The study explains the process of merger and acquisition that refers to the consolidation of the assets of the companies. This includes a number of transactions that consists of mergers, acquisition, consolidation, tender offer and management acquisition. The study at hand explains the reason for which the companies merge is synergy that means to combine of the activities and the performances of the business to reduce their cost. Moving further, this study also presents weakness and strength encountered by corporations and mentions the same in detail herein. Essentially, this study aims to explicate the reason why firms engage in merger and takeovers with other business for diversifying, sharpening overall focus of the business and explains the way it also aids to enhance the competitive advantage.
1.
As mentioned by Qiu et al. (2016), takeover of business is carried out when a business enterprise undertakes a bid for assuming control of a specific target company by buying out majority of the stakes. When there is takeover of firms, the company who is the acquiring one, becomes accountable for the operations of the targeted business firm’s activities, holdings as well as debt (Leary and Roberts 2014).
The Mergers and Acquisitions process are the vital strategies for the development and growth of the companies (Matiin et al. 2018). The variety of merger and acquisition deals with the companies in a unique way. The motives behind each of the dealings differ from one another.
Various literatures suggest the different theories of mergers that explain different motives for which the deal of merger and takeovers can take place. The motives of this can make the value of the company increase, decrease or status quo in value. The solution discusses the foundations of theory of takeover and merger by making a detailed analysis of prior studies for each type of theories of merger, takeover, and its impact on the performance of companies in the period after the merger (Rao and Tilt 2016).
There are different theories in the context of Mergers and takeover. The differential efficiency theory, inefficient management theory, and Hubris hypothesis theory deals with the same.
As per the differential efficiency theory, there is the implication that some of the firms operate below their potential so that they are taken over by a superior firm (Wang et al. 2016). According to this theory on differential efficiency, in case if the management of corporation A is more effective than the corporation B and if the corporation A takes over corporation B, the efficacy of corporation B is likely to be brought up to the level of corporation A. Also, the theory also indicates towards the fact that there are certain firms that function below their own capability and as a consequence have efficiency below the average level (Greve and Man Zhang 2017). These business concerns are also defenceless to different other more effective firms operating in the similar industry. Particularly, this is because corporations with greater efficacy would be able to recognize business concerns with higher potential but functioning at lower efficacy.
According to Brueller et al. (2018), Inefficient Management Theory can be said to similar to the notion of managerial efficiency but it is quite dissimilar in inefficient management. However, inefficient management implies that administration of one business concern merely is not performing to the full potential. Again, inefficient management notion primarily reflects that it is ineffectual in the absolute sense. The inefficient management theory that deals with the merger takes takeover that represents the difference in efficiency of the company that leads to merge of company (Marpe et al. 2015). The Hubris hypothesis theory implies that the management of the companies look for merger for the purpose of economic gains and to enhance their potential motives.
Boschma and Hartog (2014) put forward the fact that Hubris Hypothesis means that managers seek for acquisition of business enterprises for their own potential intention. However, economic gains are not the only motivations for the acquirements. Kansal and Chandani (2014) suggest that this theme is specifically evident in case of competitive tender that offer to obtain a target. In particular, the urge to win the game often leads to winners curse. This indicates towards sarcastic hypothesis that mentions that the corporation that overestimates overall target value wins the entire contest. On other hand, takeovers can be a source of different agency issues. Koenig et al. (2014) recommends that management board of the acquirer firm is every so often over-confident and optimistic in analysing prospective targets owing to asymmetry of information. In majority of cases, there is misplaced confidence regarding the capability to arrive at proper decisions. In essence, the over-optimism eventually directs towards payment of greater amount of bid premiums for potential synergies, unconscious that the present share price might have totally represented overall real value of the target. In particular, acknowledgement of particularly takeover gains normally flows to different shareholders, whilst bonuses of workers are normally conditional on the total size of the firm. Popli and Sinha (2014) suggest that managers are inspired to expand corporations at the cost of financiers. In itself, hubris notion suggests the fact that takeover is both a cause as well as a cure for different kinds of agency issues. By means of takeover, administration not only enhances their own wealth but also as their control over rich resources.
2.
Analysis of mergers and acquisitions that can direct the way towards value destruction
Mergers and Acquisitions (M&A) is a speedy way for corporations to improve scale of operations, widen product portfolio, and enter into novel markets. This necessarily relies on the way merger as well as acquisition is sketched, planned as well as executed. Essentially, M&A that starts with the appropriate vision and are implemented at the correct place augment value of the shareholders (Kim et al. 2018). A string of acquisition of software of particularly Oracle and IBM has permitted the two different corporations to get over the rising demand for specifically enterprise software. In essence, as a case in point, both the firms Oracle as well as IBM have rewarded handsomely to their shareholders after undertaking the business action of merger as well as acquisition.
On the other hand, merger as well as acquisition that start with the wrong vision and are necessarily implemented at the inaccurate price can subsequently destroy overall value of shareholders (Chang et al. 2014). The wave of acquirements of the company Cisco Systems during the late 1990s can be regarded as a case under consideration. In essence, over the time period of 1993 to 2000, the business enterprise CISCO took over around 70 business concerns, counting Cresendo Communications, Netsys Technologies, Growth Networks, Newport Systems Solutions, Net Speed, Network Translation and many others. Particularly, the issue with this specific strategy, nevertheless, is that the company CISCO end up making payments for top prices for Net Speed as well as Growth Networks purchased during the zenith of high tech bubble (Xu 2017).
The stream of acquirements of the company Hewlett-Packard during the period of early 2000, counting acquirements of Compaq Computer as well as Palm Inc that assumed to aid the firm compete effectually against the company Dell Computer. Also, Apple can be considered to be a case under deliberation where with the acquisition of the firm Compaq Computer, the company HP rode the falling trend of the market of PC, whilst with the acquirement of Palm Inc., HP went against the market leader (Kim et al. 2018). Apple, the stock of both corporations has been heading south ever since the period of merger. The acquisition of the firm Countrywide Financial and Merrill Lynch by the Bank of America can be considered to be third case as the conservative culture of the bank does not amalgamate well with the aggressive culture of CL as well as ML. In this case, the stock was heading south ever since the time of merger. The acquirement of Sterling by the business enterprise Eastman Kodak can be considered to be an important case under consideration since the EK had to pay excessive amount for a business enterprise that did not properly fit well with the important business operations of the firm (Liang et al. 2016). In this case, it can be hereby mentioned that the stock of the two business concerns have been marching towards the South Pole. Therefore, the bottom line of the premise taken into consideration is that mergers as well as acquisitions do not always present what they essentially promise to different stakeholders of the firm, particularly when they are carried out without a proper vision at a high price.
Specific financial causes behind the failure of merger as well as acquisitions
As discussed above, there are several cases where mergers generally fail to particularly add value. However, there are specific reasons behind the failure of the mergers. In particular, at the time when the mergers as well as acquisitions are mainly projects costing billion dollars, then the errors can essentially cripple an acquiring corporation financially by way of committing capital reserves. Nevertheless, a failure that is high profile in nature can cause damage to a large extent to the brand image among different shareholders as well as other stakeholders of the corporation. In essence, fraudulent actions can be taken into account as the sinister reason behind overvaluation of a project of acquisition (Bolbanabad et al. 2017). Nonetheless, not all kinds of overvaluations are because of deviance. There are different bankers as well as executives that can misapprehend the future of the entire market, overall trend otherwise present a false supposition in their calculations (Sherer et al. 2015). During the year 2007, Microsoft made a payment of $6.3 billion for particularly digital Marketing Corporation, aQuantive, ultimately took a write down for the same during the period 2013. However, whether owing to fraud or else error, overvaluation can be considered to be a primary cause behind Mergers/Acquisitions fails to insert any value.
As mentioned by Gao (2015), intervention is also another major reason behind the failure. Even at the time when two different corporations agree to different terms as well as conditions of a specific merger/acquisition, there are third parties with different ulterior intention who can necessarily interfere and add limitations (Ashfaq et al. 2014). This can prevent a merger from becoming the ultimate otherwise attaining proposed objectives. In majority of cases, third parties are necessarily the governments.
Again, distractions that go along with mergers can avert managers from concentrating on the actual business objectives of the company even after the dust has developed. In addition to this, out of fear and agreed, mergers when inspired by fear of decline, increasing costs or dramatic alteration are hardly ever the appropriate cause to carry out the merger (Bolbanabad et al. 2017). This might cause firms to carry out transactions for the completely wrong causes.
3.
Critical analysis of the statement: “Given all time low interest rates, companies should borrow long term and use the borrowed money to takeover other firms”
Merger as well as acquisition can be considered to be specific parts of accepted business cycle. In essence, merger/acquisition can aid a business to expand, acquire knowledge, move into a novel market segment, or enhance overall output (Greve and Man Zhang 2017). Nonetheless, these opportunities are said to have expends for both sides. Agreeing to take on debt of a seller can be regarded to be a viable option to making payments in cash otherwise in stock. In essence, there are several corporations; debt can be considered to be a driving force behind a specific sale, since subpar market conditions along with high costs of interests make it impossible to get closer to disbursements (Ang et al. 2017). In this kind of situations, the main concern of debtors is to lessen overall risk of supplementary losses by entering into a merger/acquisition with a business concern that can make payments for the debt.
From the standpoint of a creditor, there is an inexpensive way to obtain assets. However, from the viewpoint of seller, value of sale is lessened or else eliminated. Essentially, at the time when a business concern acquires a huge quantity of debt of company, it has greater potential of management during liquidation (Greve and Man Zhang 2017). Particularly, this can be an important incentive for a creditor who intends to restructure the business concern or else acquire acquisition of asset namely business contacts otherwise property.
A business concern might perhaps consider the fact that the debt financed acquirement can enhance the tax rate of different acquirers. It can be seen that firms can make use of tax benefit of debt financing during the period of acquirement (Wang et al. 2016). Basically, the intuition is that firms can lessen the burden of tax by way of dent financing as interest expenditure can necessarily be deducted from the corporate base of tax and thus generate a shield of tax. On the other hand, dividends, in a sense of interest disbursements to different providers of equity are necessarily not deductible. However, tax benefit of debt might perhaps direct towards economically ineffective higher ratio of debt and equity and subsequently to higher risk of financial distress and lower resistance to different kinds of crisis. Additionally, it can turn acquisitions very profitable that would not take place in a world without tax discrimination of particularly equity (Qiu et al. 2016). Additionally, multinational firms encounter opportunities of tax planning at the time when it comes to specific decisions of financing of particularly corporate acquisitions because of diverse systems of tax and rates of tax in the nations where their subsidiaries are situated in.
Business concerns can acquire debt financing as current management can help in retaining full control. Together with ownership of company, there comes control over different management decisions. Based on the way ownership can give up to third parties in exchange of equity financing, then there is less nimble to arrive at decisions (Leary and Roberts 2014). Also, disbursements for interests can be said to be tax deductible. Irrespective of charges paid for a term loan, interest payment on money, account for working capital otherwise interest paid for money borrowed for different business actions can be said to be tax deductible. Again, taxes are also said to lower rates of interest. Owing to tax benefit of particularly debt financing, there is need to adjust rates of interest at the time of comparing debt financing to different other alternative options of funding (Rao and Tilt 2016). Whilst there are different alternative methods to acquire funds, many of the funds are not accessible to different owners of small business. Firstly, during the period 2012, only 2% of small businesses listed venture capital as a source of financing. Conversely, 87% of listed businesses using debt financing can act as a source of financing.
Essentially, the notion might perhaps appear to be counterintuitive at the beginning, however is very analogous to acquirement of a mortgage. As a mortgage is secured against the purchased property, debt for the purpose of acquisition can necessarily be secured against the underlying business assets (Greve and Man Zhang 2017). In essence, a business can generate positive flows of cash that can be utilized to service interest costs as well as amortisation. Basically, by means of acquiring debt this way, the overall equity portion of a specific transaction can lessen. Essentially, increasing debt increases overall risk level. In case if the business concern suffers from financial distress and cannot meet scheduled payments of interest to different debtors, then the company might be compelled into technical defaulting or else even bankruptcy.
Conclusion
The above study helps in understanding specific presumptions that have been presented over the years that essentially help in formulating the reason why firms merge as well as takeovers take place. Also, this study presents detailed arguments regarding the statement that mergers direct the way towards destruction of value. Various empirical evidences are presented with substantiation of theories for explaining the assertion. Furthermore, this study at hand also explains the statement regarding debt financing of mergers as well as acquisitions. This study also helps in understanding viability of debt financing with suitable reasons and empirical validation.
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