Takeover, Merger and Acquisition Pros and Cons

The issue of impacts of merger and acquisition, in the context of cost and benefits of cross border takeover, is an organization is found to be in a state of the financial crisis with other aspects in a comparatively better shape it would be a logical conclusion for the acquiring company to go for a direct acquisition but from the perspective of the acquired company, it would be their best bet to negotiate the whole matter in a merger as in an acquisition the entire control of the company would be lost. Therefore, it is more of a choice of parties with an individual perspective that is to be taken into account. However, if the companies were found to be of similar potential and ability then a merger would be the most logical conclusion. (King, 2001) Thus, it is important to understand the issues related to the aspect of merger and acquisition and therefore a full evaluation and analysis are needed.

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Although the concept of Mergers and Acquisitions is relatively long existent in the corporate markets, a clear intensification of its execution has been observed since the 1980s. In more recent times, owing to the ingenuity of globalization, the interests of market giants in mergers and acquisitions still remain strong. This paper aims at looking into the impacts it has on the markets and on various other facets.

To analyze its effects we first need to realize what is meant by mergers and understand the idea of acquisitions. A merger in the broader sense is used for expressing the amalgamation of two or more organizations. However, more specifically, only a corporate arrangement in which one of the merging companies continues to exist as a legally recognized entity is termed as a merger. These corporate mergers can be effected in three singular methods: by pooling of interests, by purchase acquisition, or by consolidation.

The pooling of interests is usually carried out by means of a common stock swap at a pre-defined ratio. This mechanism is also at times referred to as a tax-free merger. Nevertheless, this procedure of mergers is subject to a number of legal necessities. It has been observed that this approach is not very popular as compared to purchase acquisitions.

The concept of purchase acquisitions calls for a specific company buying out the common stock or assets of a different company. In this approach, the acquiring company decides to gain control over another and proffers to purchase the stocks of the target company at a certain value in cash, in terms of securities or both. This is known as a tender offer because the acquiring party offers a certain price for the stocks provided that the shareholders of the target party concede or tender their percentage of stock. Normally the quoted price of the stocks in the tender offer is considerably higher than the existing market value to persuade the shareholders to relinquish possession of their stocks. The difference in sum between the current market value and the price quoted in the tender offer is known as the acquisition premium. These premium amounts can occasionally swell up to reach a huge sum.

The third approach adopted in corporate mergers is consolidation. In this method, all the companies partaking in the merger cease to exist and a new organization is established. The assets of the merging companies are combined and are allocated to the new establishment and stocks of the consolidated company are distributed amongst the shareholders of all participating companies.

Based on the relationship shared amongst the merging companies, mergers can be classified into three categories: horizontal, vertical and conglomerate mergers.

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  • Horizontal mergers take place when all partaking companies are direct market competitors along equivalent product lines.
  • Vertical mergers take place when a corporation combines with either a provider or a client.
  • Conglomerate mergers take place when the merging companies share no relationship amongst each other.

Reasons behind Mergers and Acquisitions

There can be a variety of reasons, objectives, economic issues and institutional aspects which taken collectively or in isolation, affect corporate ratiocinations to indulge in mergers or acquisitions. In recent times, the demands rooted in global competition, economic innovation, fiscal growth and development, increased political and economic amalgamation and technological advances have all played their roles in the heightened tempo of mergers and acquisitions.

If a firm decides to initiate the takeover of a market competitor it may benefit from this strategy as it strengthens its position in the industry. However, such an objective is deemed illegitimate by the antitrust acts as a raptorial pattern. Thus even if the background of a merger is competition purging, companies are forced to present a strong case in favour of the merger not being anti-competitive and proving that it is only intended towards providing a better market framework. A lot of corporations advocate that taking over a company is the preeminent investment for the excess cash flow it encounters. Thus on grounds of excess liquidity, various conglomerate mergers are explained. Although deemed as an economically inept approach to negate instability, mergers between companies having similar sales volumes and comparable size, occur on a regular basis with the motive of reducing seasonal instability. Another very common purpose for mergers is a firm’s intention to venture into a completely new market. Acquiring a firm already present in that market opens up a lot of opportunities for the procuring firm as the target’s resources in the form of employee skills, commercial relationships, etc. and awareness about the market becomes available to it post-procurement. Some lesser impacting factors on mergers may be acquiring synergy and achieving corporate tax cutbacks. Synergies are at times quoted to be reasons for conglomerate mergers even though it is difficult to file cost efficiencies related to it. Although secondary, tax reductions are also encouraging for major firms to jump into merger deals.

In recent times, the noted company J P Morgan is facing huge concern over the issue of human resources. The issue took shape when J P Morgan, operating on a global basis, integrated and moved into a merger with WAMU. Once this was formulated and executed, the entire workforce of the WAMU became the responsibility of J P Morgan. Under such circumstances, it became necessary for J P Morgan to relocate and reinstall the employees previously working with WAMU. As WAMU worked on a different parameter than J P Morgan it was difficult for the company to execute this relocation and reinstallation process in terms of services and electronic systems. It was necessary to evaluate and analyze the most effective utilitarian moves and implement them.

However, there are methods to solve this issue of human resource utility maximization. It is obvious the process undertaken would be time-consuming and tedious as it would involve hard workforce implementation. The fundamental and basic measure would be to understand and evaluate the working procedure of WAMU and analyze the methods that would be instrumental in the process of integration of the WAMU process into the overall J P Morgan working conditions. It would need multiple working teams who would be responsible for carrying out the plans and once the plans are formulated, each of the processes should be processed and the best measures should be sorted out after vivid analytical evaluations. As this would take a good amount of time, it is logical the WAMU would not change the brand name and assimilate with JP Morgan before the issues are resolved.

However, once this stage has been completed it is obvious that J P Morgan would implement some new ideas into the parameters of the human resource department. It is true that JP Morgan is a huge organization and the methods followed at the concern are near perfect but there are always chances of betterment and there are always scopes of change. J P Morgan has a good amount of teams who are instrumental in reviewing and reorganizing the process implemented within the company. However, they should allow the usage of more electronic systems to enhance the capacity of the business by the means of the system up-gradation within the parameters of the human resource departmental systems. Sure, it is not mandatory to change everything but is needed to change aspects that can be made better and more profitable. (Lamb, 2004)

The Economic Impact of Mergers and Acquisitions

To analyze the impacts of a merger, a unilateral approach cannot be adopted. It has a manifold effect on a variety of issues. This paper throws light on those diverse issues and aims at understanding the assorted facets of its impact economically.

On Employees

Each merger is bound to affect the human resources of all participating companies. Mergers can be a real taxing issue for the employees. Post-merger, layoffs have become a normal trend. This has been observed and comprehended in numerous relevant studies. After the merger, if the objective of being more efficient, at least in a business-oriented view if not on the financial front, is achieved, then the merged firm would not require the services of the combined workforce to operate at existing business volumes. However, at times, these layoffs are not dreadfully rigorous. These layoffs may be achieved by attrition. On the contrary, under a growing economy and subject to possession of a valued skillset, the laid-off workers can gain from switching jobs in actuality. However, in reality, the employees being given the pink slips lie in the bottom part of the performance charts and are of the least worth to the merged firm. This implies that they might not be significantly appreciated by possible employers. Locally, workers affected by layoffs fail to get openings that are as financially lucrative as their previous job profiles. This produces a damaging impact on the local financial system. Despite the fact that this might not lead to a serious unemployment issue owing to easy jobs availability, the new employee might not compensate with good amounts as compared to the previous job to the lesser-skilled recruits. This causes a ripple effect across the economy owing to the decline of wages for the laid-off employees.

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Even for those employees who survive the layoff, conditions might not be greatly comforting. Only in a few cases does the merged corporation retain a similar work culture. In most cases, the corporate working environment changes drastically in culture. Reorganization of business procedures and adapting to a new operating environment can lead to severe anxieties and in intense cases, may also cause the employees to suffer both psychologically and physically.

On Management

The employees in managerial ranks might be subjected to job losses, based on a proportion as compared to normal employees. To some extent, this is ascribable to the collision of corporate cultures. Managers might also be given the responsibility of implementing certain corporate strategies with which they might disagree on behalf of disliked superiors on employees who refuse to go along with the change. This causes high levels of pressure. Further, after being merged, the firm doesn’t require redundant managers. This implies that an employee presently working on a managerial profile has to be either laid off or reduced in rank. It is often observed that it is difficult for managers who are accustomed to holding authority to report to someone else, prompting them to leave by themselves. Subject to their skills being coherent with the latest trends, leaving might prove to be beneficial for a manager’s career. Lower tier managers do not enjoy the advantages of golden parachutes. Mostly it is the affiliates of the top management who have such settlements printed into their bonds. Regrettably, these approaches further worsen financial ineptness.

On Shareholders

In the case of the purchase acquisition approach being adopted for the merger procedure, the stakeholders of the company being acquired gain a huge advantage from the combination. The rationale behind this fact is that researches indicate that the acquisition premiums paid by the acquiring company are a huge sum that exceeds the valuation of the acquired firm in the majority of the merger cases. It has also been noticed that a resulting merged company is valued at a lower rate than the summed up individual values of the companies. This overpayment can be accounted to asymmetric information. Even after utmost careful investigation, analysis and reviews it is almost impossible for the procuring company to completely understand all aspects of the target company until it actually mergers and starts operating together. The methodology of purchase acquisition is an additional reason to which the high acquisition premiums can be attributed. In order to persuade the present stockholders to surrender their shares of stocks, the purchasing firm is forced to pay more than the existing market value. However, as the procuring firm pays such a high dividend, the deal goes well with the local shareholders and promotes the local economy.

The economic impact on the stockholders of the acquiring company is noticeably downbeat. Numerous studies indicate that they lose by the comparable sums to the profits of the target firms stakeholders as a minimum. High acquisition premiums, escalated debt loads and other economic inefficiencies normally associated with a purchase acquisition are responsible for such a result. Although debatable, the justifications provided by the managers of the acquiring companies are identical to the reasons for mergers and acquisitions discussed in the previous section.

Several studies have endeavoured to demonstrate that the payback which makes up for the high acquisition premium. Unfortunately, all these endeavours ended up concluding that acquisition has a significantly negative impact on the acquiring firm. A few studies have brought forth some data substantiating the positive benefits of the acquisition. However, unequivocally describing such benefits has proven to be difficult to pinpoint. Undeniably, acquiring the shares of a potential takeover target can be seen as a good trading strategy.

In the event of the pooling of assets approach being adopted as a merger technique, the impingement of asymmetric information is considerably decreased as the assets of all participating firms coalesce and economic inefficiency is reduced. Plainly speaking, the asymmetric information on either side counterbalances each other to some extent. Even then any form of corporate combination is primarily economically inept due to the acquisition of redundant assets.

On Competition

Issues like competitive market environment are of much importance in relation to mergers. The future of small competitors is at stake and the market may move towards a situation where only giant companies would compete against each other and control the economy. The response to such a situation depends on technology and investment structure. Interesting statistics reveal that the relative numbers of competitors in the financial industry have remained almost unchanged. This implies that even after a reduction in the number of competitors due to mergers, new players have come into the arena. It is needless to say that these results are industry-specific. But it also proves that the market environment would remain competitive if entrepreneurs can introduce innovativeness in their businesses and can come up with alternative ideas which could get things done in a better way.

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On Debts

For large acquisitions companies often acquire a debt presuming that their future earnings would enable them to clear off the debt. The situation is analogous to an individual taking a loan for huge investments like a house or a car. However, in some cases, the companies misjudge their future accounts or are faced with some economic decline. In those cases, they are unable to clear off their debts and are forced to declare bankruptcy.

Conclusions & Recommendations

From the above, we can conclude that mergers and acquisitions take place due to some solid business movements. Even if the merger takes place for intelligent and profitable reasons, but the acquiring firm suffers a lot. Mergers also do not have a positive effect on the short-term profits of a firm. Generally, the profit-to-sales ratio and the profit-to-equity ratios of the firm fall immediately after mergers. The reason behind this can be that after mergers take place, the firms follow a long term perception by investing in technological and physical capital and are thus, prepared for fewer profits. However, all corporate mergers and acquisitions are basically economically inefficient. Each firm functions differently and combining them is not always economically efficient for the combined firm as compared to a single investor’s market share value. However, it is certain that every merger is complex and has its individual set of benefits and detriments.

In conclusion, it may be said that by looking at various merger results it is apparent that mergers and acquisitions do not optimistically impact short-term productivity. A major downturn is often noticed in the profit-to-sales ratio as well as the profit-to-equity ratio. It may also be noticed that immediately after the takeover process is completed, the investments are directed towards physical resources and research and developments. This may be viewed as efforts of the merged corporation to channelize the resources towards a long-term perspective. However, in order to do so, it has to engage in a tradeoff with short-term profitability.

Further, mergers and acquisitions have strong business motives behind them. Even though purchase acquisitions are carried out based on rational, logical and comprehensible reasons, the acquiring premiums are on average quoted at abnormally high prices. The reasons for such high rates are incomplete information and the methodologies of tender offer used in purchase acquisitions in mergers. The economic impacts of mergers and acquisitions on various groups such as the employees, management, stockholders, debts and the competitive economic environment are not encouraging either. However, the effects of mergers and acquisitions can be viewed as a mixed bag- it usually has a positive impact on the acquired firm’s stockholders, but on the other hand, generates an adverse effect on the procuring firm’s stockholders and also on the employees and management of the merged company. Finally, it should be well understood that each individual acquisition is a multifaceted procedure having its own exclusive set of pros and cons.

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