Reasons, Methods, And Impacts Of Mergers And Acquisitions

Advantages of Mergers and Acquisitions

Mergers and acquisitions are observed to attain great attention because of great amounts of money associated with it along with public competition for support of shareholders. Moreover, they can also offer faster means of attaining strategic goals (Bauer et al. 2016). On the other hand, this can also lead to drastic failure that demands a better appraisal of the target organization. Considering this, the objective of this paper is to analyse the reasons for methods along with impacts of mergers and acquisitions. The report will also try to attain a strategic understanding of the business valuations and capital structure. Evaluation of the use of cash offer and share exchange as a form of merger and acquisition consideration will be carried out. Along with that in discussing the same, it will be anticipated that the bidding organization has no surplus cash and can consider employing debt finance or rights issue in order to attain cash.

Mergers and acquisitions can be understood as mutual resolution of two companies in order to turn out to be one entity and it might be observed as a choice generated by two equals (Boyson, Gantchev and Shivdasani 2017). The mutual business by means of structural and operational advantages attained by the merger will decrease cost along with increasing the profits. This can facilitate in increasing shareholders value for all the shareholder groups. The major intention of a company is to increase the wealth of its shareholders over and more than that of the two company’s wealth. Considering the same, the best instance of merger is AOL and Time Warner merger in the year 2000 and this turned out to be one of the biggest deals that failed later (Malmendier, Opp and Saidi 2016). The advantages and disadvantages associated with merger and acquisition is relied on the new organizations long term and short term strategies and initiatives. This is due to the reason that the factors prefer differences in business culture, market environment, acquirement expenses along with changes within financial power associated with the captured business (Cartwright and Cooper 2014). Certain advantages and disadvantages associated with the use of merger and acquisition by organizations are explained through taking cases of real life organizations. Certain advantages associated with following merger are explained under:

• The major reason for the companies to enter within merger and acquisition is to merge their control and power over the markets
• Economies of scale are carried out through resources and services sharing. This is because of the reason that union of both the companies’ leads to total cost reduction along with offering increased competitive advantages which is feasible because of high buying power and longer production runs (Osarenkhoe and Hyder 2015). For instance, one successful business merger is observed in case of Dell and EMC that merged into a single organization and succeeded in the international technology industry.
• In order to become competitive, organizations are to be compelled to remain at the top of all technological advancements along with their dealing applications (Chui and Ip 2017). Through merger and acquisitions of a small organization with exceptional technologies, a huge organization is deemed to attain or develop a competitive advantage.
• One of the major advantages of merger and acquisition that can be attained by the organizations is tax advantages. Financial benefits can encourage mergers and companies will totally consider use of tax-shields, improvement in monetary leverage along with use of alternative tax advantages (Reddy 2015). 

Certain disadvantages are observed to be associated with the use of merger strategy by the companies. These are explained below:

• Due to the merger and acquisition implementation, employees belonging to a small merging organization might need exceptional re-skilling
• Organizations are deemed to deal with big difficulties because of the frictions and internal competition which might take place among the employees of the merged organisations. There exist risks of attaining numerous employees in certain departments (Cording et al.2014).
• Merging two organizations that are carrying out identical activities might indicate over capability along with duplication in the organisation that might require retrenchments. Increase in expense might take place in case appropriate measurement of modification along with implementation of the merger and acquisition is delayed (Scharf 2015).
• Another disadvantage that is associated with the implementation of merger and acquisition strategy is the uncertainty associated with the approval of merger by suitable assurances (Durand 2016). In several instances, the return of the share associated with an organization that resulted in other company’s buyouts was less in comparison to the return of the industry overall.
• Merger and acquisition strategy is deemed to decrease great amount of flexibility. In case a competitor makes revolution along with marketing important resources that are of high quality, change is observed to be difficult. The expense associated with change serves as the major difference between a specific merger along with the merchandising value of the company that might be of increased difference (Reddy, Xie and Huang 2016).

The merger among the AOL and Time Warner took place in the year 2000 that was worth $183 billion. This was recorded as the largest merger within the American business world history. AOL had more than 40% share of the online service within the United States and the Time Warner has more than 18% shares in the US media along with cable households (Friedman et al. 2016). This merger is taken into consideration to be a vertical merger between one of the most vital web service suppliers along with the largest entertainment and Media Company. This new organization was emerged and was named to be AOL Time Warner that was positioned along the four largest companies of US as analysed by the valuation of stock market. After the deal of the merger, AOL turned out to be a subsidiary with the Time Warner Organization at stage (Weber 2015). The company also had its operations within North American Nations, Asia and Europe. As the supplier of web services, AOL on look drastically rival from Yahoo, Microsoft along with distinct low price net access suppliers (Gomes et al. 2017). For this reason, the company attempt to include e-commerce growth and advertising that is thereby separated by its business rivals.

Disadvantages of Mergers and Acquisitions

Cash offer:

The types of considerations associated with mergers and acquisitions are treated in the form of share exchange and cash offer. Various benefits and limitations in relation to acquisitions have been facilitated on the part of the cash offer (Greve and Zhang 2017). The main benefits of taking into account the cash offer are enumerated as follows:

Lower risk:

When a firm is acquired, using the cash offer could fetch a number of benefits. The main reason behind such benefits is the constant amount in the form of medium of payment. As a result, the risks involved in the transaction are minimised against the acquisition of stock, since there is no variation in cash such as the stock values (Bauer et al. 2016). This statement could be illustrated in a better way via an example based on stocks, instead of cash, which is reaping the advantages of a transaction with fixed amount. At the time of acquisition, with the increase in stock value, the acquiring firm needs to incur additional amount in order to acquire the other organisation. This is one of the significant benefits at the time of acquisition of the organisation with the help of cash offer (Tanriverdi and Uysal 2015). 

Absence of dilution:

When cash acquisition is made via cash offer, another potential benefit is that there is absence of dilution in the ownership of the acquired organisation. However, at the time of acquisition, depending on stocks, the acquisition of maximum amount of shares would transfer the ownership of the acquired firm to the acquiring firm (Boyson, Gantchev and Shivdasani 2017). This would help the latter firm to earn maximum portion of the profit from the acquired firm in future years.

However, there are certain limitations for an acquisition through cash offer, which are described as follows:

Greater degree of operating leverage:

One of the major drawbacks of acquisition via cash offer is that the organisations functioning in a minimised degree of operating leverage or minimised gearing ratio are highly probable to be acquired by the firms functioning on a greater degree of operating leverage. This denotes that the organisations with reduced gearing ratio could be acquired by the firms with greater gearing ratio. This is especially due to the fact that in case of the acquired organisation functioning on greater degree of operating leverage, the debt-related risk has been funded with the help of the third party investors (Cartwright and Cooper 2014). The dominant organisation is needed to bear this specific risk. In addition, various factors such as the capital structure of the acquiring firm after the acquisition have to be taken into account.

Types of Considerations for Mergers and Acquisitions

Drainage of liquid assets and cash reserves:

Another significant limitation in relation to acquisition of cash is that the acquiring firm while acquiring the other organisation encounters the issue of drainage of liquid assets and cash reserves. It is extremely troublesome for a business organisation to transfer the non-current assets into liquid assets for fulfilling its urgent needs, despite the fact that the non-current assets provide needed strength to the financial base of the organisation. Hence, it is greatly suggested to the acquiring organisation to assure the stability in its overall cash flows (Chui and Ip 2017). This is because such cash flow stability would enable in driving the cash exchange for the non-current assets of the other organisation.

In case of the share exchange, certain advantages and benefits associated with employing a scheme on the bidding organization, the target organization along with their shareholders. In the share exchange type of acquisition, the acquirer offers cash, stock or a combination of share in exchange and cash for the stock of the target organization. In the share exchange type acquisition, a share purchaser requires approval from the shareholders. Moreover, the target shareholders are taxed for any advantage and acquirer anticipates the abilities of the target company in acquisition deal (Hajro 2015). The advantages associated with the share exchange is that this do not require particular anticipation of takeover premium. In addition, it is relied on current market transactions so that the information is observed and recent and moreover, it decreases litigation risk. 

However, there are also certain limitations associated with the share exchange type of merger and acquisitions. This is for the reason that such merger relies on takeover transactions being the appropriate valuations and there might not be enough transactions for taking into account the valuations. Another disadvantage of share exchange based merger is that it does not encompass value of changes to be conducted in the target company. In the share exchange, the shared synergy risk remains shared in percentage of the combined organization the selling and the acquiring shareholders will attain (Humphery-Jenner, Masulis and Swan 2017).  The only way that can be attained by Buyer Inc.’s shareholders can attain the same shareholder value added from a share exchange deal might be through offering Seller Inc.’s lesser new shares. Moreover, this can indicate the value that is considered by the managers of Buyers Inc. and this will be rather than $100-per-share preannouncement market value. Share exchange mergers provides the acquired organizations an opportunity to profit from a likely synergy gains. This is expected by the acquiring shareholders to attain above and more than the premium.

Benefits of Cash Offer for Acquisition

Mergers and acquisitions is observed to be valuable for any company for several reasons such as for enhancing the existing services and products, change in direction or personality and becomes a pathway to foreign markets (Jenter and Lewellen 2015). This is also helpful in attaining intellectual individuals or talented people. Despite of all these beneficial reasons of merger and acquisitions in carrying out a transaction, it is startling how few of them generate value. A report prepared by KMPG explained that more than half of the mergers decision destroys shareholder value and on the other hand one third observed no difference at all. The causes of failed mergers encompass operation failures and tangible accounting and the most difficult reasons are associated with culture, people and human emotion (Osarenkhoe and Hyder 2015). These are deemed to be highly complex to make it correct. There are certain financial reasons because of which the merger failed to add significant value and one among them is overvaluation. It is observed that, at the time mergers and acquisitions costs billions, mistakes can destroy an acquiring organization financially though committing al its capital reserves. In addition, it can also result in a high profile failure which can drastically damage reputation of a brand among the shareholders as well as other stakeholders. Certain fraudulent accounting conducts serves to be the most sinister reason for an acquisition overvaluation (Krug, Wright and Kroll 2014). For instance, in the year 2013, Caterpillar Company observed a $580 million accounting charge that is associated with their acquisition of China’s Siwei, whose fraudulent management team resulted in Caterpillar Company to overpay greatly.

It can also be observed that not all the overvaluations result in due to deviance. Executives and the bankers can wrongly judge the market future, trend or make a wrong anticipation within their calculations. For instance, in the year 2007, Microsoft Company paid $6.3 billion for digital marketing organization, quantise that finally attains $6.2 billion write down in the year 2013. Whether because of error or fraud, overvaluation is deemed to be a great reason for which the mergers or acquisitions fail to add certain value. Intervention is another reason of failure or success of merger and acquisition strategy of any organization (Lebedev et al. 2015). Even if two organizations agree with the terms and conditions of acquisition and merger, third patties having ulterior motives might interfere. This results in restriction that prevents the merger from turning out to be final or attaining its desired objectives. In most of the instances, the third parties are known to be the government. For instance, in the year 2013 UPS stated that it might not continue to pursue its acquisition of the European Express Operator TNT in the situation of European Union Resistance that the merger might be anti-competitive (Wei and Clegg 2017). Moreover, Anheuser-Busch InBev and Mexican brewing giant Grupo Modelo was observed to be among the largest beer organizations in the world. This is before the US Justice Department started to demand that certain Modelo’s brewing operations can be shifted locally in order to generate more American jobs. Distraction is among the major reasons of merger and acquisition failure (Malmendier, Opp and Saidi 2016). It has been observed that the distractions that are associated with mergers can put off the managers from catering on the actual business goals of their organization after the dust is settled. While the busiest global merger and acquisition period resulted in a historic break in 2000, a ground breaking Wharton Study analysed the cost-cutting bank performance in America that follows a long period of consolidation. Moreover, the cause behind such merger was deemed to be maintaining cost-efficiency, a research revealed that the merged organizations actually resulted in cost cutting at a slower pace in comparison to its peers that was highly independent. In addition, mergers are observed to prevent organizations from attaining objectives as fast as possible (Jenter and Lewellen 2015). 

Limitations of Cash Offer for Acquisition

There are certain cultural reasons that can also result in the failure of merger and acquisition to add shareholder value. Mergers and acquisitions are deemed to be important strategic and financial transactions considering the important legal and financial steps that must be correctly done (Yaghoubi et al. 2016). In addition, success relies on the ways in which most vital assets of a company and its people effectively associate. A major limitation of such negotiation is that the financial and the legal arrangements can offer management with a tunnel vision. This is in consideration to the fact that just the human capital decisions taken with conviction can be able to become the next CEO or will be part of the new Board of Directors (Krug, Wright and Kroll 2014). People never fit as simply as flow charts. In case the cultures are not compatible or managed in a better manner, the partnership might be affected from the start. In several cases, problems associated with most of the mergers as indicated by their generally conjoint names are that they do not really merge to an extent where they can strap together (Rahman and Lambkin 2015). Both the organizations are determined to co-exist rather than generating something innovative. For this reason, culture can be observed to remain entrenched. For instance, collaborative structure of Chrysler’s including designers, engineers along with marketing people working on every model (Lebedev et al. 2015). However, this clashed with philosophy of Daimler-Benz’s considering putting engineers in charge. At the time the mergers straddle the national borders, communication barriers and race might add friction additionally.

Conclusion

The objective of this paper was to analyse the reasons for methods along with impacts of mergers and acquisitions. The report also attempted to attain a strategic understanding of the business valuations and capital structure. It was gathered from the report that the advantages and disadvantages associated with merger and acquisition is relied on the new organizations long term and short term strategies and initiatives. This is due to the reason that the factors prefer differences in business culture, market environment, acquirement expenses along with changes within financial power associated with the captured business. It is also gathered that the causes of failed mergers encompass operation failures and tangible accounting and the most difficult reasons are associated with culture, people and human emotion. These are deemed to be highly complex to make it correct. Moreover, Mergers and acquisitions are deemed to be important strategic and financial transactions considering the important legal and financial steps that must be correctly done. 

Advantages of Share Exchange for Acquisition

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