Global Versus Domestic only Mergers and Acquisitions - Essay Example

Global Versus Domestic only Mergers and Acquisitions A simple rule that exists in the business world s that, either the business grows or it will be wiped out. Businesses that follow a growth path usually snatch market share from their competitors, generate economic profits and reward shareholders accordingly while those businesses that do not grow tend to stagnate, lose clients and market share and obliterate shareholder value. In order to succeed, businesses must at one time or the other has to take risks, but these risks have to be smart ones that will drive the business to the next level (Thomson & Martin, 2005). The strategy of Mergers and Acquisitions (M&A) plays an important role to both sides of the growth path by enabling strong companies assume faster growth than their competition thereby rewarding entrepreneurs for their efforts and ensuring the weaker companies get swallowed faster and even made redundant through share erosion and exclusion. M&A therefore is a crucial fraction of any healthy economy by basically ensuring that shareholders are able to gain rewards from their businesses (Thomson & Martin, 2005). This fact, coalesced with the potential for large returns makes M&A a highly attractive method for entrepreneurs and business owners to capitalize on their company values. It is therefore no wonder that the unique business trend of M&A has, in the recent times, become a common occurrence in the business world between firms seeking to achieve strategic value for themselves. M&A deals always make media headlines probably due to the huge amounts of cash that some of them entail, sometimes involving billions of US dollars which may exceed the GDP of some small countries. The main reason for their occurrence is to boost the shareholder value of both firms and this is also used as a performance measure to gauge the success of M&A (Galpin & Herndon, 2007). M&A is used as a survival tactic during tough economic times and in most cases involves strong companies buying out smaller ones to create more cost-efficient, competitive companies. M&A can either take place between firms operating within a country’s borders (domestic M&A) or beyond a particular country’s boundaries (global M&A). This article will provide a general overview of merger and acquisitions and then compare and contrast the domestic and global M&A using a few case studies (Aoki, Jackson & Miyajima, 2007). Mergers and Acquisitions The level of success or failure of M&A deals affect not only the managers, leaders, employees and customers of the firms involved but also the immediate communities, the industry and the economy in which the firms operate (Sudarsanam, 2003). As such, M&A decisions by firms seeking to realize strategic and business goals are deemed as very important. The term M&A collectively relate to some four corporate transactions of mergers, acquisitions, buyouts and takeovers, each of which is distinct from the others even though they all are geared towards achieving the same strategic goals. Mergers involve sharing and integration of the involved firms’ resources with the understanding that the transaction is necessary for the achievement of common objectives (Sabherwal & Fernandez, 2009). Acquisitions involve one firm, usually the stronger one economically, purchasing a majority of the other firm’s assets or in some cases all the assets with the aim of acquiring ownership of the weaker firm (Lajoux, 2006). The main difference between the two, besides the resource ownership change being the possible emergence of a new business firm in mergers while in acquisitions, the emergence of a new firm is a definite. A buy out involves the purchasing of firm or of only sections of it by another firm. It resembles acquisition only that the buyout only involves part of the firm whose assets are being purchases and as such its existence is not affected (Galpin & Herndon, 2007). Takeovers also resemble takeovers with the difference being that the purchasing firm is usually the stronger one financially or in size albeit there are cases where smaller firm acquire bigger ones in cases known as reverse takeovers. This means that while mergers consist of a singe transaction, acquisitions involve multiple transactions namely buyouts, takeovers and acquisitions. Apart from telling the difference between M&A it is also vital to recognize the several types of mergers and acquisitions namely horizontal, vertical, market-extension and conglomeration M&A, mentioning a few (Thomson & Martin, 2005). The different types of M&A all involve differing processes as well as legal and financial issues that the involved firms are prepared to go through with. Importance of Mergers and Acquisitions M&A entail a resource combination of for instance financial resources, human resource competencies, logistic systems, technological resources and production chain processes. In general, businesses get into M&A with the hope that, the value generated from their coming together would be boosted. This may be taken to mean that this expectation entails value multiplication to establish a synergistic result (Lajoux, 2006). Realistically though, the merging firms do not always achieve their expected synergistic results with some of the transactions resulting in feelings of non-accomplishments and disappointments (Sudarsanam, 2003). There several explanations as to why some of the M&A are considered as failures. One explanation states that the success or failure of M&A highly depends on the type of takeover that is, whether it is friendly or hostile. This means that the degree of successes or failure depends on what combination the participating firms choose to adopt. Friendly mergers and takeovers have been deemed as having greater chances of turning out successful as compared to hostile takeovers. This is because the friendly takeovers are motivated by the objective of creating value (Sudarsanam, 2003). The combinations that make up hostile takeovers have higher chances of failing because they are led and motivated by the necessity to discipline the leadership of a firm seen as under-performers. M&A may offer the benefit of offering the benefit of generating synergistic value for the involved firms but experience shows that the realization of these benefits relies on the nature of M&A. The generation of synergistic value is best done under the environment created by friendly takeovers instead of the hostilities that may arise from the hostile takeovers (Aoki, Jackson & Miyajima, 2007). However, in order to ensure hostile takeovers do not lead to failures, the involved firms need to device strategies to deal with the hostilities that accompany such takeovers. Case Studies The Oracle acquisition of PeopleSoft Oracle Corporation’s 10.3 billion USD acquisition of PeopleSoft Incorporated in January, 2005 was unique in more ways than one (Sabherwal & Fernandez, 2009). The acquisition’s announcement came after all but three percent of shareholders of PeopleSoft tendered their stock. The acquisition however did not come easy and took almost two years before a deal could be reached. The acquisition was marred with controversies and debates with some opposition coming from PeopleSoft’s shareholders. The resultant Oracle emerged as the second biggest business application software manufacturer globally. Oracle corporation showed its interest in PeopleSoft around June 2006 when it made a hostile bid towards the acquisition of PeopleSoft. Meanwhile, around the same time, PeopleSoft was in the process of acquiring JD Edwards. Oracle’s hostile bid did not go down well with many people from PeopleSoft. There were also numerous litigations between Oracle’s and PeopleSoft at the time Larry Ellison and Craig Conway, were the companies’ CEOs respectively (Sabherwal & Fernandez, 2009). Moreover, apart from raising numerous corporate governance issues, this acquisition was one that attracted a lot of analysis given its hostile nature, numerous litigations, big scale and the high costs involved (Lombard, 2008). There was even some exchange of words when oracle stated that it would discontinue supporting some of PeopleSoft’s products. These problems were, however, solved and the acquisition seemed to have worked towards the purpose it was meant for. The HP-Compaq Merger The HP-Compaq merger agreement was endorsed by HP’s shareholders and board members in 2002 but most analysts and critics viewed the deal as big mistake. The critics argued and criticized the deal terming it a merger between two bad performing PC businesses which would result in another bigger bad business (McShane, McShane & Glimow, 2004). Most of those who analyzed the deal argued that synergies foreseen by HP would be easy to effect. They further argued that the company would need more than just the merger to succeed in business. Some of the suggestions given were investments in research and drastic cutting down of costs so as to effectively compete with the other major competitors like Dell, Sun Microsystems and IBM (McShane, McShane & Glimow, 2004). The performance of the merged company remained shaky with many people questioning whether the deal was worth getting into in the first place (McShane, McShane & Glimow, 2004). Not even the few of the HP divisions that were known for their huge revenue earnings could boost the company’s performance. The resignation of HP’s CEO in 2005 seemed to change the level of confidence in HP. This was shown by the 6.9 percent jump on the NYSE. Most people still view the merger as a big failure and a mistake that should have been avoided. Domestic Mergers and Acquisitions in Japan Compared to the US or the EU member states, the proportion of GDP in Japan that make up M&A is still much on the lower side but has been gradually and steadily increasing over the last decade. In 2006, the M&A figures were approximately 3,000 which was double the 2001 figure that was just slightly over 1500 and was more than a tenfold increase from 1996 (Cooper & Finklestein, 2008). A similar trend can be observed with the values involved in the transactions albeit with some fluctuations given the magnitude of some deals. With M&A becoming a more common occurrence in Japan, it would be easy to assume that foreign firms that are seen as being more experienced with M&A can easily be allowed to take part in Japanese corporate takeovers, either friendly or unfriendly takeovers. This statement has been proven wrong by the number of announced M&A remaining constant in the recent times and at the same time the transactions value for every deal declining. This means that in Japan, foreign entities constitute only about 5% of the total M&A activity with the rest being domestic (Galpin & Herndon, 2007). Several explanations have been given for the Japanese market being seen as showing preference for domestic M&A one being the entry barriers to potential foreign investors put by the Japanese government. These barriers may be less visible but are still seem quite high. Secondly, most of the Japanese organizational leaders are known to be actively against foreign acquisitions and would only turn to foreign takeovers in desperate cases where a local investor cannot be found (Cooper & Finklestein, 2008). Thirdly, the Japanese economy has over the last decade been in the doldrums and as such, potential investors would rather turn to other potential markets like the Chinese and Indian markets. The other convincing explanation may come from some of the foreign firms that have gotten involved in M&A within Japan. These firms have experienced the difficulty of executing M&A in Japan as the environment is seen as beyond the competence of foreign investors. In fact, the recent popular global firms have reported negligible returns for their shareholders from their Japanese investments (Sudarsanam, 2003). Some global firms like Daimler-Benz, Merrill Lynch and Vodafone withdrew from their Japanese investments mostly due to lack of knowledge on how to manage their newly acquired assets. These withdrawals of globally high ranked corporations discourage other potential investors from wanting to try M&A in Japan for fear of not getting any significant returns. The domestic Japanese M&A began to rapidly increase in the last few years of the 20th century. During the 1990s, the Japanese market registered approximately 500 transactions annually rising steadily to over 2,700 by 2005. The transactions that took place from1991-1997 were valued at 25.3 billion USD and the 138.1 billion from 1998-2005 (Aoki, Jackson & Miyajima, 2007). Before the 1990s, Japanese firms rarely turned to M&A for corporate restructuring purposes or a strategy for growth and when the M&A became popular, they did not affect all sectors evenly often being seen to concentre on oil refining, paper pulp industries, finance, distribution and telecommunication sectors of the economy (Galpin & Herndon, 2007). One of the most popular M&A in Japan was the year 2002 formation of Mizuho holdings by a merger of the Fuji bank, Dai-Ichi Kangyo and the Industrial Bank of Japan. This was a merger of equals between three commercial banks and not a corporate rearrangement of corporate to fit into a changing market. The resultant bank is estimated to have assets of more than 1.4 trillion USD making it such an important bank that the government cannot allow it to ever go bankrupt (Aoki, Jackson & Miyajima, 2007). Mizuho holdings’ monetary muscle has enable the bank be in position to offer a wide range of financial services that the three banks would not have managed to do individually. Global Mergers and Acquisitions Global M&A are now a life reality for all types of companies. A few of the big deals may have found themselves as media headlines but those only make up a fraction of the total number of global M&A deals. The increasing competitiveness, challenging and changing business world has led privately held businesses to recognize the importance of M&A as survival tools (Aoki, Jackson & Miyajima, 2007). Global M&A are also known as international or cross-border M&A and as mentioned above, involves M&A transactions happening across boundaries of countries. Worldwide financial reforms and globalization have played am important role in encouraging the development of global M&A (Cooper & Finklestein, 2008). These transactions are usually carried out with the aim of benefiting strategically from the markets in which the mergers occur. Multinationals can utilize global M&A as a means of attaining market dominance and economies of scale. Global M&A can boost the growth of a company by helping the company penetrate emerging markets and can in addition aid in stimulating foreign direct investments. The regulations and rules vis-à-vis global M&A are always changing constantly in different countries and as such, organizations seeking to get involved with these transactions have to also update themselves with the numerous amendments (Aoki, Jackson & Miyajima, 2007). Fortunately, there are numerous attorneys, consultants and the many professionals investment who can offer knowledgeable and expert advices and recommendations to those wanting to engage in M&A. Differentiating Domestic and Global M&A Potential M&A are categorized according to their geographic options. A good example of a domestic M&A is a local business purchasing other local businesses to give it more of a nationalistic outlook. The domestic M&A strategy mostly occurs in nations possessing highly fragmented markets (Cooper & Finklestein, 2008). The US, Spain and Italy are good examples of countries having fragmented domestic markets in which about a dozen banks control around half of the market, and this undoubtedly gives a lot of capacity for consolidation. Developing markets such as the French and German markets, only about seven banks control approximately three quarters of the market and the number of banks seems to be decreasing with the continuance consolidation of these markets. Within the heavily consolidated markets for instance the UK, Canada and Belgium markets, only about four major banks control more than three quarters of the market. Industry regulations in these heavily consolidated markets prohibit further consolidations and banks wishing to further engage in M&A may have too seek cross border opportunities (Sudarsanam, 2003). Realistically though, there is still a decline in the total number of banks as there still exist some domestic M&A activities. With the dynamic regulatory environment, one can not rule out the possibility of huge potential mergers occurring in countries like France, Italy and the UK. Considering the UK for example, the increasing number of bank assurance could be the main propeller for cross-border deals involving life insurance firms and banks which in an effort to diversify so as to sustain and expand their growth in revenues (Sudarsanam, 2003). Global M&A are in more instances more challenging to get involved in as compared to domestic M&A. Some countries, for instance China and Japan are known to be not so receptive to outsiders taking over their businesses (Aoki, Jackson & Miyajima, 2007). Even their legislation places more stringent regulations on foreign investors as compared to their domestic investors. Conclusion With the amounts of resources involved in M&A, it becomes very important to understand the nature of M&A so as to take the appropriate measures to ensure that they turnout successful. It can be said that the failure of a good number of M&A to achieve the expected results are due to involvement of soft factors that take place in the implementation stage of the mergers and acquisitions. The soft factors include the management team, learning environment, organizational culture, communication and intellectual capital. The extent and nature of these factors is what decides on whether these soft factors can be attributed with failure or success of the M&A. The learning environment relates to knowledge management as an important resource. Firms interested in getting involved in M&A must possess strong organizational cultures and structures directed towards learning so as to be able to support the choice of engaging in changes and integration that accompany the implantation of M&A. The presence of strong learning environments enables organizations ensure continuous organizational learning throughout the transition period of M&A which in turn will ensure that the organizations’ human capital acquire the knowledge to adjust with the changing business world. The management teams are related to the new management that are to head the joined firms. The formation of this team needs to have been thought of and selected at the planning stage so as to downsize the creation of new positions to lead the new firm. If this is not done at the planning stage, there is likely to be a problem in choosing a new management team as managers from both teams may show some resistance to a new team. This is especially true in cases of hostile takeover where the management of the absorbed firm may be regarded as lacking the competency to lead. Intellectual capital makes up the differentiating issues for contemporary businesses operating globally since specialists and experts operating in the newly formed firm determine the ability of the firm to take part in innovations essential to adjust to the emerging business issues. This also needs to have been handled during the planning stage so as to ensure a smoother transition stage especially of human capital. The intellectual capital can however be problematic during the transition stage should there be a shortage of talents and experts to assess the stage or in cases where the intellectual capital of the merging firms does not satisfy the objectives of the newly formed firm. Organizational culture is made up of the value systems and beliefs held by the merging firms with regards to human capital identification basis of the new firm (Teerikangas & Very 2006). Change is a necessity during M&A transition stages so as to integrate both firms’ organization cultures into a single culture that reflects the expectations of the emergent firm. The organization culture often causes problems in cases of merging of equals as both organizations try to enforce their organizational cultures and none is willing to be adaptive to changes or in cases of clashing cultures. In both hostile and friendly takeovers, there needs to be fusion of cultures to take care of the cultural adaptability issues. Communication makes up an important tool in both implementation and transition stages of M&A. Open and honest communication at all times during the M&A process will enable both firms control and manage the resource sharing process or even the integration process. The communication process during M&A is often lengthy due to the need for consultations and detailed discussions with numerous players (Bertoncelj & Kovac 2007). This therefore means that firms wishing to engage in M&A need to establish reliable and strong communication channels even before the commencement of the process. Furthermore, the two firms’ communication channels need to be connected to enable the building of collaborative communications between the personnel of the merging business firms. Without open and honest communication between the two players, the process is bound to be harder than it already seems. The domestic and global M&A do not differ much from each other apart from the domestic M&A taking place within a countries boundaries while the global M&A involving cross-border or cross continental transactions. The global M&A have also been associated with huge amounts of cash changing hands, attracting much attention. References Aoki, M., Jackson, G. and Miyajima, H. (2007), Corporate governance in Japan: institutional change and organizational diversity. Oxford University Press: Oxford. Bertoncelj, A. and Kovač,. “An Integrated Approach for a Higher Success Rate in Mergers and Acquisitions”. Journal of Economics and Business, 25,(1), 2007. 167-188. Cooper, C.L and Finklestein, S. (2008), Advances in Mergers and Acquisitions, Volume 7. Emerald Group Publishing: Bingley. Galpin, T.J and Hernon, M. (2007), The complete guide to mergers and acquisitions: process tools to support M&A integration at every level, John Wiley and Sons: Hoboken. Lajoux, A. R. (2006), The art of M&A integration: a guide to merging resources, processes, and responsibilities. McGraw-Hill Professional: New York. Lombard, D., The Second Life of Networks, Odile Jacob Publishing Corporation: New york. McShane, S.L., McShane, S. and Glinow, M.A. (2004), Organizational Behavior, McGraw Hill/ Irwin: New York. Sabherwal, R. and Fernandez, I.B., Business Intelligence, John Wiley and Sons: New Jersey. Sudarsanam, S., (2003), Creating Value from Mergers & Acquisitions: The Challenges: An Integrated and International Perspective. Prentice Hall: London. Teerikangas, S. & Very, P., 2006. “The Culture–Performance Relationship in M&A: From Yes/No to How”. British Journal of Management, 17, 2006. 31–48. Thompson, J.L and Martin, F. (2005), Strategic management: awareness and change. Cengage Learning EMEA: London. Read More