Mergers and Acquisitions: A Comprehensive Analysis Report

This report provides a detailed analysis of mergers and acquisitions (M&A) in the corporate world, emphasizing their strategic significance and the driving forces behind them. It explores the various economic reasons for M&A, including increasing capabilities through research and development, enhancing market share, diversifying product ranges, cutting costs, and ensuring survival in a competitive market. The report delves into the positive aspects of M&A, such as synergistic results, cost efficiency, improved purchasing power, and enhanced market control. Conversely, it also addresses the negative aspects, including reduced competition and potential consumer disadvantages. The study covers factors leading to M&A, their positive and negative impacts, providing a comprehensive overview of the subject.

MERGERS AND
ACQUISTIONS

ABSTRACT
Mergers and acquisitions (M&A) in a corporate world is highly extensive and occupies a
very strategic position in the functioning of any business unit. The decision towards taking this
step by an organization is attached with many critical aspects and is driven by various forces
existing in the market. It has been gained that Merger and acquisition of businesses generally
takes place due to presence of many type of strategic reasons but the main reason is linked with
economic condition where businesses have to utilize resources for enhancing overall
performance in the market. The reasons for mergers and acquisition includes survival, cutting
cost, diversifying product range, enhancing market share as well as increasing capability of the
organization.
It can be concluded from the study that there is existence of several factors that results in
failure of the particular strategy. It involves poor strategy fit. In addition to it can be due to
poorly managed integration. Too optimistic project regarding the target market is the another
reason that leads to bad decision and failure of M&A. Further it is because of inadequacy due to
diligence that can result in failure of the entire strategy.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................2
Factors leading to merger and acquisition..................................................................................2
Positive Side of Mergers and Acquisition...................................................................................4
Negative side of merger and acquisition.....................................................................................4
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
The study of subject of Mergers and acquisitions in a corporate world is highly extensive
and occupies a very strategic position in the functioning of any business unit. The decision
towards taking this step by an organization is attached with many critical aspects and is driven by
various forces existing in the market. Companies looking for economic expansion by
consolidation of different segments into one forms to be one of the factors persuading corporates
to undertake this decision of merging in a horizontal line of industries. Apart from the steps of
the company to integrate on a vertical or horizontal basis in order to satisfy the need of
expansion, another vital driving force is posed by the desire of diversification. The rationale
behind undertaking this decision is to mitigate risk by investing in variety of areas or assets.
This further enables the company to bring down the element of volatility in the business and
further minimize its exposure to idiosyncratic risks which has the potential to hamper a specific
asset by reducing its price or any particular area of the business. Such a kind of risks works in an
unsystematic manner to deteriorate the conditions related to peculiar aspects of an enterprise.
The decision of diversification leads to formation of conglomerates which in turn minimizes cash
flow volatility of the company as it further reduces the vulnerability of conglomerates to risk
from any specific industry (Ravenscraft and Scherer, 2011). In other words, it enables the
corporates to offset the effects of downfall in one industry with the other unconnected industry.
The concept of bargain hunting is another factor which leads to the decision of mergers
and acquisition by the organizations. This can also be viewed through the term leveraged buy-
out, which in essence take assistance of debt capital and such sources for acquisition were
preferred to either destitute or undertake a simultaneous move of expanding and downsizing the
businesses. The rationale behind such decisions was to reduce the immense debt obligations
existing on the business units. This trend was primarily prevalent during the years of 1984-1989
and then witnessed a slow down in this market pursuant to 1989. Post 1990, the international
market experiences a major boom and brought economical prosperity, with the major focus on
Globalization. This era witnessed mergers and acquisitions beyond the geographical borders and
hence emerged the concept of a significant trend which can be characterized as cross-border
acquisitions and mergers. The emergence of this trend could be credited to the desire of
corporates to make best utility of opportunities on a global level and enhance the growth of the
business in terms of exposure and monetary (Mergers and Acquisitions., 2013). Hence, business
1

units started looking outside the borders of their home to target some new and fresh markets of
the world (Cooper and Finkelstein, 2014). Some of the mega deals which were witnessed during
this era and were driven by the force of Globalization are that of Citibank and Travelers, Exxon
and Mobil and so on . This led to technological innovations and redirected the companies to
focus on the enhancement of their core competency, which in turn can enable them to attain a
competitive edge in the market.
In pursuance to these trends shown by the Mergers and acquisitions market, the present
report seeks to explain various factors which form the driving force for the corporates to
undertake such strategic and critical decisions. It is an established fact that the main core of
undertaking any decision by a business unit is based on the requirement of enhancement at the
economical level and hence, the instant study shall elaborate on various aspects of the said
economical forces, prevalent in the modern era.
MAIN BODY
Factors leading to merger and acquisition
Merger and acquisition of businesses generally takes place due to presence of many type of
strategic reasons but the main reason is linked with economic condition where businesses have to
utilize resources for enhancing overall performance in the market. Various economic reasons are
present which are associated with merger and acquisition and they are discussed below:
Increasing capability: Generally capability of any business enterprise increases through
expansion into research and development activities. Further, in case if any organization acquires
advanced technology then it enhances overall capability and in turn overall challenges present in
the business environment can be faced easily. Apart from this, other main reasons involve
businesses are interested in combining to leverage costly manufacturing operations. In case when
any two organizations merge with each other then overall capability to carry out operations
within the market enhances and this in turn acts as development tool for the business. As per
view of Kemal and Shahid (2012), in every sector concept of merger and acquisition is gaining
importance and it has become one of the main reason behind success of businesses in the market.
Enhancing market share: It is regarded as one of the main reason due to which concept of
merger and acquisition is gaining importance at faster pace. Apart from this, many time it is
possible that companies are not able to operate efficiently in the new market due to lack of
2

knowledge or expertise. According to Zerdin (2014) acquiring new businesses to enter into
different market is considered as one of the most efficient way. This allows companies to
enhance their market share and they can surely operate on broader platform in the market.
Businesses are adopting the process of merge with the motive to gain better distribution network.
Therefore, this reason clearly represents that need for merger and acquisition is increasing at
faster pace in every market.
Diversifying product range: One of the main reason due to which merger of two companies
takes place is to complement present product or service. Two businesses are indulged into
practices of combining product range with the motive to enhance market performance (Connell,
2008). Apart from this, core competencies of the organizations are combined so that it can
enhance long term strength of the businesses. This in turn brings favourable results for the
companies in every possible manner.
Cutting cost: Reducing overall cost and other type of expenses is one of the main motives of
every business. As per view of Johnston (2012) strategic decision linked with merger and
acquisition allows businesses to focus on the main areas where they can easily reduce overall
cost and in turn performance can be enhanced easily. Apart from this, when two organizations
merge then they are delivered opportunity to combine located and this in turn decreases level of
opportunity cost through integration of support functions. Due to this basic reason firms are able
to enhance their profit margin and this in turn leads to rise in level of overall performance in the
market.
Surviving: In the modern era due to presence of large number of challenges in the market it has
become difficult for businesses to survive in the market. Merger of both businesses supports to
deal with the survival issues like in the case of financial crisis organizations who merged with
one another were able to survive in the market and rest have to face large number of issues
(Buckley, J. P. and Ghauri, 2002). This represents that survival is one of the main factor which
has encouraged organizations to merger with each other so that they can smoothly carry out all
the operations and in turn this acts as development tool.
Therefore, these are some of the most crucial factors which have lead to merger and
acquisition of businesses where main motive is to grab opportunities which are being present in
the business environment and provides long term benefits.
3

Positive Side of Mergers and Acquisition
The process of Mergers and Acquisition is one of the most prominent decisions which is
frequently been taken by the the corporate houses in the present world. Some of the key
advantages leading to the expansion of this innovative and strategic form of restructuring, which
it offers to the business world are immense in number.
With the assistance of this restructuring measure, corporates can attain synergistic results
which fundamentally is a result of a surplus power which is offered through this medium of
expansion or divestment by a company. In addition, this is a means to achieve cost efficiency in
the operations as it leads to a scenario wherein more than one company function together by
combining its resources to produce tremendous financial gains and excellent performance. As
also stated by Kaur (2005) this further empowers the business units to improve on their
purchasing power while making orders in bulk. Furthermore, the volume of production also
experiences an enhancement which is large and thereby leads to a positive effect on the profit
margin being realized by the company. A reduction can also be made in the total workforce
working for the resulting company, thereby further increasing the profit margin. On the
strategical level, this enables the management to better understand some of the critical issues and
policies and make an optimum utilization of the combined resources of the companies. It has also
been observed that the resulting company is empowered to exercise a better control on the forces
prevalent in the market, which in turn enables them to effectively face the severity of stringent
markets. Further, an efficient risk management scheme can be developed as the market forces
can be foreseen by the management. Moreover, the combining effect of the authorities of the two
companies shall bring variance in the perspective of analyzing situations and taking decisions,
thereby covering every aspect of a scenario and leaving no buffer space of discrepancies. A
major enhancement can be realized in network of the resulting business unit, which would
enhance and strengthen the hold of the entity in the market as well as increase the market reach
(Projects, 2007). In consequence, new sale opportunities may be offered to reach some
unexplored areas of the market or regions. Another area which shall experience an advancement
can be that of technology, which in result may further enable the conglomerate to effectively
fight against obsolescence and price wars. Therefore, this one of the prominent ways to gain
power in the market and place the corporate at a higher position in the business world.
4

Negative side of merger and acquisition
Concept of merger and acquisition has many advantages but some disadvantage are also
present. Negative impact of this concept has been discussed below:
 Merger and acquisition is regarded to be bad for consumers as when two businesses
adopt strategic decision of merging with one another then level of competition reduces
within the industry (Johnston, 2012). Moreover, the new firm may have power to charge
higher prices
 Overall level of imparting jobs decrease in case of merger. Further, in case if one
company has acquired another one then it can surely lead to shut down of operations
which is unfavourable of organization in every possible manner.
 Merger and acquisition can lead to diseconomies of scale for the new business in the
market.
 Market saturation is considered as one of the main disadvantage of acquisition where
two businesses operating together may find difficult to enhance sales volume along with
the profitability level. Moreover, difficulty also arises in terms of strengthening
customer base along with other form of operations being carried out by companies.
 Cultural clashes also take place when companies undertake the concept of merger and
acquisition (Mergers and Acquisitions., 2013). Different type of individuals work
together who differ from each other in terms of religion and culture. Therefore, chances
of conflict increases where all the individuals may not prefer to work with each other.
This directly has negative impact on organizations and sometime productivity is also
adversely affected.
 Increased debt is one of the negative impact of merger and acquisition. Sometime
business can borrow money to acquire another business and it is shown in the books of
company. Therefore, to repay the entire amount back business has to earn higher
income. Sometime it may not be possible to earn higher revenues.
So, these are some of the main disadvantages of merger and acquisition which businesses
have to undertake for enhancing overall performance in the market. Further, by considering all
the negative aspects companies can surely focus on long term development and it allows to deal
with the challenges present in the external surroundings such as competition and all other
5

barriers faced while carrying out operations. Effective strategies have to be built for dealing with
the negative aspects of merger and acquisition.
CONCLUSION
It can be concluded from the study that Mergers and acquisition have increased
importance since its initial appearance at the end of 19th century. The decision with respect to
execution of such an strategy is associated with several crucial aspects. In addition to this it is
being driven by several forces which are prevailing within the market. It has been inferred from
the present report that the firms that are looking for economic expansion can opt for this as such
can assist them in building sound image in the market. The study concludes that both mergers
and acquisition can take place by the means of purchasing assets, common shares, exchange of
shares for assets as well as exchange of shares for shares. It has been inferred from the study that
Mergers and acquisition is regarded as important agent of change. Further it is crucial component
of any organizational strategy. There is presence of various reasons that results in M&A among
the businesses. This is comprised of enhancing the performance of the organization and
accelerating its growth. Along with this it assist in diversifying the risk and assist in increasing
the market share as well as positioning by providing broad access to the market.
M&A involves series of steps that facilitates the organization in attaining its aim of
merger and acquisition. The study concludes that there is presence of various factors that results
in failure of the particular strategy. It involves poor strategy fit. This can be because of wider
difference among the objectives as well as strategies of the companies. In addition to it can be
due to poorly managed integration. Often the integration is managed poorly without planning as
well as design. Such results in failure of execution. Too optimistic project regarding the target
market is the another reason that leads to bad decision and failure of M&A.
6

REFERENCES
Books and Journals
Cooper, C.L. and Finkelstein, S. eds., 2014. Advances in mergers and acquisitions (Vol. 13).
Emerald Group Publishing.
Kemal, M.U. and Shahid, S., 2012. Mergers, acquisitions and downsizing: Evidence from a
financial sector. Global Business and Management Research, 4(1), p.112.
Ravenscraft, D.J. and Scherer, F.M., 2011. Mergers, sell-offs, and economic efficiency.
Brookings Institution Press.
Online
Buckley, J. P. and Ghauri, N. P., 2002. International Mergers and Acquisitions: A Reader.
Cengage Learning EMEA.
Kaur, G., 2005. Corporate Mergers and Acquisitions. Deep and Deep Publications
Connell, B. R., 2008. Why Companies Do Not Pursue Attractive Mergers and Acquisitions.
Cambria Press.
Hoang, Lapumnuaypon T. V. N. and Kamolrat., Critical Success Factors in Merger and
Acquisition Projects, 2007. [PDF]. Available through:
<http://www.diva-portal.org/smash/get/diva2:141248/FULLTEXT01.pdf>. [Accessed on
1st October 2016].
Johnston, K., 2012.The Disadvantages of a Business Acquisition. [Online]. Accessed through
<http://yourbusiness.azcentral.com/disadvantages-business-acquisition-11688.html>.
[Accessed on 1st Oct 2016].
Mergers and Acquisitions., 2013. [Online]. Accessed through
<https://www.efinancemanagement.com/mergers-and-acquisitions/mergers-and-
acquisitions>. [Accessed on 1st Oct 2016].
Schlachter, T. C. and Hildebrandt, H. T., 2014. THE REASONS FOR MERGERS AND
ACQUISITIONS. [Online]. Accessed through
<http://www.dummies.com/business/corporate-finance/mergers-and-acquisitions/the-
reasons-for-mergers-and-acquisitions>. [Accessed on 1st Oct 2016].
Zerdin, M., The Mergers and Acquisition Reviews, 2014. [PDF]. Available through:
<https://www.slaughterandmay.com/media/2082932/the-mergers-and-acquisitions-review-
united-kingdom-chapter.pdf>. [Accessed on 1st October 2016].
7