THE BEST AND WORST OF MERGERS AND ACQUISITIONS
M.RATCHANYA, B.Com.,LL.B.,(Hons.) V Year
SCHOOL OF LAW, SASTRA DEEMED UNIVERSITY
SUMMARY:
Every corporate, structure themselves to attain utmost profit. In order to ensure the same they will stay focused, consistent and professionalized. In addition to this the process of Mergers and Acquisition play a significant role in enhancement of profit margin. M&A is described as competitive advantage in the corporate world. Therefore corporate should engage to M&A thematically, need to manage their reputation during the process of acquisition, get confirmed to their strategic vision and to manage the synergy targets throughout the process of M&A life cycle. M&A which has best and worst faces need to be overviewed to get it managed.
Keywords: Acquisition, Consistent, Focused, Mergers, Professionalized, Strategic vision, Synergy targets
INTRODUCTION:
In general scenario, Mergers and Acquisitions refers to the process of consolidation or collaboration of companies or assets. This term is thereby extended to include the department of financial institution in practice which deals with the mergers and acquisition. Though the two terms sounds similar there is a thin line of demarcation between the two. On the one hand the term merger refers to the collaboration of two companies into a single new entity with new ownership and management on the other hand acquisition depicts the process when one company takes the operational management of the other institution.[i] The interpretative distinction rests on the common analysis to determine whether the transaction is friendly [Merger] or hostile [Acquisition]. In common and most effective parlance mergers and acquisitions refers to Contemporary corporate restructuring. Both the terms are objected towards a common goal of creating a synergy which makes the standards of the combined company greater than the synergy that formed by the process of enhancement of revenue and cost savings.
METHODOLOGY:
During the process of mergers and acquisition there are numerous issues need to be analyzed to determine whether the benefits of the process overweighs the risks involved thereby. There are always benefits as well as disadvantages in the process of M&A which determine the characteristics feature of M&A being best or worst. Every long term advantages will outweigh the short term difficulties involved in the process of M&A. When any deal is consummated in general it is thereby followed by a stumbling block which needs to be cleared and managed in order to have effective merging and acquisition process. The acquiring company executives will involve a method to avoid paying too much for the target companies. For instance investment bankers and internal deal champions who worked on contemplated transactions will push a deal just to have get things done.
A collaboration of joint corporate interest will render greater revenue with a lower cost of scale. The different management styles of the corporate establishments and incessant market changing conditions will negatively impact the projected profitability and the growth trends in the economy. In these situations attentions ought to be specifically rendered to motivating factors which drive the mergers and acquisitions right from the beginning of the century to the most recent corporate activities. In addition to this a perspective was sought from varying sources regarding the variant reasons for the transactions which are being generally subject towards the success or the failures arising in the process of M&A. The shareholders and company directors should drive the enactments of the business transactions in order to have successful M&A techniques. Research methodology should be involved for the analysis of the causation of success or failure in the business transactions.
MOTIVATING COMPONENTS TRAILING MERGERS AND ACQUISITIONS:
Generally motivating factors need to be analyzed and involved in order to have successful mergers and acquisitions process/ techniques. These factors will involve the question as to Why firms involve in the process of mergers and acquisition? And whether they are capable to overcome the difficulties involved thereby? During the process of acquisition the buyers will destroy their own share holder’s wealth in order to have profit and growth as their own primary considerations. In mergers and acquisition the corporate transaction can be expected to have more operational efficiency than operated independently due to the existence of synergies between them. The synergy can be materialized by removing the operational function duplication and thereby sharing the management expertise between the corporations involved in the process of M&A. The M&A will involve not only the different management system to integrate day by day, but also merging variant human resources who are invariably endowed with variant corporate cultures and practices. In addition to this a stronger and a larger financial base are necessitated in order to have more capital resources.[ii]
Another driving factors behind the process of M&A are “increased market share and penetration into new market”. The companies can effectively compete with each other with the aid of market power and revenue growth can be attained to the large extent by lowering the price of the commodities which are highly price sensitive. Creation of technology, new product lines, and additional market opening in the economy can be made effective by the collaboration of resources of different corporate in the market economy. Any two companies will exploit the opportunities in the market place when increased market share mixed with the creation of innovative product and services. Managers of the entities who consolidate their corporate need to communicate properly and thereby champion the post-integration milestones step by step. The consolidating entity need to be attuned to the new target companies branding and customer base. The new company will face the risks of losing its customers if the management is perceived as aloof and impervious to the customer wants which need to be handled with due care and caution.[iii]
DETERMINANTS TRAILING THE SUCCESS OF MERGERS AND ACQUISITION:
In order to have successful mergers and acquisition process there need to be an allocation of closed connection between the two enterprises which are integrating. Sound business strategies play a significant and eminent role in the success of M&A. It is a logic that Human factor is a driving force which enable the successful marriage betwixt dual companies. In order to have peaceful running of business concern aftermath of the integration process an establishment of post-integration team in all critical areas of the enterprise is deemed essential. It is the responsibility of every prudent enterprise to have pre- investigation, planning and a task force which dedicate to the consolidation of two enterprises to a success.[iv] Every organization should recognize the financial expertise and human factor in order to underpin success in the process of M&A which thereby render the following benefits:
- Enhancement of enterprise:
The organization will enhance in its size when there is mergers and acquisition between two enterprises. The motto behind every business enterprise is to become bigger in its size in order to seek more profit margins and to double its size which takes even a decade time but the same can be achieved within a stipulated period of time by the process of M&A. Efficiencies are sought by the removal of duplication which pave the way for overall enhancement in the revenue as there exists no costly redundancies’ in the product chain of the establishments.
- Elimination of Competition:
The M&A techniques will reduce the competition and rivalries betwixt two companies in the market. It thereby eliminates competition in the future by acquiring larger market share in the product market by the acquiring company. The rivalries are reduced to a very large extent as there exists a new market share instantly after the M&A process which not exists before and people are brand loyal within the industry which enable the industry to maintain the loyalty even while potentially transitioning to new goods and services.
- Synergies and economies of scale:
M&A is one of the motivating processes for the small companies who will often face the financial constraints during their process. These small companies integrate with some bigger companies having similar nature and type of business transaction in order to secure the bigger companies synergies and economies of scale. The enterprise can upgrade their internal processes and existing technologies which render cost effective method to expansion of the fuel in the long run. The M&A is depicted as an accretive one in this scenario as every saved money goes to the bottom line which upsurge and boost the earning per share.
- Tax purposes:
Companies will involve in M&A process in order to reduce their tax structure. For instance, U.S. Companies which has a huge tax structure will involve in corporate invasion with a smaller foreign competitor in order to have lower tax jurisdiction and finally to reduce its tax bill substantially. It thereby create more economic opportunities for the people as there exists no race to bottom between two companies which are integrated. Although the motive is implied rather than overt it renders eminent benefit to the economy at large.[v]
DETERMINANTS TRAILING THE FAILURE OF MERGERS AND ACQUISITION:
The causation for the failure in the process of mergers and acquisitions are multiple. It will range from one enterprise to another. The most common reason for failure is that the bidders paid too much. The financial enterprise in every organization should take appropriate measures to prevent the repetition of the failures. M&A process complex, unpredictable and replete with risks in day to day practices. In addition to this current global and political uncertainty add the risks of financial constraints in every organization. Generally there are three causes for mergers and take over failures in practice. They are:
- The executive in the enterprise are unable to recognize the significance of achieving the appropriate level of commonality in their process and systems;
- The top officials who are involved in the process of M&A are not aware of the procedure to attain the commonality;
- M&A are unable to achieve the expected performance level as the executives in the enterprise to follow up the difficult decisions involved after the post- merger and post- acquisition process.[vi]
In addition to these three causations the following are the backlogs of the Mergers and Acquisition process:
- Substantial upsurge in prices:
As M&A process reduce competition in the market the acquiring company will have the privilege of enjoying the status of monopoly in the market. Due to this it is capable enough to increase the price of the commodity to substantially high as there exist greater market share and lesser competition in the market. For instance when automobile industry in the market merger with another company and become monopoly company and impose higher price for the commodity the consumer left with no option rather to purchase the commodity fort their usage which stands a serious disadvantage for the consumers.
- Affects Employee base of each enterprise:
M&A process will generally involve Layoff due to which employees will lose their job for indefinite period of time which affect the employee by causing distress to them. And it will increase the balance sheet debt of the consolidated company if any due exists during the process of M&A. This will hinder the corporate ability to establish new credit line and also hamper the borrowing capacity of the company which act as fuel for their enhancement. Though it is not by itself catastrophic it will affect the corporate capacity in the long run.
- Diseconomies of scale:
The M&A process will increase the size of the company due to which the new company will face the diseconomies of scale. When the company is expanded in its size it is unable to exercise control over its function and the employees lack motivation to work more as they think they are part of big multinational companies after they get integrated. The corporate culture will be different from one company to another and it will take time for the employees to get regulated and adhere herby.
- Lack of productivity:
The time incurred for M&A process is extended for a considerable longer period of time. The employees of the smaller company when they merge will require re-skilling to get adapted to the integrated company. During this time the company will suffer from non-productivity of the employees. This will indirectly cast burden to the capital of the corporate. Better commitment and more access to the market and plug and play operation should be involved by the employees to avoid the loss of productivity during the M&A process.[vii]
CONCLUSION:
Thus Mergers and Acquisition process should be followed by an empowered resolution. Any business transaction should not be something which is rushed simply without any thought. Despite global trend of significant failure rate, the shareholders and the directors of the corporate encourage this M&A process in order to motivate the business transactions to mix the forces and resources available in order to ensure sustainability in the economy. Economic downturn potentially enables the higher growth level despite variant failures in order to high lighten the need to branch out the resources in to the foreign and emerging markets.[viii] The M&A is thus like a coin which has two faces, in the same way on the one side it enable the corporate to extend its area of business and thereby eliminate competition in the market on the other hand it create the situation of monopoly in the market which increases the price of the commodity and reduce the productivity of the company to a large extent. But without this M&A technique there may not be well known brands and companies exists today. Therefore possible steps and remedial measures should be undertaken to overcome the backlogs in the process of M&A in order to enjoy the fruitfulness of Mergers and Acquisition process.
[i] Mergers and Acquisitions – M&A Available at https://www.investopedia.com/terms/m/mergersandacquisitions.asp
[ii] Mergers Acquisitions M&A Process Available at https://corporatefinanceinstitute.com/resources/knowledge/deals/mergers-acquisitions-ma-process/
[iii] Ibid
[iv] 8 Pros and Cons of Mergers and Acquisitions Available at https://brandongaille.com/8-pros-and-cons-of-mergers-and-acquisitions/
[v] What Are The Pros And Cons Of Mergers And Acquisitions Available at https://blog.ipleaders.in/pros-cons-mergers-acquisitions/
[vi] Essay on “Mergers and Acquisitions: Factors Determining Success and Failure” Available at https://www.writemypapers.org/examples-and-samples/essay-on-mergers-and-acquitions-factors-determining-success-and-failure.html
[vii] What Are the Pros and Cons of M&A? Available at http://successfulacquisitions.net/what-are-the-pros-and-cons-of-ma/
[viii] M&A: Concepts and Theories Available at https://www.edx.org/course/ma-concepts-theories-new-york-institute-finance-ma1-1x
Author Bio
Good insight on M&A !