The Factors Affecting Mergers and Acquisitions Essay

Introduction

Mergers and acquisitions (M&A) help a firm to grow by venturing into new markets. Mergers are a combination of two or more companies who join together to achieve some strategic or financial objective (Sherman A. et al 2006).

Acquisitions involve the purchasing of assets or shares of a company in order to have control of that company (Sherman A. et al 2006). M &A can take place peacefully or can sometimes be a difficult process for the companies involved.

Having given the definition of M&A, this report focuses on how they develop and the reasons why companies pursue M&A. Then focus will be made on the types of M&A along with the threats and opportunities.

This report will further examine the factors that affect M&A with the support of real cases. Finally a conclusion will be drawn from the research.

Trends of mergers and acquisitions

In the 1970s, there was increased formation of M&A. This trend was persistent and resulted in increased, globalisation. Firms are incorporating the concept of internationalisation in their operation. The current boom with regards to M&A in the 21^st century has similarities with older conglomerations of the 1990s.

However, the trend has affected firms in economic sectors (Hijzen et al 2008, p. 852). The financial markets are no longer the major factors in determining formation of mergers or acquisitions.

Furthermore, there is a cause to believe that the current surge is progressed by strategic choices of businesses in light of opportunities offers by the economic prowess.

Most cross-border M&A are mostly experienced in the same industry with few variations where new investors are involved.

Reasons for acquisitions/mergers

The primary motivation for coming together or purchasing another business has been to ensure creation of corporate profits hence maximising the shareholder’s value (Bösecke, 2009, p. 46; Campa & Hernando, 2004, p. 56).

In addition, firms also enter into strategic alliances (business relationship between 2 or more parties with the objective of attaining a critical business objective such as acquire the skilled employees, products and intellectual property).

Companies such as Googles, Cisco and Yahoo have all formed acquisitions over the years. M&A may also take place because of a rapid change in technology, fierce competition, changing consumer preferences, control costs and a reduction in demand (Sherman A. et al 2006).

This means that a company cannot keep up with the changing situation and thus, it resorts to this measure. In addition, firm’s share all the risks involved. However, the individual firm’s remain independent. When venturing in to new markets companies encounter problems.

Cultural Factors Affecting M & A

When firms from different national origin interact through M&A, they are bound to experience very different and incompatible cultural characteristics (Alvesson, 2002 p. 74).

Cultural differences are major components to be considered because cultural clash is considered to be a major obstacle that often causes failed M&A (Häkkinen et al 2004, p. 28).

Various studies have revealed that the existence of cultural differences in different companies greatly contributes to failure of M&A (Alvesson 2002, p. 76).

In the process of implementing M&A, managers assess the key cultural differences that exist in the merging/aquiring firm (Marmenout 2008, p. 75). To reduce the cultural differences interference with synchronization, managers are encouraged to have mergers with firms operating in the same industry.

Analysing cultural differences will aid in increasing the probability of the merger succeeding (Mercer 2006, p. 134).This arises from the fact that the necessary harmony in the merger is established (Sudarsanam 2010, p. 135).

Culture conflict translates into misunderstanding in the firm (Gitelson et al 2004, p. 1). , Hence, the merging firms experience inefficiencies and time wastage (Frensch 2007, p. 112). A number of aspects such as valuable resources, employee benefits, decision-making process, communication and measures are affected (Gertsen et al 2004, p. 123).

Therefore, there is a need to establish harmony among a new firm since cultural differences can affect the synchronization process and hence reduce the intended synergy. The degree of complexity in M &A is high if two countries are involved due to cross-cultural disparity.

Despite M&A involving firms in the same industry being easy, the workforce could respond to comparable situations in a completely different way (Mercer 2006, p. 134). Therefore, consideration of cultural differences prior to the merger is necessary (Gitelson et al 2004, p. 123).

Firms should also conduct harmonisation of the M&A which entails ensuring that their operation strategies are similar. Strategies of harmonization are very critical for managing cultural differences. To achieve this, an efficient communication within the organisation should be adopted to minimise chances of resistance (Gitelson et al 2004, p. 123).

Other disadvantages of M&A

Apart from cultural differences, other disadvantages relate to attainment of a bad reputation. This mainly occurs if one firm acquires a firm which has a negative publicity. This may have a significant effect in the success of the new entity established.

Thus, the management team should conduct a comprehensive analysis of the potential partner so as to determine the reputation it has established.

In addition, the firm may experience diseconomies of scale. This arises from the fact that the firm may grow in its size leading into an increment in unit costs. M&A may also result into a decline in the employees’ level of motivation because some employees especially those in the management level may be rendered redundant.

M&A may also result into conflict of objectives between the two firms. The resultant effect is inefficiency in the firm’s operation.

Cross-Border M&A

M&A involve are formed with a common goal of sharing resources in order to achieve a particular goal. Sharing resources means that each firm benefits from the resources of the other firm and the new firm established is able to attain synergy (Sudarsanam 2010, p. 138)..

For example, one party may have a skilled human capital while the other may have adequate financial resources. A cross border M & A entails two firms that operate in two different national economies or two companies that operate in the same economy but they belong to different host nations (Andrade et al, 2001, p. 106).

Global Trend

According to Hijzen et al (2008, p. 852), the high rate of globalisation is forcing firms to incorporate the concept of internationalisation. Other factors include increased deregulation, corporate restructuring and privatisation (Marmenout 2008, p. 75).

Understanding the threats and opportunities of cross-border is essential in M & A activities and the nature of global strategy. Formation of cross-border M&A is costly (Bruner, 2004, p. 89).

The price being offered is a critical determinant of the success of the acquisition, there is no intrinsic reason why that can cause failure for the properly-conceived strategic mergers.

Evidence gives quite contradictory outcomes. For instance, the BP and Mobil merger was aimed at gaining market power by competing with other larger oil corporations in the market and to cut down significant expenses through elimination of duplicate facilities, reducing work force and other overheads (Carleton et al 2004, p. 103).

Some mergers may not have significant integration problems, it seems that it had a strong strategic logic and it’s regarded as a blueprint for other similar ventures among rival firms like Amoco and Shell.

It is also quite unusual strategy because, the merger only consolidated market resource in Europe but the firms remained rivals in other places.

Theories for International Expansion

There are three theories that offer probable reasons why firms expand their businesses to the global market (Madura, 2006, p. 56). They include comparative advantage, product cycle and imperfect markets theories. The internalisation theory has also been highlighted by several researchers.

Comparative advantage theory purports that a company/ country has a totally different comparative advantage of producing when it is able to run a cheaper production with minimal opportunity cost compared to other firms or countries (Finkelstein, 2009, p. 109).

Thus, western nations invest in China due to its large population, China a source of cheap labour and market; however, it has had a totally different cultural background making integration very challenging (Finkelstein, 2009, p. 109). This theory further explains that the two firms engaged in M&A could draw great benefits from each other because of these cheap production process and free trade.

For example, Fresenius Kabi acquired APP pharmaceutical company to enter into the American market and supply generic drugs to US and Canada. Through the acquisition, Fresenius Kabi expanded its operation hence becoming a global leader of IV generics status (Mullin, 2008, p. 9).

Other important examples of comparative advantages include the emerging economies that have great advantage in certain fields (Frensch, 2007, p. 212).

Brazil has an advantage of investing in bio-fuels, Russia in energy, while Indians have captured the information technology industry and taking it to a very competitive level (Hoskisson et al, 2000, p. 454).

China as a new strength in the economy enjoys comparative advantage of manufacturing, where most of products are made in china because of availability of cheap labour (Hoskisson et al, 2000, p. 455).

Imperfect market theory asserts that countries are usually differing with the amount of resources that are accessible for production. These resources are not transferable to another country in a cheaper way or freely (Hoskisson et al, 2000, p. 458).

This means that there could be a lot of obstacles and expenses that are attached to the transferring factors for production.

In essence, if there were no such barriers or if the factor were transferable without restrictions, then there won’t be comparative cost advantages hence there will be no reason for the international or cross-border M&A (Chari et al, 2004, p. 126).

Market imperfections help cross-border M&A to grow and exploit international transactions which would be purely for domestic industries (Rossi & Volpin, 2004, p. 278).

Product cycle theory purports that whereas a company will initially produce products and services that are able to satisfy the demand in the domestic country, with time, the market becomes mature and saturate. This may force the firm to expand its market in the foreign market (Rossi & Volpin, 2004, p. 278).

This explains why firms are very innovative. It’s through such dynamics that Big Pharma was motivated to acquire Biotech in order to venture into new drugs and equipment after its patent expired.

Basell acquisition of Lyondell chemicals led to growth in the size of the firm (Salmon, 2010, p. 27). The firm was able to improve its market position by diversifying its operation and also to attain economies of scale.

Internalisation theory explains that when M&A enables a company to exploit the benefits of intangible assets like branding, management skills, marketing strategies, patents, superior expertise and goodwill (Chari et al, 2004, p. 129).

These assets are influenced by the size of the business. They also have immobility and limited information and basically founded on proprietor information (Rossi & Volpin, 2004, p. 279).

Such obstacles can be bypassed by engaging in cross-border deals hence gaining access to these intangible assets and consequently increasing shareholder value (Campa & Hernando, 2004, p. 56).

Studies have found that many takeovers in this perspective are mainly those in the research and development business (Guillén, & Tschoegl, 2008, p. 123).

Target valuation

The value of M&A from the value creation impact of the target firm capital and profitability are implicit in value and there is goal difference between the goals of net assets value. From the financial results, M&A following a merger value creation entail the increase in the net current cash flow value.

From a corporate M&A viewpoint, analysis of M&A value creation from the merging firms’ net asset value, via an analysis and evaluation of the target firm’s intrinsic value, the M&A value synergies developed to determine the acquisition value creation can be attained.

The target firm in the value of the M & A process of value creation can be addressed at three levels of synergy.

Net asset value: together with profits from ongoing operations to changing the enterprises capital increase, the formation of accumulating capital, this accumulated capital is invested business on the basis of long-term business formation in the past.

Target firm M&A price is evaluated from the current enterprise, future profitability and growth as determined by the inherent value, value added acquisition synergy and firm growth option value.

Target Company’s Value: the acquisition seeks to pursue the objectives of the undervalued firms. It’s important to determine the target firm’s inherent value and then make comparison with the market.

Growth option value: M &A returns when the target firm has indicated rising trend, meaning that the value has a call option and future growth of M & A income can be brought.

The value of synergy Target firm: M&A to create value via collaboration and bring together resources, knowledge for enhancing combined value of the M&A on both sides. Many cross-borders mergers face serious difficulties in the process of integration after the merger or acquisition (Häkkinen et al, 2004, p. 32).

The new firm has to undertake a number of activities so as to attain synergy (Carleton et al 2004, p. 103). Through effective integration, M & A can succeed in the long term (Olie 1990, p. 206).

Cross-Border Merger/Acquisition obstacles

A number of legal requirements have to be met in cross-border mergers. As a result, the acquiring firm can be disadvantaged or hampered by lack of crucial information and the legal incompatibility (Olie 1990, p. 208).Sometimes, the legal structures frustrate organisations’ M & A.

These restrictions are not restricted to cross-border mergers but they explain the failure of M & A (Vasconcellos et al 1990, p. 174). An example of legal barriers is evident in China where the government introduced a regulation on monopolies limiting the probability of entering into the market by foreign firms.

Tax barriers are another obstacle which governments impose to cross-border mergers. Despite efforts by managers to ensure smooth transition process, taxation matters are usually problematic (Arnold 2002, p. 145).

This is because these issues are usually dealt with domestically and they are sometimes not clear exhaustive to determine the effect of tax of the international M & A (Vasconcellos et al, 1990, p. 178).

Such impediments require seeking expert consultation services or special agreements with tax agencies on these grounds.

Cross-border mergers could expose gaps or weaknesses in the regulatory framework thus making the regulatory bodies inadequate or uncertain on how to carry out the process of merger thus causing delays (Vasconcellos et al 1990, p. 179).

Economic barriers, such as fragmentation of equity markets can impose extra transactions expenses on cross-border M & A (Arnold 2002, p. 145). For example, the share mechanism can be intricate and costly when the merging firms are listed differently on the stock markets.

The extra costs could influence the bidder on the kind of deal to get into (Sudarsanam 2010, p. 138). In addition to these barriers, there would also be differences of member state that would demand differentiated approach adoption. The differentiated approach has very little information available on value-based process.

With regard to the attitudinal barriers, some of the member states support ‘National Industrial Policy’ openly or surreptitiously, targeting to become domestic national champions. Among possible justification, some could argue that these types of policies could ensure more finances for the national economy.

Political issues could also affect privatised firms that have in the past received public money hence cross-border mergers can be blocked (Cartwright & Cooper 2000, p. 112).

In the European banking sector, companies are seeking to consolidate their market position in the domestic arena before they make the strategic move in response to formation of single market and also introduction of single currency.

Merging in this view is often differentiated because of specific development is individual nations (Vasconcellos et al 1990, p. 174).

The following example is about a cross border acquisition of two banks from different countries:

Cross border Acquisition of the Royal Bank of Scotland with ABN AMRO

In 2007 the Royal Bank of Scotland was involved in the Europe’s biggest cross border banking deal (F.T, 2011). ABN AMRO, a Dutch bank was acquired by the Scottish bank after having competing against Barclays. This was supposed to be an effective deal which was intended to cause rapid growth and global domination (Wilson H at el, 2011).

They intended to make savings on the stationery bill and shared computer software (Hosking P, 2008). However, this was not the case. This type of cross border acquisition has been used to explain the consequences of a deal which produces negative results within a year.

As stated not all acquisitions are successful. This deal had a liquidity impact on RBS in particular to its capital ratios. This was a costly deal for them.

Also the ABN’s staff were concerned of the RBS management attitude, this reflects cultural differences in workers/managers. Finally in 2009, the ex boss of the Royal bank of Scotland, Sir Tom McKillop pointed out that the takeover of ABN Amro was a “bad mistake” (Duncan H., 2009).

Conclusion

From the analysis, it is evident that there are a number of factors which motivates firms to consider forming M&A. Factors relate to the high rate of globalisation, increased privatisation and economic liberalisation. In addition there are a few theories which explain why firms expand into the international markets.

These include the comparative advantage, product cycle, imperfect markets and the internalisation theory. However, M&A are faced with numerous challenges, cultural differences etc which limit the probability of success such as RBS faced.

M&A may result into diseconomies of scale as a result of increment in the size of the firm. The employees’ level of motivation may adversely be affected limiting the firm’s operational efficiency.

In addition, legal, political, and economic barriers are associated with M&A. All these restrictions cause uncertainty of future trade and cash flow and this in turn affects asset value and therefore poor performance.

However, various economies are considering forming trading blocs so as to harmonize these issues and allow free trade. In most cases, the target value of M&A relate to increasing the net assets value, attain a high growth and to attain synergy.

Reference List

Alvesson, M., 2002, Understanding Organizational Culture. New York: Sage, pp. 74-76.

Andrade, G., Mitchell, M., & Stafford, E., 2000. ‘New Evidence and Perspectives on Mergers,’ Journal of Economic Perspectives 15, pp. 103–120.

Arnold, G., 2002, Corporate Financial Management. 2^nd Ed. Harlow: Prentice Hall.

Bösecke, K., 2009, Value Creation in Mergers, Acquisitions, and Alliances. Wiesbaden: Gabler Verlag.

Bruner, R. F., 2004, Applied Mergers and Acquisition, Stockholm: Rutledge Publishers.

Campa, J. M. & Hernando, I. 2004, ‘Shareholder Value Creation in European M&As,’ European Financial Management, Vol. 10 (1), pp. 47-81.

Carleton, R. J., & Berry, C. S., 2004, Achieving Post-Merger Success: A Stakeholder’s Guide to Cultural due Diligence, Assessment and Integration. New York: John Wiley & Sons.

Cartwright, S., & Cooper, C., 2000, HR Know-How in Mergers and Acquisitions. London: Institute Of Personnel and Development.

Chari, A. Ouimet, P. & Tesar, L. 2004, Cross Border Mergers and Acquisitions in Emerging Markets: The Stock Market Valuation of Corporate Control, EFA 2004 Maastricht Meetings Paper. No. 3479.

Duncan H., 2009, Ex-RBS boss holds up hands to ABN takeover – admitting it was a ‘bad mistake’, Mail online. Web.

Finkelstein, S., 2009, Advances in Mergers and Acquisitions. New York: Emerald Group Publishing.

Frensch, F., 2007, The Social Side of Mergers and Acquisitions: Cooperation Relationships after Mergers and Acquisitions. Sydney: DUV FT 2011, ABN Amro takeover battle, Financial Times. Web.

Gertsen, M. C., Torp, J. E., & Soderberg, A. M., 2004, Cultural Dimensions of International Mergers and Acquisitions. Sydney: Prentice Hall.

Gitelson G., Bing, J. W., & Laroche, L., 2004, The Impact of Culture on Mergers and Acquisitions. New York: ITAP International Incorporation.

Guillén, M. & Tschoegl, F. (2008). Building A Global Bank: The Transformation Of Banco Santander, Princeton, NJ: Princeton University Press.

Häkkinen, L., Norrman, A., Hilmola, O., & Ojala, L., 2004. Logistics Integration in Horizontal Mergers and Acquisitions. International Journal of Logistics Management, Vol. 15 Issue 1, pp. 27 – 42

Hijzen, A., Gorg, H., & Manchin, M., 2008. Cross-Border Mergers and Acquisitions and the Role Of Trade Costs. European Economics Review, Vol. 52, Issue 5, pp. 849 – 866

Hosking P. 2008, RBS remains upbeat after ABN Amro deal, The Times. Web.

Hoskisson, R. E., Eden, L., Lau, C. M., & Wright, M. 2000. ‘Strategy In Emerging Economies,’ Academy Of Management Journal, 43: 249-267.

Madura, J., 2006. International Financial Management, 8th ed., Thomson South-Western, Mason, Ohio.

Marmenout, K., 2008. Getting Beyond Culture Clashes: A Process Model of Post-Merger Order Negotiation. Montreal: McGill University.

Mullin, R. (2008). Generic Drugs Germany’s Fresenius Will Acquire Heparin Leader APP Pharmaceuticals, Chem. Eng. News, 86 (28), p. 9.

Olie, R., 1990. Culture and Integration Problems in International Mergers and Acquisitions. European Management Journal, Vol. 8, Issue 2, pp. 206-215.

Rossi, S. & Volpin, P. 2004, Cross-country Determinants of Mergers and Acquisitions, Journal of Financial Economics, 74: 277-304.

Salmon, J. (2010). The Rise and fall of Corporate America, Victoria: Trafford Publishing.

Sherman A. & Hart M., 2006, Mergers & acquisitions from A to Z, American Management Association, second edition, printed in the United States of America. Web.

Sudarsanam, P. S., 2010. Creating Value from Mergers and Acquisitions. Harlow, UK: FT Prentice Hall.

Vasconcellos, G. M., Madura, J., & Kish, R. J., 1990. An Empirical Investigation of Factors Affecting Cross-Border Acquisition: The United States vs. United Kingdom Experience. Global Finance Journal, Vol. 1, Issue 3, Pp. 173-189

Wilson H., Aldrick P., Ahmed K., (2011), Royal Bank of Scotland investigation: the full story of how the ‘world’s biggest bank’ went bust, The telegraph. Web.