Mergers and Acquisition Has a Means of Creating Shareholders Wealth - Essay Example

Research Proposal - Mergers and Acquisition has a means of creating shareholders wealth - the case of financial s Introduction 1a. Purpose of Research In modern market, mergers and acquisition (M&A) have become a common strategic tool for the development of business activities; through the M&A firms increase their investment capabilities but also their competitiveness towards their rivals; at least, these are the initial intentions of shareholders that agree to proceed to a relevant procedure. When the performance of a firm is improved - within the context explained above - it is expected that the shareholders are going to be benefited; in many case the increase of shareholders value has been found to be related with the development of a M&A process; however, the specific outcome is not guaranteed. Firms in different industrial sectors tend to respond differently when entering a M&A process. Current study focuses on the effects of M&A process on the increase of shareholders value and the creation of shareholders wealth. Reference is made on a specific industrial sector: the financial services industry. The case of a recent merger of two financial institutions - banks in Britain, Lloyds and HBOS, is used in order to show all the potential aspects of the issue under examination. Employees from both these institutions have accepted to participate in the study. The results - along with the material published in the literature - indicate that M&A can be a valuable strategic tool for the increase of a firm's profitability; however, its effects on the creation of shareholder wealth are not quite clear. 1b. Research Questions The study focuses on the examination of the following issues: a) how can mergers and acquisition benefit a firm's shareholders, b) which are the effects of mergers and acquisition on a firm's equity' c) are there specific measures taken for the increase of shareholders' wealth in the case of a merger or acquisition, d) which is the role of state in the development of the relevant procedure - control by antitrust authorities, e) does the leadership style affects the development of mergers and acquisition' And f) does the national culture or the organizational culture influence the effectiveness of mergers and acquisitions in modern firms' 2. Literature Review The development of M&A through the decades has been continuous; the specific strategic tool has been used by managers in order to support the improvement of their firms' performance - even if the results have been found to the different in each particular firm. M&A have been used since the 1940s but their use was then limited; through the years M&A have been significantly developed reaching in 1980s an important level. However, it was necessary that changes are made on the existing M&A practices in order to meet the demands of the market but also the firms' potential to respond to the requirements of the particular processes. Regarding this issue it is noted that 'the market for acquisitions changed dramatically in the 1980s as government policies facilitated 'mergers for efficiency' rather than 'merger for diversity'' (Lubatkin et al., 1997, 59). On the other hand, it is proved that the effects of M&A on a firm's performance can be differentiated - the financial strength of the acquirer may not directly supported or increased - long term benefits are rather to be expected in case of development of the relevant process. The above issue is highlighted in the study of Flanagan (1996) where it is noted that 'purely related acquirers benefit more than purely unrelated acquirers; acquiring firm stockholder returns were also higher if the acquisition was friendly or a tender offer' (Flanagan, 1996, 823). At a next level, it is noted that 'acting in a socially responsible and lawful manner is a necessary, though not sufficient, condition for increasing shareholder wealth' (Frooman, 1997, 221).Of course, it is possible that the effects of M&A do not appear within a short period after the completion of the process. The reasons for this delay can be many: the cost of the procedure has been proved to be higher than the benefit acquired, the competitors reacted immediately - developing their performance and limiting the benefits of the particular initiative and so on. In many cases, the failure of M&A process is related with the managers' inefficiency - in terms of the lack of capability to respond to the needs of the specific project or in terms of the efforts of managers to be benefited personally from the above project. Because of the above, the development of M&A is carefully monitored by the authorities. When referring to this issue, Clougherty (2003) notes that '(a) Antitrust institutional independence plays a fundamental role in determining the effectiveness of corporate political activity, and (b) domestic mergers with international competitive effects are more likely to receive positive antitrust reviews' (Clougherty, 2003, 115). The effectiveness of M&A is difficult to be identified and evaluated. The leaders of the firms involved need to be appropriately skilled making sure they can respond to the demands of the relevant project (Bligh, 2006, 395) by appropriately aligning the organizational culture with the needs of the market. The relationship between the shareholder value and the M&A process has been extensively examined in the literature. In the study of Berger et al. (2006) it is revealed that 'customer lifetime value (CLV) affects shareholder value (SHV); CLV serves as an intermediary in the relationship between firm actions and SHV' (Berger et al., 2006, 156). Within the above context, shareholder value is related with the customer value; in this way by increasing the number of a firm's customers - a target that can be achieved through M&A - the increase of shareholder value is expected to follow - either in the short or the long term. Again, there are specific requirements that need to be met: the firms involved in the process need to notify their customers on the specific change otherwise it is possible that customers will not positively respond to the specific initiative. Also the costs involved need to be carefully estimated in advance making sure that there is a balance between the cost and the benefits expected. Shareholder value is also related with the interests of a firm's managers. The specific issue is highlighted in the study of Sundaramurthy (2000). The above researcher supports that 'antitakeover provisions can enhance shareholder value' (Sundaramurthy, 2000, 1005). However, specific criteria are set for the above view: a firm's board of director needs to monitor closely all relevant initiatives making sure that the interests of the firms are promoted. At a next level, the decisions of managers should be not directly applied; they should be verified - especially if related with proposals with the participation in a M&A scheme - by the board of directors which should be the only body of the organization with a decisive vote on the specific issue. It should be noted that the effects of M&A on the shareholders value of firms in various industrial sectors may be differentiated under the influence of the pressure developed in a specific industry - position of competitors, substitute products, limited support by the state or radical changes in the customers' preferences. The specific issue is discussed in the study of Hsu et al. (2007) where it is made clear that 'the shareholders of acquiring hotel companies earned no abnormal equity returns over the short term, which indicates no significant relationship between merger announcement and the change in short-term equity value; merger has a negative effect on the acquiring firms' equity values over the long term' (Hsu et al., 2007, 471). The above study refers to a specific industry - the hotel industry. In this industry, M&A is proved to be inappropriate regarding the improvement of the performance of firms operating in the industry. In the case of the financial institutions, different assumptions could be made - especially if taking into consideration the performance of the two firms used for the development of this study's research - Lloyds and HBOS. In fact, in the financial services industry, M&A is considered to be a common strategic tool for the development of firms' performance. However, any time that a relevant project is undertaken it is necessary that all relevant requirements are met - appropriately customized strategic methods may be necessary in order to minimize the risks of a potential failure. Towards this direction, it is supported that 'the goal of shareholder wealth maximization ensures a closer interdependence between strategy formation and the setting of operational objectives for managerial decisions' (Sinha, 2006, 1). Again, the issue of close cooperation between managers and managing directors when a M&A process is in progress appears. The risks related with the specific project can explain the above suggestion. In fact, in the study of Daly et al. (2004) it is noted that 'most mergers and acquisitions (M&As) reduce rather than increase shareholder value for the acquiring firm; an inverse relationship exists between differences in espoused values and postmerger performance' (Daly et al., 2004, 323). In other words, M&A could be related with severe risks for the firms involved; the benefits expected can be significant but appropriate plans should exist regarding the case of unexpected turbulences or failures of various types. In practice, the specific strategic tool seems to be preferred by strategic managers that have to respond quickly to the turbulences of the market - that can cause severe delays in the organizational performance. It is for this reason that the number of financial institutions globally has been decreased the last decade - an indicative example is presented in the Appendix section - Figure 1; it is clear that the number of financial institutions in USA has been decreased reaching extremely low levels - the radical expansion of M&A is partially responsible for the specific phenomenon. On the other hand, the limitation of the number of banks in USA does not seem to be related with their performance. In fact bank rates for the period 1997 up to 2008 have been decreased - probably as a response to the turbulences in the global market - see Figure 2, Appendix. It has to be noted that the response of modern firms to the strategic tools used for their development can be different under the influence of local culture, ethics and commercial practices. An indicative example is the case of Japan - a highly industrialized country which is well known for its corporate culture - innovative managerial schemes have led the country's firms to a significant growth especially the last decade. The performance of Japanese firm under the influence of specific strategic methods cannot be precisely estimated; it has been proved that local firms are likely to be highly influenced by the local culture. The concept of the 'shareholder capitalism' which is limited in Japan could be possibly regarded as the main reason why the corporate performance in this country is not directly related with shareholder wealth - at least in the relevant context of firms operating in West countries (Morris et al., 2008, 687). In Japanese firms the interests of the organization - as reflected through the interests of stakeholders - are a priority - compared to the position of the shareholders' interests. The effectiveness of M&A on the increase of shareholders value is also depended on the behaviour of employees (DeVito, 1995, 46) - referring to the response of employees to the changes suggested because of the development of M&A. The above view is also supported by the findings released through the study of Giessner et al. (2006). In the above study it is made clear that 'employees of merging organizations often show resistance to the merger; the employees' support depends on the companies' premerger status and on the merger pattern' (Giessner et al., 2006, 339). Because employees are likely to suffer the limitation of their benefits when such a process is developed it is necessary that the details of M&A process are carefully explained - as possible - to the firms' employees trying to limit the chances for the appearance of severe conflicts. 3. Research Methodology Current study is based on two different research methods: qualitative and quantitative research. Qualitative research involves in the identification and the evaluation of studies that have been developed in the specific field. It also includes interviews with the employees in two major British financial institutions, Lloyds and HBOS. Employees in the firms' branches across Britain - about 12 branches have been chosen for the development of this study - are going to be asked to state their views - through interviews - on the potential effects of M&A on a firm's equity, on its employees but also on the shareholders' value. Within the context of the qualitative research, the studies published in the literature in relation with the issue under examination will be critically examined - as of their value for the development of current study. The simultaneous use of qualitative and quantitative study for the development of a study can have many challenges - however, it can also guarantee the credibility of results - views included are likely to reflect both the current market conditions as well as the scientific assumptions developed through a long term study on the specific subject. From another point of view, the requirements of qualitative and quantitative research seem to be different. Regarding the above, it is noted that 'the varied ways in which data are conceived, presented, synthesized, signified, and translated, and the complex repertoire of skills required to activate the knowledge transformation cycle in qualitative health research fully' (Sandelowski, 2004, 1366). Qualitative research is a valuable research method; however the researchers that are involved in such tasks can face many challenges. In this context, it is supported that 'there is a growing recognition that undertaking qualitative research can pose many difficulties for researchers' (Swift et al., 2007, 327). On the other hand, there is also the quantitative part of the research. This will be conducted using a questionnaire which is going to be distributed to the firms' employees through the e-mail. Overall, 74 employees - 38 in Abbey and 36 in HBOS - will be contacted for the survey. The time given to the employees for the return of the completed questionnaire will be 3 days. About 8 more days will be required for the gathering and analysis of the results. Quantitative research also has difficulties and challenges. The number of people that will accept to participate in the relevant survey cannot be estimated in advance. On the other hand, if the number of people taking part in a particular survey is extremely limited then the credibility of the data gathered could be doubted. 3.1 Questionnaire The questionnaire used in the research required for this study includes 14 questions. Each question has a series of answers - the participant has to choose the answer that best suits to his/ her views. There will be no reference to the employees' personal details; in fact, only the age of each participant and his/ her position in a particular firm would be stated. As noted above, the completed questionnaire will be returned through the e-mail. It is expected that all questions of the questionnaire will be answered - in order for all participants to be represented in the research under equal terms. No other issues should be addressed - referring to the specific questionnaire - by the participants apart from those clearly stated by the researcher. 3.2 Participants The research developed for this study is based on the following rule: employees from all organizational departments - if possible - will have the chance to state their view on the potential effects of M&A on their firm's performance; also, the issue under examination, i.e. the relationship between the shareholders' wealth and the M&A has also to be analyzed- through relevant questions - in the specific survey. As already noted above, the number of employees that will be contacted for the study has been estimated to 74 - 38 in Abbey and 36 in HBOS - 12 of the participants have also accepted to give an interview supporting the further analysis of the issue under examination. Equality has been a priority in the study. The number of male and female approached for the needs of current research has been equal; however the percentage of each gender on the research cannot be estimated - at least not before receiving the completed questionnaires. Another issue that is particularly important is the fact that employees at all levels of the hierarchy - managers, cashiers, secretarial department - have been asked to participate in current research. In this context, it can be expected that the findings of the research will reflect the views of the average percentage of employees in the specific industrial sector. 3.3. Analysis of results The findings of the empirical research will be critically analyzed using the views of the literature - as these views will be identified through the qualitative research. The findings will be categorized using specific criteria and appropriate graphs will be produced. Personal assumptions are also going to be included in the analysis - in the context that the relevant comments will be necessary in order to understand the various aspects of the study's main subject. 4. Timetable of Research The development of the study is expected to last for about 20 days. Within the first 10 days the research related with the study will be conducted - gathering and analysis of results. At the same time the material available in the literature will be gathered. The literature is expected to take 3-4 days - the research on the literature will be developed while waiting the completed questionnaires. At a next level, a week is required for the process of the material and the development of the study. It is necessary that 2-3 more days are available for the identification of the points that need to be changed meeting the requirements of the study. Bibliography A. Journals Baptiste, R. (2002) The Merger of ACE and CARE - Two Caribbean Banks. The Journal of Applied Behavioral Science, Vol. 38, No. 4, 466-480 Berger, P., Eechambadi, N. (2006) From Customer Lifetime Value to Shareholder Value - Theory, Empirical Evidence, and Issues for Future Research. Journal of Service Research, Vol. 9, No. 2, 156-167 Bligh, M. (2006) Surviving Post-merger 'Culture Clash': Can Cultural Leadership Lessen the Casualties' Leadership, Vol. 2, No. 4, 395-426 Clougherty, J. (2003) Nonmarket Strategy for Merger Reviews - The Roles of Institutional Independence and International Competitive Effects. Business & Society, Vol. 42, No. 1, 115-143 Daly, J., Pouder, R. (2004) The Effects of Initial Differences in Firms' Espoused Values on Their Postmerger Performance. The Journal of Applied Behavioral Science, Vol. 40, No. 3, 323-343 DeVito, M. (1995) Communication Processes and Merger Success - An Exploratory Study of Four Financial Institution Mergers. Management Communication Quarterly, Vol. 9, No. 1, 46-77 Flanagan, D. (1996) Announcements of Purely Related and Purely Unrelated Mergers and Shareholder Returns: Reconciling the Relatedness Paradox. Journal of Management, Vol. 22, No. 6, 823-835 Frooman, J. (1997) Socially Irresponsible and Illegal Behavior and Shareholder Wealth - A Meta-Analysis of Event Studies. Business & Society, Vol. 36, No. 3, 221-249 Giessner, S., Viki, T., Otten, S. (2006) The Challenge of Merging: Merger Patterns, Premerger Status, and Merger Support. Personality and Social Psychology Bulletin, Vol. 32, No. 3, 339-352 Hsu, L., Jang, S. (2007) The Postmerger Financial Performance of Hotel Companies. Journal of Hospitality & Tourism Research, Vol. 31, No. 4, 471-485 Lubatkin, M., Srinivasan, N., Merchant, H. (1997) Merger Strategies and Shareholder Value During Times of Relaxed Antitrust Enforcement: The Case of Large Mergers During the 1980s. Journal of Management, Vol. 23, No. 1, 59-81 Morris, J., Hassard, J. (2008) The resilience of 'institutionalized capitalism': Managing managers under 'shareholder capitalism' and 'managerial capitalism. Human Relations, Vol. 61, No. 5, 687-710 Sandelowski, M. (2004) Using Qualitative Research. Qualitative Health Research, Vol. 14, No. 10, 1366-1386 Sinha, R. (2006) Corporate Governance and Shareholder Value Analysis. Global Business Review, Vol. 7, No. 1, 1-16 Sundaramurthy, C. (2000) Antitakeover Provisions and Shareholder Value Implications: A Review and a Contingency Framework. Journal of Management, Vol. 26, No. 5, 1005-1030 Swift, V., James, E., Kippen, S. (2007) Doing sensitive research: what challenges do qualitative researchers face' Qualitative Research, Vol. 7, No. 3, 327-353 Vaara, E. (2002) On the Discursive Construction of Success/Failure in Narratives of Post-Merger Integration. Organization Studies, Vol. 23, No. 2, 211-248 Vaara, E., Tienari, J. (2003) The International Match: Metaphors as Vehicles of Social Identity-Building in Cross-Border Mergers. Human Relations, Vol. 56, No. 4, 419-451 Yang, M., Hyland, M. (2006) Who Do Firms Imitate' A Multilevel Approach to Examining Sources of Imitation in the Choice of Mergers and Acquisitions. Journal of Management, Vol. 32, No. 3, 381-399 B. Online Sources BBC News (2009) Lloyds HBOS merger gets go-ahead available from, http://news.bbc.co.uk/1/hi/business/7823521.stm Danny, J. (2008) Merger revamp claims ABN Amro Chief, available from http://business.smh.com.au/business/merger-revamp-claims-abn-amro-chief-20080904-49wr.html Duke, S. (2009) Banks: US is key to Britain's recovery. Daily Mail, available from http://www.thisismoney.co.uk/investing-and-markets/article.html'in_article_id=482971&in_page_id=3 Evening Standard (2008) RBS managers the winners in battle for jobs, available from http://www.thisismoney.co.uk/investing-and-markets/article.html'in_article_id=429992&in_page_id=3 Hosking, P., Hawkes, S. (2008) HBOS and Lloyds TSB merger would change the face of high streets, Times On Line, available from http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4776455.ece Appendix Figure 1- Saving Institutions and Commercial Banks in USA (source: http://www.mybudget360.com/10-fdic-charts-and-graphs-highlighting-bank-problems-fdic-analysis-examining-2009-future-of-over-8000-banks-insured-by-the-fdic/) Figure 2 - Bank Rates in USA (source: http://www.thisismoney.co.uk/news/article.html'in_article_id=453127&in_page_id=2) Read More