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Merger and Acquisition (PDF)

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Merger and Acquisition
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Introduction
The increasing competition in the external business environment is causing the business
firms to adopt new strategies of sustaining in the market. In this context, it is highly essential for
the firms to gain entry into new markets for increasing customer base and attaining a global
competitive position. Mergers and Acquisitions (M&A’s) are increasingly being viewed by
business corporations as the most successful option to promote their international expansion and
growth. The present report is carried out for critically evaluating the characteristics of a
successful Merger and Acquisitions. This will be presented through including relevant examples
which help in presenting and analyzing the characteristics discussed in the context of Merger and
Acquisitions.
Section 1: Critical Evaluation of the Characteristics of a Successful Merger and
Acquisitions
1.1: Concept of Merger and Acquisitions
Mergers and acquisitions (M&A) are gaining increasing importance for business
corporations in the world of intense globalization. This is because the increasing competition in
the business environment is driving the companies to achieve quality and excellence for
maintaining their competitive advantage. The main objective of the business organizations is to
maximize profitability and as such M&A’s are proving to be highly useful for businesses in
fostering their external growth (Zollo, 2004). The external growth of the businesses is facilitated
through mergers and acquisitions that are increasingly being used worldwide for their growth
and expansion. M&A helps businesses to grow and prosper by expanding the asset base,
providing opportunity to enter into new market, increasing the market shares, enhancing the
manufacturing capabilities, analyzing their strengths and weaknesses and attaining competitive
advantage. Thus, it can be said that the process of M&A is increasingly being used by businesses
for their restructuring and are largely pursued a long-term growth strategy by them (Cording,
2008).
Mergers and acquisitions are viewed by the business mangers as a most important
strategic means of achieving sustainable competitive advantage in the highly complex business
environment. The policies of liberalization and globalization of economy has exposed the
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corporate sector to domestic and global competition. Thus, business managers are largely
undertaking the process of corporate restructuring through mergers and acquisitions and is
becoming as major long-term growth strategy pursued by them (Buckley, 2002).
The concept of ‘Merger’ can be defined as the processes of integration of two or more
companies into a single form by the exchange of securities and leading to the survival of only
one company. The new company that comes into existence with the process of merger is known
as amalgamation for example the merger of Bank of Punjab and Centurion Bank has resulted in
the formation of Centurion Bank of Punjab. On the other hand, if the process of merger results in
survival of a company and completely losing the independent entity then it is known as
absorption. The most prominent example that can be stated in this context is merger of Global
Trust Bank Limited (GTB) with Oriental Bank of Commerce (OBC) that has resulted in
completing losing the identity of GTB but OBC has retained its identity. There are main two
types of mergers that businesses usually undertake these are horizontal and vertical M&A.
Horizontal merger and acquisition usually occurs when two or more companies carries out
similar lines of activity for example, the merger of Tata Oil Mills Company Ltd with Hindustan
Lever Ltd. On the other hand, vertical M&A can be regarded as a merger occurring between the
two companies that are operating at a varied level within supply chain merge their operations
together. For example, the merger that has occurred between Reliance Petrochemicals Ltd with
Reliance Industries Limited can be cited as a prominent example of vertical merger (Rasiah and
Ming, 2014).
On the contrary, the process of acquisition can be defined as acquiring control over the
assets of a company by another company but it does not involve any physical combination
between the business entities. This can occur through acquiring majority shares of another
company by purchasing the assets or having a control over the Board. The most prominent
example of acquisition that can be cited is takeover that can be regarded as business strategy in
which a company gains control over the management of another through direct or indirect basis.
The businesses may undertake acquisitions for several reasons that include achieving economies
of scale, expanding the market share, reducing the cost of operations and introducing new
offering within the market place (Lin and Piesse, 2004). The businesses usually undertake this
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type of business expansion when it is more profitable to grow by acquiring another company
than to carry out its own expansion plan.
(Source:http://shodhganga.inflibnet.ac.in/bitstream/10603/117606/9/09_chapter%201.pdf)
The major objective of M& A can be regarded as achieving economies of scale by
business entities. This is because the development of an integrated company can result in
reducing the fixed costs and thus increasing the profitability by serving larger part of the market.
The increasing market power of the company results in maximizing the growth opportunities of
businesses. The acquiring of scarce resources by a firm by the interaction of another company
helps to overcome the gaps in performance and thereby providing an opportunity to grow by
outperforming the competitors. In addition to this, the ultimate objective for a company to
undertake M&A can be regarded is maximizing the shareholder value. Thus, it can be stated that
a company should undertake a merger or an acquisition only if it results in creation of maximum
value. The merger or acquisition can be justified if it results in creation of cost synergies that is
creating operating, financial or managerial synergy (Christensen, 2011).
Operating synergy can arise by combining the operations of the acquirer and the target
company that results in decreasing the cost of operations. The major benefit is achieving
economies of scale and reducing the production costs and maximizing the firm profitability. On
the other hand, financial synergy is gaining access to financial competency of a firm such as
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enhancing the debt capability and reducing the financial risk. The big corporations have the
advantage of gaining access to cheap sources of finance and this can be a potential reason for
small companies to undertake M&A with them. In addition to this, managerial synergy can be
created when a high-performing team of managers is replaced with a weak one and thus
providing the opportunity to a company to gain managerial competency that would helps in
driving the growth of a firm (DePamphilis, 2009).
1.2: Characteristics of Merger and Acquisitions
M&A’s process enables the firm to gain instant availability of new technologies,
distribution facilities and market share of the target companies. As such, the success or failure of
M&A’s can be evaluated based on analyzing whether the financial strategic or operational
determined objectives are adequately met or not. The ultimate aim of the M&A’s are to promote
growth and expansion of a business company that can be accessed through discussing their
following characteristics:
Portfolio Diversification
It has been stated by portfolio theory that M&A’s results in creating a merged firm
having higher market power as it will provide buyers varying inputs and thus helps the firm in
gaining a monopoly within the market. The creation of merger results in the development of
conglomerates that can stated as larger corporations that consists of numerous businesses which
are not related with each other. For example, General Electric is a conglomerate that has been
created by investing in different businesses such as healthcare, transportation and energy. The
diversification is achieved through reducing the exposure to industry specific risk as the
conglomerate created will have very less vulnerability to get exposed to the risks present within
an industry. This is because conglomerates have less dependency on a specific industry as it can
gain income through varying industries so that the loss incurred in one can be offset by gaining
income in other industries (Golubov and Petmezas, 2013).
It has been reported by a survey conducted in this regard that larger U.S. companies are
pursuing a strategy of diversification to reduce the strategic and operational risk related with
their businesses. For Example, in the past few years it has been identified that larger companies
have acquired the assets of larger manufacturing and mining companies in comparison to the
new investment undertaken. The best business example that can be cited in this regard is of Dell
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Inc. that has achieved higher growth through pursuing a diversification strategy. Dell has
diversified its business model by making several small purchases that has facilitated the growth
of its traditional computer business. It has fostered its sales through acquiring Compellent
Technologies that has enabled it to increase its sales by about 60% within the three months after
acquisition.
The increased revenue realized by Dell can largely be attributed to its strategy of
acquiring small companies involved in developing software components that has enabled it to
maximize its profits despite of lack in the gains in revenue realized from its core business model.
The business model has helped the Dell to sustain its profitability as its software business has
provided it more sales as compared with the hardware business model. It has been stated in case
of Dell that acquisition of small software companies has enabled it to increase its earnings to a
large extent contributing to its present competitive position. It has undertaken about 25
acquisitions in the past 25 years of value less than $1 billion and boosted is non-computer
revenue by about 30% since the year 2007. The diversification that has undertaken by Dell has
enabled it to sustain in the highly competitive electronics market despite of declining sales of its
core business model of Personal Computers (PC). The increasing competition from the creation
of tablets and smartphones have resulted in decreasing its sales to a large extent but
diversification has enabled the company to reduce the industry specific risk and enabled it to
maintain its competitive position within the market (Sherr, 2012).
Internal Control
It has also been stated in this context that internal forms of control can be regarded as a
critical determination of a successful merger and acquisition. This is because it is necessary to
align the interest of the shareholders with that of the executives and managers for ensuring the
successful creation of an M&A. The above fact can be explained adequately based on agency
theory as per which agents are regarded to be business executives or managers and the principals
are the shareholders. The theory has stated that agents are responsible for maximizing the interest
of the shareholders and this is only possible of their interest are aligned with the shareholder’s
interest. The top managers involved in the M&A should take correct decision regarding the
transactions involved and therefore its success it’s largely impacted by the leadership factor. In
this context, it is essential for a firm undergoing merger or acquisition process that business
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