Financial Mergers and Acquisitions: Methods and Strategies

Define the Concept of Risk Propensity Profiles. What are the Components of Risk Propensity?

Mergers and acquisitions are the most common expansion strategies due to an extended variety of advantages such as increasing competitive edge, improving a sufficient allocation of the resources, and pertain to the financial benefits for both companies (Pablo & Javidan, 2002). They tend to be highly popular in the modern business world, as the executives of the firms tend to focus their attention only on the associated growth opportunities linked to the potential enlargement of the geographical coverage or vertical or horizontal mergers to optimize the flow of information in the supply chain.

It is believed to enhance communication between different components of the organization and ensure that all actors in the supply chain are aligned with the company’s strategy and its mission statement (Walker, 2016). Overall, it could be said that the management of the company has all reasons to consider that using mergers and acquisitions is the most suitable strategy to increase the scope of business operations.

Nonetheless, despite the initial positive effect on profitability, these decisions tend to be risky and require applying critical thinking and analytical skills before making a final choice. To support this point, the managers of the firms tend to create a ranking of types of acquisitions depending on the potential percentage of failures, and, in this case, conglomerate (42 %) and concentric marketing (26 %) or technology (21 %) have the highest rates (Kitching, 1967).

In this case, one of the critical difficulties is finding an equilibrium between the confronting needs of the acquired and acquiring firms (Pablo & Javidan, 2002). Establishing a connection with the management of the company will assist in ensuring the alignment and help allocate the resources and workforce effectively (Kitching, 1967). At the same time, the executives of the firm have to be aware of the economic fluctuations in the industry and ready to take advantage of new tendencies to optimize their competitive edge with the assistance of acquisitions.

In the article Thinking of a Merger…Do You Know Their Risks Propensity Profile? by Pablo and Javidan, the authors indicate that the substantial definers of the merger’s success are strategic alignment and intent (Pablo & Javidan, 2002). To gain a clear understanding of this term, a concept of risks propensity profile was introduced. In this case, it remains apparent that the companies tend to have different organizational cultures and decision-making mechanisms, which they use to assess the amount of risk that they can take when acquiring a suitable company. In the first place, the authors of the article state that managers tend to apply different tactics when ranking the risks (Pablo & Javidan, 2002).

It remains apparent that the selection of a particular approach is dependent on the situation and the personal traits of the managers. The most common decision-making styles are hierarchically-oriented and collaborative (team), and the initial difference lays in the contribution of different levels of subordination to making a final choice and selecting the right option (Pablo & Javidan, 2002). It could be said that the concept of risks propensity profile unites these matters under one definition and assists in establishing links between these controversial components.

In this case, the risks propensity profile can be defined as a set of the concepts and principles used to make a particular decision including taking responsibility for risks, differentiating between appropriate and non-acceptable actions, and defining an outcome associated with this process (Pablo & Javidan, 2002). To understand and avoid confusion when discussing this matter, the main components are identified risk, decision-making process, and the actual outcome.

As was mentioned earlier, one of the major elements of risk propensity profile is the identified risk (Pablo & Javidan, 2002). In the first place, a decision-maker has to determine any possible causes of risk, which may decrease the level of stability and shift the degree of volatility of acquiring a company in a particular country or region (Pablo & Javidan, 2002). In this case, potential risks that a manager may consider are linked to political stability, economic fluctuations, levels of corruption, and other uncertainties. Not taking into account these matters may be regarded as the possible causes of failure and the insufficiency of the decision-making process.

Simultaneously, it is critical to consider the individual traits and personality of the leader when determining the reasons for prioritizing some factors over others. Based on the analysis of the concepts highlighted above, this assessment is the first step that identifies that the main features of the decision-making process and critical thinking follow the principles of due diligence, which help find an equilibrium between common sense and emotions (Culliman, Roux, & Weddigen, 2004). Overall, this initial action will have an advantageous impact on determining the type of risks prosperity profile of a manager and the subsequent steps that one will take to succeed in this process.

In turn, the second component has a clear correlation with the decision-maker and his/her analytical and critical skills and the actual tactics applied when taking risks. In the previous studies, it was revealed that “inadequate target evaluation” was the potential cause of the failure in 11 out of 12 cases (Hitt, Harrison, Ireland, & Best, 1998, p. 91). This finding signifies that underrating the decision-making process will be the primary cause of failure and will lead to the adverse consequences associated with the takeover.

In this instance, the majority of the managers tend to evaluate the levels of risks, which will take place when making an acquisition (Pablo & Javidan, 2002). Nonetheless, the mindset of the managers is not protected from external influences. Consequently, the decision-making mechanism is vehemently affected by a plethora of factors including organizational and societal values, structure, power distance, personal traits, and industrial mindset (Pablo & Javidan, 2002). When considering the attributes of the corporate culture, one has to take into account the reward and punishment and recognition systems, the firm’s values, vision statement, cultural principles, and norms (Pablo & Javidan, 2002).

These matters could be viewed as a basis for using a particular decision-making mechanism, as they define the aspects that the managers have to follow to remain role models for their subordinates and effective leaders. Simultaneously, the features of the industry may also have a critical impact on defining the risks and its features since the actions of the manager have to comply with the commonly accepted principles of the industry (Pablo & Javidan, 2002).

Alternatively, the social values and needs tend to have a similar impact on the decision-making and risk identification, as being involved in wrongful actions may have a negative influence on the firm’s reputation leading to the potential loss of the revenue or market share.

Based on the analysis of the influential factors depicted above, it remains apparent that these aspects tend to work as a combination. It could be said that they form a particular framework, which drives a manager through the process of aligning the alternatives with the company’s vision, mission, and objectives. Simultaneously, it helps determine whether the actions of the manager correspond with the concepts of due diligence when being able to evaluate the risks without having a vehement influence of personal bias and subjectivity on the proposed action plan and final decision.

The last step refers to the actual outcome of the situation and the selected option (Pablo & Javidan, 2002). In this case, this matter can be regarded as a significant element of risks propensity profile since it serves as a touchpoint to find a connection between the evaluation process, a level of risks tolerance, and behavioral patterns related to taking responsibility for the actions (Pablo & Javidan, 2002).

In this instance, it could be said that this step provides a sufficient summary of the actions indicated above and helps depict a correlation between the outcome and the process that leads to its development. Overall, it remains apparent that despite the positive intentions of mergers and acquisitions and their beneficial effect on the financial prosperity of the company, there is an extended variety of risks, which question the appropriateness of this method as a growth strategy. In this case, it could be said that risk propensity has a substantial impact on the understanding of the merger and its working mechanism.

It assists in depicting the stages of the decision-making process and the influence of the organizational culture on taking particular risks. Consequently, it offers insights about making a certain decision when acquiring a company and assists in minimizing risks and avoiding them in the recent future. Applying the principles of risks propensity profile will increase the effectiveness of the acquisitions and mergers and will maintain the balance between emotionality and the concepts of due diligence.

“Acquisitions Will Not Improve the Performance of a Firm That’s Being Commoditized.” What Do You Think About This Statement?

In the current business world, the companies tend to apply various methods and strategies to enhance their formulas of profitability and financial prosperity, and acquisition is one of the most popular instruments to encourage growth (“The new M&A handbook”, 2011). In this case, takeovers are often regarded as the major definers of success, and their principles are actively used by the managers to expand the financial and geographical opportunities of the companies (Pablo & Javidan, 2002).

In the article, The New M&A Handbook, the authors depict that the decision-makers often make mistakes since they do not consider that diversifying the product lines with the assistance of M&A may not enlarge market shares and shift the retention of the consumers (“The new M&A handbook”, 2011). As a consequence, many companies made a plethora of deals, which did not support the initial mission and vision and generated only a limited number of financial benefits for the parenting firm (Culliman et al., 2004).

Underestimating the importance of due diligence led to these consequences and contributed to the sequence of events (Culliman et al., 2004). In this instance, these outcomes lacked logic and evaluation of the potential risks. At the same time, this misunderstanding led to wrongful choices while increasing the level of bias and questioning the effectiveness of acquisitions and mergers as a revenue-generating tool.

Nowadays, the business world provides an extended number of expansion opportunities. Nevertheless, this market feature can be regarded as a benefit and drawback simultaneously. One of the critical aspects of the present business environment is the fact the market is fulfilled with goods, which tend to have similarities in their features and purposes. These products are highly popular among buyers due to the low prices and an extended variety of options and alternatives.

Consequently, it could be said that this matter of the industry intensifies the rivalry, and the revenue and profits do not experience high growth margins (Sogn-Gruvag & Young, 2013). To overcome the difficulties related to competition, the firms have to introduce various concepts to increase their competitive edge by vehemently relying on the cost-leadership approach. It helps the companies increase their profits, but it is not effective in the long-term since the market constantly evolves.

It could be said that the analysis of the factors depicted above underlines the fact that commoditization of products and services is one of the major challenges, which the companies tend to face. A significant number of firms try to take advantage of this market feature, but utilizing it requires the companies to adapt their organizational structures and strategies to remain competitive on the market. It is believed that M&A is not a suitable growth instrument in this case while being a potential cause of the rising financial costs (“The new M&A handbook”, 2011).

To support this opinion, I will rely on the conceptualization of economies of scale and its consequences in the ways of conducting business. At the same time, it is vital to highlight that the intensity of the rivalry plays a pivotal role in this matter, and it tends to be high due to a critical level of commoditization and substitution. Based on the components discussed above and the description of the current situation in the market, I consider that M&A will have a low effect on the company’s profitability and financial performance in the case of commoditization.

Consequently, relying on the principle of the economies of scale will help justify my viewpoint regarding the effectiveness of acquisitions and takeovers in the commoditized markets. It remains apparent that the global producers tend to focus on the principles of the economies of scale, as it assists them in reducing production costs and deliver large volumes of the products to the target audiences. Applying this strategy is effective in the era of mass marketing, as commodities have to be distributed in large capacities to increase their chances of delivering the goods to the consumer segments and groups. It may seem that this market is associated with positive financial growth and high revenues (“The new M&A handbook”, 2011).

Nevertheless, there are several reasons for the absence of the possibility of the co-existence of acquisitions and economies of scale at the same time. One of the potential causes is the fact that the mergers have an advantageous impact when the product has a unique value proposition about the recognized brand image and exclusive features. In this case, it enlarges the scope of the firm and coverage of the organization and increases the possibility that the products will be purchased at the right time simultaneously (“The new M&A handbook”, 2011).

This matter causes a substantial growth of the revenue and makes the acquiring and acquired firms, strategic partners, as both units have to work together as a team to reach their financial goals and prosperity. In this instance, both vertical and horizontal integrations can be regarded as beneficial elements since they enhance the quality of the delivered message and the flow of information within the supply chain (Walker, 2016).

Nonetheless, these aspects are not applicable in the context of economies of scale, as the products tend to have an extended number of similarities, and increasing their scope only shifts the revenues in the short-term. In this case, using mergers pertains to the fact that more consumer groups have to be satisfied (“The new M&A handbook”, 2011). In this case, this procedure does not attract new customers, and the market share is only merely increased by gaining the target audience of the acquired firm (“The new M&A handbook”, 2011).

Consequently, utilizing the concept of M&A only creates an illusion of the increased market share and the profitability of this venture. Relying completely on this growth strategy will be a potential reason for the existence of adverse consequences such as high financial risks, a threat to the business viability, and the loss of the market share.

Another common feature of commoditized markets is a high level of substitution (“The new M&A handbook”, 2011). In this case, the managers make a false assumption and state that the acquisition or takeover can be viewed as the most appropriate solution to cultivate a firm’s growth and development. It leads to a low return on investment and substantial cash outflows. Meanwhile, these matters hurt the overall capital value of the firm and its financing mechanisms.

Alternatively, it questions the company’s financial stability and maybe a potential source of the problems when fulfilling the budgeting plan. Despite the well-defined positive intentions of M&A, its effectiveness is not guaranteed. For instance, the expected shift in customer retention may not be a potential outcome of these actions, as the present market is fulfilled with a plethora of choices (“The new M&A handbook”, 2011). Due to a great level of substitute products and the high density of the companies, the rivalry will continue to intensify. In this case, any merger or acquisition is not a potential resolution, as the critical issue pertains to the high competitiveness of the existent market of commodities.

In the end, it could be said that acquisitions play a pivotal role in defining a business strategy and making it one of the most critical instruments to cultivate a company’s growth and development. Nonetheless, the managers tend to make mistakes when selecting a suitable firm for a buyout, as they rely on several misconceptions that acquiring any company will have a beneficial impact on their profits (“The new M&A handbook”, 2011).

Nonetheless, reconsidering the development of the company’s framework and corporate strategy will have a positive influence on increasing the revenue by taking advantage of this growth strategy. In this instance, the firms should avoid commoditization, as it is believed that the conglomerates pursuing the economies of scale cannot use acquisition as an instrument to assure the alignment of the strategy with the objectives of the acquired organization while increasing the market shares.

References

Culliman, G., Roux, J., & Weddigen, F. (2004). When to walk away from a deal. Harvard Business Review, 82(4), 96-104.

Hitt, M., Harrison, J., Ireland, D., & Best, A. (1998). Attributes of successful and unsuccessful acquisitions of US firms. British Journal of Management, 9(1), 91-114.

Kitching, J. (1967). Why do mergers miscarry? Harvard Business Review, 45(6), 84-101.

Pablo, A., & Javidan, M. (2002). Thinking of a merger…Do you know their risks propensity profile? Organizational Dynamics, 30(3), 206-222.

Sogn-Gruvag, G., & Young, J. (2013). Commoditization in food retailing: Is differentiation a futile strategy? Journal of Food Products Marketing, 19(3), 139-152.

The new M&A handbook. (2011). Harvard Business Review, 1(1), 48-57.

Walker, W. (2016). Supply chain architecture: The blueprint for networking the flow of material, information, and cash. Boca Raton, FL: CRC Press.

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BusinessEssay. "Financial Mergers and Acquisitions: Methods and Strategies." December 12, 2022. https://business-essay.com/financial-mergers-and-acquisitions-methods-and-strategies/.