How Merger And Acquisition Provides A Competitive Edge Finance Essay
As merger and acquisition has introduced globalisation to the business world. It has changed the era of business. So it’s most difficult decision for an organisation to dissolve with another organisation losing their identity but we have such examples when the targeted company starts performing well after merger and acquisition. I am going to analyse the importance of merger and acquisition especially in the banking industry. This research will provide me with the necessary knowledge that how merger and acquisition are helpful for the organisations to strengthen their position in the market and what are the factors involve in the process of M & A.
To analyse how merger and acquisition provides the organisations a competitive edge towards continuous progress.
To assess the motivation factor behind the merger and acquisition.
To study the conception and categories of merger and acquisition by reassessing the past literature.
To make an analysis on the process of merger and acquisition.
To analyse the post changes and financial position in the market value of the organisation after merger and acquisition.
An important, some would say only, rationale of a business is to prioritise the owner or shareholders. For the achievement of this purpose in this most rapidly changing business environment of the world and for the getting a competitive edge among other companies, When a company recognizes a value in owning another company, it might negotiate with the target company to merge and create a single company under the control of the initiating company (merger) Or the target company might be purchased by tendering an attractive offer for the outstanding share of the target company or by purchasing the assets of target company (acquisition). Acquisitions are mostly happen in the area that allows the firm to apply its conventional base to enter to the new growth markets.
The global bank merger wave:
We have seen enormous changes in the banking industry in 20th century because of a recession which we have seen globally. If we consider top five banks in the world in including Dai-ichi Kangyo bank, Sumitomo bank, Sakura bank, sanwa bank and Fuji bank all these banks were operating in Japan but if we analyse the same ranking in 2000 then we came to know that top five banks in terms of assets were Sumitomo sui banking corporation (Japan), Citi Group (USA), deutsche banking group (Germany), HSBC holdings (UK) and Bayerische Hypo Vereins bank (Germany). These all companies prevail in the market at that time as they have involved in merger and acquisition in recent years. The merger and acquisition bustle is being analysed on a worldwide base especially in the banking sector. The basic procedure of this assignment is as following first of all the discussion of the pattern of consolidation is discussed and after that involved risk will be analysed after this process the economical result consideration is very important for the estimation of the future activities. For this analysis we have to look back in 20th century when enormous wave of merger and acquisition took place.
Merger and acquisition worldwide:
This analysis does not involve all the countries but the group of ten with Australia and Spain. During the 1990s total 7300 merger and acquisition deals have been observed in these countries which have been mentioned. Total values of the assets based on the market price of the shares were observed as 1.6 trillion USD. This wave of merger and acquisition was nearly tripled in the last three years of the decade. During all those merger and acquisition happened in the last three years nearly 85% of the M & A were domestic.
According to Jon Decesare and Dean matsikas merger and acquisition transactions have mounted nearly 2.7 trillion dollars nearly as compared to the 38% of the previous years.
M & A in Europe:
A big wave of merger and acquisition have been seen in the 1990 in the European Union especially in the banking sector as compared to the cross border. As the banks plays the important role in the economy of the country so the process of merger and acquisition in the sector has fascinated extensive interest not only form merger but they have also attract policy makers. A particular research by Yener Altunba and David Marqués Ibáñez in October 2004 shows that the sustainability on the performance of the company and the combined strategies of mergers are enhancing the performance for both domestic and internationally merger and acquisition.
The overall numbers of transactions happen in 1995 were 326 but after just four years almost 500 deals happen and as this chart shows that there is strong increase during the last three years. If we look closely on the domestic level then we can find that mostly deals are have been took place between the small banks rather than the large banks but there has been seen a slight increase after woods in the large banks as well. Those deals in the small banking sector was nearly 87% overall deals.
Merger and acquisition in UK:
According to national statistics just within quarter three to quarter four 2010 the value of acquisition in UK by UK companies arose from £3.0billion to £3.8billion but overall total value of the domestic acquisition was reported at lowest level since 1994.
This chart shows the total number of merger and acquisition involved in UK companies including acquisition abroad and by foreign companies also this provides us acquisition in the UK by UK companies. Overall ratio shows that foreign companies have significantly taken over the UK companies.
Value of transaction in the UK by UK companies:
Overall value of acquisition reported in 2010 was £10.1billion which is decreased from £12.2billion which was reported in 2009.the graph below shows how the value of involving UK companies from 1996 to 2010.
If we make a detail analysis of UK market with other countries than its clear that foreign countries remain dominant over the UK market.
If we consider the net transactions by the foreign companies in the UK were valued at £29.5billion in 2010. This shows an increase than the previous year of £5.3billion. On the other hand net transactions by UK companies in abroad were valued at £2.2billion. This was a reflection of a low value of acquisition mutual with reasonably high number of considerable disposals. In the banking sector disposal of Royal bank of Scotland group plc of a number of compnies in the press reported value in the excess of £3.4billion.
A large portion of the empirical work examining the benefits of mergers focuses on changes in cost efficiency using available accounting data. Berger and Humphrey (1992), for example, examine mergers occurring in the 1980s that involved banking organizations with at least $1 billion in assets.
The results of their paper are based on data aggregated to the holding company level, using frontier methodology and the relative industry rankings of banks participating in mergers. Frontier methodology involves econometrically estimating an efficient cost frontier for a cross-section of banks. For a given institution, the deviation between its actual costs and the minimum cost point on the frontier corresponding to an institution similar to the bank in question measures X-efficiency. The authors find that, on average, mergers led to no significant gains in X-efficiency. 1 Berger and Humphrey also conclude that the amount of market overlap and the difference between acquirer and target X-efficiency did not affect post-merger efficiency gains. In addition to testing X-efficiency, they also analyze return on assets and total costs to assets and reach a similar conclusion: no average gains and no relation between gains and the relative performance of acquirers and targets.
Non-interest costs yield significant results, but the findings are opposite of expectations that the operations of an inefficient target purchased by an efficient acquirer should be improved.
Akhavein, Berger, and Humphrey (1997) analyze changes in profitability experienced in the same set of large mergers as examined by Berger and Humphrey. They find that banking organization s significantly improved their profit efficiency ranking after mergers. However, rankings based on more traditional ROA and ROE measure s that exclude loan loss provisions and taxes from net income didn’t change significantly following consolidation.
DeYoung (1993) also utilizes frontier methodology to examine cost efficiency and reaches similar conclusions as Berger and Humphrey. Cost benefits from mergers did not exist for 348 bank-level mergers taking place in 1986 and 1987. In addition t o the lack of average efficiency gains, improvements were unrelated to the difference between acquirer and target efficiency. However, DeYoung does find that when both the acquirer and target were poor performers, mergers resulted in improved cost efficiency.
In addition to frontier methodology, the literature contains several papers that solely employ standard corporate finance measures to analyze the effect of mergers on performance. For
Example, Srinivasan and Wall (1992) examine all commercial bank and bank holding company mergers occurring between 1982 and 1986. They find that mergers did not reduce non-interest expenses. Srinivasan (1992) reaches a similar conclusion.
The 1993 study is the most recent of a number of studies on the subject by this author. In an Earlier study, Rhoades (1987) examines the impact of mergers on the ratios of net income before extraordinary items to assets and non-interest expenses to assets. He runs profit analyses in which a dummy variable distinguishing non-acquired banks from banks acquired by multibank holding companies is the dependent variable. Performance measures and several control variables serve as the independent variables. Rhoades finds that neither income no r non-interest expenses were affected by merger activity. In Rhoades (1990), a similar study to Rhoades (1993) is conducted with 13 acquisitions involving billion dollar banks.
According to a research paper by paul guest 2007 he analyse the impact of merger and acquisition on executive pay in united kindom. According to his research literature, shows that acquiring firms are on average rewarded with higher absolute compensation following acquisition (Khorana and Zenner, 1998; Bliss and Rosen, 2001; Anderson et al., 2002; Grinstein and Hribar, 2004; Girma et al., 2006; and Harford and Li, 2007). Evidence on whether these pay increases are greater than would be expected from internal growth is mixed. Firth (1991), Conyon and Gregg (1994), Khorana and Zenner (1998), and Girma et al. (2006) find evidence in favour, whilst Avery et al. (1998), Bliss and Rosen (2001),
Anderson et al., (2002), and Harford and Li (2007) find evidence against.
Evidence on whether bad acquisitions also result in pay increases is also mixed. Lambert and Larcker (1987), Khorana and Zenner (1998), and Girma et al
(2006) find no evidence of this, whilst Firth (1991), Avery et al. (1998), Bliss and Rosen (2001) and Anderson et al., (2002) find evidence in favour. The evidence on how poor acquisitions affect overall director wealth (pay plus shareholding value) is mixed. Firth (1991) and Bliss and Rosen (2001) find that poor acquisitions result in an increase in total CEO wealth, whilst Lambert and
Larcker (1987) find that the effect on CEO wealth is negative. If pay awards following acquisition are a manifestation of agency problems, then pay awards should be constrained by sound corporate governance. The evidence is, once again, mixed. Grinstein and Hribar (2004) show that CEOs receive significantly larger cash bonuses when the CEO is also the chairman and when the CEO also sits on the nominating committee, whilst Anderson et al. (2002), find no evidence that pay increases are related to either CEO share ownership or tenure.
A lot of work has been done in the last decade on merger and acquisition by gathering all the information some past researchers has worked on the motivation behind the M & A and some have observed the benefits for both the companies which are entering into merger and acquisition contract. As according to (gong ET .2007) there are several factors for which companies enters into merger and acquisition contract but the main two factors are:
the first one is financial gains and the second one is the strategic advantages An acquirer can only get the benefit when they have undertake the undervalued assets of the acquirer company or to take control of all the needed cash flows and to develop economies of scale through alternative management approaches (Girma and Gorg, 2004). Elimination of a competitor could be possibly one of the strategic advantage other could be to gain over the strategic assets or the recourses. A specified target market or through conglomeration entering into entirely different business or gaining special skills or services, are also strategic advantages for the acquirer company. If a company is suffering from economic distress or unable to meet an opportunity perceived by its current owners then it may become a target of hostile takeover (Farrell and Shapiro, 1990). In these cases if we analyse then we can see that acquirer has more ability to get more value from the undervalued assets than the current owner.
I will use primary and secondary research methods in order to gather the best information for my research. I am also looking forward to visit some of the companies involved in merger and acquisition by assessing their data so that I can analyse that how merger and acquisition make an impact on the companies or what is the post reaction of the companies. Through primary research I would be able to gather the information about the merger and acquisition and by secondary data I would be able to narrow down my research towards my main goal. I will also gather information from the following sources. Substantial assessment:
By this method I will be able to analyse the pre and post performance of the companies after merger and acquisition. It would be very helpful for me to know the motivation factor for both the companies.
Books, newspapers, and journals, online resources:
Books are the best source to get the information in the detail about merger and acquisition through news papers and journal I would be able to know that what the current situation of the market is? Through online resources I will face across the information on all aspects of merger and acquisition.
Motivation behind merger and acquisition: In this competitive business environment merger and acquisition practising has become very common in every type of business industry. There are several Benefits of the mergers and acquisition due to which companies enters into contract of merger and acquisition. Mergers and acquisition possibly enhance tax gains or can enhance the revenue and can reduce the cost of capital so it’s very important for a company as every business is for profit.
Greater Value Generation
Value generation of an organisation can be increased constantly through merger and acquisition. Usually shareholders value of an organisation is expected to be greater after merger and acquisition than the total of the same values of the parent companies. When a company is weathering through rough times then Mergers and acquisition could really prove to be valuable to the companies towards their continuous growth. On the other hand if the company is having problems and is not stable in the market then it can go for acquisition deals as if a company which has strong presence in the market buys out that particular firm which is not performing well then from their acquisition more efficient, competitive and revenue generating company can be generated. Both companies can get benefit from this deal as the acquired company will get out the trouble or rough times and from joint company the acquirer can have strong presence in the market and accumulates larger market share. This is because of these benefits that the small and less powerful firms agree to be acquired by the large firms.
Gaining Cost Efficiency When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced.
An increase in cost efficiency is affected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down.
Revenue enhancement: The most important factor because of which companies enter into merger and acquisition contracts are to enhance the revenue.55% of the interviews by Matthias Schubert quoted this reason for their contract of M& A.
Mergers and Acquisitions are also beneficial
When a firm wants to enter a new market
When a firm wants to introduce new products through research and development
When a forms wants achieve administrative benefits
To increased market share
To lower cost of operation and/or production
To gain higher competitiveness
For industry know how and positioning
For Financial leveraging
Merger and acquisition process:
Feasibility study: it can be defined as the process for the recognition of the problems and opportunities also by assessing the entire situation what are the successful outcomes and for determining objectives. Decision making process can be supported by business feasibility process. Basically this is an analytical tool which provides recommendations and also provides assistance to the decision makers.
After completing the feasibility study it comes to an actual process.
Permission for merger and acquisition:
Companies can only mingle when there has been a complete communication process between the associations. For the acquiring company it’s necessary to have the authorization in its intention section to precede the business of the acquired company. If these provisions are not communicated in the memo then it’s necessary to have the permission from the shareholders or the board of directors and the law board of the company.
Registration to the stock exchange:
Both the companies entering into the merger and acquisition deals should inform the stock exchange when they are listed for integration.
Approval of board of directors:
Board of directors of both the companies need to approve the draft proposal for integration and also provide authorisation to the management of the companies so that they can proceed the process of integration.
Application in the high court:
For the approval of the draft amalgamation proposal there is a process to send an application to the high court which has to be approved by board of the directors of both companies. High court would gather a meeting of the shareholders and the creditors for approving the proposal. At least 21 days before the meeting they should be informed.
Shareholders and creditors meeting:
Both the involved companies should arrange a meeting of the shareholders and creditors for the approval of integration proposal. The ratio of the shareholders approving the proposal should be 75% for individual company.
Sanction by the high court:
Following the authorization of shareholders and creditors on the petitions of the companies, the High Court will pass order sanctioning the combination scheme by considering that it is a fair and practical. If it deems so, it can amend the scheme. The date of the court’s hearing will be in print in two newspapers and also the Regional Director of the Law Board will be intimated.
Filling the court orders:
As the companies get the certification from the high court then the original copies will be filed with the registrar of the companies.
Transfer of assets and liabilities:
All the assets and liabilities of the target company will be transferred to the acquirer company which will be in effect from a specified date.
Payment by cash or securities:
According to the proposal the, the acquiring firm will swap shares and debentures and pay cash for the shares and debentures of the acquired firm. These securities will be listed on the stock exchange.
Types of merger and acquisition:
Mergers can be categorized as follows:
Horizontal: Two firms are merged across similar products or services. Horizontal mergers are often used as a way for a company to increase its market share by merging with a competing company. For example, the merger between Exxon and Mobil will allow both companies a larger share of the oil and gas market
Vertical: Two firms are merged along the value-chain, such as a manufacturer merging with a supplier. Vertical mergers are often used as a way to gain a competitive advantage within the marketplace. For example, Merck, a large manufacturer of pharmaceuticals, merged with Medco, a large distributor of pharmaceuticals, in order to gain an advantage in distributing its products.
Market extension merger:
This is the type when two companies that sells the same product in different markets. This is an interesting type of merger because companies can be regional. Companies can have different segments of the marketplace in which they have gained a reputation. By acquiring another company that has a foothold in another market, you can automatically increase the markets that you address.
Product extension merger: is when two companies selling different products in the same market merge. An example of this is the EMC/Data General example where EMC sold at the high end and Data General sold at the low to mid-range.
Conglomerate: Two firms in completely different industries merge, such as a gas pipeline company merging with a high technology company. Conglomerates are usually used as a way to smooth out wide fluctuations in earnings and provide more consistency in long-term growth. Typically, companies in mature industries with poor prospects for growth will seek to diversify their businesses through mergers and acquisitions. For example, General Electric
(GE) has diversified its businesses through mergers and acquisitions, allowing GE to get into new areas like financial services and television broadcasting.
Plan of research:
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