According to Brian Coyle, a merger can be defined as "Any takeover of one company by another, when the businesses of each company are brought together as one". An acquisition can be defined as "It is the takeover of the ownership and management control of one company by another". (B Coyle, 2000) Mergers and Acquisition is also commonly called as M&A. It refers to taking over a business or buying another business. (S. Freeland, 2007) in simple words, It is a corporate action wherein one company buys or takeover another company in order to expand their business.
There are many purposes or goals for the company to engage in mergers and acquisitions. The main purpose for M&A is for growth. Mergers and acquisition helps in providing fast way of growth. The another purpose can be to gain synergy, as they believe that if two companies will merge together than they will have greater power and strength instead of running two different companies. One more purpose can be of diversification. It helps the acquiring company to diversify its business and product line with the help of acquired company. Another purpose is to achieve economic gain. This will help in increasing their current market share and more profitability with reduced cost. Pressure to strike deal can also be one of purpose for Mergers and acquisition. Sometimes CEO has so many pressures about competition that looks for striking a deal for any competitor acquires one. In order to increase their customer company often goes for acquiring another company offering same goods and services. The another purpose can be reducing their risk as entering or opening a new market/industry may be more difficult and risky rather than acquiring an existing one. Another purpose can be of expanding their technology base as they can use the technology of the acquired company. (E. Cameron and M. Green, 2004)
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After having a look on the purposes of Mergers and Acquisitions now let's discuss about the different types of Mergers and Acquisitions. One of the types is horizontal deals, in which both the companies are at same stage and doing well in the market and want to achieve economies of scale than they enter into this type of deals. Example of horizontal deal is the 1998 $77.2 billion merger between Exxon and Mobil. Another type is vertical deals, in which the merging undertaking would be either a supplier or a buyer using its product as intermediary material for final production. Example of vertical deal is the 1993 $6.6 billion merger between Merck, a pharmaceutical manufacturer, and Medco, a pharmaceutical distributor. One more type of deals is conglomerate mergers, in which the two companies that are dealing completely in different industries will merge together. Example of conglomerate deal is General Electric acquiring Honeywell. (P. Gaughan, 2001)
There are many advantages and disadvantages of mergers and acquisition. The advantages of M&A can be described as follows, M&A is quite simple than any other forms. It also helps in reducing the competition in the market as it increases the market share. It also helps in diversifying their business and their product line of business. It also has some disadvantages which can be described as follows, It can create cultural barrier in international M&A. There can be conflict in business as objectives of both companies would be different. It can create dissatisfaction in current employees as new management has to decide about which employee will hold position. (P. William, 2008)
Let's look at the process of Mergers and acquisitions. The process of Acquisition can be explained in following six steps which can be explained as follows. The first step is to define the goal or strategy. In this step the company defines its Goals, strategy plan and objectives for which they intend to acquire another company. In this stage only organization evaluate their strategy to acquire another firm. The second step is selecting a target company. In this stage management evaluate and identifies the target company they want to acquire keeping all the undervalued assets in mind. The target company is evaluated by its growth rate, market share, technology etc. The third step is Forecast evaluation. In this step the acquiring company forecasts the opportunity and financial status of the company. In order forecasts take place affectively, the data provided should be reasonable and accurate. (K. Solovan, no date)
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The fourth step is analysis. Once you have analysed all the financial data than we almost reached towards the completion. In this stage we finally analysed the financial data with the internal management accountant. After this there is a fifth stage which is Management review and decision. As all the evaluation completed by the management accountant, now the upper level management will decide the price in which they want to acquire the firm and upper level management will finally make a decision to acquire a firm. Finally the last step is negotiating the acquisition. This plays a very important role. As now the decision is finalized the two companies will try to negotiate on the basis of ethical and valid points so that a fair value deal can be signed. (K. Solovan, no date)
There is also a failure sometimes in M&A. There are many reasons why Mergers and Acquisitions often fail. Let's try to discuss some of the main reasons for the failure. One of the many reason can be size issue. This can be a core reason wherein acquirer tries for a big size organization or when a big organization tries to acquire a small firm where the percentage gain is very low. Another reason can be previous Acquisition experience. It is not likely to have previous experience to acquire a new organization. The firm who has more talented staff and skills in acquisition are more likely to success. Another reason for failure can be over paying. In this competitive world, one tends to bid more than require. Though the wins the bid but not likely to be happy as he has been paying more and often this turns out to be failure. Another reason can be of poor culture fit. This is often neglected initially but turns to be important while closing the deal. As culture plays an important role. Poor cultural knowledge may lead to confusion, misunderstanding and ultimately towards conflicts. (T. Mallikarjunappa, P. Nayak, 2007)
One more reason can be limited focus. If the acquiring company has altogether different products, cultures etc. are likely to fail. This is more in case of conglomerates type of acquisitions as both the companies are from different industries. One more reason can be of incompatibility of partners. It is said that Mergers between two strong companies is much safer than those of two weak companies. A strong company taking over weak company may often leads to dispute as partners may not be compatible which leads to conflict and finally failing the merger. One more important reason for failure is lack of communication. It is very important to communicate to the people and employees of the organization after M&A procedure as they directly affect the success because improper communication may lead to loss of trust in management. (T. Mallikarjunappa, P. Nayak, 2007)
Now, let's try to see what the effects of mergers and acquisitions on employment are. The study reveals that mergers and acquisitions do not lead to the declining of employment and wages of the workers but actually it increases the employment and wages of workers at the production level. It has also been found out that white collar employees suffer more that the productions level workers after the mergers and acquisitions. But it also again depends on the type of corporate control change. "Using firm-level data, Conyon, Girma, Thompson, and Wright (2002a) reported that U.K. mergers resulted in a reduction in wages and compensation of non-production workers. In a follow-up to this study, Conyon, Girma, Thompson, and Wright (2004), the authors reported that wage increases tend to follow mergers, especially related mergers. Several studies have directly examined the effects of takeovers on the compensation of nonexecutive employees. Contrary to Shleifer and Summers (1988), Mitchell and Mulherin (1989) find that only a small percentage of corporate takeovers lead to a termination of a pension fund". (D. Siegel, K. Simons, 2008)
After merger and acquisition company can adjust its employment level and workforce by hiring or firing policy. There is also an equation for ajusting costs. The equation is called Cobb-Douglas technology. (K. Gugler, B. Yurtoglu, 2003)
" where , and denote the logarithms of employment, real wages relative to user cost of capital and real output of firm i in period t. We proxy real output by real total sales. are a set of time dummies to account for technical progress and business cycle effects, and isolates firm-specific fixed effects". (K. Gugler, B. Yurtoglu, 2003)
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After discussing what it means by mergers and acquisitions, its advantages and disadvantages, types, how mergers and acquisition fails and effects in employment. Let us now try to have a look on recent mergers and acquisition case. "Tata Jaguar Land Rover Takeover".
Tata has created a history by acquiring world class British brands Jaguar and Land rover. Tata group was always a well known company in India and it produces almost every goods that needs man on day to day activity. Jaguar and Land rover are two luxury brand of Britain in cars. After Ford acquired two brands, they have been invested nearly $ 10 billion but did not have profit. They have been incurring losses for continuously two years in 2006 and 2007 and finally they decided to sell off the brands in March 2008 and cut down their losses. Almost a decade earlier, Ford has acquired those brands for $5 billion and now Tata bought them at $2 billion. There will be no change in the terms of employment for JLR employees. (Tata Group Media report, 2008)
"The Indian company shot into the international limelight in 2008 with the troubled launch of its ultra-cheap Nano and its debt-loaded purchase of Jaguar and Land Rover from Ford (F). Since then, its fortunes have been unsure, as the slump in demand for automobiles has depressed its revenues at the same time Tata has invested nearly $400 million in the Nano launch and struggled to pay off the expensive $3 billion loans it racked up for the Jaguar/Land Rover shopping bill. All through the fiscal year ended March 2009 the company bled money, losing a record $517 million on $14.7 billion in revenues, just on its India operations. Jaguar and Land Rover lost an additional $510 million in the 10 months Tata owned it until March 2009. So when the company announced a surprise quarterly profit July 28 of just under $107 million, investors took notice. Operating profit was up 11.4%, even though exports were down 43% and domestic sales were down about 10%". (M. Srivastava, 2009)
On 1st October 2009, Tata announced its plan to close the Land Rover factory in the West Midlands, UK. "Mr Burden is chairman of the Parliamentary All-Party Motor Group, a group of MPs. In an interview during Labour's conference in Brighton, he insisted there could be a bright side to JLR's announcement that it will close one of its two plants in the West Midlands. He said: "If they have a plan with a good model range and investment, then that could, in the long term, secure jobs in the region. But we do need to question them closely about what those plans are, and how it links to the supply chain". (J. Walker, 2009)
He added: "There are positive things in JLR's announcement. The first thing is that they are announcing one definite new model and a range of other new models for the UK". "At a time when the motor industry is facing real challenges, that is positive news". "However, they are also talking about reducing the number of manufacturing plants in the West Midlands from two to one". (J. Walker, 2009)
"On 16th November 2009, GE Caps and JLR $250 mn financing deal first of its kind. Necessity could well be the mother of innovation. Tata Motors and Jaguar Land Rover have tied up $250 million (£170 million) in Buying pre-owned luxury cars makes sense World's fastest cars distribution financing from GE Capital, in a unique financing deal, a first of its kind in Europe". (S. Sen, 2009)
"GE Caps has undertaken to finance all new production of JLR cars from the time the cars leave the factory for up to 90 days, while the cars are in transit to dealers. Says Sean Neville, European business development director at GE Capital, who structured the deal for GE Caps: "While the cars are sitting in trucks, highways, and ships on their way to markets all over the world, they soak up cash like a sponge. We will squeeze the cash out and make it available to JLR". "The deal, which will be announced on Monday, will help the maker of luxury brands access working capital, the funds used for the day-to-day operations such as paying suppliers". (S. Sen, 2009)
On 12th February 2010, It was reported in Economic Times, India that Tata is still looking for chief to handle its JLR activity."Tata Motors, which slipped into losses after buying Jaguar Land Rover at the peak of a bull market, is yet to find a chief executive for the iconic British company as disputes with the trade union deter potential candidates from taking up a challenging task, people familiar with the matter said. The company has spent more than two weeks looking to replace David Smith, who last month quit as the CEO without specifying reasons. Ravi Kant, vice chairman of Tata Motors, is acting as interim CEO even as it looks to get a permanent head". (L. Philip, 2010)
"A successor will be announced as and when decided. Jaguar Land Rover's executive team is running the operation, as usual, day to day, reporting to Ravi Kant, vice chairman of Tata Motors, who is now the interim CEO," a Tata Motors spokesman said, adding, Jaguar managing director Mike O'Driscoll and Land Rover managing director Phil Popham are also helping in the operations". "Some of the potential candidates are not keen to take up the position since the management's strategic review has led to disputes between the workers and Tatas which may make it difficult for a CEO to turn around fortunes, the people said. The unions are not in a mood to give up their claims easily after conceding some during the height of the credit crisis". (L. Philip, 2010)
"(The strategic review) will weaken job security in the UK," said Dave Osborne, national secretary for UNITE, UK's biggest union that has employees from JLR as its members. "The company has little credibility among the workforce, given that we entered into agreements early last year which saved the company £80m and included a pay freeze and pension contribution increases for our members. Within six months of concluding that agreement, the company was approaching trade unions asking for more concessions. Through the recession, our members have lost considerable amounts of money and made sacrifices. The trade unions and our senior representatives are unanimously opposed to them." (L. Philip, 2010)
In summary it can be said that Mergers and acquisition is quite often used term in Today's market and companies find it easy to merge and acquire another company in order to expand and diversify their business. In some cases M&A fails too but it all depends upon certain factors discussed in this essay. In any case, whether positive or negative, some effects can be seen on employment due to M&A.
In case study, Tata taking over Land Rover and Jaguar; are also some effects on employment. According to Tata Media Report, "there will be no change in the employment of the Jaguar Land-Rover". (Tata Group Media report, 2008) This can be positive announcement for employees already working in Land Rover and Jaguar as everyone will have same position but can be negative as some employee may be expecting promotions.