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Submitted By: Yatendra Kumar
"Discuss the strategic rationales and motives for American companies wishing to execute mergers outside the American borders. Do you think it is correct for the European Union to restrict mergers between American companies that do business in Europe?(For example, the European Commission vetoed the proposed merger between WorldCom and Sprint, both U.S. companies and it carefully reviewed the merger between AOL and TimeWarner, again both U.S. companies). Make recommendations on whether such mergers in the European Union are a worthwhile investment for American corporations."
Today's business world is of growing economy and globalization, so most of the companies are struggling to achieve the optimal market share possible on both market level i.e. Domestic and International market. Day by day business person works to achieve a most well-known goal i.e. "being the best by what you perform as well as getting there as quickly as possible". So firms work effortlessly to beat their rivals they assume various ways to try and do thus. Some of their ways might embody competitive within the market of their core competency. Therefore, it insuring that they need the best knowledge and skills to possess a fighting likelihood against their rivals in that business.
In 21st century businesses are the game of growth. Every business want the optimum market share (growth) over their competitors, so companies are trying to get optimum growth by using the most common shortcut i.e. Merger and Acquisition (M&A). The growth main motive is financial stability of a business and also the shareholders wealth maximization and main coalition's personal motivations. Mergers and acquisitions (M&A) provides a business with a potentially bigger market share and it opens the business up to a more diversified market. In these days it is the most commonly use methods for the growth of companies. Merger and Acquisition (M&A) basically makes a business bigger, increase its production and gives it more financial strength to become stronger against their competitor on the same market. Mergers and acquisitions have obtained quality throughout the world within the current economic conditions attributable to globalization, advancements of new technology and augmented competitive business world (Leepsa and Mishra, 2012). In the last decade, M&A are the dominant means of organization's globalization (Weber, Shenkar and Raveh 1996). Merger particularly could be a growing development that has become an area of the recent business conditions and it's apparent to possess affected each nation and trade (Balmer and Dinnie 1999).
Concept of Mergers and Acquisition
The main idea behind mergers and acquisition is one plus one makes three. The two companies together are more worth full than two classified companies at least that's the concluding behind mergers. Merger is the combination of two or more firms, generally by offering the shareholders of one firm's securities in the acquiring firm in exchange for the acquiescence of their shares. Merger is the union of two or more firms in making of a new body or creation of a holding company (European Central Bank, 2000, Gaughan, 2002, Jagersma, 2005). In other words when two firms combine to create a new firm with shared resources and corporate objectives, it is known as merger (Ghobodian, liu and Viney 1999).
It involves the mutual resolution of two firms to merge and become one entity and it may be seen as a choice created by two "equals". The mutual business through structural and operational benefits secured by the merger will reduce cost and increase the profits, boosting stockholder values for each group of shareholders. In other words, it involves two or more comparatively equal firms, which merge to become one official entity with the goal of making that's value over the sum of its components. During the merger of two firms, the stockholders sometimes have their shares within the previous company changed for an equal amount of shares within the integrated entity. The fundamental principle behind getting an organization is to form shareholders wealth over and higher than that of two firm's wealth. The best example of merger is merger between AOL and Time Warner in the year 2000. In 2000 the merger between AOL and Time Warner is one of the biggest deal that later fails.
Advantages and disadvantages of Mergers and Acquisition (M&A)
The advantage and disadvantages of merger and acquisition are depending of the new companies short term and long term strategies and efforts. That is because of the factors likes' market environment, Variations in business culture, acquirement costs and changes to financial power surrounding the business captured. So following are the some advantages and disadvantages of merger and acquisition (M&A) are:
Advantages: Following are the some advantages
The most common reason for firms to enter into merger and acquisition is to merge their power and control over the markets.
Another advantage is Synergy that is the magic power that allow for increased value efficiencies of the new entity and it takes the shape of returns enrichment and cost savings.
Economies of scale is formed by sharing the resources and services (Richard et al, 2007). Union of 2 firm's leads in overall cost reduction giving a competitive advantage, that is feasible as a result of raised buying power and longer production runs.
Decrease of risk using innovative techniques of managing financial risk.
To become competitive, firms have to be compelled to be peak of technological developments and their dealing applications. By M&A of a small business with unique technologies, a large company will retain or grow a competitive edge.
The biggest advantage is tax benefits. Financial advantages might instigate mergers and corporations will fully build use of tax- shields, increase monetary leverage and utilize alternative tax benefits (Hayn, 1989).
Disadvantages: Following are the some difficulties encountered with a merger-
Loss of experienced workers aside from workers in leadership positions. This kind of loss inevitably involves loss of business understand and on the other hand that will be worrying to exchange or will exclusively get replaced at nice value.
As a result of M&A, employees of the small merging firm may require exhaustive re-skilling.
Company will face major difficulties thanks to frictions and internal competition that may occur among the staff of the united companies. There is conjointly risk of getting surplus employees in some departments.
Merging two firms that are doing similar activities may mean duplication and over capability within the company that may need retrenchments.
Increase in costs might result if the right management of modification and also the implementation of the merger and acquisition dealing are delayed.
The uncertainty with respect to the approval of the merger by proper assurances.
In many events, the return of the share of the company that caused buyouts of other company was less than the return of the sector as a whole.
The merger and acquisition (M&A) reduces flexibility. If a rival makes revolution and may currently market vital resources those are of superior quality, shift is tough. The change expense is the major distinction between the particular merger worth and also the merchandising value of the firm that can be of larger distinction.
This paper deals with the merger and Acquisition of the companies. The combination of two firms is measure additional value than two companies at least that's the concluding behind mergers. This also includes the main strategic rationales and motives for American companies wishing to execute mergers outside the American borders and also is the European Union restriction on the American companies M&A with European companies is correct by the help of case study of merger between AOL Time Warner.
Strategic rationales and motives for American companies:
The main rationales and motives of American companies to merger outside the America are to extend their market, get new source of raw materials and tap in large capital market. The cross-border M&A is a widely used and popular strategic means for international companies looking to expand their business reach, widen new production facilities, enlarge new sources of raw resources, and tap into capital markets (Weston, Chung, & Hoag, 1990). Deals out of the borders' have been many and large during the 1990s (Subramanian et al., 1992), and the deals like that are probable to attain new heights due to globalization trends, decline in unwieldy business regulations and red tape, and by the development of standardized accounting standards by various capital-starved countries (Zuckerman, 1993). Moreover, the main motive is to expend their business or market and develop new sources for raw material.
Restriction for Mergers in European Union:
In the earlier times, the enforcement rules in European Zone against mergers were totally different. In the starting, the European Community wasn't abundant involved concerning mergers. The founders of European Economic Community believed that division of markets resulted into unskillfully and for them largeness was never a problem or a haul (Bermann et al, 1993). They'd even thought of regulation as an answer for giant mergers instead of de-concentration. Actually, Mergers were generally accepted and cross-border mergers were most welcome which might facilitate mix the European Union. To the extent that the European Community started taking social control for mergers seriously, it majorly focused upon a drag that mergers would produce abuse of market power (Eleanor, M n.d). Finally, European Commission (EC) law thought of merger as a main growing concern. The EC authorities make certain that, once companies merge, the market balance is maintained and avoid distortion of competition and formation of dominant position that might be abused. Giant companies ought to take approval from the European Union and deliver them with necessary one.
The merger between AOL and Time Warner was declared on 10 January 2000 and it was worth $183 billion. That was the biggest merger in the history of American business world. AOL had about 40% share of online service in the United States and the Time Warner have more than 18% of US media and cable households. The merger is taken into account to be a vertical merger between one amongst the most important web service suppliers and this one amongst the biggest media and entertainment firm. The new company was formed and named as AOL Time Warner and was the fourth biggest company in the US, as evaluated by stock market valuation. After the merger deal, AOL become a subsidiary the Time Warner Company at stage and has operations in Europe, North American countries and Asia. As a web service supplier, AOL on look severely rival from Microsoft, Yahoo and different low price net access suppliers. Thus, the corporate tries to induce advertising and e-commerce growth, thereby separate it by rival (BBC, 2000).
Impact of deal on the performance
After the official announcement of deal merger between AOL and Time Warner growth rate in revenue has dramatically declined. The profitability suffered a good plunge when the alliance. The potency of the new united firm was terribly poor as determined from the asset turnover ratio. Even the liquidity of the firm suffered once the merger as evident from this ratio. There are several reasons for failure however the foremost vital reason was the unequal size of the companies, wherever AOL was overvalued as a result of web bubble. According to New York share exchange before the deal the share price of AOL is 73 and Time Warne is 90 but after announcement of the merger deal the shareholders dissatisfaction shown on share market of AOL and Time Warner and the shares drop down to 47 and 71 respectively. AOL and Time Warner fail to keep up shareholders satisfaction levels this conjointly one among the rationale to loosing stability of share holders according to the Times magazine (Kane and Margaret, 2003).
The market valuation of both the companies AOL and Time Warner were decline from the starting of the merger to end of the deal. AOL has drop down approximately 60 percent and Time Warner around 30 percent of market value once the deal has been closed. The market valuation of both the companies from 2000 to 2011 was dropped down drastically. The AOL market value has dropped from 167$ billion to 107$ billion and the Time Warner 124$ billion to 99$ billion and is the biggest dropped down of any company in American history.
Reasons for merger Failures
1+1 = 3 sounds great but in practice or reality every time it's not work properly and go awry. Historical trends show that roughly 2 thirds of huge mergers can let down on their own terms, which implies they're going to lose worth on the stock exchange. The motivations that mainly drive mergers are frequently blemished and efficiencies from economies of scale might prove elusive (Investopedia, 2010).
Adoption of the new technology takes time for the normal company. In late twentieth century dramatic changes has occur in web. Migration of recent mode of web service is connected with high barricade and a number of other social and legal problems was encircled around and recently established firms like yahoo, msn etc was giving high edge competition. Economical rate of inflation is high, to create economy stronger American government has modified the policy and taxation rules have throwing a dispute for AOL to beat this things merger with Time Warner became a fruit to the AOL. Public and private policies are one of the reasons for the merger failure. The reasons of merger failure is over valuation of AOL shares has shown a dramatic impact on the deal, where as stake holders are not satisfied and improper communication with consumers damages the trust of user. The merger's fail was a result not only because of the replete of the dot-com bubble but it also the failings by AOL Time Warner management to ever really integrate the two firms.
One size does not match all. Several firms think that the most effective way to get ahead is to expand business boundaries through mergers and acquisitions (M&A). Mergers produce synergies and economies of scale, increasing operations and cutting prices. Investors will take comfort within the idea that a merger can deliver increased market power. The same thing happens with the America's biggest merger deal between AOL and Time Warner. They think that merger is helpful for both the companies but it not matched for both of them. Both AOL and Time Warner synergies shows diversification is that the main goal of the firms to extend the revenue and to attain the value gain because of the amendment in mode of technology and increase in the competition for the well established firms. Throughout the phase of merger web bubbles also the main cause for over valuation of shares. In distinction Time Warner was the victim of net bubble. This type merger failure cases shows support the European Commission to restrict the American companies to merge with the European companies. European commission has a right to govern the European market and make stable the Euro Zone market. The European commission (EC) is thought of defending domestic companies from foreign rival and they encourage their zone mergers. So the European commission doesn't want any problems like dis-economies of scale, clashes of cultures and reduction of flexibilities by the merger of American companies. So the merger is highly regulated by European Union to avoid major concentration of economic power in euro zone. The merger deals cases like AOL and Time Warner helps the European Commission (EC) to make strict rules to restrict the merger and acquisition (M&A) of American companies with the Euro Zone companies.