Do Mergers and Acquisitions Give the Expected Returns - Literature review Example

MERGERS AND ACQUISITION Name Institution Course Professor Date MERGERS AND ACQUISITION The global economic trends influence the much attention today about the increase in the frequency of mergers and acquisitions (M & A). According to Lebedev et al. (2015, p. 651), past researchers on the topic to a great extent considered M &A in developed economies, however, with the rapid changes in financial markets, there is available literature in emerging economies and their efforts in participating in M & A. Agreeing with the observed increase in M & A is the discussion by Cartwright and Cooper (2014, p. 1) highlighting the financial benefits of the move as one of the primary factors. In a contrasting view, Brouthers, Van Hastenburg and Van Den Ven (1998, p. 347) identify the business strategy as one prone to more failure than success which is a contribution of the change in the structure of the management and the pursuit of personal goals rather than those of the shareholders. Nevertheless, Rossi and Volpin (2014, p. 278) argues that more M & A activities occur in countries with enhanced systems of accounting and high standards of shareholder protection. Therefore, it is necessary to provide a comprehensive research on the topic through the analysis of both mergers and acquisition as independent entities and examine their advantages and disadvantages. Zahid and Shah (2014, p. 44) explain on the relevance of competitive advantage, profits, and scales of economies in today’s market. These factors alongside globalization revolutionize the business industry influencing the shift to M & A in the maximization of its benefits to the firm (Altunbas & Marques, 2008, p. 205). The imperative is the realization of the difference between mergers and acquisitions in the quest to understand their contributions as effective strategies towards the success of companies. Motis (2007, p. 3) affirms the difference in M & A through their definition regarding the processes through which the announcement to the target company occurs and the effects of the change in management. According to Motis (2007, p. 3), the manager representative of the enterprise receives the announcement on behalf of the company in the case of a merger. Comparatively, acquisitions involve the directly informing of the owners of the firm. Motis (2007, p. 3) presents the difference in shareholder participation in M & A. During acquisitions, the shareholders of the firm make an independent decision regarding the sale of their share in response to the proposed bid. Contrastingly, in mergers, the firm makes a collective decision. In this case, acquisition of firms may result in the sale of part of the company leaving two independent firms whereas mergers include the complete turnover of one business to another and the formation of a single unified identity. Similarly, Schuler and Jackson (2001, p. 240) agree that a merger involves the joining of two firms into one entity, whereas acquisitions provide the acquirers an opportunity to regulate the operations of the acquired company. Scholars have classified mergers according to types including the horizontal, vertical, and conglomerate (Motis, 2007, p. 3; Zahid & Shah, 2014, p. 44). Based on Motis (2007, p. 3), horizontal mergers involve competing companies both in terms of products and market. Comparatively, vertical classification occurs in the case that the two firms are interdependent with one being a customer to the other. Conglomerate mergers involve different enterprises that lack any commonality in their line of business (Motis, 2007, p. 4). Cartwright and Cooper (2014, p. 3) identify a fourth category namely the concentric merger involving unfamiliar yet related companies. The success of M & A requires the complete integration of its different types and classes. Moreover, there is the need to develop a strategic fitness between the mergers to generate more benefits and mitigate the failures (Altunbas & Marques, 2008, p. 207). Motives are yet other contributing factors fueling the decision to enter into either one of these types of business strategies. Concerning motives, Brouthers et al. (1998, p. 347) provide broad categories including the need to increase profits and enhance the position of the manager in the firm. Following a similar classification is the work by Motis (2007, p. 8) elaborating two classes of motives where one involves maximization of benefits to the company while the other focuses on managerial gains. Examples of motives under the classification of managerial benefits include an increase of market share, managing uncertainty, and enhance the managerial prestige (Cartwright & Cooper, 2014, p. 19). Comparatively, those relating to the shareholders include achieving the economies of scale, maximizing profits, spreading the risks, gaining a marketing bargain, cost reduction, and addressing failures (Brouthers et al. 1998, p. 347). As a strategy utilized in the business and finance industries, M & A attracts multiple advantages and disadvantages. According to Hennart and Reddy (1997, p. 2), the primary advantages revolves around four major issues including indivisibilities, government and international regulations, cost-management, and challenges in asserting the value of the company. M & A integrates the indivisible companies allowing an increase in output (Hennart & Reddy, 1997, p. 2). Concerning cost management, Carow, Heron and Saxton (2004, p. 563), identify both the M &A as being central to obtaining valuable resources which interpret to cost reduction in production. The resources may have the indivisibility characteristics providing the first-movers with a competitive advantage. Closely relating to cost management is the gaining of strategic agility. Brueller, Carmeli, and Drori (2014, p. 42) identify strategic agility as encompassing three stages of sense making, decision making, and resource use. In this case, the particular stages of M & A coincide with the stages allowing their smooth implementation. Moreover, the integration and efficient transition from one stage to another promotes the success of the firm. About the value of the firm, Hennart and Reddy (1997, p. 3) explain that M & A allows the partner companies to learn about each other’s business through the combination of assets. Similarly, De Man and Duysters (2005, p. 1380) identify M & A as a significant contributor to the acquisition of knowledge leading to effective innovation in the firm. Moreover, it manages to raise the Research and Development allocations interpreting to the ability of the entity to engage in advanced projects. Consequently, this results in gaining power and control of the market reaping the advantages of economies of scale. The imperative is the results of collaboration with M & A in bridging the differences among the participants (De Man & Duysters, 2005, p. 1383). The imperative is the input by Schmidt (2015, p. 26) supporting the need to have a friendly board in profiting the shareholders during the process of M & A. Echoing the central position of the board, is the work of Ishii and Xuan (2014, p. 344) recognizing their social ties as important forces that direct the success of the M & A. Despite the numerous representations of advantages, disadvantages occur as a result of many factors. To begin with is the difference in size of the firms. According to the argument by Brouthers et al. (1998, p. 350) small firms manage to easily engage in M & A compared to the large companies. The specific disadvantages of the large enterprise involve the complexity of their integration and the increased possibilities of disruptions. Secondly, M & A may result in a cultural difference between the merging companies especially during a cross-border type of M & A (Zahid and Shah, 2014, p. 45). The difference in the people may stall the process of acquisition and breed hostility in the internal operation of the company. Moreover, culture includes the working environment, practices, and system, which if not proper addressed through the M & A process contributes to internal feuds, problems in the implementation of ideas and poor output. The imperative in contributing to the chaos during M & A includes the type of merger as discussed by (Motis, 2007, p. 5). Both the horizontal and vertical mergers result in anti-trust issues within the firm especially since they are directly involved in meeting the welfare of the employees through the similarity in function and interdependencies. Motis (2007, p. 18) continues to develop the disadvantage by referring to the managerial motives which encourage conflict between the stakeholder. The pursuit of personal goals by the top leaders affects the overall satisfaction of other shareholders which develops into a conflict of interest within the firm. In a contrasting contribution regarding the disadvantages, Cartwright and Cooper (2014, p. 41) present the case personal losses in the form of lose in employment. The major contributing factor towards the loss of employment is the cultural difference in the business influencing the result to the replacement of persons to achieve an integrated work culture. Moreover, Cartwright and Cooper (2014, p. 41) provides that the process of M & A promotes the risks on redundancies, early retirement, and volunteers to early retirement and resignations. A majority of the employee turnover occur on the acquired company as a strategy by those in top position to avoid unemployment or poor treatment. However, the complete and accurate analysis of the M & A towards its meeting the expected result is a subject of the available data and the data considered in a particular study. According to Netter, Stegemoller and Wintoki (2011, p. 2316) some of the data formulating the conclusions on M & A is misleading, especially when small data sets become utilized. According to Stegemoller and Wintoki (2011, p. 2316), the use of large samples in quantitative analysis produces an in-depth discovery of facts on M & A that are otherwise left out in small data samples. The consideration of a large data also provides a better comparison of different kinds of mergers that contributes to a better understanding of its characteristics incomparable to the much generalization characteristic of the small data samples. Nevertheless, the inclusion of a large data set adds to the challenges of performing accurate computations following the bulkiness of the data and the variations of the statistics about the various paradigms. Moreover, the inclusion of bulk data may be difficult to interpret, confusing and misleading. Comparatively, Schuler and Jackson (2001, p. 239) follows a qualitative analysis involving the presentation of literature about the factors influencing the failure of M & A. In particular, the study focuses on human resource related issues that influence the unsuccessful outcome of M & A to the company and the personnel. The study narrows down to the three stages of M & A and how human resource management contributes to each stage. Much as the study provides significant literature, it fails to consider other relevant factors that are part of M & A characteristics in developing its outcome. An interesting research is one provided by Cartwright and Cooper (2014, p. 42) combining the qualitative and quantitative data in developing an understanding of the events covered through the M & A process and its impacts. The importance of such an approach in the research is the ability to combine data from various sources in formulating a comprehensive analysis. It is, therefore, a suitable approach in managing a complex subject such as that of M & A. However, its act of combining the two study methodologies may fail to adequately present quality data. In summary, the global economic positions of a majority of countries influence the rise M&A implementation as a business strategy. The definition of the terminologies provides a clear distinction of the two similar terminologies, especially about the position of the shareholders in deciding the shift. The imperative is the realization of the types of mergers and how each promotes the benefit of M & A. In particular, the types of conglomerate and concentric eliminate the disadvantages of M & A to the company and the staff. Moreover, the pursuit of managerial motive contributes to the observable failures of M & A compared to its successes. Nevertheless, the understanding of the position of M & A follows the availability of data and its analysis which includes both qualitative and quantitative techniques. Nevertheless, M & A continues to fail in meeting its expected results as an influence of the human factors in its implementation pertaining to the economic, financial, and social paradigms. References Altunbas, Y. and Marques, D., 2008. Mergers and acquisitions and bank performance in Europe: The role of strategic similarities. Journal of Economics and Business, vol. 60, no. 3, pp. 204- 222. Brouthers, K. D., Van Hastenburg, P. and Van Den Ven, J., 1998. If most mergers fail why are they so popular?. Long Range Planning, vol. 31, no. 3, pp. 347- 353. Brueller, N.N., Carmeli, A. and Drori, I., 2014. How do different types of mergers and acquisitions facilitate strategic agility?. California Management Review, vol. 56, no. 3, pp. 39- 57. Carow, K., Heron, R. and Saxton, T., 2004. Do early birds get the returns? An empirical investigation of early-mover advantages in acquisitions. Strategic management journal, vol. 25, no. 6, pp. 563- 585. Cartwright, S. and Cooper, C.L., 2014. Mergers and acquisitions: The human factor. Butterworth-Heinemann. De Man, A. P. and Duysters, G., 2005. Collaboration and innovation: a review of the effects of mergers, acquisitions and alliances on innovation. Technovation, vol. 25, no. 12, pp. 1377- 1387. Hennart, J. F. and Reddy, S., 1997. The choice between mergers/acquisitions and joint ventures: The case of Japanese investors in the United States. Strategic management journal, pp. 1- 12. Ishii, J. and Xuan, Y., 2014. Acquirer-target social ties and merger outcomes. Journal of Financial Economics, vol. 112, no. 3, pp. 344- 363. Lebedev, S., Peng, M. W., Xie, E., & Stevens, C. E., 2015. Mergers and acquisitions in and out of emerging economies. Journal of World Business, vol. 50, no.4, 651- 662. Motis, J., 2007. Mergers and Acquisitions Motives. University of Crete Okonkwo, C O,, (2004) Legal framework for mergers and acquisitions. Central Bank of Nigeria. Netter, J., Stegemoller, M. and Wintoki, M. B., 2011. Implications of data screens on merger and acquisition analysis: A large sample study of mergers and acquisitions from 1992 to 2009. Review of financial Studies, p. hhr010. Rossi,S. and Volpin, P. F., 2014. Cross- country determinants of mergers and acquisitions. Journal of Financial Economics, vol.74, no.2, pp.277- 304. Schmidt, B., 2015. Cost and benefits of friendly boards during mergers and acquisitions. Journal of Financial Economics, vol. 117, no.2, 424-447. Schuler, R. and Jackson, S., 2001. HR issues and activities in mergers and acquisitions. European Management Journal, vol. 19, no. 3, pp. 239- 253. Zahid, N. and Shah, A.M., 2014. Mergers and Acquisitions in International Business. European Scientific Journal, ESJ, 22. Read More