The report is prepared to evaluate the reasons for merger and acquisitions as a method of corporate expansion. Considerations for merger and acquisition have been explained on relation to share exchange and cash offer. Moreover, report also illustrates the reasons associated with high rate of failure of merger and acquisitions in enhancing value of shareholders. The consolidation of companies is referred to as merger and acquisition. Acquisition is taking over of any company by any other company operating in the same segment (Kansal et al. 2017). On other hand, merger is about combining of two or more companies into a single large company. When two companies are combined in the form of take over and acquisition, then their ownership is transferred through cash payment and stock swap.
Merger and acquisition as method of corporate expansion:
Acquisition and merger by companies is associated with several reasons and a series of rationale and drivers lead to organization being acquired and merged. Merger and acquisition is regarded as an important part of implementation plan of corporate strategy and is considered as potential strategic plan (Titmanet al. 2017). Below listed points represents rationale for and against merger and acquisition.
Rationale for merger and acquisition:
Failure of merger and acquisition:
Financial position or status of company- In order to increase total worth of company or their total value, merger and acquisition is considered as the appropriate strategy. Such strategic implementation can attribute regaining of loss trust of shareholders. If any organization is running out of profit or making continuous loss, it would be suitable to get itself acquired by any other company operating in same segment (Furlan et al. 2015).
Strategic rationale- Merger and acquisition provides opportunities to entities for leveraging synergies and thereby offering real value to both acquired and acquiring companies. There are number of areas that are suitable for cutting costs when an organization merges and gets acquired such as work forces, existence of redundant facilities, areas of operations and business units. Organizations can experience increase negotiating and buying power.
Efficient way for acquiring intellectual property and talent-Acute shortages of experienced staffs are faced in many industries engineering, accounting and cyber security are some examples of industries that lack talented and experienced staffs. Implementation of such strategic initiatives would help entities in gaining a talent pool that would contribute to overall success of company.
Increasing market share and competitiveness- Many organizations succumb to get acquired by company because of problems related to internal management and high degree of competition. Evolving market behaviour and trends of industry are some of the reasons associated with merging of companies. Companies will be able to explore new markets by diversifying their business through such strategic implementation (Croci et al. 2017).
Absence of common vision- There will never be feasible bending of organization and no convergence point if the merged company does not have statement. It is essential for merging companies to share a common vision for attaining sustainability.
Weak management and leadership- Strategic implementation of any plan requires strong leadership for directing their employees properly suitable to change management. Poor management is considered as root cause of failure and merger. The collective leadership should be capable of mitigating risk and leveraging strengths. Any faulty decisions made by management at the strategic level might lead to total failure if they combined entities could not align their strategic objectives.
Poor communication- Poor communication is the most common cause for companies that fail to integrate and generating profit from their merging and acquisition activities. Lack of proper communication would make company in integrating the operations of combined entity (Bauer and Matzler 2014).
Considerations for merger and acquisition:
Merger and acquisition considerations can be explained in terms of cash offer and share exchange.
- Acquired company ownership will not get diluted if the cash acquisition is done via cash offer. Nonetheless, if the acquisition is done through stocks, then ownership of company will be turned to the company that is acquiring other company due to owning of majority of shares. Acquiring company will be entitled to major profit percentage derived by acquired company (Sarala et al. 2016).
- Cash offer utilization in event of company acquisition would provide to be beneficial. The reason is attributable to the fact that the transactions will be less risky due to adoption of fixed payment method as against acquisition of stock where stock value fluctuates (Angwin and Meadows 2015). It is so because if company has been acquired based on cash rather than stock would enable them to enjoy transactions of fixed amount. On other hand, acquisition via stocks, an increase in stock value of acquired company, then acquiring company need to pay more due to increase in stock value. Therefore, cash offer comes with potential benefits of less risky transactions.
- Now, there are also some drawbacks associated with acquisition of entity through cash offer. The process of acquisition comes with problems of exhausting liquid assets of company and other cash reserves if acquisition is done via cash acquisition. Nevertheless, the acquired fixed assets strengthen the financial foundation of company. For meeting the immediate firms’ requirement, it would be difficult to use such fixed assets in generating liquid assets (Sung et al. 2017). Therefore, acquiring company is recommended to ascertain the cash flow position of company to be acquired. It is essential to determine the liquidity position stability so that it is enough for facilitating for exchanging fixed assets of acquiring company with cash.
- Acquisition of company by cash offer has profound ramification for the shareholders of both acquiring and acquired companies. There is a simple transfer of ownership by exchanging of money for shares and the role of two parties is clear in cash deal. Acquiring shareholders in cash transactions results in taking on entire risks that there will not be any materialization of expected synergy value embedded in the premium acquisition (Brueller et al.2016).This can be explained with the help of an example, say, Seller Inc wants to acquire its competitor named Buyer Inc, the market capitalization of seller Inc stood at $ 5 billion, and that is made up of 50 million shares at the rate of 100 per shares. Capitalization of Seller Inc stands at $ 2.8 billion with 40 million shares with each share worth $ 70. It is estimated by Seller Inc manager that an additional synergy value of $ 1.7 billion can be created by merging of two companies. It was announced by Seller Inc to buy shares of Buyer Inc at $ 100 per share. The value placed on Buyer Inc stood at $ 4 million that represents premium of amount $ 1.2 billion.
- When acquiring firms through cash offer, it has been ascertained that the firms having high gearing ratio or operating on high gearing ratio is less likely to be taken over compared to firms having lower degree of operating leverage or low gearing ratio. It is so because, if the acquired company has higher degree of operating leverage, then the risks associated with higher level of debt financed by third parties or borrowers needs to be borne by acquiring company. In addition to this, there are also other factors such as capital structure of biding company after acquisition should be considered (Han et al.2016).
Share exchange-The following points discussed below depicts the benefits and drawback of acquisition through stock exchange.
- Companies intending to acquire other company through any specific process of acquisition such as share exchange are exposed to risk of fluctuation in values of shares. There is certain possibility that acquisition of company through shares might result in bad acquisition and ultimately leading to failure (Rottig and Reus 2018). It is so because when the acquired company would be sold by acquiring company would lead to generation of potential loss because of decline in shares value.
- Moreover, the acquired company will not be able to experience exhaustion of their liquid assets, if they are acquired through share exchange. For merger and acquisition to be successful and profitable, it is required by acquiring company to conduct proper forecasting of share trends and proper analysis of acquired company liquid assets along with their future performance (Yiu et al.2016).
- There is an ownership transferring to the company that is acquiring if the acquisition is done using share exchange. It is indicative of the fact that the risk associated with its debt or solvency position will be taken over by acquiring company (Giessner et al.2016). Therefore, acquiring company will be adversely impacted because of bankruptcy of the company that is being acquired.
- Furthermore, the liquidity position of company will be elevated by the acquisition done through exchange of shares. If the acquired company has generated positive and commendable performance, merger or acquisition of such companies with the company that is acquiring will lead to addition of value to intangible assets. This increase in firms’ value in terms of goodwill will be attractive to borrowers and investors and increase acquired company reputation.
Reasons for high failure rate of merger and acquisition in enhancing shareholder value:
Variety of factors serves the basis of high rate of failure of merger and acquisition such as firm diversity, size of firms, overlapping of products, industry characteristics, target customer base and nature of market. Any transactions relating to merger and acquisition come with potential pitfalls. Merger benefits are indicated in terms of enhancement of potential revenue that becomes vague. Lack of considering different factors both during post and prior to merger phase is the reason for high failure rate of merger and acquisition (Han et al. 2016).
Cultural differences-Failure of merger and acquisition is related to national cultural differences and are more frequent in post and pre acquisition phase. Acquisition and merger performances are negatively impacted by difference in culture of organization. Moreover, strategic direction of company is neglected in terms of over emphasis on legal and short-term financial issues. Such neglect involves failure to clarify leadership issues and lacking communication with key stakeholders during process of merger and acquisition.
Poor integration of execution and planning, poor strategic rationale and misappropriate risk management strategies are some of the reasons associated with the failure of merger and acquisition (Xu 2017).
Distrust-One of the necessary ingredients for merger and acquisition is some amount of confidence that is namely regarded as trust. Restructuring of organization might affect employees personally, that leads to creation of distrust among them. Management of stakeholders are performed poorly and this ultimately leaders to failure of merger and acquisition.
External advice and promotion-For initiating the structure and carrying out transactions of merger and acquisition, managers areheavily dependent upon promoters. Top management consultancies and investment banks are promoters for dealing with merger and acquisition (Reddy et al. 2016).
Example- The largest and leading telecom companies in Sweden and Norway merged into a new telecom company on 20th January, 1999. Newly combined company set to Newtel A set to become one of the strongest telecom companies. It was stated by the board that merger would make new company stronger and create robust competition in large market players. Moreover, merger was perceived to be jewel of communication, as it would mark new era in the telecom sector (Brueller et al. 2016). However, after eleventh months of announcement, merger was cancelled and merged company was dissolved. Merging of the two companies was considered as a good match and the outcome was quite surprising. Firstly, in the telecom companies, two companies have dominating positions in their own countries of operations and analysts viewed this relatedness as favourable. In terms of fixed, mobile and internet market, both the companies were ahead of their competitors and both companies were present in same product market (Greve and Zhang 2017). In addition to this, both companies faced similar competitive challenges and for surviving in deregulated market, they change their strategies.
Overvaluation is one the reasons associated with the high rate of failure of merger and acquisition in enhancing the value of shareholders. Acquisition and merger cost billions and acquiring company will not only be crippled financially by committing to capital reserves, but the reputation of brand among the shareholders can be damaged due to high profile failure (Reddy et al. 2016).The most threatening cause of overvaluation of acquisition is the fraudulent accounting practices. For example, in year 2013, it was revealed by Caterpillar that an accounting charge of $ 580 million concerning the acquisition of Siwei of China and the fraudulent activities of Siwei made caterpillar to overpay wildly. Therefore, the major reason for failure of merger and acquisition to add value to shareholders is overvaluation.
It can be ascertained from the above analysis that failure of merger and acquisition is associated with difference in culture, distrust and poor strategy formulation. Therefore, it is recommended to organizations to have proper formulation of risk management strategies and properly integrating the execution. Moreover, it is also recommended to consider cash offer while merging or acquiring company as it carries lower level of risks.
From the above discussion of several aspects of merger and acquisition, it can be inferred that there are several reasons associated with such strategy implementation failure. Merger and acquisition do not necessarily create financial value of shareholders and despite high failure rate; such strategic implementation is regarded very popular. However, the reasons associated with popularity of merger and acquisitions are promoting of special brands, intentionally swallowing potential competitors and impending bankruptcy. It has also been ascertained that human factor is the most mentioned problems in the integration stage. This is so because human beings are difficult to change as against the processes and equipment. Therefore, it is required by merging companies to determine the pre requisites for lowering the failure rate of such strategic implementation.
Angwin, D.N. and Meadows, M., 2015. New integration strategies for post-acquisition management. Long Range Planning, 48(4), pp.235-251.
Bauer, F. and Matzler, K., 2014. Antecedents of M&A success: The role of strategic complementarity, cultural fit, and degree and speed of integration. Strategic management journal, 35(2), pp.269-291.
Brueller, N.N., Carmeli, A. and Markman, G.D., 2016. Linking merger and acquisition strategies to postmerger integration: a configurational perspective of human resource management. Journal of Management, p.0149206315626270.
Croci, E., Pantzalis, C., Park, J.C. and Petmezas, D., 2017. The role of corporate political strategies in M&As. Journal of Corporate Finance, 43, pp.260-287.
Furlan, B., Oberhofer, H. and Winner, H., 2015. A note on merger and acquisition evaluation. Industrial and Corporate Change, 25(3), pp.447-455.
Giessner, S.R., Horton, K.E. and Humborstad, S.I.W., 2016. Identity management during organizational mergers: Empirical insights and practical advice. Social Issues and Policy Review, 10(1), pp.47-81.
Greve, H.R. and Zhang, C.M., 2017. Institutional logics and power sources: Merger and acquisition decisions. Academy of Management Journal, 60(2), pp.671-694.
Han, B.S., Park, E.K. and Kang, T.K., 2016. Determinants of Global Merger and Acquisition (M&A) Deals Completion: Focus on the Role of the Firms’ M&A Experience.
Kansal, S. and Chandani, A., 2014. Effective management of change during merger and acquisition. Procedia Economics and Finance, 11, pp.208-217.
Reddy, K.S., Xie, E. and Huang, Y., 2016. The causes and consequences of delayed/abandoned cross-border merger & acquisition transactions: A cross-case analysis in the dynamic industries. Journal of Organizational Change Management, 29(6), pp.917-962.
Rottig, D. and Reus, T.H., 2018. Research on culture and international acquisition performance: a critical evaluation and new directions. International Studies of Management & Organization, 48(1), pp.3-42.
Sarala, R.M., Junni, P., Cooper, C.L. and Tarba, S.Y., 2016. A sociocultural perspective on knowledge transfer in mergers and acquisitions. Journal of Management, 42(5), pp.1230-1249.
Sung, W., Woehler, M.L., Fagan, J.M., Grosser, T.J., Floyd, T.M. and Labianca, G.J., 2017. Employees’ responses to an organizational merger: Intraindividual change in organizational
Xu, J., 2017. Growing through the merger and acquisition. Journal of Economic Dynamics and Control, 80, pp.54-74.