Understanding Mergers And Acquisitions In Corporate Expansions

Difference between Mergers and Acquisitions

Mergers and acquisitions fundamentally refer to the consolidation of the companies. Before understanding the concept of merger and acquisition, the difference between the two terms mergers and the acquisitions has to be understood. The term merger refers to the merging or the combination of two companies into one particular business entity. Acquisition refers to a single company that has been necessarily taken over by the other company. Mergers can fall into a wide range of varieties like the horizontal merger, vertical merger and conglomeration (Greve and Zhang 2017).

Mergers and acquisitions is the particular method that has been chosen for the achievement of the exponential growth of the organization. Here, it should be noted that mergers and acquisitions have become an integral part of the modern economy.

This particular study aims to focus on the concept of merger and acquisition as a potential method of corporate expansion. Furthermore, the use of cash offer and share exchange has been discussed in this paper. Therefore, an overview into the aspect of merger and acquisitions has been aimed to analyze and evaluate.

Mergers and acquisition are complex organizational processes that involve many parties. A merger or an acquisition in regards to an organization refers to the combination of two or more companies into a new business entity. The particular difference between the mergers and acquisitions is the technique that is adopted for the combination of the companies to take place (Tanriverdi and Uysal 2015).

Furthermore, this particular activity can be explained with the help of an instance. In case of a merger, an initial procedure of negotiation takes place. For instance if company X and company Y has been operating for a number of financial years as financial institutions. The financial institution X has been of high repute and has a large trusted customer base. Company Y on the other hand is a small-scale financial institution in comparison to company X. Here, in this case the particular option of merger will be beneficial for both the business units. This merger will not only provide the companies with the required scope of benefits like broadened customer base and enhancement in the value of the intangible assets like goodwill. Moreover, the skills and the experience-based knowledge gained by the respective companies would result in the unison of the business force. 

In case of acquisition, the particular process in regards to negotiation does not take place. The process of acquisition can be explained with the help of a particular example. It must be noted here that in case of an acquisition, the Company B will be completely owned by the Company X. This means that Company B might be fully taken over by the company and that the Company Y will be ceasing to exist as a separate entity or it might be the case that company X might retain company Y in its pre-acquired form. This phenomenon is known as limited absorption and is utilized when the company acquiring another company intends to sell of company Y by deriving the desired amount of profit. Moreover, in case of acquisition the dominant company may acquire another company by buying the majority of its shares. Here the term majority of shares are very important. The majority of shares refers to the fact that the dominant company or the acquirer company acquires the shares of the target or the acquired company up to a point where it becomes the owner of the company. Here it must be noted that the acquisitions can be friendly or hostile in nature.

Advantages of Mergers and Acquisitions

A friendly acquisition might be such that the target company is willing to be acquired. This is because small companies might want to be acquired for enjoying the benefits of further development and expansion, which it cannot carry out alone due to the unavailability of the required resources like capital. This particular problem of lack of capital triggers the small company to search out for a larger partner who will facilitate the required proceedings of the investment. This will actively result in an agreed friendly acquisition of the small-scale company. In the case of a hostile acquisition of a company, the particular company that has been acquired may oppose this particular decision. However, it must be noted here that the in case of both friendly and hostile takeovers the final decision depends on the shareholders of the company as they are the ones who will sell the shares. A larger portion of the shareholders agreeing to sell their shares will result in a successful acquisition (Patel 2017).

A potential example of a merger and acquisition is that the Royal Dutch Shell on 8^th April 2015 had agreed to buy BG Group for £47 billion. The complete acquisition process was facilitated on February 2016. This has been a friendly acquisition and BG Group being a multinational oil and gas corporation provided the much required financial and industrial boost to the corporate entity, Royal Dutch Shell. The benefit of the merger was derived immediately. This particular corporation surpassed Chevron Corporation to be the second largest oil company (Urmal 2017).

There are a number of reasons behind the organizations going for the option of merger and acquisition. The discussion of the reviewed literature suggests the fact that the one company chooses to merge due to a series of drivers and rationales.

Rationales refer to the detailed reasoning behind the decisions that are taken by the management of the corporate entities in regards to merger. Drivers on the other hand, refer to the influencing factors that are operational in nature and form a major contributing factor towards supporting the particular decision of merger. For instance, the management of a corporate entity might decide to acquire another corporate entity as a part of the strategy implementation plan. For the achievement of the organizational objectives, the company A might plan to acquire Company B. This is a potential example of strategic rationale. Moreover, the driver in the above mentioned case is that the dominant company desires to control the capacity in the respective sector. 

Forms of Consideration in Mergers and Acquisitions

Therefore, the rationales that lead to the decisions of a proposed merger or acquisition can be listed down as follows:

• Strategic rationale – the strategic rationale is the primary rationale that is utilized by the companies for acquiring other companies. Moreover, it is beneficial for the small scale companies that is doing good business and climbing up the ladder on an accelerated speed but lack the necessary capital (Boschma and Hartog 2014).
• Speculative rationale – the speculative rationale on the other hand refers to the situation when the acquirer acquires the acquired in the form of a commodity. This happens when a large corporate entity or a conglomerate takes over a very small firm only due to the fact that it is doing well and that the conglomerate body wants to have a share in the profit earned by the business entity (Boschma and Hartog 2014).
• Failure by the management rationale – merger or acquisition may be the result of the faulty management decisions in regards to the strategic implementation of a corporate entity. This means that the administrative body of a corporate entity might take the decision to carry out the necessary changes or renovations in the selected sectors of business but within the time these changes are implemented the market or other related conditions might change and the implemented strategy may prove to be a total loss for business. Therefore, in such a condition the strategy variance can only be corrected by acquiring the business that will facilitate the correction of the undertaken strategy (Boschma and Hartog 2014).
• Financial necessity rationale – mergers and acquisitions can also be a significant or potential solution for increasing the value of the company. The particular fact that the shareholders of the firm are losing trust in the profitability of the company can be regained or reinstated by the merger or acquisition of a profitable company (Lee 2017)
• Political rationale – Political rationale has been the primary reason behind the major mergers and acquisitions in UK between 1997 and 2002. The government in UK had signaled the merger and acquisition of the companies in UK of the large governmental departments for the purpose of rationalizing the operations and reducing the costs that are operating in nature (Lee 2017)

Therefore, the advantages of merger and acquisition can be listed down as follows:

• Merger or acquisition marks the consolidation of the specialist skills and the acquired resources of the two companies that result in the creation of the  required synergy that establishes business as desired (Popli and Sinha 2014)
• The stock markets both national and international in nature are affected positively by the merger or acquisition decisions by the major listed companies (Popli and Sinha 2014)
• The business world, in the recent times is moving towards globalization. Moreover, the development and growth of the IT department, has supported and encouraged the merger of the companies which has resulted in the enhancement of the modern world economy (Popli and Sinha 2014)
• The particular decision by the companies for penetrating the new markets in the foreign lands can be facilitated and benefited by the business activities in regards to merger and acquisition (Bindabel, Patel and Yekini 2017)
• Moreover, the acquisition of business that has displayed a certain level of proficiency in regards to a particular product or a target market may be merged with or acquired in order  to provide the business with the required boost both in terms of the financial and non-financial aspects of business (Bindabel, Patel and Yekini 2017)

Cash offer

The forms of considerations in regards to merger and acquisition can be pointed out as cash offer and share exchange. There are certain advantages and disadvantages in regards to acquisitions that have been facilitated by cash offer. The advantages and disadvantages of considering a cash offer can be listed down as follows:

• While acquiring another company the utilization of the cash offer may prove to be advantageous. This is because the amount that has been fixed as a medium of payment is a less risky transaction in comparison to stock acquisition as the cash does not fluctuate like the value of the stocks. This can be explained with the help of an example that a company that has been acquired on the basis of stocks other than cash enjoys the benefits of a fixed amount transaction. If in case of acquisition if the value of the stocks increases the acquiring, company has to pay much more for acquiring the acquired company. This is a potential advantage of acquiring the company via cash offer (Davies, Desbordes and Ray 2015)
• In case of a cash acquisition through cash offer another potential advantage is that the ownership of the acquired company will not be diluted. However, in case of acquisition on the basis of stocks the acquisition of the majority of the shares will turn the ownership of the company to the acquiring company. This will entitle the acquiring company to a major percentage of the profits that will be derived by the acquired company in regards to the future (Davies, Desbordes and Ray 2015)
• A potential disadvantage in case of an acquisition through cash offer it has been found out that the firms operating on a low gearing ratio or a low degree of operating leverage are more likely to be taken over than the firms operating on a higher degree of operating leverage. This means that the firms having a lower gearing ratio are more likely to be acquired than the firms having a high gearing ratio. This is particularly because of the fact that in case of the company that is being acquired operates on a high degree of operating leverage the risk in regards to the debt that has been financed from the third party investors will have to be borne by the dominant company. Moreover, the several additional factors like the post acquisition capital structure of the bidding company have to be considered (Davies, Desbordes and Ray 2015)
• Another disadvantage in regards to cash acquisition is that the acquiring company in the process of acquiring another company faces the problem of exhausting the cash reserves and the other liquid assets of the company. The fixed assets though provide the required strength to the financial foundation of the company but it is not possible for a corporate entity to convert the fixed assets into liquid assets to meet the immediate requirements of the firm. Therefore, it is highly recommended that the company acquiring another company should ensure the fact that the cash flow of the acquiring company is stable enough to facilitate the exchange of cash for the fixed assets of another company (Parola, Ellis, and Golden 2015). 

Share Exchange

The potential advantages and disadvantages of share exchange can be listed down as follows:

• The particular acquisition process that has been carried out on the basis of exchange of shares is exposed to the risk of fluctuation of the value of the shares. This means that the acquisition of a particular company by acquiring the shares of the acquired company may result in a bad acquisition. This is because the fall in the value of the shares of the company will result in a potential loss when the acquiring company tries to sell off the acquired company (Tanriverdi and Uysal 2015)
• Moreover, the acquisition of a particular company on the basis of the shares results in the transfer of ownership of the shares to the acquired company. This means that the acquiring company takes over the risk in relation to the debt position of the company. Therefore, the bankruptcy of the acquired company will affect the acquiring company in a negative way (Tanriverdi and Uysal 2015)
• The acquisition of companies on the basis of shares however, does not result in the exhaustion of the liquid assets of the acquired company. Moreover, proper and accurate analysis of the future performance of the company and the forecast in regards to the probable trends of the shares of the acquired company will result in a successful and profitable merger and acquisition (Tanriverdi and Uysal 2015)
• Moreover, the acquisition of a company on the basis of the exchange of the shares will result in the elevation of the liquidity position of the company. Moreover, if the acquired company has displayed a splendid level of performance the acquiring of the same will result in the addition to the intangible assets of the company like the goodwill. Furthermore, the increase in the goodwill of the firm will also lead to potential benefits like the attraction of third party investors and the elevation of the reputation of the acquired firm (Kansal and Chandani 2014)

The failure or the success rate of the merger and acquisition depend on a variety of factors like the size of the firm that has been acquired, the diversity of the firm, the characteristics of the industry and the overlapping of the products, the nature of the market in which the industry is based and the targeted base of customers.

The reasons for the failures of the potential financial events of mergers and acquisitions can be listed down as follows:

• Too much confidence – Managers of the acquired companies may be too much confident in their particular ventures on the basis of the acquired financial data that has been analyzed and evaluated in regards to the acquired company. However, the particular fact that the managers fail to realize is that the all decisions should not be taken completely upon the basis of only financial analysis. Application of intuition on the basis of the acquired experience is also required up to a certain degree (Marks and Mirvis 2015)
• Promoter and external advice – Managers depend on the promoters that are available in the case of a particular merger and acquisition. The particular promoters for the mergers and the acquisitions can be defined as the investment banks and the top management consultancies (Marks and Mirvis 2015)
• Distrust – Distrust among the management and the shareholders of the firm will result in a delayed or failed acquisition. Trust among the shareholders of the firm is a key component for the success of the financial events of the firm(Bauer and Matzler 2014) 

The popular car manufacturer, BMW took over the Rover for £800 million in the financial year of 1994. This is BMW was looking for methods to increase the volume of sales and considered Rover as a potential solution (Warter and Warter 2017).

The merger of BMW and Rover failed because of certain differences between the two corporate entities. Moreover, factors like the cultural differences between the corporate entities, poor due diligence on the part of the management of BMW and poor leadership. Moreover, the fact that BMW did not know about the particulars of the company that it is being merged with led to a failure of this particular event. Therefore, it is not important as to what financials are available in respect to the company that has to be acquired but proper knowledge and information into the internal proceedings of the particular company is also crucial (Warter and Warter 2017).

The particular recommendation that can be deduced from the discussions that have been carried out in the preceding paragraphs reveal the fact that the acquisitions that have been executed through cash offer considerations are likely to be successful. This is because the aspect of cash offer includes a fixed amount and the risk pertaining to such acquisitions is also less. Moreover, a cash offer acquisition also will not facilitate the transfer of ownership of the acquired company.

Factors Affecting Merger and Acquisition Success or Failure

Conclusion

The particular conclusion that can be arrived at is that mergers and acquisitions are advantageous for corporate entities that want to further grow and expand their boundaries of business. However, careful speculation and analysis of the financial proceedings of the company and application of the acquired experience on the part of the managers in regards to the acquired company is very important. Moreover, failures in the case of merger and acquisition can be avoided by analysis of the important factors like size and diversity and other related factors. 

References

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