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In this report I am going to talk about mergers and acquisitions in general, define each of them, also have examples of companies that have gone through mergers and others that have been through acquisitions. Furthermore, I am going to discuss their success rate, success factors and failure rate and failure factors. Moreover, what different factors affect them, and also how mergers and acquisitions affect a company's success and its market value as well as its market share. How they can increase their profitability and also how they can backfire and bring two or more companies down. Finally, the report ends with a conclusion based on what have been mentioned and my personal views on mergers and acquisitions.
Merger is the state under which both companies mutually agree to work with each other. On the other hand, acquisition is basically when a bigger company takes over or buys out a smaller company. In that case, the acquired company has little but no choice to be sold out. The main reasons behind mergers and acquisitions are of survival, entering new markets, efficiency or even expanding as a global firm. Survival is considered as a reason for most of the companies which lack stability and are unable to deal with competitive forces. Thus, in this way, private or small companies can be aided financially and be assisted upon for growing into a business entity. Many companies acquire or merge to use it as a gateway to enter new or foreign markets. In such cases, acquiring or merging with a well settled firm in that current market would prove to be highly informative and helpful. Moreover, the company can merge or acquire in order to become more efficient in production and also get involved in a wide range of variety of products. Also, through merger and acquisition, a firm gets a chance to expand its existing operations and come into the spotlight of international market for the risk of higher revenues. (Harrera, 1996)
Mergers and acquisitions are quite common in the current market scenario, but the fact that how many mergers and acquisitions prove to be successful and how many end up in failure, is the true factor to be considered. Examples of mergers and acquisition are AOL Time Warner, GlaxoSmithKline, Hero Honda as well as Sony Ericsson, News Corp acquiring My Space, Vodafone Group plc acquiring a share in Essar Hutchison etc. This does prove that nowadays mergers and acquisitions are a popular strategy, easily figured out by so many companies in the market. (Werhane, 1988)
The main factors responsible for the success of mergers and acquisitions are firstly, getting an upper hand on competition. Companies tend to combine in order to bring together their useful resources and get a bigger market share. For instance, the mobile telecommunications market is a tough and constantly changing market driven by close competition. The merger of Sony Ericsson was an effort to bring up the pool of resources and strengthen in front of major competitors of Nokia and Motorola. The merger has helped the company to portray a better performance in the global market performing at a comparable level with its competitors. Secondly, the company would try getting a better name in the international market, like in the case of Vodafone which acquired a share in Hutchison making India Vodafone's second largest mobile market right after United States of America. (Roll, 2005) Furthermore, there are many more reasons including higher revenue and a more efficient usage of resources. Also, in the time of recession mergers and acquisitions are way more successful because many companies do not survive the credit crunch and prefer merging or being acquired instead of closing down. Therefore, many small companies are listing themselves down for this.
"The good news is that large corporations may actually start looking for deals again. The bad news is that the buying spree will be motivated by massive valuation decreases. While big tech companies may try to buy established companies with revenues, Mc Aleer also believes that smaller, tech-focused companies will attract suitors". (Cook, 2009)
The good merger and acquisition companies have experienced professionals with them. They monitor different types and sizes of companies and study their developments in the business world constantly. Sometimes the clients approach them with a specific merger or acquisition target in mind. (Peterson, 2009) Another reason for the success of mergers and acquisitions is that many companies want to be more open or flexible to changes and prefer to be more global. Thus by merging or acquiring any company following a different organizational culture would be a light of opportunity.
Even though some renowned companies have been highly successful with their merging or acquiring decisions, but the fact cannot be ignored that many companies have failed miserably in their strategies. For example, the Daimler and Chrysler partnership resulted in both the firms loosing around 60 billion dollars of market value, whereas AOL Time Warner realized the decrease in the company's worth of 54 billion dollars ever since the merger took place. Furthermore, a collaborative effort was launched between Coca Cola and Procter and Gamble of worth 4 billion dollars, which would bring all the brands together and the company staff working under one. This decision was soon found to be a mistake all in five months time, as the stock of Coca Cola drastically went down while Procter and Gamble's prices rose. It resulted in the collaboration being called off. (Roll et al. 2009)
It is important to know what exact reasons led to the failure of these efforts. Firstly, many of the companies jumped to collaborative efforts without carefully deducing the amount of risk and the great monetary loss in it. It is difficult to analyze how two different companies would work with different set of resources and how well the company would do under such circumstances. Secondly, many companies have failed with their efforts because of the difference in both the company's organizational cultures. Sometimes one management is not happy working under the other or shareholders are not satisfied with it. Thirdly, there is a likely possibility that a newly merged company does not survive due to the intense amount of competition present. This can be mainly concerned with the global market. Moreover, at times the market itself is reluctant in accepting the new company due to many obvious reasons like cultural reasons, geographical reasons, social reasons etc.
Under the current global financial crisis, mergers and acquisitions are pretty much successful if carefully planned along with suitable market conditions. In this time of credit crunch, companies are coming up with cost saving or cost effective strategies and thus are flexible to small mergers and acquisitions which increase revenue and production. More flexible strategies should be used by companies to ensure the merger or acquisition runs successfully. These strategies include keeping both the company staff satisfied and aware. Nowadays, the company's employees and shareholders are not told regarding major decisions like mergers or acquisitions. This is considered unethical as employees and shareholders do hold a very vital position in the company and because of such mergers a lot of jobs are changed or eliminated. An ideal example is that of Lenovo and IBM, after the acquisition Lenovo put IBM's executives in charge as the Chief Executive Officer of the company. Furthermore, it helped change the image of both the companies and it helped regain customer trust by launching the new product of the ThinkPad X41 Tablet.
In summation, mergers and acquisitions are surely affected by the financial crisis, but companies are still considering these options because they provide a promising good start if planned accordingly as well as a significant growth in market share. Moreover, it provides a good way to battle the credit crunch by pulling together two or more companies resources together. It is evident that not many major mergers or acquisitions will be seen but such activity at a smaller level is always functioning, even at a time of financial crisis. Even though it is proven that not all mergers and acquisitions are a success and a lot of them fail to serve their purpose, mergers and acquisitions are a good way to increase profitability and market share. I personally think that mergers and acquisitions are very helpful for companies which plan to expand to an international level as it reduces the risk content, but under crisis, such risk should be avoided unless the company is highly stable to handle the risk or is highly certain of the merger or acquisition it is about to go through. As a result of all the variables that are to be taken into consideration and all the benefits and risks that could result as an outcome of mergers and acquisitions, companies should study the cause and effects of mergers and acquisitions as well as their possible benefits and costs thoroughly and closely; so that they are certain of the outcomes and do not be a victim of unseen events.