facebook
twitter
vk
instagram
linkedin
google+
tumblr
akademia
youtube
skype
mendeley
Wiki

CORPORATE MERGERS AND ACQUISITIONS: GENERALIZED EXPERIENCE

Автор Доклада: 
Stoyanovskaya K.S., Batchenko L.V.
Награда: 
CORPORATE MERGERS AND ACQUISITIONS: GENERALIZED EXPERIENCE

УДК 336.76

    CORPORATE MERGERS AND ACQUISITIONS: GENERALIZED EXPERIENCE

    Batchenko L.V., Doctor of Economics, professor
    Stoyanovskaya K.S., postqraduate
    Donetsk State University of Management, Donetsk (Ukraine)

     

    The article provides the analyze of an essence of mergers and acquisitions, their basic types, the main backgrounds for carrying out transactions on the basis of generalized world experience are considered.
    Key words: corporate finance, merger, acquisition, transnational corporations, integration, consolidation.

      The big part of the corporate finance world is taken by corporate restructuring and mergers and acquisitions (M&A). Not surprisingly, such actions often are highlighted not only in connection with the companies’ brands but also the value of such contracts itself. Furthermore, they can dictate the fortunes of the companies involved for years to come.

      Strengthening of the market positions, development of industrial specialization, reduction costs, increase of quality control procedures are the backgrounds for economic restructuring under market conditions. Transnational corporations, in turn, as the leading players of the world market, uses a wide range of tools for strategic development of which innovative and most widespread one is currently the merger. These facts demonstrate the relevance of defining a basis of operation and prospects for the world market of mergers and acquisitions.

      Therefore, the main aim of the article is to research theoretical principles and guidelines for implementation of mergers and acquisitions in the global practice.

      Growth in business as one of the main objectives of owners of most commercial enterprises can be achieved in two ways:

      1) due to the "internal" growth, the company adds capacity to produce a new product (service) or to increase the production of goods (services), which are already implemented;

      2) due to "external" growth, which is the main form of mergers and acquisitions (M&A). External growth is often typical for companies that in its internal growth achieved the maximum, therefore they start to look for external ways, named the company targets for mergers and acquisitions [1].

      One plus one makes three: this equation is the special alchemy of a merger and acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate ones – at least, that's the reasoning behind M&A.

      This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy others to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

      When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

      In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

      In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out a company often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable [2].

      In 1978 the consulting agency Arthur D. Little has researched this market world experience and allocated the main reasons for mergers and acquisitions [3]:

      • activities for synergies;

      • business diversification;

      • increase market share;

      • strategic restructuring under the influence of changes in technology and legislation;

      • purchasing of undervalued assets;

      • tax benefits;

      • CEO attempts of self-development and contract success;

      • increase the size of business;

      • exit strategies, etc.

      To global factors that have an influence on the dynamics of these procedures, provide several factors which are depicted on the picture 1.

      Global factors that affect the international M&A processes

      Picture 1 – Global factors that affect the international M&A processes

      As for the development of management thought it gave an opportunity to expand those optimal sizes companies outgrowing that were capable of causing management problems. The most significant step was the revolution that made computer technology in the methods of management organizations. Virtually every firm or large company today introducing an automated management system, which able to track all information about activities on the basis of processing and analysis of the data needed to make a decision as soon as possible, etc.

      The next point is that a constant tendency to integrate the economies of developed countries leads to increased competition on national markets, where national corporations have to actively compete with involved foreign players. In reality, it is removing barriers between national economies and their transformation into a single global market. The best example of this trend is the unification of Europe and creating a single European market.

      Government agencies that are designed to regulate M&A procedures to prevent excessive concentration and monopolization of certain markets gradually soften the criteria for determining monopoly position and remove the administrative ban, thus making market deregulation. This position is explained by the fact that simultaneously with transforming national economies into one global economy has changed and the appropriate regulation.

      The last proposed reason is connected with the "chain" nature of the merger that is not global, and probably acting within specific industry of the world economy. It appears in the event that the merger makes the imbalance of power between the main market participants and rivals companies merged, so it comes the necessity to consider options for possible consolidation [4].

      Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

      From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

      • Horizontal merger – two companies that are in direct competition and share the same product lines and markets.

      • Vertical merger – a customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

      • Market-extension merger two companies that sell the same products in different markets.

      • Product-extension merger two companies selling different but related products in the same market.

      • Conglomeration – Two companies that have no common business areas [5].

      There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors: purchase and consolidation mergers.

      In the first case the purchase is made with cash or through the issue of some kind of debt instrument. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial. As for the consolidation mergers, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

      Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another – there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal.

      Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved [6].

      It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, ″1+1 = 3″ sounds great, but in practice, things can go awry.

      Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.

      Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal.

      The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity [7].

      More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders [8].

      Nevertheless, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies.

      In conclusion it is necessary to underline that many modern companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. Besides, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power.

      Nevertheless, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can provide growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies. M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.

      At the same time, according to the mentioned above, we can sum up that the process of concentration of capital in the developing economies is at just starting-up development stages. However, integration processes related to almost all other countries will promote corporate mergers and acquisitions and investment.

       

      Literature:

        1. Timothy J. Galpin The Complete Guide to Mergers and Acquisitions : Process Tools to Support M&A Integration at Every Level // Timothy J. Galpin, Mark Herndon. – San Francisco : Jossey-Bass. – 2000.

        2. Електронний ресурс. - Режим доступу : http://www.investopedia.com/university
          /mergers/mergers6.asp.

        3. Michael A. Hitt Mergers and Acquisitions : A Guide to Creating Value for Stakeholders // Michael A. Hitt, Jeffrey S. Harrison, R. Duane Ireland. – New York : Oxford University Press. – 2001.

        4. Слияния и поглощения. Путеводитель по рынку профессиональных услуг. – М. : Альпина Бизнес Букс, The Platzdarm Group, 2004. – 192 c.

        5. Michael P. Gendron Integrating Newly Merged Organizations // Michael P. Gendron. - Westport, CT : Praeger. – 2004.

        6. Stephen J. Wall The Morning After : Making Corporate Mergers Work after the Deal Is Sealed // Stephen J. Wall, Shannon Rye Wall. - Cambridge, MA : Perseus Books (Current Publisher: Perseus Publishing). – 2000.

        7. Ginsburg Mergers, Acquisitions and Leveraged Buyouts // Ginsburg, Martin D., Jack S. Levin. – Chicago : Commerce Clearing House. – 1989.

        8. Marks Charging Back up the Hill: Workplace Recovery after Mergers, Acquisitions, and Down-sizings // Marks, Mitchell Lee. – San Francisco : Jossey-Bass. – 2003.

          0
          Your rating: None
          PARTNERS
           
           
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          image
          Would you like to know all the news about GISAP project and be up to date of all news from GISAP? Register for free news right now and you will be receiving them on your e-mail right away as soon as they are published on GISAP portal.