Merger and Acquisition by Modern Organisations - Essay Example

Merger, Acquisition, and International Strategies Introduction Merger and acquisition has long been considered as vital strategies to gain competitive advantages by modern organizations. While many industry giants have been involved and quite aggressive in implementing these strategies to merger with another more competitive company or acquire a smaller competitor, the bid has always been motivated by increased market share prospects and profitability concerns. Nevertheless, there have been exclusions to this practice in the global forefront, wherein companies have also remained reticent to merger and acquisition. Perhaps to keep distance from aggressive competition or to value their non-profit concerns greater than their profitability objectives, these reticent companies have mostly been operating nationally, with more than required stability and constancy. Such a notion gives rise to the question seeking relationship amid organizational structure, competitive presence of the brand, its sustainability and the organization’s decision to merger or acquire. To gain a comprehensive understanding to this question, the discussion henceforth elaborates on the advantages of merger and acquisition, comparing Shell Transport & Trading Co. with Chesapeake Energy Corporation. To be noted in this regards, while the former company has a long history of merger and acquisition, the later has been inactive in the same front, despite being in the same industry, i.e. oil and gas. Hence, comparing the two will help identifying the need and implications of merger or acquisition in the contemporary industry context. Discussion Evaluation of Strategies and Justification: A Study of Shell Transport & Trading Co. Shell Transport & Trading Co. merged with Royal Dutch and enlisted a new company called Royal Dutch Shell Group in 1907, which was its initial merger as per the company records. Commonly referred as Shell, the company owns its equity with 40% earnings from Shell Petroleum Co. and the rest 60% earnings from Royal Dutch plc. A close contour of this strategic move taken by Shell reflects its competitive intent to diminish the market power of Standard Oil, one of the topmost competitors of Shell Transport & Trading Co. and Royal Dutch. In addition, the merger helped enhancing innovation, profitability, market share and stock prices. Along with industrial competitive advantages and augmentation of its international strengths, the merger backed Shell to quickly expand to leadership in the global industry context. The merger also gives positive effect on economies of scale enjoyed by Shell, which implies that the Shell has to deliver low cost of production to retain a high value of investment. However, as a drawback of the considered strategy to merge, Shell had to undergo an extensive corporate reorganization, launched in 2009. Nevertheless, this reorganization helped simplifying the company structure, reducing costs, and creating a platform for better obtainment of the desired outcomes from the merger (Shell Transport and Trading Company, Plc, 1997). Cash flow from operations, exclusive of changes in working capital, was $43 billion in 2011, wherein Shell also aimed at rebalancing its excess cash flow. With a goal to capture an even larger share of the market, Shell started up 14 new projects in 2009-11 including the international debated Pearl Gas to Liquids project in Qatar. Between 2009 and 2011, Shell’s stream base of oil and gas possessions increased by 33%, from 3 billion BOE to 12 billion BOE, which can also be asserted as the boon of the merger (Royal Dutch Shell plc., 2013). Hence, from the above discussion it becomes clear that merger, in case of Shell, resulted in huge growth and development of the corporation and has been quite advantageous rather than negative. Profitability of Chesapeake Energy Corporation through Merger Unlike Shell, Chesapeake Energy Corporation has been resistant to get involved into any kind of merger, since it was incorporated. The differences between the implications of merger for Chesapeake can be better understood by analyzing as to whether Shell would be profitable for the growth and development if it gets merged with Chesapeake. Considering the financial stance of both the companies, it becomes apparent that Shell’s total revenues, purchases, productions and manufacturing expenses, selling and distribution expenses and overall income after taxation for the three successive years (i.e. 2011, 2012 and 2013) are much higher than Chesapeake (Cheasapeake Energy, 2013). Shell runs its business globally in 70 countries whereas Chesapeake Energy Corporation has its business within the United States and thus, operates only nationally (Royal Dutch Shell plc., 2013). In its strategic intent, Chesapeake focuses on processing shareholder worth through financial rules and generates profitable growth by procuring resources, which include equal balance with capital expenditure and cash flow from operations, deducing operational hazards and complexity and launching a cultural security and reliability to obtain better results. Correspondingly, merging Shell with Chesapeake may result in huge profitability and growth for Chesapeake and Shell as well, which is at the foremost to gain a larger market share in the American oil and gas industry. Following the merger, it is likely that there will be rise in value generation, cost efficiency and market share in concern to the business. As Chesapeake has been operating independently, it also had to face issues such as higher production costs, competitive pressure and fluctuating market value of shares. This has further led to diminished tax gains and decreased cost of capital. It is probable that shareholder value of company would be better than combined value of parent companies. Hence, from the above discussion regarding the merger or acquisition of Chelsea with Shell, it can be asserted that as Shell is a giant corporation dealing in energy and petrochemicals, the merger will be advantageous for Chelsea to enhance it performance and likewise, the merger may also earn benefits for Shell to capture a larger proportion of market share in America. Hence, the combined strategies of Shell and Chelsea may have a positive impact towards their combined profitability (Cheasapeake Energy, 2013). Shell’s International Business-Level Strategy and Corporate Level Strategy One of the key business-level strategies of Shell is to emphasize enhancing its financial income and cash flow by the end of the year 2014 and target towards distributing competitive returns with a raising dividend. In its business-level strategy, the company also aims to restructure its business model in North American Shale, increase the capital efficiency and maintaining a solid path record of launching new projects (Royal Dutch Shell plc, 2013). Notably, these objectives can be sufficed with the implementation of merger as proposed in the above section. The enhancement in technology and innovation is also important for the successful development of the company, which can be referred as it’s another key business-level strategy. In correspondence to this particular strategy, in 2014, expectation of capital investment reached to approximately $ 37 billion, which was, if compared to that of 2013, indicated a reduction of $9 billion. At the onset, the reason for such reduction can be justified with respect to its strategic intent to implement its expansion ambitions and liberate cash flow in subsequence (Royal Dutch Shell plc, 2013). In accordance to its business-level strategies, Shell’s foremost corporate-level strategy is to fulfill the worldwide energy demand with long term investment in latest supplies and depth focus on return of shareholders. Shell’s holding and treasury branches conduct vast range of dealings, which also includes raising debt instruments to deal with foreign exchange related issues. Notably, Shell’s Treasury offices in London, Singapore and Rio de Janeiro have been observed to maintain these functions. Additionally, Shell’s personal insurance subsidiaries afford insurance exposure to its subsidiary entities around the globe (Royal Dutch Shell plc, 2013). A critical understanding of the phenomenon herewith implies that better alignment is required between Shell’s business level and corporate level strategies to help it obtain long-term benefits. Chesapeake’s Business-Level Strategies and Corporate-Level Strategies Chesapeake’s business level strategies have been focused on delivering high value to the shareholders through profitable and consistent growth. Chesapeake has a portfolio of high-class alternative assets and has been taking necessary steps to run business that reflects assets excellence. In its business and corporate level strategies, the organization has taken various strategies regarding increase in capital, investment proceeds, and growth of cash flow. Correspondingly, the organization has performed extensive and rigorous evaluation of its portfolio of assets and liabilities to resolve the complexities in financial statements. This particular measure will undoubtedly help in boosting the control of its management to leverage its financial excellence. Again, when concerning its corporate level strategies, Chesapeake has been assisted by its shareholders, management team, board of directors and board committee members to follow a much simpler and controlled business model as compared to that of Shell’s (Cheasapeake Energy, 2013). However, it is recommendable in this regard that, to lead in the competitive market, Cheasapeake has to keep a consistent focus on the overall enhancement of technology innovation, market behavior and competitive pressure prevailing in the industry. In addition, it is also necessary for the company to expand internationally, wherein, its decision to merge with Shell may prove beneficial. Conclusion From the above research study it is apparent that merger and acquisition are interrelated with the international positioning as well as organizational progress of any company, especially when considering its competitive objectives. As the study reveals, Shell has been able to obtain considerable advantages through its merger, which are identifiable in terms of its increased market share, potentially larger competitive stance and long-term profitability. While on the other hand, Cheasapeake has been suffering certain drawbacks in terms of its competitive positioning, which are identifiable in terms of its shrinking competitive exposure and deteriorating financial positioning. Thus, it is suggestive that Cheasapeake also emphasizes the strategy to merge with a larger organization, such as Shell, to enhance its current strategic position. References Cheasapeake Energy. (2014). Chesapeake Energy Corporation. Retrieved from http://www.chk.com/Pages/default.aspx Cheasapeake Energy. (2013). 2013 Annual Report. Retrieved from http://www.chk.com/Media/Publications/AnnualReport/Documents/PDF/Annual-Report-2013.pdf Royal Dutch Shell plc. (2013). 2013 Annual Report. Retrieved from http://reports.shell.com/annual-report/2013/servicepages/downloads/files/entire_shell_ar13.pdf Shell Global. (n.d.). About Shell. Retrieved from http://www.shell.com/global/aboutshell/our-strategy.html Shell. (1997). Shell Transport and Trading Company, Plc. Retrieved from http://shellnews.net/PDFs/Shell11.pdf Read More