Introduction
The firm acquisition is defined as a corporate concept where a firm buys all or most shares from another company and takes over the control of the acquired firm. This strategy is used by firms as a growth strategy. There are various benefits of the acquisition to a firm, which may include obtaining superior human resources and skills essential for business and attaining new capital and market share for the company. Further, through acquisition, firms can increase their returns, hence facilitate expansion (Sherman & Hart, 2006, p.1). Alternatively, acquisitions are done to reduce the level of competition in the market.
Although an acquisition is a good strategy, some problems could arise including negative impacts on the firm’s management and overall culture or financial strain. Also, the acquisition of firms in foreign countries is bound by many regulations from the governments. The management of a firm venturing into global acquisition should consider these laws.
There are several forms of acquisition, horizontal and vertical. The horizontal acquisition is the acquisition of another company that is in the same industry; this is mainly done to ease competition. The vertical acquisition is an acquisition where the buyer and target firms are in the same industry but on different parts of the production process. The firm may wish to acquire a firm that produces similar goods or companies that provide complementary services. This paper will explore the motives, how to make an acquisition successful, and factors to consider before the acquisition.
Preparation for acquisition
The firm that the company wishes to acquire is Seasoned Wines Company located in Australia. In Australia, the wine industry is dominated primarily by four large wine-producing multinational companies. Seasoned Company is a middle-sized wine producing company with a few acres of vineyard and a workforce. Further, the firm has an additional supplier of grapes for the production of a premium product. The acquiring company, Shiraz Wines, is located in the United States of America and its biggest market is the local market.
To have a successful acquisition, both the target and acquirer firms need to be prepared adequately to maximize the value of the deal. This can be attained by building the firm acquisition readiness and developing a plan that will aid in value creation in the acquisition (Saint-Onge & Chatzkel, 2008, p.9).
Firms also need to optimize their “operating performance before entering into any negotiations to achieve the highest valuation and financial benefit from the transaction” (Saint-Onge & Chatzkel, 2008, p.9). In readiness for a takeover, the firm will need to develop some capabilities that will ensure success in the future. These capabilities will form the building block for effective integration.
Shiraz’s board will develop a business plan with its objectives and strategies outlined. The plan should include how the firm intends to meet its objectives and the number of functional units it intends to have (DePamphilis, 2009, p.137). Subsequently, an acquisition plan that spells out how the acquisition is to be carried out is made, and it should include a schedule of completion and people to oversee the process.
Primarily, the plan should indicate the maximum resources it is willing to commit to an acquisition. This plan gives guidelines on the selection criterion to the people in charge during the selection process. Moreover, a negotiation strategy that will aid the firm to get the best value for money should be established. In preparation for the post-acquisition phase, the firm must develop an integration plan and identify the leaders of the integration committee.
Since Shiraz Wines wants to venture into cross border acquisition, it will be essential to consider how the foreign culture will affect the business, as well as how the foreign country’s laws will influence the transaction i.e. currency and tax matter.
The target firm, Seasoned Wines, needs to have a pre-sale plan and evaluation of its worth. The firm will also have to find out the legal obligations of its transactions i.e. whether income tax can be deferred or not. Additionally, the target company would also require a negotiation strategy.
Failure of acquisitions
The success rate of business acquisition is very low, therefore, the firm has to evaluate carefully, factors that can cause failure and establish mitigating factors. Moreover, it has been established that firms acquired perform more badly after acquisition (Peng, 2008a, p.275).
Steps taken during pre-acquisition and after acquisition determine whether an acquisition will be successful in the future. The key issue that contributes to the poor performance of the target firm is overpricing for the target firm plus a lack of an appropriate strategic fit (Peng, 2008a, p.276). Moreover, in cross border acquisition, it will be essential to be familiar with a foreign culture and business systems used in Australia. Further, the organizational culture is another aspect that must be explored to take appropriate steps to ensure the success of the venture. Moreover, the success may be influenced by the political will in Australia, as some governments have policies that promote companies owned by its citizens over foreigners.
According to Peng, failure of acquisition during the post-acquisition phase is mainly as a result of lack of proper integration (2008a, p.275). Therefore, the firm needs to consider the organizational culture of Target Company to establish if it can merge with its existing culture. Moreover, nationalist concerns about the takeover can also lead to failure after post-acquisition.
Having established some causes of failure, the firm will set up good strategies to increase the chances of success of the acquisition. Importantly, the acquisition process will be manned by a competent board tasked with overseeing the overall process. To counter this effect, a proper evaluation of the target should be done. The integration strategy developed will be essential in the transition phase, and to enhance integration, proper representation from both companies will be emphasized. Moreover, the selection of the target company will be done appropriately to obtain a company that gives good returns for the money invested. Also, involving all stakeholders to participate and support the venture will increase the chances of success of the acquisition.
Institution-based issues
One of the institution based issue that the firm is bound to encounter is how to respond to formal institutional constraints and transition. The firm will have to understand the formal and informal institutions that govern the target firm and device a method to integrate the important concepts and discard unwanted practices. Indeed, institutions define the strategies a firm will utilize and affect the strategy of firms by reducing uncertainty and signaling conduct as acceptable or not, which constrains the range of acceptable actions. Moreover, there may be a need to review the present institutional framework to create a more credible system. Moreover, the transition can be met with resistance, leading to a lack of proper integration. Uncertainties during transition must be managed effectively.
Similarly, the institution-based issue in the firm needs to exploit the market opening and globalization.
Resource-based issues
According to Peng, the most common resource-based issues that are likely to be encountered are learning and developing new skills, accessing necessary resources, and leverage superior managerial capabilities (2008a, p.275).
The most important resource-based issue is the acquisition of superior resources from the firm. By acquiring our target company, the firm will be able to exploit the resources in Australia. The procurement of grapes is made easy by the large production of grapes in Australia; therefore, our firm will acquire quality raw material at a low cost. Moreover, the country has readily available material used for packaging. Further, there is a large market for wine products from Australia since the government has engaged in an Australian marketing agenda to promote the brand Australia, hence opening more markets for wine from Australia. Additionally, the firm has the latest technology for wine production and the location of the plant is strategic. For instance, the plant is located near suppliers, hence reducing the cost of transportation.
The firm will not incur large costs to develop skills since the area has a highly qualified skilled workforce in this sector. However, in the division of management and administration, a little adjustment is required. Nevertheless, Shiraz will attain contemporary resources from the deal (Peng, 2008b, p.344).
The managerial capability enables a firm to build, coordinate, integrate, and reconfigure multiple streams of competencies and deploy them strategically to exploit changing market opportunities. It is a higher-order capability that helps generate other capabilities and put them into productive use.
Managerial motives
The primary motivation is to establish an empire for the company through diversification and obtaining a wide variety of markets. Therefore, the company will become one of the dominant firms in the industry. Besides, the success of the business will add value to my achievement as a manager, which can give me better opportunities elsewhere.
On the other hand, as the manager, I am motivated by self-interests that will be gained from compensation and side-benefits of this acquisition (Peng, 2008b, p.344). As a result of the merger, my management compensation contract will be reviewed where my salary and bonus are set to double. However, this is not my core motivations, since the potential private gains can influence me when handling the transaction, leading to failure.
Do you possess hubris?
As the CEO of the company, I do not possess any hubris. The pursuit to acquire Seasoned Wines is well thought and considered, with all aspects of the market being the basis. Besides, the timing of the acquisition is not influenced by what other firms are doing, herd behavior, following custom, and chasing the mirage of acquisition (Peng, 2008b, p.344). Therefore, I have put in place an acquisition committee that will direct the takeover to ensure the firm gets value for its money in the long run. This committee will evaluate the firm and obtain the correct capacity of the firm
How to ensure the success of the acquisition
To facilitate the success of the acquisition, the integration will be essential for the newly acquired company. The success of this venture is pegged on human capital integration and organization culture. I will not introduce drastic changes, as the employees are likely to reject; however, small and slow incremental changes will be effected where necessary. The employees will be involved in some decision making especially those that will affect their welfare. Moreover, an integration team will facilitate easier integration with proper representation from both sides of the divide (Peng, 2008b, p.347).
The leadership board will formulate leadership and organization principles that will shape the new company after and during reconfiguration (Saint-Onge & Chatzkel, 2008, p.23). During the planning stages, the board will have to structure the acquisition plan in a manner that the objectives of the acquisition are achieved. Moreover, the proper valuation of the target company and the evaluation of other circumstances surrounding the business will be adequately done. The understanding of the acquisition target will prevent unexpected eventuality from becoming known after the deal is closed. Additionally, the firm will not use the services of deal brokers, since the firm could lose money in the transaction.
Importantly, a post-acquisition plan to be effected after the closing of the deal will be formulated to guide effective integration (Magliolo, 2007, p.126). Moreover, through an effective communication strategy, the firm will be able to identify factors that could lead to failure. The firm will have to communicate with other stakeholders in the company to get their input, hence support during the acquisition process. Therefore, the management of expectation will be important, as well as a proper explanation of what the firm requires from every person.
As in many acquisitions, it may be essential to downsize the number of employees; therefore, the selection criterion that the board will use will be fair and one that will retain the best employees. Further, an efficient program for selection, recruiting, and appraising the human capital will be developed to obtain a competent workforce. Importantly, it will be essential to meet business obligations. Finally, a risk assessment will be conducted to help the identification of strategies that can eliminate the risks or mitigate the effects of their occurrence.
Conclusion
The firm acquisition is defined as a corporate concept where a firm buys all or most shares from another company and takes over the control of the acquired firm. The acquisition is a strategy through which a firm “seeks to benefit from economies of scale, efficiencies, and enhanced market visibility” attained because of growth (Peng, 2008b). Simply, the acquisition can be paid through cash or stock.
Hubris and managerial motivation may undermine the value of acquisition due to the self-interest involved. The main drivers for acquisition are synergies, managerial motivation, and hubris where synergies add value while managerial motivation and hubris reduce the value (Peng, 2008b, p.344). in most cases, the key issue that contributes to the poor performance of a target firm is overpricing for the target firm and lack of appropriate strategies. Therefore, a post-acquisition plan is of great significance to guide effective integration. Also, universal participation by all stakeholders will not only lead to sound decision making that is widely accepted, but also to the success of the acquisition process.
Self-interests to be gained from compensation and side-benefits of this acquisition process will greatly motivate completion of the acquisition process. Moreover, the presence of an acquisition committee will direct the takeover to ensure that the firm gets value for its money in the long run.
References
DePamphilis, D. M. (2009). Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. MA: Academic Press.
Magliolo, J. (2008). Corporate Mechanic: The Analytical Strategist’s Guide. Cape Town: Juta and Company Ltd.
Peng, M. W. (2008a). Global Strategy. OH: Cengage Learning.
Peng, M. W. (2008b). Global Business. OH: Cengage Learning.
Saint-Onge, H. & Chatzkel, J. (2008). Beyond the deal: mergers & acquisitions that achieve breakthrough performance gains. NY: McGraw-Hill Professional.
Sherman, A. J. & Hart, M. A. (2006). Mergers & acquisitions from A to Z. NY: AMACOM Div American Mgmt Assn.