Advantages and Disadvantages of Acquisitions and Mergers - Essay Example

? International Business Merger and Acquisition Globalization and liberalization have brought huge changes in business world and the evolution of newbusiness strategies is one among them. Competition is intensifying in global market because of the increased readiness of the countries in attracting foreign direct investment as a mean to enhance economic growth. Political differences or cultural differences are not providing any obstacles in front of international companies in diversifying their business to overseas countries. It should be noted that plenty of American companies are currently operating in China. Same way plenty of Chinese companies are operating in America at present. In short, international business is facing fewer constraints at present even though it faced plenty of barriers in the past. The mode of entry into overseas market by international companies is often attracted huge debates. Some companies are looking for alliances with a company in the target country whereas other companies are looking for merger and acquisition as a mode of entry strategy to expand their business to overseas countries. Even the same company opts for different mode of entries in different countries. For example, Wal-Mart established a business alliance with Bharti group in India as a mode of entry in India market. At the same time, they used mergers and acquisition as the mode of entry in European and South African markets. “Cross border mergers and acquisitions (M&As) are a main vehicle for foreign direct Investment. Yet despite its quantitative importance, the determinants of cross-border M&As are still not well-understood” (Brakman et al, 2008, p.1). Gaughan (2007) explained M & A as a process in which two corporations combined together to form a single one. Moreover, only one corporation survives after the M & A while the merged corporation goes out of existence after the merger process (p.12). Merger and acquisition are one of the most popular business strategies in the modern business world. However, there are lots of concerns and debates about the success and failures of this business strategy. This is because of the fact that there are plenty of examples about the success and failure of the M & A deals in recent times. Some of the recent statistics show that the popularity of M&A as a mode of entry is decreasing in recent times. Some think the M&A cycle has already started to turn up. In the first three quarters of 2012, as the euro tottered and fear gripped the global economy, M&A activity worldwide was 17.4% lower than in the same period of 2011. Yet it surged in the fourth quarter, to the highest level of any quarter in the past four years. This is one reason to expect more mergers this year, says a report by Wachtell, Lipton, Rosen & Katz, a law firm that specializes in M&A. However, Mr Moritz suspects that some deals in late 2012 were rushed through by companies that were worried about possible changes to the tax code. Most deals in 2013 will probably be fairly small, designed to strengthen or fill a gap in the buyer’s existing operations. These are known as “plug and play”. Transformational megamergers grew rarer in 2012, with only four deals topping $20 billion. That was the same as in 2011, and fewer than in each of the three previous years (Mergers Shall we?, 2013). From the above statistics, it is evident that business pundits are not sure about the success and failures of M & As. To merge or not to merge, that is the question. Whether it is nobler in the mind to suffer the pains of negotiation & integration or to defy global trends and find alternatives. This paper critically evaluates the arguments of the pro-merger and anti-merger schools and takes a conclusive position that global mega-mergers are a good policy to undertake in international business practice. Arguments in favor of M & A Miller (2008) pointed out that Edwin L. Miller (Author) › Visit Amazon's Edwin L. Miller Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central Mergers and Acquisition (M&A) will help organizations to diversify into other areas (p.12). Diversification of business is unavoidable for organizations at present because of the huge competition in the market. The ability to diversify business determines the success and failures of an organization. For example, Apple Inc. struggled a lot in 80s and 90s. Many people though that the company is one the verge of destruction. However, Steve Jobs diversified its business during the latter periods of 90s and the initial periods of 2000. The company has diversified into consumer electronics market at the beginning of 2000 with a series of “I” series products such as iPhone, iPad, iPod etc. The rest is history. Apple Inc is the most valuable company in the world at present and they are the second largest in terms of market capitalization. On the other hand, Microsoft failed to diversify its business and they stuck with the OS business. They are far behind Apple Inc.at present in terms of market share and market capitalization. In short, diversification is unavoidable for companies and M & A helps companies in the diversification process. For example, the acquisition of Motorola by Google is helping Google to diversify its business portfolios to the mobile phone manufacturing business. It should be noted that Motorola has more than 1500 patents and Google can use all those patents to increase its market share. Google and Motorola Mobility together will accelerate innovation and choice in mobile computing. Consumers will get better phones at lower prices. Motorola Mobility’s patent portfolio will help protect the Android ecosystem. Android, which is open-source software, is vital to competition in the mobile device space, ensuring hardware manufacturers, mobile phone carriers, applications developers and consumers all have choice (Facts about Google’s acquisition of Motorola, n.d.) Accelerate product development, Spread risk/share resources, Access to new markets, Expand customer base, Increased market presence, Provide added value to customers, Access knowledge and expertise outside of your company, Strengthen reputation – credibility etc are some of the advantages of a cross border merger deal (Sharma, 2001, p.17). In mathematics, 1+1 =2. However, in business 1+1 > 2. Gaughan, (2001) mentioned that the combination of two firms will yield a more valuable entity than the value of the sum totals of the individual entities. Value (A + B) > Value (A) + Value (B)” ( p.5). In other words, the combined strength and capabilities of two companies are more than the sum of their individual strengths. Imagine a situation in which Microsoft and Apple Inc. merged to form a single company. It is quite possible that the company evolved out from the merger of these two companies may rule or dictate the computer and consumer electronics industry for a longer period. In short, the collective financial capabilities, technical abilities and resources of a firm after the merging process would be immense compared to the resources and capabilities of the independent firms before the merger process. Both the offeror and the offeree can increase their market share and customer base, after the M& A deal. South Africa’s MTN and India’s Bharti Airtel have engaged in a mega deal of M & A recently. “According to this cross border merger deal, MTN and its shareholders would acquire around 36 per cent economic interest in Bharti Airtel, while Bharti Airtel would acquire a 49 per cent stake in South African telecom giant MTN” (India's 11 largest M&A deals, 2009). From the above statistics, it is evident that this deal helped both the companies in expanding to different territories. In other words, MTN got access to India’s telecommunication industry whereas Airtel got the opportunity to enter into South African market. It should be noted that Airtel is familiar with Indian market whereas MTN is familiar with South African market. Merger helped them to share their knowledge each other and expand effectively in different markets. Increased market share, lower cost of production, higher competitiveness, acquired research and development, knowhow and patents, financial leverage, improved profitability etc are some of the other advantages M & A can bring to a company (Berry, 2009). Manpower cost is extremely high in American and European continents because of lack of skilled labour force. In fact these continents are experiencing severe manpower shortage in all critical segments. That is why people from Asia are getting plenty of opportunities in these regions. American and European companies are currently struggling to stay competitive in international market, not because of the lower quality of the products they produced, but because of the increased price of these products compared to the products manufactured in India or China. Therefore, these companies are currently trying to offshore or outsource their business to Asian countries to exploit the cheap labour. M& A helps those companies to enter Asian market without much troubles. It should be noted that India and China like Asian countries are looking for every opportunity to attract foreign direct investments. American and European companies can exploit such opportunities. In short, M & A helps companies to exploit cheap labour markets and increase their competitive power in global market. Arguments against M & A This paper so far discussed about the advantages of M &A; however, there are some disadvantages also. Berry (2009) pointed out that mergers can create complications ranging from employee bonuses and added debt. In his opinion, when M&A activity reduces industry competition and produces a powerful and influential corporate entity, offeree may suffer from non-competitive stimulus and lowered share prices (Berry, 2009). In most of the M& A cases, the offeree faces lot of disadvantages compared to the offeror. It should be noted that the brand value and the corporate image of the offeree will be decreased as a result of the deal. The customers of offeree may lose their faith in the company. Moreover, the shareholders of the offeree may withdraw their investments. All these factors cause problems to the offeree. Plenty of studies have proved that more than half of all mergers are essentially financial failures. The success and failures of the M & A deal depends on the type of M&A and the size of institutions involved. It is not necessary that the small firms or the offeree may get any role in the decision making process after the deal. In some M & A cases, the ownership of the combined organization may shift to distant locations and the offeree may face lot of problems. The corporate identity of the smaller firm or the offeree would be lost after the deal. For example, after the mega M& A deal with Vodafone, Mannesman lost its corporate image and identity. Moreover, some of the Mannesman workers forced to resign because of their differences with the Vodafone management. It is not necessary that the employees of the offeree may get same freedom in the offeror company before and after the deal. Impact of merger and acquisition on top level management may actually involve a clash of egos. There might be variations in culture of the two organziations. Under the new setup the manager may be asked to implement such policies or strategies, which many not be quite approved by him. When such situation arises, the main focus of the organization gets diverted and the executives busy either setting the matters among themselves or moving on (Conceptual framework of merger and acquisition, n.d., p.23) It is not necessary that the work culture will be the same in the offeror and offeree company. After the deal, the retained employees from the offeree company may face lot of cultural and work related problems. It is not necessary that the management styles in both the companies are the same. The offeree may have a participatory management style whereas the offeror might have an autocratic management style. It is difficult for the employees in the offeree to adopt with the new management style. Work culture and business philosophies of the offeror and the offeree could be entirely different. In short, employees may struggle a lot after the M & A deal. M & A would affect the consumers negatively. The merger will help the offeror to increase their monopoly in the market and the consumers would be forced to pay more for the products because of the less competition faced by the offeror because of merger. It should be noted that monopoly helps a firm to fix the prices of their product. For example, Microsoft is able to fix the prices of their Windows OS because of the absence of strong competition. Same way, M & A helps companies to increase their market share and market control. Increased market share and market control helps companies to reduce challenges from competitors and subsequently thy might fix higher prices for their products. In short, from a consumer point of view, M & A may not be a good idea to protect their interests. Conclusion Even though there are some disadvantages associated with merger and acquisition, in the final analysis, this strategy seems to be unavoidable in the heavily competitive business world at present. Even though there are plenty other mode of entry strategies available for international companies, none of them provides the same advantages given by the M & A strategy. M & A helps companies to increase their corporate image and brand value. The capabilities of the combined company would be larger than the sum total of the capabilities of the individual companies in the merger deal. M & A helps companies to identify the target market properly with the help of their local partner in the target country. Collaborations or alliances are suitable for small companies; however, for bigger companies, M & A seems to be the ideal option as the mode of entry to overseas market. M & A helps companies to explore the opportunities such as cheap labor available in overseas market. It helps companies to diversify business and to expand the market share. In short, M & A is ideal for big companies to establish monopoly in the market. References Berry A.W. 2009. Advantages and disadvantages of acquisitions and mergers, [Online] Available at: http://www.helium.com/items/1561489-mergers-and-acquisitions [Accessed 08 April 2013] Brakman S. Garretsen H. & van Marrewijk C. 2008. Cross-border Mergers and Acquisitions [Online] Available at: http://www.tinbergen.nl/discussionpapers/08013.pdf [Accessed 08 April 2013] Conceptual framework of merger and acquisition, N.d. [Online] Available at: http://shodhganga.inflibnet.ac.in/bitstream/10603/1949/5/05_chapter%202.pdf [Accessed 08 April 2013] Facts about Google’s acquisition of Motorola, N.d. [Online] Available at: http://www.google.com/press/motorola/ [Accessed 08 April 2013] Gaughan P. A. Ph.D., 2001. Mergers And Acquisitions: An Overview, [Online] Available at: http://media.wiley.com/product_data/excerpt/79/04714143/0471414379.pdf [Accessed 08 April 2013] India's 11 largest M&A deals. 2009. [Online] Available at:http://business.rediff.com/slide-show/2009/may/29/slide-show-1-indias-11-largest-m-and-a-deals.htm 10431128 [Accessed 08 April 2013] Mergers Shall we?, 2013. The Economist. 09 February 2013. Miller E. L. 2008. Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide Publisher: Wiley (January 9, 2008) . Sharma H. 2001. Corporate Relationships: Pros and Cons, [Online] Available at: http://www.cata.ca/files/PDF/Resource_Centres/hightech/reports/studies/Overview_09.pdf [Accessed 08 April 2013] Comparison of the concept of sustainable foreign direct investment (FDI) to Dunning’s definition of transactions cost FDI “Sustainable FDI” was defined in terms of four dimensions: economic development (linkages, technology transfer, training, etc.); environmental sustainability (minimizing the adverse environmental impacts of investments, mobilizing environmental technologies for conservation, etc.); social development (labor and employment standards, community health, education, training, etc.); and good governance (fair and efficient negotiations, contracts, etc) (Investment Promotion Agencies and Sustainable FDI, 2010, p.10). In other words, sustainable FDI refers to the foreign direct investment which helps the host country to develop properly without causing any harm to the environment or the people. John H Dunning developed or fine-tuned the eclectic theory of economics in 1980 with the help of his theory of internationalization of business. This theory says that if the transaction costs on the free market remains higher than the internal costs, transactions may happen within the frameworks of an institution. Duning has added three more dimensions to eclectic theory of economics; ownership advantages, location advantages and internationalization advantages. Ownership advantage refers to the advantages of the organization looking for internationalization of business whereas location advantage refers to the advantages with respect to the local resources such as raw materials, low wages, and tariffs. Internalization advantages on the other hand refer to the advantages related to own production. Companies invest in foreign countries only if they find something attractive in the host country. For example, international companies are currently competing each other, to increase their investments in China and India. This is because of the fact that India and China are not only the emerging economies but also the labor costs in these countries are extremely low. At the same time, no overseas manufacturing company would dare to establish a manufacturing unit in America at present because of the higher labor cost there. It should be noted that foreign companies have the habit of exploiting the natural resources in the host country in an uncontrolled manner. Such exploitations often bring protests from the public and the company may struggle to survive in the host country. Corporate social responsibility is often rests on papers, not in practice for such companies. For example, Coke forced to stop its operations in Kerala, India because of public protests against the uncontrolled exploitation of ground water at Plachimada, Kerala. In a number of districts of India, Coca Cola and its subsidiaries are accused of creating severe water shortages for the community by extracting large quantities of water for their factories, affecting both the quantity and quality of water. Coca Cola has the largest soft drink bottling facilities in India. Water is the primary component of the products manufactured by the company.The protests by villagers from Plachimada, in the southern state of Kerala have shown the strength of community-led activities, even against this global multi-national company (Case against Coca-Cola Kerala State: India, n.d.) It is necessary for the companies to take more care while operating in a foreign country. People all over the world are aware of the importance of Corporate Social Responsibility or CSR. Current consumers are dealing only with the companies which have good track records of CSR. The importance of real CSR to large multinationals operating FDI projects in developing host nations Kotler and Lee (2004) defined Corporate Social responsibility or CSR as the “commitment to improve community well-being through discretionary business practices and contributions of the corporate resources” (p.3). Corporate Social Responsibility (CSR) has become the buzzword of practitioners, academics, NGO’s and even the United Nations. “When business is booming and the bottom line comfortable, corporate responsibility seems an achievable goal.  But in difficult times, “responsibility” and “accountability” are – surprise, surprise – much trickier terms to define and employ” (Connor, 2009). In other words, companies do something to prove their credibility with respect to CSR only in good times. When they face problems, they do nothing to prove their commitments to the society and the environment. “CSR cannot serve as a tool for development, because it is a micro solution to a macro problem” (Amparo & Carmen, 2011, p.164). At the same time, a combination of micro solutions may solve a macro problem. In other words, small contributions from many companies may help the society and the environment in many ways. “MNC’s could radically improve the lives of millions of people and help bring into being a more stable and less dangerous world” (Prahlad & Porter, 2003, p.3). The distance between the rich and poor is increasing day by day even though governments all over the world are trying to reduce it. More than 90% of the global wealth is controlled by the corporate world. If corporate world shows some readiness to help the poor people, poverty in this world can be eradicated easily. Warren Buffet and Bill Gates recently announced their decision to contribute more than 90% of their earnings to charity. Such generous measures will increase the social image of the companies. It is difficult for companies with bad reputations of CSR to develop properly at present. It is ironic that international corporations such as Lehman Brothers and Enron received CSR awards in their time. Lehman Brothers and Enron were successful in putting dust in the eyes of the people for a prolonged period of time. However, the destruction of these companies clearly indicates that no company can survive long in the market, with the help of unethical business practices. “Lehman Brothers became entangled in the subprime mortgage lending crisis, which led to its demise in 2008. The company's assets were subsequently sold to several other firms, including Barclays Bank, PLC and Nomura Holdings, Inc” (History of Lehman Brothers, 2012). The 1984 Bhopal gas tragedy is still debating very much in India. The handling of 1984 Bhopal gas tragedy by Union Carbide generated many controversies. Even though this tragedy was accounted for the loss of thousands of innocent people, the American company tried to wash their hands from taking responsibilities of it. Victims of this tragedy got only small amounts as compensation. Moreover, Union Carbide CEO Warren Anderson escaped to America without facing trial in Indian courts. He argued that Indian courts have no authority to prosecute him since he is an American citizen. (Bhopal gas tragedy: Accused awarded only 2 yrs in jail, get bail, 2010). He is deliberately forgetting the fact that no American or any other foreigner has the authority to conduct business in India without obeying the rules and regulations in India. It is interesting to imagine how American government would respond to such a situation, if an Indian company CEO raises such claims. It should be noted that Anderson raised such a claim since he knows very well that India do not have the influence in international circuits to prosecute an American citizen. However, two Italian marines are currently facing prosecution in India for killing two Indian fishermen in a shooting in sea. In fact Italy forced to send these marines back to India for facing prosecution because of the huge diplomatic pressure exerted by India. The controversial case had seen India and Italy engage in a major diplomatic tussle last month after Rome refused to send back the marines. They had gone to cast their vote in the national elections after being granted permission by the apex court. The court allowed them to leave India after Italian Ambassador Daniele Mancini gave a written assurance that they would return to face trial in India. But when Italy backtracked on its commitment, the Supreme Court banned Mr. Mancini from leaving India. Finally, India prevailed as Italy was forced to send back the two murder accused but not before New Delhi assured Rome that the marines, if convicted, can serve their sentence in Italy (NIA asked to probe Italian marines case, 2013) The Anderson case and Italian marine case clearly reveal one thing. At the time of Bhopal gas tragedy, India had little influence in international politics. At present India is one of the rapidly emerging economies in the world. America and European countries are keen in establishing business relationships with India. President Obama has visited India recently and signed trade agreements worth billions of US dollars. Same way, Italy also has plenty of trade agreements with India. India is one of the major purchasers of Italian and American weapons for defense purpose. Under such circumstances, neither Italy nor America would dare to make a conflict with India. It should be noted that Italian marines forced to return to India because of the pressure exerted by European Union. European Union has plenty of trade dealings with India. Even though Italy is one of the prominent members of NATO, they forced to send the marines back because of the growing importance of India in global trade and politics. British Petroleum or BP is another company which showed good examples of social responsibility when the Gulf of Mexico oil spill occurred recently. Around 4.9 million barrels ^ of crude oil spilled over the water the Gulf of Mexico as a result of oil spill from a BP oil tanker. Unlike Union carbide, BP never tried to wash its hands from the incident. They accepted the moral and legal responsibility of this accident and did everything possible to help the victims. They agreed to pay $20 billion to compensate the victims of the Gulf of Mexico oil spill (Blum & Snyder, 2010). BP is currently facing bankruptcy because of the huge compensation the distributed to the victims of this disaster. Yet, they succeeded in demonstrating their commitments to CSR to the external world. Citibank, PepsiCo and Chiquita are some other companies which have good records of showing social responsibility. Citibank, along with other major financial institutions has developed criteria for assessing the environmental impacts of its lending decisions in developing countries. PepsiCo along with more than a dozen oil companies and consumer goods manufacturers has withdrawn its investments from Burma because of human right concerns. Chiquita has implemented stringent environmental practices for its suppliers of banana in Central America (Vogel, 2006, p.2). At the same time, Shell is another oil company which has poor track records of CSR. They tried to cheat the public and the shareholders with the help or fabricated financial data to increase its share value. However, huge public protests and the concerns about the bad image forced them to distribute compensation to the public. “Royal Dutch/Shell said that it would pay around $120m to the US Securities and Exchange Commission (SEC) for breaches of SEC rules, and 17m UK pounds to the Financial Services Authority to settle action over its misreporting of proven oil reserves” (Baker, 2004). Conclusion It is difficult for the corporate companies to survive long, if they undervalue the importance of corporate social responsibility. Ultimately, the society or the community provides the necessary resources for the successful operation of a company. Therefore, it is the duty of the companies to give something back to the communities in which they operate as a reward to the community resources they might exploit. Companies in the past, played gimmicks to put dust in the eyes of the people of CSR. Such companies put CSR on papers, not in practice. Current consumers are well aware of the importance of sustainable development and the protection of the environment. Plenty of companies have already started to take CSR as an important topic in their business strategies. All the people; irrespective of rich or poor, have equal claims on natural resources. It is unethical to allow only few people to exploit it. Delivering something to community should be visualized not as a liability but as a responsibility by the companies. Companies should realize that this world is not owned by the current generation alone. It is the duty of the companies to protect the environment and provide enough support to the future generation. References Amparo M & Carmen V 2011. The potential of Corporate Social Responsibility to eradicate poverty: an ongoing debate, Development in Practice, 21:2, 157-167 Bhopal gas tragedy: Accused awarded only 2 yrs in jail, get bail, 2010. [Online] Available at: http://news.rediff.com/slide-show/2010/jun/07/slide-show-1-bhopal-gas-tragedy-verdict.htm [Accessed 08 April 2013] Baker M. 2004. Shell fined over reserves scandal, [Online] Available at: http://www.mallenbaker.net/csr/page.php?Story_ID=1328[Accessed 08 April 2013] Blum, J & Snyder, J. 2010. BP, U.S. Agree on Establishment of $20 Billion Gulf of Mexico Spill Fund. [Online] Available at: http://www.bloomberg.com/news/2010-08-09/bp-20-billion-oil-spill-compensation-fund-agreement-completed-with-u-s-.html[Accessed 08 April 2013] Connor M. 2009, Trying Times for Corporate Responsibility, Business Ethics, The magazine of corporate responsibility Mon, 02/23/2009, Case against Coca-Cola Kerala State: India. N.d. [Online] Available at: http://www.righttowater.info/ways-to-influence/legal-approaches/case-against-coca-cola-kerala-state-india/ [Accessed 08 April 2013] History of Lehman Brothers. 2012. [Online] Available at: http://www.library.hbs.edu/hc/lehman/history.html [Accessed 08 April 2013] Investment Promotion Agencies and Sustainable FDI, 2010, [Online] Available at: http://www.vcc.columbia.edu/files/vale/content/IPASurvey.pdf [Accessed 08 April 2013] Kotler P Philip Kotler (Author) › Visit Amazon's Philip Kotler Page 4. Find all the books, read about the author, and more. 5. See search results for this author 6. Are you an author? Learn about Author Central 7. & Lee N. 2004, Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause, Publisher: Wiley; 1 edition (December 13, 2004) NIA asked to probe Italian marines case, 2013. The Hindu. April 1, 2013. Prahalad C. K.& Porter M. E. 2003. Harvard Business Review on Corporate Responsibility Publisher: Harvard Business Press; illustrated edition edition (July 10, 2003) Vogel D. 2006. The Market for Virtue: The Potential And Limits of Corporate Social Responsibility Publisher: Brookings Institution Press (August 1, 2006) Read More