Mergers and Acquisition (M & A) refers to those corporate strategies that support the banking and finance buying, selling, and merging different companies that can financially help in aiding a company without creating a separate business entity. M & A refers to all the generic processes and linkages that comprise financial intermediation or the basic financial strategies that ultimately drive efficiency and innovation in the financial system. We can say that M & A supports the specific financial activities that form the ground root of financial sector reconfiguration, commercial banking, securities, and investment banking, insurance, and asset management. M&A activities, particularly when it comes to the financial services sector takes place within and between these areas of activity.
Intermediated Financial Flows: Financial flows are dependant upon ‘savings’ as savings are the ground root of the financial sector which are either in the form of deposits or alternative types of claims issued by commercial institutions or savings organizations that finance themselves by placing their accountability to the general public.
Intermediation: Since savings are the main tools of any financial sector, they are directly or indirectly responsible for collective investment vehicles to the purchase of securities publicly issued and sold by various public and private sector organizations in the domestic and international financial markets.
The connection between ultimate borrowers and lenders: While depending upon the surplus savings, the process then deals through various kinds of direct-sale mechanisms, such as private placements, usually involving intermediaries.
Merger – combining two companies as one and Acquisition – the takeover of one company by another has been one of the major vehicles in the transformation of a key set of economic activities that stand at the center of the national and global capital allocation and payments system (Walter, 2004, p. 201).
Effects of Merger and Acquisition
Takeovers or acquisitions where on one hand have become the dominant route through which changes in the external control of regional economic activity occur, on the other, it also provokes international competitive pressures on market share associated with the slowdown of growth in mature product markets. Therefore the need for rapid entry into new and developing markets, the desire to minimize the transaction costs of overcoming barriers to entry, and with increasing customer differentiation the need for access to local knowledge, are all likely to have contributed in varying degrees to the switch.
Once control passes to a new owner, management is no longer free to devise and progress to its development strategy and it cannot act solely in the interests of the acquired company if these conflict with those of the new parent. Strategic options, although are well constrained therefore the self-interest in the management of an independent company can be reduced where managerial drive and entrepreneurship may be dull.
The loss of strategic control over functions and resources fundamentally undermines an economy’s ability to anticipate and respond to the changing economic environment and to generate new economic activity from within. The regional effects of this loss of strategic control cause by M & A can therefore be considered in terms of those that are internal to the company acquired, and those that are external to the company and affect the wider regional economy.
Changes in the structure of production between the acquired and acquiring companies following the merger are unimportant per se in the merger literature. The reason is that mergers usually occur within the same unit of account, e.g. within the national premises.
However, the significance of a merger does not lie in the occurrence of rationalization or switches of demand and resources between the companies, but whether such changes have net effects on the appropriate indicators of economic performance for the merged company. If no resources are lost to the unit of account, then the crucial question concerns whether mergers and acquisitions promote more efficient use of resources. However, whenever takeovers occur between different units of account or between different regions and the focus is on the effect on economic performance in only one of those regions, then the impact on resource demand and supply within that region is considered as well as the effect on economic efficiency.
An external takeover may, for example, result in more efficient use of resources in the combined company, but for the acquired regional company a whole range of eventual effects is possible. In this case, the acquired firm could experience some neglection in its scale of operations, a lower rate of growth, and a reduction in the sophistication of its operations. That means these effects may be associated with the removal of key control and operational functions such as the planning of corporate strategy, investment appraisal, accounting and finance, R&D, marketing, purchasing, legal advice, and several others.
The firm may also experience the removal and simplification of its products and product lines. Conversely, the takeover could enable an acquired company to enjoy an increase in the number, size, and sophistication of its functions and gain access to markets, new products, and processes, managerial expertise, and finance (Ashcroft & Love, 1993, p. 35).
Real Life Acquisition of Netscape and AOL
Friendliness is the key tool in making mergers a success. Consider the acquisition of Netscape by AOL (America Online). Netscape, the pioneer in Internet access, employed some of the brightest minds in the software industry while AOL was best known for providing access to users who are largely computer illiterate. However, at the time of the deal, AOL was moving in the direction of technological sophistication and Netscape had been having problems due to Microsoft’s strong competitive position. This acquisition was a success since the companies need each other, yet industry observers were concerned that a combination would scare away many of the talented minds that were Netscape’s greatest strength.
AOL acquisition of Netscape is an illustration of a successful acquisition of how a friendly deal can work. As a start, both companies were backed by Kleiner Perkins Caufield & Byers, a leading venture capital firm in Silicon Valley. Kleiner companies come together annually for a private conference. It was at the June 1998 meeting that Stephen Case, Chairman of AOL, told James Barksdale, Netscape’s CEO, that AOL should have bought his company years ago. However, after discussions by November, the companies considered a wide range of possible partnerships, including a deal that would embed Netscape’s browser into AOL’s software.
Since the ultimate deal was dependent on a venture with yet another Kleiner company, therefore AOL to sell Netscape’s talented employees on the benefits of the acquisition, agreed with Sun to purchase $500 million in computer systems and services over three years in exchange for access to Sun’s sales force of 7,000. This was a huge increase over the 700 salespeople Netscape had previously employed.
Another important aspect of the deal was the vocal support of Netscape principals, especially those of the target firm. Marc Andreessen, co-founder of Netscape, reflecting on the combination, said, “America Online has changed from a closed online service for novice users to an Internet media and technology company with a diverse set of brands. These two companies have been moving in the same direction, and the fit is good” (Hitt et al, 2001, p. 66).
The above example indicates that successful acquisitions require thoughtful selection, diligent planning, and appropriate financing, but these actions are not enough since success also requires cooperation. Merging two companies is complicated and requires much work by many people such that an uncooperative spirit in the target firm can lead to disastrous results. AOL’s deliberate approach reduced the potential for turnover in Netscape through simultaneous negotiation of a joint venture with Sun Microsystems. Therefore AOL being aware of the consequences of an unfriendly attitude responded positively to what is most important to the target firm is an excellent first step toward creating an atmosphere of trust and cooperation.
Real Life Mergers
While analyzing merger cases, it was found that in eleven of the twenty-five cases, the Scottish company actively sought the merger, and in most of these cases, it selected the acquirer. The most common reason for a merger is to gain access to extra finance which the firm is unable or unwilling to raise by other methods. In five cases, the firm feared an unwelcome takeover bid and the possibility of an unwelcome change of policy, coupled with the possibility of asset-stripping.
Five of the companies had commercial problems, in two cases very severe. In three cases, the controlling family wanted to sell up, and in one case the family wished to avoid issuing new equity, which would have diluted their control and raised the possibility of a hostile takeover. In another case, a private company found itself with management succession problems and declining performance after the death of its owner and sought the takeover largely to rectify its decline. In addition to these eleven cases, there were a further three in which the company was sold at the instigation of the sole or dominant shareholder. One of these involved a Scottish holding company that wished to sell one of its subsidiaries, while the other two involved the unexpected sale by non-Scottish concerns of strategic shareholdings which led to takeover bids.
Real Life Merger of Daimler Chrysler
The merger is an example of how mergers across borders can be made successful on an international platform. The announcement of the cross-border transaction as the world’s largest industrial merger stunned the automobile industry when they hear that Germany’s Daimler-Benz AG and United States’ Chrysler Corporation are intending to merge. Such a merger between two of the automobile industry’s most profitable manufacturers created a company that ranked third globally in sales revenue and fifth in-vehicle unit sales for the reason the goals were commonly followed by a friendly environment to create the world’s preeminent automotive, transportation, and Services Company.
This merger was driven by the formerly independent companies’ needs. The reason for the merger was the profitable company’s presence outside U.S borders, therefore Chrysler while recognizing the fact that it lacks the infrastructure and depth of management required to become a truly global corporation, decided to a merger.
Another reason that draws us to the conclusion of the merger was when executives concluded that Chrysler CEO Robert Eaton’s goal to increase the firm’s sales revenue by at least 20 percent annually could be reached only by substantially enhancing the company’s presence in markets outside the United States. On the other hand, for Daimler-Benz, it was difficult to cope up with the increasing competition in the luxury car market as an indication that his firm had to diversify its product line and distribution channels. Therefore Daimler-Benz had to sell its products in a larger number of national markets on a global basis to achieve its growth goals and the merger was the best option left.
In addition to cost-based efficiencies, DaimlerChrysler sought cross-selling synergies through the merger which for the most part, were to result from a melding of firm-specific assets and capabilities, such as the ability to consistently develop high-technology advances and rapidly introduce new products to the marketplace (Hitt et al, 2001, p. 144).
Petroc
Petroc was initiated as one of many small independent oil refining operations of the early 1900s which by the end of the twentieth century was the product of over 100 mergers, acquisitions, and joint ventures. Petroc with the purchase of a small refinery needed upgrade and repair by a young entrepreneur who realized that the early days involved a great deal of turmoil, including periods of significant financial insecurity and competition with former allies.
The company’s history tells us that the business survived primarily through the extremely hard work and dedication of the founder who was notorious for working long into the night and through weekends as well. The founder spends a great deal of time with workers in the plant itself whom he came to trust and to treat as something of a large family and it was through these experiences of struggle and survival that the culture of Petroco was formed.
The values of Petroco’s culture revolved around dedication and loyalty which were exhibited through the ‘artifacts’ of what might well today be considered as ‘workaholics’. The driving forces behind such behavior could have been fear of failure, or personal ambition, or greed but according to speeches given by the founder, his motivation was something more like the passion or intensity that drives a scientific researcher.
The first cultural change in Petroco was marked by the proposed merger between Petroco and a larger competitor in the late 1940s which was followed by vulnerabilities. The competitor had lower net profits along with the fact that whereas Petroco was now a publicly-traded company with many ties to the financial community, the competitor, though technically a public company, operated essentially as a partnership of the cofounders.
There were differences between the two companies that merged, such that Petroco’s founder noted that there was a little resemblance in the character or the psychology of the two companies. The differences were manifested in a dinner conversation in which Petroco’s founder reacted to the enthusiasm of a member of the other company regarding vacations by remarking that for Petroco, work was their ‘vocation, avocation, and vacation’. Despite all the differences with culture dominating nature, the two companies completed the merger.
Petroc in the early 1950s acquired many small companies and continued seeking a prominent position. This was the time when doctors informed Petroco’s founder of some problems with his health, and the future leadership of the company was, for the first time, in question (Daniel & Metcalf, 2001, p. 210). With twelve to eighteen-hour workdays continuity through the weekends, growth continued primarily through acquisitions, expanding current operations, acquiring larger means of transportation and distribution, and reaching into new, but related industries.
By the early 1960s, the volatility of oil refining and the price fluctuations for petroleum products caused Petroco to look for ways to expand into new markets. Profits in refining and sales were flattening, and there did not appear to be any simple way to improve profitability through increasing efficiencies. Petroc began by expanding its operations beyond the fuels produced by most refineries to produce petrochemicals.
It continued this expansion through its largest acquisition to that point, which formed the foundation of a new division focused on the chemicals industry. By 1967, Petroco as a whole acquired more than 75 other companies among which the chemical division alone was made up of 63 facilities covering manufacturing, research, service, and distribution facilities and was located in 22 states and 14 foreign countries (Daniel & Metcalf, 2001, p. 210).
With the death of Petroco’s founder in the late 1960s, a major milestone in the company’s history and culture was set. The company had grown and expanded tremendously from its initial roots in the early part of the century and now included many executives and managers, all of whom had come up in the company under the watchful eye of the founder. Leadership fell, collectively, to two very different individuals, but ones who were seemingly able to complement each other’s differences.
The older was a nephew of the founder and the younger a law school graduate who had only joined the company in the early 1950s. Though they had fairly distinct roles the elder working at the policy level and the younger more in charge of operations they reportedly were able to continue the legacy of shared responsibility and overlapping efforts established by the founder.
With a defined and fix the culture of Petroco, profits in existing operations took fairly dramatic drops through a variety of circumstances and several large and key mergers and acquisitions fell through. The circumstances were due to the complaints that began to be voiced by citizens groups about possible health damage from the emissions of various company operations, and government requirements were developed requiring the production of unleaded gasoline requiring a significant change to existing equipment and operations.
For the first time in Petroco’s history, major austerity measures were undertaken in the company to reduce costs, including a reduction of executive salaries, elimination of the traditional Christmas parties, and scrutiny of even business-related travel and expenses. From 1970 onwards, Petroc is under fluctuation and turmoil because of erratic profitability, frequent mergers and acquisitions, and younger executives taking charge as senior managers.
This is not to say that the acquirers set out deliberately to exploit the acquired firm; simply that the acquisition was perceived as being an answer to the needs of the acquiring firm with relatively little thought given to those of the acquired company. Interestingly, the poor outcome of these takeovers did not appear to spring from any lack of industrial logic between the partners. Petroc’s merger was followed by a failure, and further acquisitions were like multiplying failures followed by erratic management.
The merged partners of Petroco made similar products in industries that were reasonably healthy and which appeared to have reasonable growth prospects, therefore the mergers failed to work as expected because of the gross insensitivity of the acquirer in one case and because of changed circumstances in the other. It seemed that the merger was less sound than it at first appeared, the companies were at opposite ends and communication between them was poor, they served different end markets; and, although similar, the technologies involved in their products proved to be quite different. They had different perceptions which only enhanced the communication barrier between their environments.
The reasons why the takeovers worked out as badly as they did seem to lie mainly in the nature and behavior of the acquirers was that the acquired companies saw themselves as a budding corporation, but had virtually no experience of running subsidiaries. Because of the acquirers’ motives for their purchase, it was probably predictable that Petroco would suffer, but they undoubtedly suffered more because of the inability to maintain that friendly and cooperative behavior, the founder of Petroco devised.
Conclusion
M & A uphold effective actions and processes as well as some pitfalls which have already been discussed in the essay by highlighting ineffective actions and processes in various case studies mentioned above. This is not to say that all mergers and acquisitions produce negative results, however for an M & A to be successful, it requires a friendly and cooperative environment which not only bring to the firm plants and equipment, but employees, management teams, customer and supplier relationships, and often new product lines.
Firms that got engage in multiple acquisitions over time are likely to introduce fewer new products to the market because they often overemphasize financial controls and become more risk-averse. These firms then look for their competitors to make acquisitions to supplement their innovations. As these firms provide an opportunity to the newer firms to come up with new products, they integrate them into a system that discourages innovation, and thus they must continue to buy other firms with innovative new products to compete, to the extent that the industries in which they operate require new products to meet customer demand.
On the other hand, potential merger partners may also find it easier to achieve a friendly and productive relationship during the acquisition process if they have worked together before. To maintain a friendly deal, adequate timing is a significant issue that does not necessarily require formal meetings or time spent in a formal business venture. Therefore, we can say that M & A is a two-way deal seeking to produce financial benefits expected or desired for the acquiring firm.
Work Cited
Ashcroft Brian & Love H. James, (1993) Takeovers, Mergers and the Regional Economy: Edinburgh University Press: Edinburgh.
Daniel A. Teresa & Metcalf S. Gary, (2001) The Management of People in Mergers and Acquisitions: Quorum Books: Westport, CT.
Hitt A. Michael, Harrison S. Jeffrey & Ireland R. Duane, (2001) Mergers and Acquisitions: A Guide to Creating Value for Stakeholders: Oxford University Press: New York.
Walter Ingo, (2004) Mergers and Acquisitions in Banking and Finance: What Works, What Fails, and Why: Oxford University Press: New York.