According to Sherman & Hart (2006), the business environment observes that the general rule in business is that the business either grows or dies. Companies which are on a growth path will take away market share from competitors, create economic profits and provide returns to shareholders. The companies that do not grow usually stagnate, lose customers and market share and destroy shareholder’s value. Mergers and acquisition (M&A) play a critical role in both sides of this cycle; enabling strong companies to grow faster than the competition and providing entrepreneurs rewards for their efforts, and ensuring weaker companies are more quickly swallowed, or worse, made irrelevant through exclusion and ongoing share erosion. Mergers and acquisitions, usually referred to as M&A, are aspects of management, corporate finance and strategy. The two restructuring strategies entail buying or combining different companies in order to form one big company with a higher competitive edge. Mergers and acquisitions are a vital part of any healthy economy and importantly, the primary way that companies are able to provide returns to owners and investors. This, combined with the potential for large returns, make acquisition a highly attractive way for entrepreneurs and owners to capitalize on the value created in a company.
Mergers and acquisitions as value destroyers
Corporate mergers take place in the event two independent companies combine. The companies forming mergers are independent entities seeking to grow and expand. This corporate strategy may take two forms. Mergers may take place when there is a fair agreement between the two companies. There are also cases where there is ‘hostile takeover’, that is, when one company seeks to gain control another even when there is no fair agreement. The shareholders of the targeted company have the final decision concerning merger. They are the ones required to approve it. Usually, mergers occur due to existing motivations like need for expansion. A large growing company may try to acquire a competitor, usually a small rival, so that it can expand in the market. It could also happen that the small company seeks to grow but is constrained by capital and may seek to merge with a larger company. The lager company will help propel the vision of the small company because it has the necessary capital to undertake the investment of the small company. When a stock market booms, mergers becomes more attractive. This is so since it is cheaper (relatively), to acquire companies and pay for them in highly valued shares. When the prices of shares fall, however, it leads to companies being undervalued. This also makes acquisition more attractive. Mergers are usually not successful when the companies fail to agree on the prevailing or new terms. They are also regulated by the government because they may create a monopoly which is not pleasant to the consumers. In this case, the government may require the merged companies to sell its subsidiaries which are usually value destruction.
Another way in which mergers can destroy value is by the failure to harmonize the different values and opinions of people both who have been acquired and the employees of the main company. This is according to Gaughan (2005), when two companies merger, there is a conflict between the employees as they seek a common ground through which they can work. He has claimed that most of these issues may arise especially in decision making where each of the group wants to do it in their traditional way. This may affect the performance of the company in the short term, although it may recover later on and enjoy the benefits associated with merging companies.
According to Brito (2006), mergers and acquisition can be a value destroyer when a well known and respected company merges with a company that has had questionable deals in the past. He has observed that although mergers and acquisition are important in order to enjoy the economies of scale, it would important for a company to scrutinize the other company it wants to merge with. This is because some of the actions taken by such a company may have affected the consumers in a negative way and therefore any attempts to merge or acquire it may lead to people shunning away from the goods and services being offered by the new company.
Machiraju (2003) has observed that mergers and acquisitions have made some of the employees redundant an ineffective in the new-look company. He says that mergers and acquisitions bring about efficiency because of increased use of technology. As a result, some of the employees have their work done by one or two people thereby making them a liability to the company and hence they are laid off. Firing some of employees may not be a good move by the company because people will perceive it as profit driven and not caring about the welfare of the people. The laid off employees may talk negative things about the company that may affect its reputation to the members of the public.
Mergers and acquisitions as value creators
Mergers and acquisitions have helped in the creating the values of companies all over the world. According to Sherman & Hart (2006), there are those companies that have earned a good reputation in the whole world. Therefore, when they merge with another company, the value of the new company may improve. They have observed that Erickson had remained a trusted brand in the market for many years. However, its mobile phone division was not performing well in terms of sales. As a result, the company decided to merge with SONY, which has remained a market leader in the production of many of the electronic goods in the world. They argue that, the two companies formed the SONY ERICSSON Company, which within a short period of time has managed to challenge the well established mobile phone companies such as the Samsung, and Nokia Companies. Therefore, it can be argued that the merger between the two companies has led to value creation.
In addition, Pablo (2004) has stated that mergers and acquisition help in the transfer of technology. He claims that during merger, each company brings on board the technology it had been using previously. He argues that when the two technologies are combined, they can help the company improve on its operations by cutting down the costs involved in the day to day running. As a result, the new company is able to reap the benefits associated with merger and acquisition.
Brito (2006) has asserted that a larger company is in a position to operate more efficiently than two smaller firms because it will be able to cut down on costs. He has observed that acquisition and mergers may generate economies of scale. As a result of this, he claims that the average production cost may come down as the amount of production volume increases. On the other hand, he says that merger may enable a company to cut down on its operating costs by more closely coordinating production and distribution. As a result of all that, the company will be able to realize economies of scale and also when firms have complementary resources. He notes that this happens when one firm has excess production capacity and another has insufficient capacity.
Connell (2008) says that mergers help the new company offer more products and services to the clients. He has observed that since the two companies had their own and unique products prior to the merger, their clients now has a chance of getting the different services they used to get under one roof and therefore, the company stands a good chance of making more money under this arrangement.
Mergers and acquisitions have become very common in the contemporary world. This has been partly informed by the difficulties experienced by smaller companies in accessing the market. Most of the mergers currently being witnessed involve a big company merging with small companies. In order to make sure that the new entrants in the market do not face a lot of challenges, the government should make sure that it levels the playing field other than let big companies continue dominating the market. This move will go a long way in making sure that each company innovates its own way of marketing the goods and services to attract its own clients.
Brito, D., 2006. Mergers and acquisitions: the industrial organization perspective. Alphen: Kluwer Law International. Web.
Connell, R., 2008. Why Companies Do Not Pursue Attractive Mergers and Acquisitions. New York: Cambria Press. Web.
Gaughan, P., 2005. Mergers: what can go wrong and how to prevent it. New Jersey: John Wiley & Sons, Inc. Web.
Machiraju H. R., 2003. Mergers, Acquisitions and Takeovers. New Delhi: New Age International. Web.
Pablo, A. L., 2004. Mergers and acquisitions: creating integrative knowledge. Victoria: Blackwell Publishing Ltd. Web.
Sherman, A. J. & Hart, M., 2006. Mergers & acquisitions from A to Z. US: AMACOM Div American Mgmt Assn. Web.