Introduction
One of the major events happening to the financial world today involves the union of small firms to form bigger firms, or big firms acquiring or taking over the management and running of the smaller firms.
These events are news breakers since they have a direct impact o the reactions of the vendors and customers at Wall Street.
The customers’ perceptions of the events are also a matter of concern for the concerned companies, and they have to be keen enough to ensure that their move acts to retain the present customers and acquire new one’s, in other words identify new markets (DePamphilis 33).
On a daily basis, the bankers at Wall Street organize Mergers and Acquisitions (M& A) ventures, which if they end up being successful result to the combination of different separate companies to bring one larger corporation.
When not doing this, they are busy doing the opposite, breaking up the already established corporations via the several means at their disposal such as carve- outs and tracking the given stocks (Cartwright and Schoenberg 12). Spinoffs are also a method they use in their deals to break down the companies.
As usual, the transactions, as stated earlier are big time news. The money involved could be running into the millions of dollars if not billions, and these actions in most cases end up affecting the daily operations and fortunes of the companies that have been combined for many years they will be in operation (Harwood 54).
For the chief executive supervising the merger, this aspect could be the highest point in one’s career.
The Main Idea
The main principal underlying the concepts of these transactions is that the companies involved are always out to increase their shareholder bases, to get to a maximum beyond the sum of the current share holders in the two companies when put together (Rosenbaum 61).
Common sense in finance dictates that when to companies combine or come together to form one company, their share value appreciates, and its value is higher compare d to two individual companies. That is the principal idea or the raison d’ĂŞtre behind Mergers and Acquisitions.
This concept sounds appealing to companies when they are going through the worst of times, the large able companies often opt to buy others in order to increase completion and reduce the costs involved in their daily operations.
Corporations combine so as to gain control of a larger share of the market and increase their efficiency; it is for these reasons that firms opt to be bought when they know their chances of survival in the market when they are operating solo are bleak.
In this context then, Acquisitions occur when one company or corporation usually bigger in size takes over a smaller one and runs the affairs of the smaller company. The larger company is usually regarded as the owner of the entire business.
For a more in-depth and professional take on the issue, the smaller company’s existence is invalidated, the stocks of the acquired company cease to be traded on while the mother company’s shares still operate in the market.
A merger, on the other hand is as a result of the combination of two firms that are almost equal in size (Dyer 05). These companies choose to abandon their previous identities to form a new corporation that is synonymous to both of them.
On the stock market, the shares that used to represent the different companies are capitulated and new ones introduced in the market to replace them.
The Advantages of Mergers and Acquisitions
Companies merge when they realize that the market conditions ahead of them are hard or that they cannot go through a given period of time in the market unscathed, therefore, they opt to strengthen up. In this case, they opt to either merge or acquire other players. The merging companies enjoy the following benefits from the union;
Reduced number of staff, this is attributed to the job losses that normally come after the whole process is done. This in turn translates to increased revenue in the form of retaining the cash they would have paid the employees who have been laid off.
Most of the time, the departments which are mostly affected are the marketing and the accounting departments. The CEO of the company that is being absorbed also loses his job, albeit with a huge package as compensation.
The companies get to enjoy the economies of scale, as in the benefits that accrue from large scale operations. The bigger the company, the much it would save on costs involved in their daily operations like purchases.
The enlarged company would have increase in their orders, which would mean that their purchasing power would greatly increase. In this regard then they have an extended ability to negotiate costs with their suppliers.
Through Acquisitions, the newly combined companies may end up getting up experiencing tremendous increases in their revenues; this would be so because they would be harnessing a common pool of resources in the name of; an extended clientele base which increases the volume of sales of their products.
They would benefit from better quality of goods or products, advanced technology that would be so necessary to accommodate the other company and an overall efficient service rendered to the customers.
Acquisition extends the geographic area within which the major company’s products can be sold to, because it also covers the area that had previously been covered by the minor company. This in turn results to an increased client base, leading to increased sales volume.
Companies also stand to gain from the diversity in products that would present multiple selling opportunities to the parent company. It increases the channels of distributing their commodities while marketing them, this result in the mother company gaining a larger chunk of the market share compared to its competitors.
There are more efficient and effective opportunities to sell, do research, develop new products and diversify product functions due to innovation. This ensures that the company is on a sure path to market dominance.
Acquisitions also assist in lowering costs; this is achieved through the elimination of unnecessary sectors in both the management and production.
This reduces idleness and inefficiencies that are caused by the dormant sectors, increasing revenue for the company while saving on production costs at the same time. For this to be achieved, the company that is targeted should easily conform to the parent company, adopting its ideals, cultures and practices.
The mother company gets to adopt new systems and technology that could accommodate the different operating systems in place, as such they remain competitive in their segment giving them a competitive edge over their competitors.
Mergers and acquisitions help the company to penetrate the wider market and increase their visibility in the market. When companies merge, they share a common pool of customers, reaching out for the new clients and exploring new markets.
A merger boosts a company’s rating in the business world, giving it ample time and easy access to capital compared to smaller companies.
The other benefits of a merger to a company are that the company may diversify their products and services while sharpening their expertise through research and further development in their products and services (Bruton 33).
The Disadvantages of Mergers and Acquisitions
Much as mergers and acquisitions are mostly good intentioned and are usually for stability purposes in the rugged market terrain, they also have their downside to them. These are the disadvantages to a given company when they choose to engage in this venture.
For instance, for a merger to successfully occur there should be total approval by members from the management boards of both parties involved. This is done through voting and in most instances, the proposition should gunner at least tow- thirds of the members’ votes.
This sometimes is hard because they may not be easily convinced about the move, convincing these people takes time and sometimes the lobbying also involves spending money (Dyer 12).
Moreover, the other firm should also cooperate for the merger to be a success. This cooperation may be hard to come by since they have to also lobby and sell their ideas to these parties.
When the two companies come together to form a single entity the overall size of the eventual corporation swells. When it gets too big then the diseconomies of scale set in, such that the costs per unit of production may increase.
There are also tendencies of culture clash when the two companies merge, especially if they are trading on two different commodities. This in return slows down and grapples the efficiency of the whole incorporation.
Sometimes mergers are a catalyst for conflicts within the organizations since for a decision to take effect, there must be extensive consultations between the executives’ of both companies meaning decision making is a long extensive process.
This would slow down operations and slow down the overall performance of the given departments. Problems would also arise when dissatisfied and disoriented staff works within this environment. The merger, as usual would result to layoffs since some of the positions and people would have to be replaced.
The management also goes through a hard time since they would have to grapple with issues of having to fire other employees in their quest to line up their employee database.
Studies on the Effect of Mergers and Acquisitions on an Organization’s Performance
Mergers and acquisitions alike, when they occur have a direct impact on the organization’s performance. Systems have to be expanded while some sectors have to be removed. In other cases employees have to be laid off, all this have an impact on how the company operates as is illustrated in the following studies;
A study on the acquisitions’ and mergers’ effect on an organization’s stability
This study was conducted by Joel Cutcher-Gershenfeld and Eric Rebentisch. It was aimed at identifying the major weaknesses (instability) that could result from the partial volatility created in the company during the transition process.
This aspect of M &A, however negligible, has multiple effects on the organizational performance and as such may cause system damage and stopp74age of major operations within a company. This study was conducted on 63 companies that had undergone either an acquisition or a merger between the years of 1993 to 2006.
The study was aimed at pointing out the market forces outside the business that affect the operations of the given company. These forces make the systems in place to be less efficient and such may portend myriad negative effects to the company.
This study was necessary because a slight change in the operations of a big company which may seem negligible would translate to huge losses in terms of both the revenue collected and the resources that may be used to repair the damage (be it company image or product image).
Other losses could be a change in customer satisfaction that may result in undermining the financial, technical and social gains that would be as a result of the instability. Restoring the system takes time, eats into the company’s resources and the time spent putting them to order would also be a waste.
The research found out that there are several degrees to instability, as such may be deemed to be the sources of instability within a given system. These are; economic instability, which the company would mitigate itself from through budget cuts.
Organizational instability is also another facet to the issue that is being discussed. It manifests itself through internal wrangling and jostling of positions as a result of the merger or acquisition.
It is further fuelled by the fact that the employees are working under the fear of being laid off anytime due to the merging of responsibilities and the company’s efforts to clear out unnecessary departments’ within the organization. As such the fear created among employees causes them to work under tension, performing dismally as a result.
A study of mergers and acquisitions on the impact of instability on intricate social and technological structures
In January 2003, Murman and others carried out an investigation into the effect of the instability that is created during the transition in a merger or acquisition to the company’s structures and the systems that hold company’s key pillars.
They had observed that immediately when a take over happens in almost al the companies, there is a period of confusion among the employees since the management will be forced to introduce new policies, new rules and new regulations altogether.
Around this time, both the managements of the concerned companies are trying to look into each other’s systems and coming up with the best from each that could propel the business a notch higher, beyond the merger.
They categorized instability to be emanating from three main sources; the management, the employees and the market’s attitude towards the merger and acquisition.
Another major source of instability that they set out to investigate was the type that is as a state of affairs created when two firms are merging, their instruments and how they will harness both of these instruments to bring out the best quality they can get.
This study was done on manufacturing companies that had merged and were producing different commodities and sometimes even the same commodities. They found that for there to be an efficient system, most of these companies opted to pick out the best machinery from both ends to enhance the quality of their products.
They also found out that when the companies opted for this method, the quality of their produce greatly improved. An improvement in the quality of their products would direct the market traffic t their products, meaning they would realize higher rates of return.
During transition, they normally work hard to get things streamlined, and when they are past this stage, they normally have the best of both companies in terms of equipment.
A study on the impact of instability in merging and acquiring companies
When these companies are undergoing transition, the period of instability that results due to the undefined structures between the two companies need to be addressed in detail before the actual merger. If not attended to earlier, there will be instances of instability which would be visible in areas such as the uncertainty over job allocation on the part of employees.
The uncertainty over who will be sieved off the management level to make way for fresh appointments and also the fusion of the cultures of the two organizations would also be another source of the instability.
Warlton, a University associate professor conducted the above research with other like minded researchers and students on 130 previously merged firms. They had set out to identify the degree towards which this instability affects the operations of a given company.
They identified the employees and the management to be the major interviewees. They conducted the research for a period of three years, during which they were monitoring their attitudes towards the big move and their shifting perceptions with time.
They discovered that initially before the merger, there were cold wars within the company of people jostling for positions and placing themselves strategically for promotional purposes.
They also discovered that there was little or no activities going on the sectors of the company that were deemed o be phased out, as such these employees would feel dejected, working minimally unless under direct supervision.
The impact of this is however much felt after the actual process, when the employees are setting down, back to business. There is total confusion since some of the departments have been moved to other sections; the files for this office were maybe moved to another one somewhere else.
Other cases are as a result of fused offices. Unless the employees are fully made aware of the changes within the organization, there still stands a chance that confusion would rein. There is also another factor; the salaries should be streamlined in order that the employees feel equal within the firm.
The researchers found out disparities in salary allocations resulted in cold wars and superiority wars among employees, albeit horizontally.
To cushion this, they recommend that the merging companies look deeply into the affairs of the other company, the change that would happen, if any should not serve to split or harm the relations between the employees of the two companies.
A study on the effects of mergers and acquisitions on the economy
Richard E. Caves, a professor of business administration at Harvard University together with his students conducted this research in order to gain an insight into how the mergers and acquisition affect the immediate economy and even that of the wider market in general.
The general assumption they carried throughout the study was that all the mergers that had been carried out were going to succeed. They also purported that because the current mergers and acquisitions (those that had happened in the recent years) had a high success rate, there was a higher probability that other companies would follow suit, merger and integrating other companies.
The study was conducted on thirty six companies that had either had a merger in the previous ten years. They conducted the interviews on the employees, the immediate occupants in the area around the company and the stock brokers.
They envisioned that if the merger had a positive impact, then it would translate to increased earnings by the employees of the given corporation. It would also be felt by the surrounding households because the employees would have more disposable income hence increased expenditure.
They would trade more with the locals, meaning that they would also have much money at their hands than they currently do. On stock brokers and securities, they had wanted to know if the value of the shares had appreciated or depreciated after the takeover.
An increase in the cost per share would mean that the shareholders were wealthier, hence impacting positively on the economy. An opposite result would mean that the shareholders are losing, hence a negative effect to the economy since it would be losing value.
The results showed that for a merger that had occurred a year ago, its shares were plagued with uncertainty since the market is keeping a keen eye on the performance of the business. A slight change on the value of these shares attracts more attention since they would always want to know how it performs.
They also found out that after a period of about five years, their stocks stabilized and the market outlook towards the company’s stocks was positive.
They interpreted this to be a good sign, and that mergers had a positive impact on the shares of a given company only if they were not plagued by internal wrangles and administrative issues. Other factors also played a great deal, like the communal perception of the deal and the market forecasts.
A study of the impact of mergers and acquisitions on the culture of the companies involved
When companies merge or make an acquisition, there are many factors that determine the degree of success the two companies operating as one would attain.
Though various factors may play huge roles during the transition, one aspect that should be tactfully and carefully handled should be the cultures of the incorporating companies.
A study carried out to investigate the effects of the above was conducted by Jumawan Ricardo to identify the influence of culture on the effects of the transition process.
He obtained his initial data from a previous research that had been carried out with the same objectives and also through interviewing the members of staff of the companies under study. The companies had recently undergone mergers and in this case the transition was inevitable, these were about thirty three companies.
The study came up with the conclusions that when a merger occurs, most of the time the cultures and traditions of the smaller or acquired are always overlooked.
This is in spite of the fact that the smaller company sometimes has better policies, better terms to its employees and clients. When all these are overlooked, the employees feel dejected, they have this notion that they are secondary to the initial employees of the mother company, as such divisions occur.
This may go way up to the management level, causing internal rivalries and disagreements. All these are detrimental to the company’s success, and are a sure way to push the whole corporation down the drain.
He recommended that before the merger occurs, there should be extensive research done on how the companies treat their clients as such it would assist in incorporation the cultures of both the companies to the safe running of the company. This makes all the employees feel recognized and counted upon, as such they both work for the prosperity of the organization.
A study of and enquiry of mergers on the share holder wealth of the acquiring firm
This investigation was carried out to analyze the effect of mergers and acquisitions on the shareholder of the mother company around the years 1905 to 1930.
The main motivation behind the examination was the inquisitiveness of Leeth and Borg of Bentley College, Jacksonville University who decided to research on and find out how these mergers and acquisitions that were then so rampant benefited the owners of the company; that is the shareholders.
At the time, both technical and administrative changes were filtering through almost all the systems in the existing companies; as such they raised the bar to faster and more efficient systems which boosted production.
At the time also, antitrust laws were already in place but the authorities had laid back on enforcing them. On the other hand, there was not a single law that protected the citizens from manipulation, being raided on or the dishonesty that would arise from corrupt administration officials.
That was the situation until the market went up in flames following the economic downturn that occurred in 1929. There wasn’t a government corporation that was charged to look into the securities and exchange bureau then, this only came into existence after the government legislated the Cellar- Kefauver Act, twenty years later in 1950.
By then, unlike now the federal Trade commission had little or no power over merging and acquisition processes though the one’s that happened were mainly on a horizontal scale.
Just for the sake of being sure about the likelihood of success of a merger that occurred between 1905 and 1930. The strategy employed is one that has time and again been used to find out how the shares and securities of merged or acquired firms were faring on in the stock market.
To do this, a wide array of data that talks about the mother company’s financial status is collected. In contrast to previous studies on the same issue, our examination of stocks of a given merger case would cover a wide time frame. This is set to examine the market behavior on the stocks of the given company before and immediately after the merger.
In this case, we shall give it a time frame of twenty six years. The study examines a group of 191 corporations which together make up for 11% of the total number of takeovers that occurred during that period.
The findings from this study point out that the transactions yielded an increase in the shareholder wealth by a mean rate of about 4 to 7 percent.
The results also point out that there is a small difference in the performance of these companies immediately before or after the merger, but the difference increases long after the deal is done.
This led to the conclusion that successful mergers lead to a tremendous increase in the value of stocks, thereby increasing the wealth of the shareholders.
A study on mergers and acquisitions in relation to how the organizational fit and the outcomes
This research was conducted by Louisiana University finance students to determine the degree to which the companies need to fit into each other and complement each other in order to finally emerge strong after the acquisition.
The research was motivated by the fact that despite the number of acquisitions and mergers being on the rise, there were still may cases of failed M & A’s as such they were keen to know how the specific companies should benefit each and complement the others need.
This was their hypothesis, they assumed that other successful merger like that of eBay and PayPal supplemented each other, assisting the other partner to also expand and grow.
In order to realize realistic results, they used the multinomial logit model to cater for the events that recurred during the company’s existence, for instance a company that had undergone a previous merger.
They carried out their investigations on 461 companies, all of which had undergone takeovers in America. This was in a period of thirty years between 1903 and 1930; both studies were done on companies whose major area of specialization was the accounting field.
The results they obtained showed that when there were instances of compatibility within the companies, it was to a large extent drawn from the prospects that the given company would in future take part in another takeover rather than the assumed rate of dissolution between the companies (Marks, 39).
They also found out that when the resources are complementary, then the prospects of dissolution are obsolete. In this case, the chances that the company would engage in another takeover are highly likely. As such, they concluded that mergers should in on way or another complement each, as this would hasten the process.
A study on the firms’ financial performance after mergers
This study, conducted by Ramaswamy, K. and Waegelen, F. intended to explore the financial wellbeing of the companies after the merger and acquisition. In the study, a total of 162 firms and industries were researched.
This was to identify how the cash flow returns in the market were appreciated or depreciated in value, and also the behavior of their market assets in relation to their performance.
In this case, the market performance of the merger combination is observed in a span of five years. The conclusion of these researchers was that the performance of the resultant company after the merger was depressant given the size of the market share they had envisioned to capture. This is however not a very bad precedence given that it is in tandem to the company’s long- term compensation initiatives.
A study on the effect on management or the leadership of a company during a merger or acquisition operation
This study was conducted by the University of New Castle on the effects of a merger on the leadership of a given company. The research was based on 57 mergers that occurred between 1983 and 2006 and was published in the 2008 issue of the journal of business strategy.
The core aspects that were being investigated are both the long term and short term effects of the leadership in the given corporation. The people who were investigated are the current employees and the employees who no longer with the given companies, either through retirement, being fired or through resignation.
The hypothesis of the study was that the overall effect of the transaction on the longevity of a company’s leadership is negative. This research brought to light that the companies that were researched on were losing a good number of their administrators annually for at least a decade after the acquisition or merger process is due.
This rate is higher compared to other firms of even the same magnitude that have undergone the transition. When the companies that have undergone these processes happen to trade in similar goods or services, then shrinkage of the management is inevitable.
This is attributed to the fact that when two companies combine, only one manager shall head a given department at one time. This is also reflected in other positions such as the CEO and CFO.
A study on the effect of the technological performance of companies in a hi-tech environment
This study, conducted by John Hagedoorn and Geert Duysters sets out to explore the effects mergers and acquisitions have on the overall technological performance of a given company. The study was conducted on companies before a merger while others were carried out after the merger had occurred.
The results were therefore comprehensive of the merger period, and even through the transition up to the formation of the final company that was a result of the merger. The factors that were put to consideration include issues such as the effects of these actions to the welfare of the company in the long run.
It was also noted how issues that pertain to technology in either the merger or acquisition have a direct effects on premeditated variables that are however always ignored in most of the research conducted around this topic which, more often than not delve into the short term effects.
In the long run, it was found out that technology affects the anticipated synergetic features through the discovery of other processes. These processes are a result of combining the existing procedures, resulting to new products that are as a result of this technology.
These innovations, if proper transformations to the products occur at the end of the day improve the technological performance, increasing the revenue earned by reducing expenditure. This effect is common in the modernization of the companies which is mostly attributed to the increasing size of a given company, when a company undergoes internal growth or when companies merge or acquire others.
A study of the impacts of mergers and acquisitions on the performance of the acquiring company
This is a research carried out by Department of Management, Bogazici University, Bebek, Istanbul, Turkey. Their modus operandi was to examine the effect of M &A deals on the performance of the mother or acquiring company.
In the study, 62 companies which had previously undergone M&A between the years of 2003 and 2007 were involved in this research.
Analysis of how their counters of these companies were doing in the stock market was also carried out plus a look into the financial records of the respective companies.
This to a small extent supported the idea that companies that acquire others have a negative performance as a result of the merger or acquisition. Throughout this study, the companies that were put into consideration were the mother companies, the acquirers in the deal.
The study was bound by two hypotheses that were formulated out of the need for the study. These were; that after the merger or acquisition, there is a significant change on the operating performance of the acquirer companies and that immediately after the M& A deal, the price per share of the acquiring companies are altered significantly.
In order to rate the degree of change, two main methods of analysis were used; these were the stock market approach and the financial accounting approach.
Using the stock market approach, analysts are keen on any major changes or unusual returns being made by the securities they hold around the duration of the event. In this case, the degree of the unusual event would dictate to the analysts the effect of the transaction.
When using the accounting approach, three principles surrounding the ratios of their profitability are employed in the assessment of the changes in commercial performance. These principles are as follows;
- ROA: Return on assets defined as Net Income/Total Assets
- ROE: Return on equity defined as Net Income/Total Equity
- ROS: Return on sales defined as Net Income/Net Sales
Sometimes when analyzing the “raw” ratios, the results may be inaccurate since sometimes the difference in corporate performance may be caused by a change in the economic or market conditions.
The acquired company or corporation is recognized in the collection of companies listed among the ISE, all these are operating or trading in the same products or services.
The company having the mean EBIT/ Total assets quotient by the end of a financial year before the acquisition is chosen as the industry’s middle player.
The corporations that recently or took part in an M& A exercise were excluded from the computation of this constant so as to gain a proper control sample. This in many ways differs from the sample that would be experimented upon.
The next process involves calculation of each company’s ratio which has been adjusted by the industry factors and the subsequent ratio that is being used as the constant for the middle firms in the given industries.
These returns are more dependable as a tool to measure performance since they hold other factors that are not related to the merger.
The findings in this study were broad based. Using the stock market approach, we drew conclusions that the returns from stocks of these companies which were involved in the M& A processes surpass the mean returns from the industry. While using the accounting approach, another method was again employed.
This method is referred to as the intercept model. Through this method, the researchers were able to establish that the unusual returns are negative and according to statistics they are also different from zero.
From these they were able to conclude that the revenue gained from these stocks is above the company’s mean return, translating to an increase in value of the stocks. These results were only yielded when applied in the long term as opposed to the short term events.
The study however, has some major weaknesses and such cannot reflect one hundred percent the market conditions. In the first place, the results have generalized everything about the study because the companies that were studied on were public companies which also plied their trade in the ISE (Sharma 26).
The other aspect that may put to doubt the authenticity of these findings is that it was conducted only two years down the line after the merger had occurred though if they had extended this period they would have sampling problems.
The third aspect that may question the strength of the findings is that the accounting methods that were used above only focused on the net income as opposed to a complete assessment of the pure cash flows of the companies (Sharma 26).
Finally, the market with which the research was carried out (Istanbul) is a small and still emergent and therefore may not actually reflect the true sense of the picture in the already established markets (Sharma 27).
A study on the effects of mergers and acquisitions on banks
The overall impact of mergers and acquisitions is strongly felt by almost all the shareholders in the banking industry. A study carried out by Lawrence White and Lawrence Goldberg to investigate the effects to bank reactions and customer relatedness after mergers in 27 twenty seven banks came up with several conclusions on the effects of mergers on the borrowing and lending rates.
The banks under study had undergone mergers, and therefore their post merger operations and premerger reports were quickly available when the researchers went for them for further analysis.
They cited the effects of the merger in the banking industry as touching on other sensitive areas that dictate the norms in banking sector such as the supply of funds to the minor players in the economy such as small businesses, the overall operating efficiency in the market and also the impact these transactions have on the antitrust policy.
Unlike other studies which have used other determinants to examine customer behavior and satisfaction such as profits and losses prior to or after the merger, this one dug straight into their lending rates.
Their result was, however unforeseen as they observed that bank consolidation tends to reduce the probability of entry into local banking markets (Seelig and Critchfield, 1999).
They also found out that in most of the banks researched on, acquisitions and mergers affected the overall market behaviors’ and attitudes. This, they claim was as result of the improved customer service attributed to the improved service and quality delivery that is as a result of the takeover.
A study on the effects of merger laws on merger activity
The 1990’s witnessed one of the biggest merger regimes in the corporate history. This spilt over to the twentieth century, with the difference between the two regimes of trade being that the latter had a global perspective to it, comprising over 2300 successful mergers whose monetary estimate is about $740 billion.
Given the fact that mergers and acquisitions directly affect the market forces and behavior, it was imperative that laws be introduced to regulate and govern the nature of these mergers.
On its part, the industry reacted to this in several ways, much of which this study is about. This study was conducted by Artoro Bris, Chriscos Cabolis and Vanessa Janowski had the objectives of identifying the impacts these laws had on the market, and how they affected the merger transactions that followed after their legislation.
The researchers interviewed members of the board of the various institutions that had previously merged in the span of five years within the research period, and also interviewed executives’ with companies that had merged over thirty years ago.
Their assumption was that by this time, though the company executives’ at the time may have retired a long time ago, their files and those of the mergers still existed in the company archives.
They also assumed that the laws that governed mergers and acquisitions thirty years ago were totally different from what they are now, and such would open up the field for comparison.
The studies revealed that much as the companies go for mergers and acquisitions, they have some form of pressure up their sleeves. The antitrust laws and other government policies tie them to the company goals and objectives; as such they go down the drain together if the takeover proves to be a total loss for the company.
These laws also make them answerable to the shareholders when anything goes wrong during or after the merger. They will also be held responsible when eventually the negative effects of the takeover affect the value of stocks.
The studies revealed that previously (thirty years ago), the laws on mergers and acquisitions were not as stringent as such, and that the only aspect to the mergers was the value it would create in the company.
Antitrust laws and the general laws surrounding mergers then were so different from what the situation is now, as such the executives’ traded more easily when it came to this.
The study also found that as it was previously, the companies sometimes entered into these contracts as a show of mighty, to prove to others their capacity in terms of financial strength. That has however changed, and companies are entering into these contracts as a means to ward off competition (Arturo, 16).
A study on the effects of mergers and acquisitions on valuation of the company’s success
All mergers and acquisitions, whenever they occur always have their predictability and chances to succeed forecasted. This is usually done by financial advisors, consultants and stock brokers who take into effect all the forces at play that are likely to affect the overall outcome of the transaction.
The following study is an attempt by Strahan and his students to identify the effects of the factors that facilitate a successful merger operation.
They conducted their research on 56b companies that undergone the mergers and acquisitions; both of which had either successful or unsuccessful mergers in their existence.
They considered the variables at play that would facilitate the success of the transition, these included industry dynamics, strategic preparations, business differences, intangibles weight, the conditions of the integration and the areas of expertise of the different companies in their studies.
They reviewed the performance of the companies under these factors, and much as they revolved around the organization’s core pillars, the discovered that there were more factors at play that influenced the degree or the height of success the companies would attain.
They discovered that the most crucial factor in the success of any takeover is the employee welfare. Most successful mergers involved the employees of the respective companies, taking their opinions and feature them in the decision making ability of the company.
Through this they feel like they are an integral part of the company and that they are valued, as such their contribution towards the success of the merger is always positive.
In other cases, the management of both companies took time to ensure that the employees of the two companies interacted with each other, this helped them in warming up to each other and look forward to the partnership or takeover since it eliminates the bad blood and the emotional turmoil these transactions are often known to cause to the employees.
75% of the companies that underwent these exercises before and after the merger reported positive growth after the takeover, while those that had neglected these factors had negative growth to show up for it (Strahan, 64)
A study of the effect of mergers and acquisitions on the entrance of new players in the market
This study was conducted by Oliver Williamson to identify the effects new entrants into the industry have on the recently acquired companies. He cited variables which according to his initial analysis would be affected.
These included factors such as the level of market penetration into the market by the new industries, the level to which their products had infiltrated the market and also the extent to which the new company is willing to go in order to win over a larger market share.
He conducted his survey on 33 multinational companies which had undergone mergers and acquisitions but were facing competition from a minor player in the industry. The results and analysis showed the already established companies have a larger share of the market, one that is not easily shaken from it.
Its size and the market area also ensure that they have a large pool of clientele, meaning their customer base of loyal clients is also big. For this reason, he claims, the smaller company will have to spend a lot per unit cost in terms of advertising and convincing the new buyers to shift from their usual products. In the end they usually back out.
A study of the effects of mergers and acquisitions on post-deal innovation
This study was carried out by Masimmo Colombo and Diego Adda. Their research was motivated by the fact that when two companies merge, there is a mixture of the different degrees of technological knowhow the companies often have. The two teams of worker have experts on the different fields of specialization.
When the merger occurs, there usually is a lot of problems in managing the vast resources that is the employees, much as the company ma y resort to fire the incompetent party, they are sometimes spoilt for choice on who to keep. This was the idea behind this research.
It was conducted on 63 companies that were operating in the same industry, which meant that their levels of expertise and knowhow were at par. They wanted to know the solutions the companies came up with in order to solve this mystery.
They found out that there were a lot of such cases, and in some cases the mother companies retained their own employees and fired the one from the younger acquired company.
This, he cautioned is detrimental to the success of the organization since the employees of the younger company would feel as if they are not a part of the team, like they are just there to fill up numbers.
He instead proposed a better method for handling the situation; expanding the sectors to accommodate both the technocrats. This would clear all ill feelings and deal with the bad blood that would have brewed as a result of the conflict that would arise (Colombo, 31).
A study of the effects of the age of companies during a merger and acquisition
This study was conducted by one Daniel Audretsch to determine whether the age of the companies in transition had any effects on the actual process. He conducted the research on 74 companies which had previously undergone the process in a period not exceeding 10 years before the merger.
He chose this period and time at the stages of these transactions because he had assumed the companies were almost settling down, and that the effects as a result of age difference would be more visible.
He went through the files of the companies involved, getting crucial data such as the circumstances that led to the merger and also looking into the financial strength of the different companies. He also went through the stages that were involved during the inception of these companies.
The studies revealed that for an effective merger, age consideration is also a factor. He cited that many mergers failed because they failed to complement each other, time heralds technological differences and such it’s hard for one company to step in for its counterpart when in crisis.
He recommended that for the transition to be effective there should be minimal age gaps between the formative years of the different companies.
He asserted that this would make it easy for the companies to substitute for each other when in crisis; he also drew from the research that the technological advancement of companies formed around the same years is almost at par, making it easier and cheaper to obtain resources in terms of spare parts needed to run and maintain them.
The Best and Worst Mergers
The best mergers and acquisitions
Thought time, the history of mergers has been a part and parcel of the corporate sector. Companies, plagued by the dynamic challenges emanating from the ever-changing market forces have for many reasons resorted to merging and acquisitions to cushion themselves against the blizzards that may arise.
As such, big companies have acquired smaller ones; others have merged to strengthen themselves and expand their areas of operation, while others have done it in order to beat competition.
Through all this, there have been companies that have had issues with their processes of merging; others made big time news only to flop at the end, while others that were united have been a success. The following are examples of the successful mergers.
News Corp Acquires MySpace
The year 2005 witnessed the union of News Corp, one of the world’s largest media houses acquire MySpace, a very popular social networking site at a $ 580 million fee.
As at then, News corp. was owned by Rupert Murdoch. That year alone, the company raked in $28 billion combined with the profits from books, magazines, radio, sports facilities and their investments in sports and also television.
When it was acquired, MySpace had a large gathering, being the fifth most visited site in the US as at then. News Corp had visualized making use of the large following that MySpace bore at the time through marketing their products through both MySpace and News Corp.
During that time, the executives at News corp. had researched and found out that there was a continuous shift by the market from the usual way of doing things like using the television and radio to market their products.
They had wanted to take advantage of this attributing the probability of success in this venture to Google’s (NASDAQ:GOOG) association.
They chose to go after MySpace because of the number of users. It had twenty million subscribers, and to top it all it had a model that was advertising other products, earning the company revenue (Becker 61).
When News Corp. chose to acquire MySpace, it was facing competition from other multiple social sites though it was emerging as the major player in the social networking scene.
It expanded beyond being a social networking giant, but also a force to reckon with in the whole of cyberspace. The company, in its quest to dominate all spheres of the sector it operated in, employed massive resources in terms of finance, technological experts, machine capacity and equipment efficiency that enabled it to retain the present users and the targeted signatories.
By 2007, according to financial analyst Alchian, “MySpace had generated around $525 million, come 2008 the company had attracted over 100 million users globally and was regarded as one of the fastest growing websites in time, only three years into existence” (63).
On its part, News corp. did not encourage or take cross-selling techniques; rather it chose to grant the executives at MySpace the independence they so needed to conduct their operations. In short, after acquisition, MySpace operated like an independent venture, though it was under News Corp.
To wind up, MySpace continued dominating while operating within the set rules and regulations that were before the acquisition. As a result, it was endowed with extra resources from the mother company which helped it to go after other growth avenues that presented themselves.
Lesson learnt; Through MySpace acquisition, News corp. opened up its services and products to a new broader market since it had obtained a channel through which it would sell and advertise all its products.
Furthermore, the franchise that News corp had acquired was still new and doing well in the market. The products it had on offer were not being offered by its competitors either; as such it was a notch higher than its other competitors.
On its part, News corp facilitated both financial and technical assistance which propelled its standing as a social website (Dierickx 27).
eBay acquires PayPal
Pay pal refers to an online venture that offers monetary services such as electronic transfers without using credit cards.
E-bay on the other hand is a huge platform that deals in auctioned goods and services whose executives were keenly watching the growth of Pay pal, which according to them would fit naturally into the systems of eBay, they envisioned that it would not only open up another venture, but would act as their preferred payment method since they would dictate the terms and conditions to their advantage.
During the later years of the 90’s, eBay tried to secure an own payment system by taking over Billpoint. This proved a futile attempt since very few people knew about it and even fewer people were using it.
Because of this, its competitors were much superior resulting to frustrations and lack of direction on the part of direction with the people that were using eBay. This made things hard for eBay instead of making things easier on their part; it was hard for people to also transact with ease.
After gaining Billpoint, eBay set to go after PayPal in 2002. By then, PayPal was widely used and had a good reputation worldwide. EBay acquired PayPal at $ 1.5 billion.
EBay was also a force to reckon with in the market scene, given its dominance in online trading which facilitated it with the large following that is the global traders using their system.
This acquisition proved to be a good business venture given that each of these customers supplemented each other with a wide client base; they easily incorporated each other, resulting to an easier trading experience on the part of their customers which translated to good business for both entities.
The chemistry that played between these two companies facilitated the growth of the other entities within the same organization. PayPal emerged as a stronger competitor and a payment method of choice among other payment options, and within a short span of time after the acquisition some of the competitors closed down.
Almost immediately after the deal, eBay chose to make it mandatory to all its current and targeted customers to use PayPal in their business transactions (Ackerlof 33).
Given that PayPal had a user friendly domain aside from its popularity, the move that payments to or from eBay be made through PayPal did not quite cause a stir or spark any debate since the clients readily agreed to this shift in policy (Cheng 11).
The end of this culminated to mutual benefit for each other in that many users of eBay were introduced to PayPal as a requirement or channel through which to receive and send money safely. The end result was that there was amplified revenue and much publicity towards PayPal.
Lesson learnt; through this acquisition, eBay directed its users to make use of PayPal as a money transfer option, directing clients to PayPal and increasing its customer base. On its part, the terms and conditions that bound the users of PayPal were not as stringent; therefore there was hardly any resistance.
The other factor that quelled the opposition that would have maybe arisen from the directive was the fact that Paypal, in the electronic money landscape is among the most superior therefore eBay users saw it as a friendly move that would in the long run benefit them. As a result of the move, Pay Pal managed to increase its volumes of sale by a very large margin while dominating the industry.
Conclusion on successful mergers
Market forces, when carefully observed and strategically watched facilitate the factors at play for a merger to occur. Companies usually merge to improve their positions in the competitive market outside, to facilitate their growth and to realize returns and profits gained as a result of the diversification of products brought about by the new companies.
There are some conditions that have to be met for a merger to be successful, for instance the norms or cultures between the two different companies should be aligned to complement each other.
Their products and the services they offer should also be aligned to the best practices in the market at the time in order to realize returns, retain the current clientele base and even acquire new markets and customers for their products.
Mergers are intended to make the working environment for both the company and the customers better through facilitating convenience of their products and services since they operate as one company.
The management for both entities (target companies and acquiring companies) is always on the lookout for ways to improve their services and products so to be on good terms with the customers.
When the company and its effort to either acquire or be acquired are at par with the customer’s wishes, both the customer and the owners of the company stand to gain from the association.
The worst mergers
Quaker Oats Company and Snapple Beverage Company
Quaker oats is one big company whose main product of trade was the Gatorade drink. The company, in its effort to expand and enlarge thought it wise to acquire Snapple around 1994. In spite of warnings from Wall Street vendors that Quaker oats was spending a billion too much; the company went ahead with the deal (Davids 86).
It paid $1.7 billion for the acquisition of Snapple, a deal which was too good for the executives and owners of Snapple. Moreover, aside from paying too much for the company, the management at Quaker Oats had broken a few rules that govern mergers and acquisitions; they did have the technical and managerial knowhow of how affairs are run at Snapple, so they did not introduce any skills or expertise to the operation of Snapple.
In a record twenty seven months, Quaker oats had seen the downside to this deal and was in dire need to dispose it. They sold it for a paltry $300 million; translating to a $ 1.6 million loss daily for the duration Quaker oats owned and managed Snapple.
By that time, the revenues which Snapple had collected were only $500, a $200 million drop from the time it was acquired by Quaker Oats (Boeker 13).
When it acquired the company, the management at Quaker oats had it mind to influence the large scale retailers and supermarkets. Through this they thought they would propel the sales and increase the volume of sales, this they envisaged would generate revenue for the company. But this was their own undoing since a big chunk of Snapple’s sales occurred from the smaller players in the economy such as gas stations and convenience stores (Chandler 19).
Snapple’s also made sales through marketing or selling their products to independent distributors from around the region, but Quaker oats did not take heed about this fact.
The executives at Quaker oats also had it wrong when it came to advertising the products of Snapple, causing chaos and confusion in their advertisements since the managers at the mother company were not aligned to the strategies Snapple had employed.
The different working cultures between the two formerly independent firms also worked against the fortunes of Quaker oats since they infringed on the organization and ethics at Snapple.
The end-result of this was a diminishing Snapple, a former shadow of what it was; even their most trendy advertisements were watered down with inapt advertising gestures to the consumers of their products (Burt 21).
In the meantime, as those challenges were plaguing Quaker oats, their nearest competitor and gigantic rivals Coca- cola and PepsiCo initiated a series of products whose effect was eating away the gains made by Snapple in the market.
Funny enough though, there is an affirmative aspect to this whole scenario; the mother company was able to make up with capital gains made from other ventures on the loss generated by this business deal.
This is because as a result of the flop, Quaker oats made $ 250 million in assets it gained through taxes that was paid on previous deals. This however, left behind a mammoth portion of lost or damaged equity prices.
New York and Pennsylvania Railroad
The year 1968 witnessed the union two of the largest corporations in America to form a single corporation that was rated sixth in the American economy. The two companies are New York central railways company and Pennsylvania railways company, they came together to form Penn central.
This was however short-lived since only two years down the line, the company shook both the market and Wall Street alike when it applied for bankruptcy filings so that it be protected by the laws governing bankruptcy regulations.
This made news since until then it was the largest corporation to file for bankruptcy in the US (Allison 13).
The two companies, though they had some similarities, were bitter foes in the industry they plied their trade in. Their inception can be traced back to the nineteenth century. Their existence is marred by their competition for among other things transport and superiority issues.
The management, in an attempt to overcome the market forces that were working against it in the industry, saw the merger as a way out of the whole situation. This, the industry players saw as a desperate move on the part of the mother company.
The railway companies plying their trade outside the northeastern side of the US enjoyed stability which came from movement of commodities through the long distance. On the contrary, the Northeastern side which was heavily occupied had a higher concentration of big industries.
The only problem with this region was that it had various water channels that were sometimes used to ship commodities out of the region. This variety in transport means meant that the companies had a wide array of transport choices to make; as such they would opt to use the cheapest, which in most cases was not railway.
The railway companies plying the route got their revenue mainly from commuting passengers (both those who travel daily and the long distance travelers), “express flight service and bulk freight service” (Ackerlof 21). This situation only facilitated transport for short distances, making the business highly unpredictable, more risky and harder cash flow for the operatives at the Northeastern side of the country.
Short distance travelling as is always the case involves individual timelines and personal arrangements of the commuters involved. The government policy was also as stringent to the operatives in that it curtailed their abilities to change prices imposed on the services they render to the commuters and other customers alike.
This made the railway companies to consider cutting costs as the only way to cushion themselves against their dwindling fortunes, and the only way to gain positively was to lower their prices. To add on their woes, businesses and other private commuters and individuals began to shift preferences towards the then newly erected wide-lane freeways.
Lesson learnt; one of the many scenarios that may unfold after a merger is the sudden change of consumers towards the given product the companies deal with. The case of Penn Central is one similar scenario, but the company tried to hold it by cutting costs because then it seemed to be the only way out (Chatterjee 78).
Unbeknownst to them, there were other factors that worked against their strategies, pushing them out of the market. These other factors were inclusive of poor planning, counteractive mechanisms in times of uncertainty, poor prescience and an overly optimistic management in both companies.
They also overlooked trivial mattes such as the culture clash as a result of the different managerial strategies, territorial tendencies by the employees of the mother company and a poor and uncoordinated system that could accommodate the different perspectives of the two companies (Buono 74).
General Conclusion
Before a deal is carried out, the executives at both firms should enlist the possible hindrances towards attaining the increased value in their shares after the deal has been sealed. For the companies that have issues with the cultures in place, more often than not it translates to a failure on the part of the management to plan ahead about the incorporation (Alchian 21).
When unnecessary departments or sections of the previous companies are left to thrive, they lead to idleness at the workplace, but when the management resolves to lay off their employees without using the right strategies, the employees would get scared and whatever their actions this time, it is usually to ensure that their jobs are secure.
Other factors held constant, the different operating systems within the given companies may make adoption a difficult and tedious process immediately after the merger (Straub 66). At both ends of the operation, there is need for effective communication especially after the merger, this would foster attainment of the milestones set.
There is also need to inform each other of the strengths of the company and the weaknesses, this will align strategies and goals of one company to the other making the transition smooth. Lastly for an acquisition, the mother company should not overpay in order to gain their target company.
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