place like HR, lack of capital, IT, lack of expertise, need for globalization and it is not necessary that companies do merger and acquisition on all factors but it depends on companies' strategies and requirements as well. But in today's dynamic environment companies do merger and acquisition for increase their efficiency and effectiveness; companies have increasingly used mergers and acquisitions to change the scope and/or competitive environment of their business. Other factors which are useful in successful mergers and acquisitions are communication, corporate culture and change for surviving. In this project the researcher will discuss the factors that have impact on before, during and after merger and acquisition. Researcher will also look into the financial statement of the GSK for the last three years to determine that whether the company grows in its market price per share and price earnings ratio. That is the main indicators that determine the performance of the company.

1.5. Research Questions

What factors encourages firms to adopt mergers and acquisitions as an international business strategy?

What are the other international business expansion strategies available to firm?

What benefits are likely to be gained by the firm, under the international business expansion strategy in mergers and acquisitions?

What factors encouraged GSK to engage in merger and acquisitions?

What are the benefits of M&A?

What are the challenges faced by the firm while engaging in the process of mergers and acquisitions?

What strategies could be implemented to enhance the international business operations?


Literature Review

2.1 Business Expansion and Growth Strategies

Businesses can expand or grows by number of ways. Whatever type of choice there may be, the business owners are on the hot seat because they have to make judgments', they should consider the best available choice that are in line with their main objective of expanding or growing business. In order to provide an initial understanding of the basic business growth and expansion strategies, some of them are discussed here.

Directly exporting, Indirectly exporting with the help of middle man, producing product in the target company, Franchising and joint ventures, strategic alliances are some of the methods that companies all over the business world are using to expands all over the world. Apart from methods mentioned above, Mergers and acquisitions are the method that big multinational companies in all business sectors are using to expand their businesses internationally as well as in domestic market.

Firms are using M&A as an expansion growth strategy in order to cut down their cost of unnecessary advertisement and other marketing programmes that they are using in order to capture new markets with the help of M&A. Companies diversifies their businesses so that they can enter new markets.

2.1.1 Business expansion through Geographical expansion

It is the first and foremost aim of every business to grow in term of capturing new markets as well as in the financial terms. It is easy with the help of M&A process, two companies that were previously competing with each other and spending a lot of their financial resources on un necessary marketing their products, can join their hands with M&A process to capture new geographical markets. GSK after their mergers captures big market of Europe, Asia, USA and Japan. In most of the world GSK, after their merger became the biggest pharmaceutical company of the world.

It is important to know that what are the methods, modern small, medium and large businesses are using in order to expand their businesses internationally. Some of the methods that organizations are using to expand internationally and in the local markets are as follows;

2.1.2 Ansoff's Growth Matrix (Product & Market Mix)

In order to understand the growth strategies, one of the common business strategy frame work is called as Ansoff's Growth Matrix. This matrix is developed by H. Igor Ansoff, a strategic management guru. This matrix helped organization in establishing a direction for the growth. In this growth matrix product and market are taken against vertical and horizontal axis. It helped organizations to understand the factor that how they grow their business. They can either enter the existing market with new product or they can enter the new market. (Campbell and Craig 2005)

2.1.3 Market Penetration

In this kind of growth strategy the firm actually wants to sell more of its product in to the existing market. The firms want to grow their business by capturing more market share, for that firm allocates more of its resources to product development. This is less risky because the firm already knows the market. (Campbell and Craig 2005)

2.1.4 Market Development

In this strategy the firm tries to enter the new market with the existing products. This happens when the firm wants to sell their existing product to new geographical markets in order to capture them. In this strategy firm has to invest highly on the marketing and sales department, in order to pursued customers to purchase their product. (Campbell and Craig 2005)

2.1.5 Product Development

This strategy necessitates on the development of new product for the existing markets. In this strategy the organization had to invest highly on the research and development. Firms have to come up with new products that are in accordance with the current trends and needs/tastes of the customer. (Campbell and Craig 2005)

2.1.6 Diversification

Diversification is the highly risky strategy. In this strategy firms want to sell entire new product in the entire new market for entire new customers.

Diversification is of two types, related diversification and unrelated diversification. Related diversification is the one in which firms stick to the business in which it already are working. Unrelated diversification refers to the strategy where firm enters in to the entirely new business. (Campbell and Craig 2005)

2.1.7 Franchising

Franchising is a business growth model in which the franchisor not only sells the its trademarks to the franchisee but despite of that he provides the franchisee with the whole business model that includes, accounting system, processes, training and technical and marketing support as well.

This kind of business expansion model is very common in retail, food business, as well as in the service sector. As GSK is a big multinational company that is involved in the pharmaceutical industry so, business expansion models like Franchising are not suitable for them.

2.1.8 Licensing

Licensing is another form of business expansion strategy that is very similar to the franchising. It worked the same way as franchising but in licensing licensor only allow licensee to use their intangible assets and in return gets royalty fees on monthly or annual basis. Intangible assets include patents, formulas, designs, copyrights and other intangible assets. This type of strategy was also not feasible for big company like GSK.

2.1.9 Strategic Alliances

Strategic alliances are a kind of business expansion strategy in which two potential or actual competitors enters into a cooperative agreement. This is usually used by the companies, that are interested in entering the markets with less risks and they want to divide their initial fixed cost for starting a business.

There are few other methods apart from the ones that are discussed above. Some companies used to expand their businesses by exporting, some like to go for joint ventures.

2.1.10. Mergers and Acquisitions

Mergers and acquisition is the method that is used by the firms all over the world in order to expand their businesses. According to a research, the total volume of mergers and acquisition business in year 1998 was 2.4 trillion. Mergers and acquisition is the kind of business expansion strategy that was used by GSK. Glaxo Wellcome and SmithKline Beecham were the companies that are in the same business of pharmaceutical and healthcare products.

GSK selects mergers and acquisition because it is easy for the manufacturing companies in the same trade and having almost same culture. A major factor in the mergers of the two firms was the suitability of the process for both the organization. After the M&A of the two organizations they became the largest pharmaceutical company of the world.

2.2 Mergers and Acquisitions (M&A)

Merger and Acquisition have been discussed by the Strategists and been at the centre of management research as a quick and efficient way to expand their business and to get into new unknown markets, to create competitive advantage, to have spread risk and dominate existing market as well.

2.2 Definitions of Mergers and Acquisition

Merger and acquisition is usually defined as a coming together of two companies however although people thought merger and acquisition to have same meaning but technically its different. An acquisition can be defined as the process of taking over of another, firm in which firms develops its own current situation by acquiring other firms resources and competencies (Johnson and Scholes 1999). Acquisition could also be defined by (Bowman and Asch 1996) as a process in which a firm acquired the shares and assets of other companies, liabilities and as well as its trading activities.

Business all our the world are learning the fact that they have to find strategic partner, if they expect to be successful in today's globalized business world even big huge multinational companies are looking for companies in national as well as international markets with whom they can make strategic alliances.

In order to operate in another country a firm has to get license for its product; get raw material or other stuff from local suppliers to meet the requirement of “local or domestic content” and so on. In order to overcome and avoid those difficulties firm develop global strategic alliances and strategic networks (Coffey, Cook and Hunsaker, 1994).

Companies, Firms are always looking for partners with whom they can balance their strengths and counterbalance their weaknesses. This thing helps companies to achieve greater sales and economies of scale (Coffey, Cook and Hunsaker, 1994). Concept of merger and acquisition is not, new in Europe. This concept is reforming the financial landscape of the global business world from the last three decades and the most number of businesses grouped together in USA. It was shown from the data available that in 1998 more than $1 Trillion were spent on the activities of M&A. Banking industry occupied the major part in the activity (Hitt et al, 1998).

Acquisition is usually seen as a part of the growth of particular firm but some also believes that it was also often used by firms to save their dyeing and diminishing industries. Business growth could either be external or internal. Internal growth was in the form of investment in new or second hand plant or machinery or acquiring an existing going concern organization i.e. the example of external growth.

A firm would choose amongst the internal and external growth according to its own requirements by thoroughly studying it as which one was more profitable.

An acquisition is a bilateral agreement where the owner accepted the cash and securities or the mixture of both of these in returns of the shares in existing company. (Chiplin and Wright, 1988).

Chiplin and Wright (1988) stated that, merger could also be defined as a process in which two companies decided to come together to shape a new legal body.

Sian Herbert Jones (1982) defined merger “as a marriage between two companies of roughly of the same size”. The bigger company in the process usually controlled the assets of the new entity. The shareholders of the companies will have to exchange their shares with the newly created companies.

A merger can also be defined as a process in which one firm amalgamate with another firm and disappeared in the new company. All mergers were accepted by the governments as they were in accordance with the laws of the states where they actually happened as well as they were also on the official scale. (Reed S. etal 2007).

The number of mergers in 1980's has far exceeds the number of mergers in 1960's. Usually in 1960'sthe mergers took place between companies of same sizes and in most of cases doing the same business. But in 1980's and 1990's the trends have with eased the M&A of companies of different size of business and of dissimilar type of business (Tetenbaum 1999).

The tendency of the organization to present in the mergers of vertical nature and the diversification type does not seem to be stop in future. Yet firm that starts merger usually attained small economic profits but value created by M&A and that benefitted mostly to the small firm that was reached (Barney 1997).

Lubatkin (1983) defined the main reason of acquiring and merger a novel firm to get better overall performance by attaining the synergy effect which is also normally described as “2+2=5”effect (Cartwright and Cooper, 1993, Hover 1971) between two organizations and that at the end helps them in gaining competitive advantage (Porter, 1985, Weber 1996). (British Institute of Management, 1986, Hunk 1988, Marks 1988, Weber 1996) stated that the successful rate for the firms in the process of M&A were around 20 to 60 percent.

2.2.1 Different Types of Mergers and Acquisitions

Mergers and acquisitions can take various forms. It depends upon the firm, a firm may choose to invest its recourses away from its current firm but within same type of business or it can decide to move to a complete new industry and invest in the area that is entirely new to it.

There are following types of mergers and acquisition (M&A). Different authors defined them as

2.2.2 Horizontal Mergers

Horizontal merger can be defined as merger between companies that produce identical or closely related products. It can also be defined as a combination of two or more competitor working within the same geographic locality. The merger of Carlton and Granada television on UK as both are television companies to form ITV plc was a horizontal merger same as the example of Daimler and Chrysler link up.

Other examples of horizontal merger in Europe in airline industry is the Lufthansa-Swiss International Linkup, Air France-KLM merger and the takeover of Buzz by Ryan air are the examples of horizontal merger in recent past.(Smart and Megginson 2008)

2.2.3 Vertical Mergers

Merger in which companies with current or potential buyer relationship combines to create a more integration company, that type of merger can is called as vertical merger (Scott, Megginson, 2008).

Vertical merger can be of Forward Integration or Backward Integration. Vertical merger can also be used as a marketing tool like Ford has acquired a financial subsidiary that has make it easy for their customer to obtain finance to purchase their products (Ford Motor Credit).

2.2.4 Conglomerate Mergers

Conglomerate Mergers can be defined are of two types. One is called as product extension merger in which firms with similar but exact line of business joins. On the other hand a pure conglomerate merger occurs between companies involved in completely different line of businesses. Pure conglomerate merger is also called as classic conglomerate mergers. Pure conglomerate mergers were very popular in 1960's but it started to decline from 1980's onwards.

In year 1984 the merger of car maker General Motors and that of computer consulting firm (EDS) Electronic Data System is a prime example of pure conglomerate mergers.

2.2.5 Concentric Mergers

In the concentric mergers the companies might not moved to the different kind of business as they does in conglomerate merger. In this firm expands its activities at the same time measuring of unity of existing activities. This can be done by acquiring technologies that can help the firm in marketing customer type (concentric marketing) or it can also be done by acquiring customers for existing technologies (concentric technology) Jones 1982.

The merger of Glaxo Wellcome and SmithKlineBeecham was a concentric merger as both companies were in the business of pharmaceutical and health care products and their merger at that time created the biggest pharmaceutical company in the world.

2.2.6 Strategic Merger

All merger are in some aspects are strategic mergers because they starts with having a particular strategy in mind. It can be define by authors and strategist to create an efficient merged company than that of its remerged companies.

As it was explained in the definition of strategic merger that all mergers are strategic mergers, similarly the merger GSK was a pure strategic merger because they management of GSK was aware of the fact that they was going to be the biggest pharmaceutical company in the world after that M&A process and they were able to reduce their cost of producing new medicines and formulas by economies of scale after merger. They were also expecting to capture the world market by geographically expanding their business.

2.2.7 Non value maximizing Motives and different theories of Mergers

The basic motive of merger should be of maximizing shareholders wealth but unfortunately not all mergers are motivated towards the maximization of shareholders wealth. Different authors have given different theories related to non value maximizing motives.

According to this theory poorly monitored managers will pursue mergers that will not create value maximization for the shareholder but they are of the view that this will increase the asset value of the company. They think that remuneration is linked with the size of the company, so in order to pursue their motive they initiate and do mergers.

Michael Jensen (1986) hypothesizes that the mergers will use free cash flow to the process of merger that will have a negative NPV in order to expand the assets of the firm. So that they will derive greater remuneration from the firm because they are of the view that larger the firm larger will be their remuneration and they can also get personal benefits from the organization.

Shleifer and Vishny (1989) purposed that the unmonitored managers try to pursue the projects that have negative NPV so as to increase the size of the firm in order to make them indispensible to the organization because they have the team that has expertise in managing the large organizations.

2.2.8 Hubris hypothesis of corporate takeover

Richard Roll (1986) contends that some managers overestimates their qualities and pursue takeovers because they are of the belief that they have capabilities that can manage their takeover targets better than the people who are already managing that.

2.3 Value Maximization and Realistic Benefits of Mergers

Numbers of theories are discussed regarding the benefits of M&A. Some of theories and the important benefits that firms think that they are getting from M&A are as follows.

2.3.1 Synergy

Donald (2008) describes synergy as a simple phenomena that suggested that joining together of two companies can helped the organization in creating more share holders value than they have created while working separately. Synergy can be of two types.

2.3.2 Operating Synergy: (Economies of Scale and Scope)

Economies of scale and economies of scope were both considered as the part of operating synergy that any organization had after mergers. Studies revealed that both these studies are important determinants in the creation of shareholders wealth (Houston, James and Ryangaert 2001).

2.3.3 Economies of Scale

It can be defined as the spreading of the fixed expenses that any firm had over the manufacturing level. The expenses that were considered as scale in this case were the fixed cost in the form of rent, maintenance cost of machinery, depreciation of building, lease payments, interest expenses, and property taxes. that you have to pay, no matter how much production you have. So here the cost is decreased with every unit produced e.g. if fixed cost for producing one unit id £2 and the firm is producing 1000 units per month. The cost decreased to £1, half as it was in previous month, if the firm starts producing 2000 units per month in a month and so on (Donald 2008).

2.3.4 Economies of Scope

This synergy is refers as by using specialized set of skills or assets that are already there for production related services and products. Like Honda already has infrastructure to produce engines, so they are using those infrastructure to produce items like lawn mowers, snow blowers apart from making engines for cars (Donald 2008).

2.3.5 Financial Synergy (Lowering cost of Capital)

The financial synergies helps the organizations in the way that they can either creates higher cash flows or it can low the cost of the capital.

Synergy is a stated motive in almost all the mergers and acquisition. Bide (1993) examined the motives of 77 mergers and acquisition in 1985 and 1986 and he stated that in one third of the takeovers synergy is the primary motive.

2.3.6 Diversification

Diversification can be refers to the act of a company to buy a firm that was currently out of its previous main business. There were normally two reasons that encouraged firm to go for diversification. The first the acquiring company wants to take advantage of financial synergy that can help them in reducing their costs second being that with the help of diversification firms wants to enter the new product line or new product so as to spread its operation.

If a firm is having slower growth rate it can increase its market share as well as increase and expands its market.

Investor often perceived companies in unrelated business areas as riskier because it is difficult for top management and they are sometime reluctant and did not have enough financial resources to finance the golden opportunities available to them. (Morck, Shleifer and Vishny 1990).

2.3.7 Strategic Realignment

The strategic realignment theory that firms engaged in the process of mergers and acquisitions because they think that this is the easiest way of getting used to of the external environments. Changes came from various sources but the change that is related to the regulatory environment and technological innovation is considered as the most.

2.3.8 Regulatory Changes

In recent years companies, where deregulation occurred are seen to have more M&A activities. This includes financial industry, healthcare, defense utilities, media telecommunication. There is proof which shows that the takeover activity is more in deregulated industries than that of regulated industry (Jensen 1993, Mitchell and Mulherin 1996, Mulherin and Brooke 2000).

Deregulation helps in breaking down of the artificial barriers that exists in these companies. This can be evident by the facts that in now day's banks are moving well beyond of their historic role of saving the money of the customers and lending them money when they needed. They are now also involved in the other functions like insurance business, investment and mutual funds. (Donald 2008).

2.3.9 Technological Changes

Every company is now looking for new technology that can help the organization in achieving its goals and objectives. Technological advancement helped the firms to come up with new ideas for the product, services and entirely new industries. Airplane invention helped the people to thought of the process of creating passenger planes and that also helped to establish the entire new satellite industry. The vacuum tube, transistors and micro chips provided basis of television, radio and computers. Technology is changing every day. Every day new products, process and machines are coming in the market. It is very difficult for the large organization to cope with the changes and to move with the pace of the technology. Large firms see M&A as a window for grabbing new technology.

Instead of setting their own research and development department and then investing highly on the development of new product they often prefer to go for mergers and acquisition. They acquire small firms that are technologically advanced so that they can readily use their expertise in the future.

E-bay acquired Skype technologies in 2006 for $2.6 billion cash. The Skype voice technologies help 157 million customers of E-bay to use this service that help mainly with transaction involving real estate's; big ticket items (Donald 2008).

2.3.10 Q-Ratio

Q-Ratio could be defined as the cost that any firm incurred to the acquiring the current face value of getting that firm. The firms who were interested in expanding their business had a choice of either investing in new plant and machinery, that will take time as well, or to go for a firm that has already got the infrastructure.

Firms who wanted to expand their business could be possibly had two ways of doing so either they could be investing in new plant and equipment or obtaining the same assets by acquiring a company whose face value (market value) is less than that of setting up a new one (i.e. Q-Ratio<1). This theory helps in explaining M&A during 70'swhen due to inflation interest rate depressed stock prices were below the book value of the shares.

Recently gas refiner Valero energy Corp acquired Premcor Rnc for $8 billion that created the largest refinery in North America. The cost of building new refinery is almost 40 % higher than that of acquiring one (Zellner 2005, Donald 2009).

2.3.11 Mismanagement (Agency Problem)

When there is a conflict arises between the mergers that are currently managing the firm and the share holders of the firm. This is known as agency problem. Because of agency problem some actions have has to be taken because management cannot ignore that problem for long time. If the share prices are falling every day, so there is a great pressure on the managers to correct this situation.

The managers were more interested in their jobs remuneration and jobs security than the maximization of shareholders wealth. So the managers are under pressure to make the firms attractive for the acquirer, because they manager thought that the stock of the firms were considered as undervalued by the investors (Fama and Jensen 1983, Mehran and Peristiani 2006) found that agency problems are an import and factors that contributes towards the start of process of mergers and acquisition. Basically the main problem arises between the mergers and the owners of the firms on the issue of how to use the excess cash flow.

2.3.12 Tax Consideration

Tax consideration is very important when companies are engage in the process of M&A. The companies can used it as a loss carry forward and then also take it as investment on tax credits to offsets the taxable income of the company. Both of firms that are engaged in the process of M&A can benefit in the form of new company when acquisitions are in accordance with the purchased methods of accountings. According to this method the assets to acquire are revealed before their purchase in order to find out the new value of assets. Due to this thing the value of the asset reduces due to depreciation that also increases the future income and at the end firm has to pay less taxes.

The tax free status of this transaction could attract the eyes of investor and they considered it as a lucrative feature that also was offered by the firm that was selling in the process of M&A. The seller firm is always wants higher price for the firm, if the transaction is not tax free in order to cover the liabilities of the tax. (Ayers, Lefanowicz and Robinson 2003).

2.3.13 Market Power

Firms merge to create monopoly in order to control products prices at levels that were not possible for them to be sustained in the competitive markets. The reductions in the number of competitors will also lower the cost of monitoring the system as well as less investment on making competitive advantage (Kitchings 1974).

The market power theory is also related to the economics of scale concept. That when you go for bigger markets definitely you have to increases your production. At the end that decreases the unit cost of the product (Cooke 1986).

2.4 Mergers and Acquisitions success factors

Following are the factors that firms must consider while engaging in successful mergers and acquisitions. Same are the factors GSK adopts while engaging in M&A.

2.4.1 Selection Procedures

Firms that are acquiring other firms are in better position if they collect all the necessary information about the firm to be acquired (Cartwright and Cooper 1996). Firms must adopt proper structural approach in order to identify the correct bidding strategy and approach for integration. (Hill and Jones 1999). Nobel et al (1997) suggested that acquiring firm must adopt proactive approach instead of defensive approach in order to start an M&A process. If the acquiring firm study the other firm thoroughly in details than it is more likely not to face unwanted risks and be able to get synergies and other benefits that they want to achieve through this process of M&A.

Mark and Mirvis (1998) started that there are more gains than pains in the successful mergers. GSK also thoroughly studied the Smith Kline Beecham before engaging in the process of M&A and that is why according to Marks & Mirvis 1998 they have more gains than pains in their whole transformation process.

2.4.2 Proper Handling of Integration Process

Success of mergers process also depends upon the facts that how well organizations handled the integration process.

Armstrong (1999) has given a three step change model that can also be applied to the integration process. In the change model of Armstrong the firms initially have to unfreeze from its original culture, norms and values. In the second phase of the model the organization have to adopt the joint value of the new organization and then at the last stage the refreezing occurs, where the process of the new systems are implemented procedure are adopted.(Armstrong 1999).

It is important for the firms to show little bit of flexibility in the integration process. So that adjustments can be made.

2.4.3 Opportunities for synergy

In order to get benefits from synergy in mergers and acquisition process firms should clearly identify the synergic opportunities available. Synergy helps organization in achieving pre mergers benefits in the form of sales as well as volume (Hill and Jones 1998).

Weston et al (1998) explained the same phenomenon by saying that the best elements of both the firms should be combined and the elements that are no of benefit to the organization should be expelled from the organization.

Organizations can benefit from synergy in the manner, if they able to clearly identify the opportunities available. The product and services that are beneficial for the organization should be identified. Departments should be recognized and integrated in the way that it helps organization in cost saving. It should be integrated in the way that different departments will benefit from each other. (Clemente and Greenspan 1998).

2.4.4 Integration of Culture

Culture is the major contributing factor in the success and failures of M&A. Cultural differences are amongst the biggest obstacle in M&A process. The cultural difference could be considered as a large hurdle in the formation of the homogeneous well organized business firm and this factor was more complicated when the firms from different cultural backgrounds join together. (Cartwright and Cooper 1996).

Clemente and Greenspan (1998) stated that in order of two cultures to integrate successfully, both organizations should change their cultures. The acquiring company should respect the culture of the company being acquired. The culture of the organization had evolved over the years. It evolved over the year with mix of all the employees' culture that is working in the organization. The acquiring company should respect the culture of acquired company. Both firms should create a corporate culture with the consent of all stake holders. (Marks and Mirvin 1998).

Cartwright and Cooper (1996) stated that both the firms should understand each other's culture that will help them in reducing the superiority complex. Certain type of cultural differences is helpful, because that helps in creating culture of the new organization. (Marks and Mirvin 1998).

2.4.5 Key Personnel

McKiernan & Merali 1997 and Nobel etal 1997 argued that the hardworking and sincere employees of the organization that were involved in the M&A process were retained by the new firm in and after the process. Such retention is an important success full factor that helps in successful new organization. Weston etal 1998 suggested that incentives should be given to the key employees in to retain them. Peter Drucker 1998. He also suggested that incentive must be given to the employees in the start of integration process that they can be beneficial for the new organization.

Key personnel should be aware of the changes in the organization during the M&A process. Mangers should be given proper training so that they can answer all the questions that arise in the mind of the employees. Training is considered as an important thing in the post merger phase, so that the key personnel feel comfortable in the new organization... (Clemente & Greenspan 1998).

2.5 Challenges in Mergers and Acquisition Process

Mergers and acquisitions are not always very easy for the organizations involved in it. When organizations finally decide to involved in the process of M&A, it has to face different challenges. It is important for the organization to realize the challenges that they have to face:

Following are the factors that are to be considered as challenges in M&A process.

2.5.1 Integration

In M&A process integration is the factor that is difficult to achieve because both organizations whether it was the acquirer or the one being acquired had their different management structure and beliefs. It is very difficult for the two companies that are previously competing with each other now integrate as one and work together. This is the challenge that GSK or any other merging firm has to face. (Hunt etal 1987).

Integration means that both companies have to join together in order to adopt common financial and other strategic policies, so that they can efficiently work together.

Same like “The Economist 1999 stated that the acquired company will always have higher staff turnover ratio because they feel insecure and they think that because of economies of scales concept, they are the ones who are going to be the sufferers.”

2.5.2 Overestimation of Potential drawbacks

Both firms should understand the drawbacks of each other's so that they can join together to overcome those. It is not always easy for the companies to be success full while entering the process of M&A. Both companies should understand the strategic advantages of each other. (Thompson 1993).

2.5.3 The cost of acquiring

It is amongst the biggest challenge for the acquiring company to correctly estimate the value of the company being acquired. If the company is public limited company so with the news of being acquired by another company increases the value of the stock of the company being acquired, which at the end affect the acquiring company because they have to pay for nothing. (Hill & Jones 1999). According to Bowmann & Asch 1996 the common assumption is that M&A always helps organization in positive way but that is not the case. Companies have to look at that aspect as well.

2.5.4 Cultural Differences

Amongst the challenges faced by the companies while entering the process of mergers and acquisition, cultural difference is always amongst the biggest worrying factor for the management of both the firms.

Rankine (1998) pointed that when the manager's looks at the financial synergy that they are getting from M&A process, they ignore other aspect and they think that after this “it's business as usual” for them, but it's actually not.

They should properly study the culture of both organizations before moving ahead. In many companies problem like these arises when people thinks that this is because of difference of culture of both organizations. Hill & Jones (2000) . People like Sirower (1997) stated that the cultural difference is not just the only reason in the failures of M&A process. It is one of the important contributing factors so the firm should realize this challenge because it is important in the integration of both the organizations.

There are people like Cartwright & Cooper (1996) who were not agreed with the statement of Sirower (1997). They argued that cultural differences are the most important factor and important challenge for the both the companies. As acquiring company take over the acquired company because they thought that their management was not running the company properly. On the other hand the employees of the acquiring company are quite nostalgic and they prefer to stick to their own old culture that creates problems for the companies in M&A process.

Challenges like cultural differences create problems for the firms to integrate with each other and ultimately this factor also creates difficulties and problems in their consolidation process. It is necessary for the establishment of newly combined organizations, Marks & Mirvin (1999).

2.6 History and Overview of the Glaxo SmithKline

Glaxo SmithKline Plc is a public limited company that was incorporated according to English law on 6th December 1999. Company shares are listed on New York and London Stock exchanges. On 27th December GSK acquired two English companies Glaxo Wellcome and SmithKline Beecham under the arrangement of mergers of two companies. Glaxo Wellcome and SmithKline Beecham were amongst the global leaders of the healthcare and Pharmaceutical Industry.

The merger of GSK plc and its subsidiary companies along with the other small business units are going to became the leaders of the pharmaceutical industry in the world. GSK also worked out to discover new medicines, formulas and new products development to improve the living condition of the human being.

GSK also captured big markets by developing new pharmaceutical and consumer health related product.

2.6.1 Glaxo Wellcome

Burroughs Wellcome & Company was founded by American Pharmacist Henry Wellome and Silas Burroughs in London in year 1880. In 1902 the Wellcome tropical research laboratories was opened and later on in the year 1959 the Wellcome Company purchased another company with the name of McDougall & Robertson Inc that was involved in the veterinary medicines to become more active in veterinary health care industry. In 1970 Wellcome Company moved its production centre s from New York to North Carolina and in the following year another research centre was established.

1904 Glaxo Wellome was founded in Bunnythorpe, Newzealand. Glaxo was a local company that was involved in manufacturing baby food and also processing the local dairies milk. The products were sold in 1930,s under the company slogan of “ Glaxo builds Bonny babies”.

Glaxo logo was still clearly visible in the streets of Bunny thorpe on the dairy factory of Derelict (the factory that was used for the drying and processing of cow's milk”. No one at that time thoughts, that this was a beginning of a major World's biggest Pharmaceutical and healthcare products firm. In 1935, in London Glaxo became Glaxo Laboratories and opened their new unit. Later on in year 1947 and 1958 Glaxo bought two companies, Josephs Nathan and Allen & Hanburies respectively. After the purchase of Meyer laboratories in 1978, Glaxo started to play important role in the USA market, later on in year 1983 Zebulan in North Carolina was the new destination for the small arm of Glaxo Inc as they moved to the Research Triangle Park. American arm of Glaxo Inc moved to Research Triangle Park (US Headquarter/research) and (US manufacturing) Zebulan in North Carolina.

In 1995 Burroughs Wellcome and Glaxo merged to become Glaxo Wellcome. In the same year Glaxo Wellcome opened their medical research centre Stevenage England. Glaxo Wellcome Purchased Polfa Poznan Company in Poland in 1998.

2.6.2 SmithKline Beecham

In year 1843 Thomas Beecham launched in England their tablets called as Beecham pills, giving birth to Beecham group. Beecham opened their first factory in England at the location of St Helen's in the county of Lancashire for the production of medicines in year 1859. By 1960's it was extensively involved in pharmaceutical business.

In Philadelphia in the year 1830 John K Smith opened their first Pharmacy. Later on in the year 1891 SmithKline and company merged with French Richard & Company. They changed to SmithKline & French laboratories and were focused more on research, till 1929. Year later they opened a new laboratory in Philadelphia. They purchased Norden Laboratories, a company doing research on animal healthcare.

In order to focused more on medicines SmithKline & French Laboratories in 1963 purchased Recherché et Industrie Therapeutique (Belgium). Company started to expand globally and get tremendous growth with the purchase of Canadian company with the name of seven laboratories. They purchased in the US in 1969, Allergan an eye care and skin care product manufacturer in 1982. The company merged with another company Beckman Inc, and changed their name to the SmithKline Beckman.

A major breakthrough in the company life was the point when they purchased their biggest competitors International Clinical Laboratories in 1988.The Company changed to SmithKline Beecham Plc in 1988 when it moved with Beecham. Company moved his headquarter to England, in order to expand their research and development in the US, SmithKline Beecham purchased a new research centre in 1995. In 1997 a new research centre was established at New Frontier Science Park in Harlow. The major centre operated in the city of Dumfries shire, Scotland. (www.gsk.com)

2.6.3 Operational Information of GlaxoSmithKline (GSK)

GSK operates in around 119 countries and London is the city where their corporate head office is located. It also has its operational headquarters in the city of Philadelphia and Research Triangle Park in North Carolina in the USA. The products of GSK are sold in over 130 countries. GSK has its principal research and development (R&D) facilities in the UK, USA, Spain, Japan, Italy and Belgium. GSK manufactures its products in 37 countries. (www.gsk.com)

2.6.4 Business Segments of GSK

The operations of GSK are based on two basic business segments.

(1) Pharmaceuticals segment that was involved in the manufacturing and development of Prescription Pharmaceuticals and Vaccines.

(2) The other segment was of Consumer Health care that is involved in the production of the over the counter medicine, products for oral health care and nutritional health care.

2.6.5 Competitors of GSK

In the Pharmaceutical segments GSK has Pfizer, Forest Laboratories, Bayer's, Abbotts and Wyeth's. In the consumer health care segments of the industry GSK has its competitors like Unilever, Proctor & Gamble, Johnson & Johnson, and Colgate Palmolive. These are well established companies than GSK. (www.gsk.com)


Research Methodology

In order to get the answers for the queries that any researcher had in his mind, he can use different type of methods. These methods ranged from questionnaires to in depth interviews, group discussions, surveys and many more.

Grinnel 1993 cited in Kumar (2005) defined research as a formal investigation that used generally acceptable scientific methodology to get answers that should be publically acceptable as well. Lundberg 1942 cited in Kumar (2005) stated that research is a “scientific method consists of systematic observation, classification and interpretation of data”.

Qualitative research methodology was used in this research. The reason for using qualitative methods in this research was that in this research financial statement of the company, GSK was analyzed to measure the performance of the company. This research analyzed the financial statement (annual statement) of the company to measure the overall performance of the company after M&A. In this research the overall performance of the GSK as how they were able to expand their business with the help of mergers and acquisition.

Financial statement, specially the earning per share in income statement is the best indicator to measure the performance of the company. Earnings per share (EPS) are the method that was used by the professionals, investors and other financial organization to see that how well company are performing. Apart from analyzing and comparing the EPS, this research also looked at the overall turnover of the GSK and the global positioning of the company in the pharmaceutical sector.

In order to incorporate the opinion of the professionals, employees and other stake holder's data collection methods like questionnaires, in depth interviews and group discussions were conducted. That helped in getting the opinion of those individuals about following key areas of the research….

(1) What were the factors that encouraged firms to adopt M&A as an international business expansion strategy? This research collected the feedback regarding the factors through questionnaires, in depth interviews and group discussions.

(2) The second important issue that need to be answered in this research was that what were the benefits that any other firm generally and GSK specially get by the process of M&A. For collected data on this research mostly relied on the information from in depth interviews and annual reports of the company.GSK website was an important source of information in this regard as well.

(3) Apart from the questions that were discussed above, there are issues like how well GSK perform and how well they utilized the opportunity of being the biggest pharmaceutical company of the world after M&A.

(4) Merger and acquisitions was not an easy process it involved the process in which two companies joined together, that were previously competitors to each other. So this research also looked into the challenges faced by GSK in M&A. Questionnaire, in depth interviews and group discussions were used to get the feedback of the employees and business professionals.

3.2. Research Philosophy

According to Saunders 2008 research philosophy helped in adopting different assumption in which a researcher viewed the world. The research philosophy is important in every research as by selecting a particular research philosophy researcher determined that what approach he was going to adopt and what would be his strategy for the thesis. (Saunders et al 2007)

There were three different ways through which researcher thought about his research philosophy. Those were epistemology, ontology and axology. In this thesis researcher adopts the epistemology philosophy. An epistemology philosophy is the one in which researcher was concerned with what he thought would be acceptable and reliable knowledge in the area of study of the research. (Saunders et al 2007)

In this research the main focus of the researcher was on the motivational factors for GSK for the merger and what were the benefits that GSK had from the merger and acquisition process. This research is epistemology on the other ground as well as he incorporated the existing knowledge on the field of mergers and acquisition and how companies were using that as a market entry strategy.

According to Saunders etal (2007) that in every research the researcher has to take a stance, had to take a position when selecting epistemology because epistemology philosophy has positivism, realism and Interpretivisim In this research positivism philosophy had been used by the researcher.

3.2.1 Positivism

Remenyi etal 1998 cited in Saunders etal (2007 p103) defined positivism as a philosophy in which the researcher worked with the social realities that could be easily observed in order to get the results. In positivism the results will help in forming the law similar to what natural scientist and physicist did.(Saunders et al 2007)

Positivism theory hypothesis were developed which was latterly tested and confirmed or rejected. Another element of positivist approach was that in this approach the researcher tried to take the researcher to the far level in order to test his hypothesis and tried to be as neutral as possible. The researcher used usually qualitative approach for the positivist approach for their hypothesis testing.(Gill and Jones 2002 cited in Saunders et al 2007 p 103)

In this thesis researcher was also adopting the positivist approach where he was actually checking his hypothesis about the motivational factors that encouraged GSK for mergers and acquisition along with the benefits and challenges the firm faced before during and after the merger process.

As it was stated by Reymenyi et al that positivism approach, social realities and could be observed were used to check the hypothesis. In this thesis researcher also used social realities like performance of the company, market control, turnover and other elements of annual statements that could be observed as a tool to check the hypothesis that he developed.

The philosophy of the research was to establish and allowed the researcher to achieve the following…….

(1) To established the primary motives and benefits that GSK achieved after M&A through the consensus of the professionals and some of the employees of the GSK.

(2) To analyzed the financial positions of GSK to determine that whether it was worth for GSK to engage in the process of Mergers and acquisition.

(3) To use the resources and information available to support the understanding of the reader for the merger and acquisition process.

(4) To get a better understanding of the use of mergers and acquisition as an International business expansion strategy. This research also looked into the fact that why GSK used mergers and acquisition as a growth strategy in the presence of other growth strategies as well.

3.3. Research Approach

Research approach is an important question regarding the research design of any thesis. According to Sunders et al (2007) researcher had to adopt either deductive approach where hypothesis were tested and a research strategy was selected to test the hypothesis or the researcher could adopt inductive approach where he had to collect data first then he test and analyzed the data and developed his own theory.

Social scientist like Mark Saunders linked these two research approaches to two different research philosophies. Deductive approach is linked with positivism philosophy while mostly inductive approach was linked with interpretivism philosophy. (Saunders et al 2007)

3.3.1 Deductive Approach

In this thesis researcher used deductive approach, because of the fact that he used positivist philosophy as a research philosophy for the thesis. According to (Collis and Hussey 2003 cited in Saunders et al 2008) that deductive approach was similar to scientific research where the law were vigorously tested. (Robson 2002 cited in (Saunders et al 2007)

The research approach of this thesis was based on the feedback of the primary research as well as on the result of the financial analysis of the annual statements of the GSK so that they were adequately supported by secondary research as well. The main purpose of this research was to find out that why GSK selects mergers and acquisition as an international business expansions strategy. What were the main factors that encouraged GSK to involve in the process of mergers and acquisition? It was also discussed in this research that what are the benefits and challenges that were faced by GSK in the mergers and acquisition.

The overall research approach qualitative as the key inputs that this research was getting about the factors that encouraged GSK to engage in the process of M&A, the key benefits and the challenges faced by the firm was collected through in depth interviews, and Group discussions. In this research quantitative method of colleting primary data like questionnaire was also used.

3.4. Research Strategy

According to Yin 2003 cited in Saunders et al (2007) that each research strategy can be used for exploratory, descriptive and explanatory research. Selecting a research strategy was very important phase in the process of research design. The choice of the researcher to choose a particular research strategy was always guided by the type of questions that a researcher had, objectives of the study and to the extent of literature and existing knowledge on that particular topic along with the time and resources of the researcher.

Researcher could used that strategy which was most appropriate for his research as these strategies were not mutually exclusive and these could be used in combination with each other.(Saunders et al 2007)

Case study Strategy

Case study strategy was defined by (Robson 2002 p178 cited in Saunders et al 2007 p 139) as a” strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon which in its real life context using multiple sources of evidence”.

In case study the phenomenon that was studied and the context in which it was studied was not quiet visible. In this thesis researcher used case study as a strategy that helped him in better understanding of the phenomenon which in this case was merger and acquisition of GlaxoSmithKline in the context of being market leader in the pharmaceutical sector. Other contexts could be the benefits that GSK achieved and how well the firm used those benefits in increasing their market share and turnover. (Yin 2003 cited in Saunders et al 2007).

A case study strategy helped in getting the answers of the questions like how a particular phenomenon happened, why was it happened? What were the consequences of that phenomenon? It helped researcher in better understanding of the context in which particular phenomenon happened along with their outcomes. (Morris and Wood 1991 cited in Saunders et al 2007)

Research strategy for this research was based on the key questions that are being answered in this research. The key questions were clearly visible in the title of this thesis th

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