How Taiwan Rose from Obscurity to Global Prominence - Assignment Example

? Mergers and Acquisitions Table of Contents Table of Contents 2 Section A 3 Q1. 3 Introduction 3 Conclusion 12 Section B: Question 4 14 a) Using Porter’s model to discuss how Taiwan rose from obscurity to global prominence 14 b) Strategic importance of Taiwan in terms of global outsourcing 16 Conclusion 18 Reference List 20 Section A Q1. Introduction In the last 5 decades there are more stances of cross border mergers and acquisitions than the number of lockouts and cases of bankruptcy. Although the number of cross border merger and acquisitions has increased manifold but the instances the number of cross border mergers and acquisitions has increased substantially. Man has always tried to conquer the unconquerable and do the undo able this is the same factor that drives the companies into the abyss of the unknown (Allan and Michael, 2010). In a bid to outdo and outsmart the competitors and get the upper hand of strategic advantages, companies cannibalise other companies or in some cases form understanding relationship. It is done either through merger and acquisition where one company either devours another one or decides to merge together and form a new entity (Andrews and Smith, 2006). A significant number of these mergers and acquisitions either goes smoothly whether the companies emerge victorious and successful in the process, while in other case the deal fails to get through, and the companies suffer massive financial damages (Debbage, 2004). a) Increased globalisation across the world has increased the number of across borders mergers and acquisitions around the world. The authors of the article named 'Dubious Logic of Global Mega-Mergers’, argue that most of the time the megamergers that take place, does not substantiate into something extra ordinary, as was thought to be. The article represents how the mega companies are still living under the shadows of the age old theory of the capitalists (Benner and Sandstrom, 2012). Most of the mighty and strong companies in and around the world strongly believe that the prevalence of one can only be guaranteed, if the prevalence of the others can be weakened. For example most of the big companies resort to constant and innumerable number of mergers and acquisitions in order to stay big and strong. The mergers and acquisitions have increased transfer of knowledge, transfer of resources, transfer of economy and even transfer of culture (Caoello and Gillesaie, 2003). This have helped to bridge the gap between the nations, between the companies and the between the various industrial sectors as well. So it can be argued that globalisation has led to concentration of companies (Chiefele, 2012). As companies engage in innumerable cases of mergers and acquisitions the length and breadth of the industry begins to get shortened. Thus slowly the industry begins to shrink and thus there remains only limited number of players. These players happen to call the shots. This argument is favoured by various researchers. Although the authors Cravens (2010) state that in reality there is no cause and effect relationship between globalisation and mergers and acquisitions. In fact globalisations after the World War II has lead to decreased concentration in certain industrial sectors. Companies engage in engage in merger and acquisition to take advantage of the economy of scale. Apart from that the other advantages are transfer of technical know-how, sharing of intellectual resources and other strategic advantages (Xu, 2000). The authors are right in their view that the history of merger and acquisitions is strewn with numerous failures but close review of the failures will indicate that the failures were partly due to the management incompetency (David, James and Arthur, 2011). Due to incompetency, the management of the acquiring companies could not evaluate the exact economic value and the subsequent risks. Despite the fact that the history of mergers and acquisitions are riddled with innumerable failures but there are various successes stories also. The following table indicates the mergers and acquisitions in and round the world. It is indicated that the number of cross border as well within the border mergers and acquisitions increased by almost 100 times in the last period 1995 to 2000. If there were no successful cases of cross border mergers, then the number of cross border mergers and acquisitions would not have increased (David, 2010). Fig 1: Measure of announced transactions Source: (Gabriele and Peter, 2002) Mergers and acquisitions involve a situation where two cultures which are different from each other have to learn to co habit. In other instances two cultures which are alike in several aspects are able to coexist more easily. The companies try to eradicate the cultural indifferences through effective measures. In the last 10 years the adaptive and non adaptive strategies of cultural adaptation in various cases of mergers and acquisitions resulted in increase of revenue by 683% in comparison to the 166% increase in the previous decade (George, 2003). Due to successful mergers and acquisitions the companies have witnessed workforce expansion of 310% in the last one decade. The stock price of the companies engaged in mergers and acquisitions witnessed an increase of 902% in the stock price. Apart from that the net income of the companies also increased by 800%. The figures stated here can be regarded as one of the parameters of the success of the mergers and acquisitions in the last one decade. A study was conducted by Gebrekidan and Awuah (2003) that included the responses of the persons who have headed international mergers and acquisitions. The following table gives an indication of the response received from the study. Fig 2: Success rate of acquisition objective Source: (Hamel and Prahalad, 2005) The sample indicates that among the sample of 25 persons interviewed the average response rate indicates that the success rate of the mergers and acquisitions vary from 3 to 4 with the average being 3.56. This indicates that most of the respondents agreed that the objective of the merger and acquisition was served to a great extent. The table given below gives an indication of the number of the mergers and acquisitions starting from the year 1968 to the year 2000. The table also indicates the number of mergers and acquisitions, where the purchase price was disclosed (Hastings, 2005). It must be noted that the purchase price of the stocks are not usually disclosed during a merger and acquisition. It is decided by the book building method. The declaration of the price at which the stocks will be bought indicates the transparency of the process. Transparency can only be achieved in the process if the system believes in the inherent benefits of the practice (Young, 2006). Apart from that, transparency also comes from the norm generated through repetition of the process. This also indicates that the industry has a strong belief in mergers and acquisition system followed. Thus this is another example, that indicates that merger and acquisition has strong benefits only if the norms are rationalised and the industry accepts the norms. Fig 3: Divestitures and disclosed value Source: (Johnson, 2009) The cases of successful mergers and acquisitions are countless in number. Even if the latest and most successful cases of mergers and acquisition are classified on the basis of the regions only, then it will be necessary to divide the regions into 4 to 5 regions. Still then the list will be enormously large. Instead of classifying into regions a simple list is created that indicates the various successful mergers and acquisitions at the worldwide level (Rose, 2005). Fig 4: Successful mergers and acquisition in the last one decade Source: (Mascarenhas, Baveja and Jamil, 2013) The diagram given below indicates the rise in the number of cases of mergers and acquisition across the world. If the views suggested by the authors in the article 'Dubious Logic of Global Mega-Mergers” are true then there would not have been such a significantly high rise in the number of mergers and acquisitions. The general trend line indicates that there is almost a linear increase in the number of mergers and acquisitions. Fig 5: Announced mergers and acquisitions Source: (Mascarenhas, Baveja and Jamil, 2013) Studies indicate that although the authors are of the opinion that the megamergers around the world are a waste of time and resources but in reality studies does indicate that with the right blend of strategies a number of benefits can be gained in a sure short way. Studies conducted by by taking the help of a sample size of 546 companies from different parts of the world comprising small, medium and larger companies, indicate that success full mergers have helped to achieve, economy of scale and scope (in almost 45% of the cases, have helped to increase the revenue or market share (in almost 56% of the cases). Other than these the other benefits that are also achieved are increased cross selling, increased effect of synergy and concession in taxation. Although these benefits are dependent a lot upon whether it is a cross border merger and acquisition activity or if it is a case of in land merger and acquisition. The benefits discussed above are mainly the major reasons for conducting the mergers and acquisitions. If these motives or the objectives were not met successfully then the companies around the world would not have participated in merger and acquisition activity (Levitt, 2003). b) The cross border merger deals involve an added risk in comparison to the deals that take place within the border. Studies conducted by Mascarenhas, Baveja and Jamil (2013) indicated that the cultural integration is the single most important factor in the case of companies that engage in cross border merger deals. Hastings (2005) negated with the idea presented here. According to them there is in fact no one but more than one 4 important factors. The factors are diligence, synergy, management team and intellectual capacity. Most of the time there are vast differences in the laws pertaining to issues like transfer of funds, transfer of shares, other facts like ownership control and bringing transparency in the accounting policies. The legal cases in the court of law pertaining to disputes between two overseas companies in most of the cases are about ownership control. Apart from that the management sometimes fail to evaluate the exact value of the synergies. The problem arises when the management overestimates the value of the synergy. The overestimation of the synergy value leads to various problems which ultimately lead to decrease in the revenue. Sometimes due to incompetency of the management the merger deal cannot be completed successfully. The search of the most important factors for the creation of the successful merger deals kept eluding the manager and researchers for a long time. Mascarenhas, Baveja and Jamil (2013) made breakthrough when they clearly showed the existence of the factors that lead to the creation of the successful merger deals. The study was conducted comprising more than 1500 companies and recording the most successful factor among all such merger deals. It is found that if the international managers made sure that at least 50% of all the factors are met successfully then the chances that the merger deal will emerge successfully increases significantly. The factors are divided into 2 factors mainly, these are, hard factors and soft factors. The hard factors are acquisition search, due diligence, integration plan, synergies and financial resources. While the softy factors are management team, intellectual capital, organisational culture, learning environment and communication. The areas mentioned above comprise a broad over view of the major issues that the international managers fail to address properly. The risk of failure can be reduced if the management is able to strike the right balance between the hard factors and the soft factors. In hard factors the managers had to narrow down the priorities for the acquisition search. This helps to keep the management focused on the type of companies that should be targeted for mergers. If the due diligences are completed then the company can avoid costly mistakes of legal entanglements. Companies sometimes fail to integrate the process of merger, due to which the time taken to complete the whole process gets extended. Due to this reason the companies has to undergo opportunity cost. This can be avoided if the company maintains a schedule of activities and follows them strictly. The management team can use the following process for exact evaluation of the synergies. Fig 6: Exact process of synergy Source: (Hastings, 2005) Another important area where the companies make frequent mistake are evaluation of the financial resources. The financial resources can be evaluated optimally if the participating companies are able to evaluate the asset and liability base for the present as well as for the next 5 years. The intellectual capital or the intellectual resources are the technological know-how or the patents the companies have gathered through years of research and development. Most of the time the disputes occur while sharing the intellectual resources and properties. If the merging companies are able to decide beforehand about how and in what way the resources are going to be shared then the disputes regarding intellectual property does not arise. Perhaps the highest chances of arrival of dispute are in the clash of organisational culture. The organisational culture of the firms engaging in merger activities tends to be different from each other most of the time. Due to this there are clashes in the organisational culture between the participating forms. The organisational difference can be met if the participating companies can create a common platform where there will be integration of both the types of cultures. For example the merger between an Asian and Western firm creates enough ground for cultural clash. This kind of clash between the two different organisational cultures can be resolved if the two come to respect and recognize the importance of the other’s culture. Communications plays a vital role too. Due to ineffective communication between the management and stakeholders and the management with the employees serious issue can emanate (Cravens, 2010). Due to miss communication the employees can put up stiff resistance when mergers take place. Studies indicate that if the management is not able to communicate effectively the news and the benefits of mergers to the investor properly then the investors go on a selling spree. The loss of confidence of the investors and the employee resistance can be avoided if the management is able to communicate effectively the benefits that will accrue from the merger. Conclusion It can be concluded that despite the historically high failure of the megamergers all across the world, the companies continue to participate in increased activities of mergers and acquisitions. Globalisation has thus ushered in an era of mergers and acquisitions. If the number of failures are high in mergers and acquisitions, then so are the number of the success stories. The studies indicate that the megamergers help to achieve economy of scale and economy of scope as well as it helps to increase the market share and thus revenue. The other benefits are like increased cross selling, increased effects of synergy, increased concession of taxation. Mergers and acquisitions help to achieve geographical diversification, transfer of resources. Studies also indicate that the mergers have helped to achieve vertical integration ad well as horizontal integration. So it can be concluded that the authors Ghemawat and Ghadar are right to some extent, but mergers and acquisitions have in fact helped big companies achieve tremendous advantage. In addition to the above argument the research paper also points out the areas that are prone to risks and thus the international managers need to be careful. The areas that are identified to have high chance of risks are due diligence, integration plan, synergies and financial resources. The other risk factors are management team, intellectual capital, organisational culture, learning environment and communication. These factors include both the soft and the hard factors. The management needs to strike the right balance between the two types of factors. Among the total 5 factors the one which have high chance of failure or risk are diligence, synergy, organisational culture and communication. If the management is able to address the issue arising out of these factors affectively then the merger deal acquires high chance of success. Section B: Question 4 a) Using Porter’s model to discuss how Taiwan rose from obscurity to global prominence Threat of entrants Threat of new entrants is very high for the electronics market of Taiwan. The cost of infrastructure setup and cost of labour is substantially low in electronics sector. The considerably low cost of infrastructure development is a result of clustering. Due to clustering there is geographical concentration among the electronic companies (Achrol, 2011). The co-location of the companies in the electronics sector made sharing of resources and knowledge easier, thus bringing down the cost of initial setup significantly. The low barrier of entry and exit saw huge proliferation of domestic as well as international companies. Threat of substitutes The threat of substitute products is substantially high in the electronics sector. This is because of the reason that for every product, there is an alternate product. For example, the highest numbers of substitutes are in the hand held device category. The significantly high presence of the substitute products leads to occasional product cannibalism (Allan and Michael, 2010). The constant product cannibalism has forced the competitors to bring innovation in their products, which helps them to differentiate the products and at same time also make it harder for the competitors to imitate (Clark and Mathur, 2011). Threat of suppliers Threat of suppliers is significantly low. This is because of the reason that the numbers of suppliers are more number of manufacturers and assemblers of the final products by almost 3:1 ratio. The electronics industry in Taiwan has one of the highest concentrations of suppliers present in one single place (Andrews and Smith, 2006). The high concentration o the supplier helps the manufacturers to bring down the cost of raw materials and subsequently the cost of product. These automatically draw the attention of the rest of the world towards Taiwan as the epicentre of high quality manufacturing zone of electronics (Gebrekidan and Awuah, 2003). Threat of buyers The threat of buyers is significantly high in the electronics market of Taiwan. It comes from two factors, which are variety and innovation of the products and the other one is price difference among the same category products. There is significant price difference among products which belong to the same category (Bajaj, 2001). For example, there are more than 50 different manufacturers of chipsets for motherboards of desktops and laptops. In order to differentiate the products for better competition, the prices among the products vary within a wide range. This equips the buyers with better bargaining capacity. Apart from that, the wide varieties of products always give the buyers to choose from wide range of products (Benner and Sandstrom, 2012). Due to this reason the buyers of raw materials or semi finished electronics products always enjoy the power to haggle for further cost reduction (Cravens, 2010). Industry Rivalry There is immense industry rivalry in the electronics sector in Taiwan. The industry rivalry in the Taiwan electronics sector can be divided into two separate groups. One is the components, machinery and equipments sector and the other one is the finished product sector. In the former, the competition is intense among the parts of the components supplier (Bonaccorsi and Daraio, 2009). While in the finished product centre, the competition is intense in the peripheral production, input and output and storage sector. This is the same reason that some of the electronics parts and components fitted in the heavy duty and light duty vehicles or those which are fitted with high endurance vehicles are outsource from Taiwan (Chiefele, 2012). Apart from that, the companies which deal in the production of the input and output devices or the storage devices also outsource from Taiwan due to its relatively low cost of production coupled with high quality (George, 2003). b) Strategic importance of Taiwan in terms of global outsourcing The strategic importance of Taiwan in terms of global outsourcing is discussed by pointing out the benefits and risks associated with outsourcing to the rest of the world (Garrick, 2011). The electronics manufacturing centre of Taiwan is now responsible for the production and generation of almost 80% of the electronics products sold across the world. Some of the major brands like Hewlett-Packard and Palm One have collaborated with the suppliers from the Taiwan electronics market for the production and design of the hand held devices (Das, Quelch and Swartz, 2000). Gain in the buy or make decision process Companies like Hewlett-Packard and Sony gained strategic advantages in buy and make process as well as in formulating effective procurement strategies. Other than these the other strategic advantage the companies and the world have enjoyed are economies of scale, pooling of the risk, reduction in the capital investment (David, James and Arthur, 2011). Since there are more than 350 suppliers in Taiwan electronics market alone, so the aggregation of the multiple orders helped to reduce the cost, both in case of purchasing, as well as in manufacturing (Gabriele and Peter, 2002). Effective risk pooling In the case of risk pooling, the uncertainty of the demand is transferred to the suppliers. The suppliers in Taiwan reduce the risk through risk pooling effect. In case of strategic advantage gained though capital investment the capital investment was transferred to the suppliers so that they can decide the best way to invest the capital in the procurement of the raw materials (David, 2010). Apart from these Taiwan has other strategic advantages also. These are focus on core competency. Since most of the process like production and assembling are outsourced to Taiwan, this enabled the buyers to focus on the core strength. Focus on core activities The buyers were able to concentrate more on those activities that are central to the line of work. For example, with 90% of the job outsourced to Taiwan, the electronics giants can concentrate on core activities like innovation, research and development (Flint, Woodruff and Gardial, 2007). These kind of activities helps to bring innovation in the product development and service development for the outsourcing companies. The other kinds of strategic advantage gained through outsourcing to Taiwan are increased flexibility (Flint, Woodruf and Gardial, 2002). The outsourcing companies can react more effectively to the changes in the customer demand. Apart from that, the technical knowledge of the suppliers present in Taiwan can also be used to increase the product development cycle time. It also helps to gain access to new technologies and innovation. Conclusion The Porter’s 5 forces model analysis indicates that most of the factors starting from the threat of new entrants to the industry rivalry have helped the electronics sector of Taiwan to combine innovation and cost reduction in the most optimal way. It is important to note that innovation and cost reduction cannot go hand in hand and there has to be a trade off between the two. Strategic alliances between rival firms and competitors have helped the electronics sector to share knowledge, resources and technological knowhow. This helped in innovation without incurring huge cost and Taiwan grabbed the attention of the rest of the world as the innovation centre of the electronics industry. Innovation and cost reduction are inversely related. The low cost of labour and the low cost of infrastructure set-up help to keep the cost of production significantly low in Taiwan. For this reason most of the electronic giants have flocked to Taiwan. Manufacturers or the assemblers of the final product are always on the search for suppliers who can provide the raw materials at the lowest price possible, reached through competitive bidding. Taiwan provides the perfect mixture of easy supply of labour, high quality raw materials and amiable environment with political back up that supports foreign direct investment in electronic sector. The combination of these factors helped Taiwan transform the country as the global epicentre of electronics. Taiwan has the largest pool of suppliers of raw materials for the purpose of manufacturing and processing the electronics goods. There are very few places in the world that offer this kind of advantage in risk pooling and Taiwan is one of such places. The production of the electronic components, their subsequent distribution and marketing involves significant amount of cost. The cost of production is reduced significantly when the companies resort to increased production. The increased production leads to economies of scale. This in turn leads to the reduction of the fixed cost per product. The electronics industry of Taiwan is equipped with state of the art production centre that has the ability to increase the production capacity by 150% in just an overnight. 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