Profitability Analysis of Mergers and Acquisitions - Essay Example

Custódio de that a merger occurs when an organisation takes over the liabilities and theassets of another business organisation. The business organisation that takes over the liabilities and assets of another organisation retains its identity. On the other hand, the business organisation that is acquired will stop from existing, and its operations will be managed by the firm that acquired it. It is important to understand that in case of a merger, there is a need of approval from the majority shareholders of the business organizations involved in this process. Scholars denote that a merger is just one example of an acquisition, and there are other methods that an organisation can acquire another organization. These methods include purchasing of a company’ shares or even making an initiative to purchase all the outstanding stocks of the business targeted for acquisition. It is therefore important to understand that the main purpose of acquisitions and mergers is for the companies involved to gain an economic advantage (Custódio, 2013). For any transaction involving mergers and acquisitions to be justified, the net worth of the two organizations when combined must be more than when the two organizations did not merge, or were not together. This paper will identify the reasons as to why so many mergers and acquisitions usually fail, despite the advantages that these mergers and acquisition bring about. Some of the advantages of an acquisition or merger include elimination of inefficiency, acquiring some tax advantages, achieving the benefits of economies of scale, and acquisition of complementary resources that can help an organisation to increase its market share (DePamphilis, 2010). Other major reasons for acquisitions and mergers include the ability to obtain proprietary rights to services and products, increasing the market share of an organisation through acquisition of the competitors of an organisation, and using the distributional channels of the acquired company to penetrate new markets, and geographic locations. All these advantages of mergers and acquisition must always be reflected in the growth of organizations shares, hence increasing the share value of an organization (Van Horne and Wachowicz, 2009). However, this is not always the case on most of the mergers that occur. This is because an acquisition and a merger is always a very complex procedure, and on most occasions, it is difficult for the managers to accurately evaluate the transactions, the benefits, the costs, and the legal and tax issues that emanate from the mergers (DePamphilis, 2012). Custodio (2013) denotes that one of the factors that normally discourage mergers and acquisitions is the high transaction costs associated with this process. It is important to understand that before commencing a merger or an acquisition, there are a variety of costs that the business under consideration must look into. This includes legal costs, taxes, the various debts of the organization under consideration, the operational expenses of the new unit to be formed (DePamphilis, 2012). It is important to understand that these costs are always high, and most organizations might fail to meet these costs. Legal costs might arise when one company, protests against the merger, and an example is in 2008 when Well Fargo wanted to acquire Wachovia. Citi Group was against this initiative, and it planned to initiate a legal challenge against this acquisition. Gaughan (2011) denotes that 60-80% of mergers are not always successful. Due to the failure of these mergers, the share values of these companies usually depreciate. It is important to understand that on most occasions, the managers of a business organization are not responsible for the failure of these mergers. Goldberg (2011) denotes that the decision to acquire or merge with another firm is capital intensive, and managers do not have the capability of preventing a merger or an acquisition, once shareholders decide to do so. However, Gaughan (2011) denotes that managers can have a decision on whether their company should merge or acquire another company, if their interests are aligned with the interests of the shareholders. It is important to denote that the interest of the manager can be aligned with that of the shareholders if the manager has some substantial shares within the organization. This would also make the manager be willing to take risks, for purposes of ensuring that the business under consideration is very profitable. Take an example of Steve Jobs, who was one of the founders of Apples, and its CEO. Because Steve Jobs had a considerable interest in the company, he was always a risk taker, encouraging his employees to be always innovative. Because of this characteristic, Steve Jobs was able to make the company to be one of the leaders in technological innovations. On this basis, if the managers of an organization are able to control a substantial portion of the company, then chance are high that they will feel secure about their jobs, and will work hard to ensure that the merger is successful (Goldberg, 2011; Custodio, 2013; and Youtie and Kay, 2014). Studies reveal that most mergers that failed are characterized by the absence of an aligned incentive with that of the shareholders. That is, managers do not hold shares within the company. This is a de-motivational factor, and managers will be unwilling to work hard, because of uncertainties concerning their positions. These managers are afraid of losing their jobs, in case a merger occurs (Goldberg, 2011). However, Youtie and Kay (2014) denote that in order to make a manager have motivation, it is important to allow them to have a control of the organization. This is by giving them power over the affairs of the organization, and making them responsible for the activities of the organization. Custódio (2013) denotes that some of the reasons as to why mergers and acquisitions normally fail are, they normally face a lot of resistance, which are either legal or transactional. Mergers and acquisitions are also faced with very complex tax and accounting issues, and they also involve change of management or corporate control over the firms that are involved in the acquisition or merger. Youtie and Kay (2014) denote that managers have very little control over these aspects that normally lead to the failure of mergers. In fact, Scholar denotes that even some of the best and most brilliant managers might fail to effectively manage an acquisition or a merger because of the aspects named above. It is important to understand that mergers are examples of synergies, and on most occasions, synergies are built upon complementary products, or for purposes of accessing the new markets for the products of an organization. It is important to denote that in reality, it is always difficult to build mergers based on technological knowhow, and accessing new markets, based on the economies of scale, that the new business enjoys. On this basis, mergers and acquisitions normally require an extra effort from the employees of the companies that are involved in the merger and acquisition. Good example of an acquisition and merger between companies that failed to effectively utilize their technological knowhow is the initiative of eBay to purchase Skype. The company bought Skype in 2005 for $ 2.6 billion, and sold it four years later for $ 1.9 billion (Sherman and Sherman, 2011). This represented a massive loss of 700 million US dollars. The main reason as to why this acquisition by eBay did not work out is because the two companies were unable to effectively integrate their technological knowhow successfully. Dilshad (2013) denotes that the failure of this acquisition was not on the managerial capability of the two organizations, but on lack of the available technology that could be used to integrate the technological systems of these two companies together. However, Gomes (2011) denotes that failure of the merger between eBay and Skype is because of the inefficiency of managers to realize that the technological knowhow in their possession was incompatible, and on this basis, a merger or an acquisition would not be successful. Gomes (2011) further go on to denote that an option for eBay was not to sale the purchased company, but to invest in research and development for purposes of developing a technology that could be used to integrate the technological knowhow of these two organizations together. On this basis, Gomes (2011) conclude that it is the irrationality of the managers that played a role in the failure of the merger between eBay and Skype. Sherman and Sherman (2011) denote that due to the failure of this acquisition, the shareholders value of eBay fell. To protect the value of the company from further deterioration, the company had to sale off Skype, to interested parties. Sherman and Sherman (2011) further denotes that mergers and acquisitions usually result to disruption of services, and this is mainly because of chaos that comes from the merging of functions, between the two organizations. It is important to understand that, in a company, there must only be one HR department, IT department, Finance, etc. On this basis, the organizations involved in a merger must harmonize their functions, and integrate them into one unit (Ross, Westerfield and Jordan, 2007). It is important to understand that during this process, chances are high that people will lose jobs, and the organization might save on costs that emanate from back office savings. Take for example in 2010, when Orange Company created a merger with T-Mobile. Liu (2014) denotes that the companies were able to save on 545 million pounds on Back Office costs. However, Liu (2014) further goes on to denote that this number is small, compared to what the organization might loss on the disruptions that its customers faced. This is because it might take time for the new employees of the organization to adapt for the new changes, and to learn on the objectives and aims of the new business under consideration. It is also important to denote that employees of a merged company are always uncertain on their future in the company, and this uncertainty is a de-motivating factor (McLaney, 2003). It is important to understand that a de-motivated staff will not perform their duties in an efficient manner, and this will lead to a low quality service or product. As a result, chances are high that the company may not be able to achieve profitability. This will not augur well to the shareholders, and this is because the value of their shares will decline. Arnold (2009) denotes that managers of an organization are unable to prevent this aspect of harmonization of functions. This is because, if a merger occurs, then the functions of the various departments of these organizations must be harmonized into one unit. On this basis, it is unfair to blame the managers of an organization of the failure of a merger, because of their inability to effectively harmonize the various functions of the two organizations that merged (Berk and De Marzo, 2014). However, Dutordoir, Roosenboom and Vasconcelos (2014) denote that to protect an organization from the problems that arise out of harmonization of functions, it is essential for the management of the two organizations that merge to operate separately, for a certain period of time, before the two organization are fully integrated into one. For instance, the merger between NTL and Virgin Mobiles took this route. The two companies formed a merger in 2007, after a court case allowed NTL to initiate a takeover of the operations of Virgin mobiles. Scholars further denote that the incompatible culture of a company is one of the major factors that have led to the failure of some mergers. In the perspective of this Dutordoir, Roosenboom and Vasconcelos (2014), 30-40% of mergers and acquisitions that normally occur, fail because of an incompatible organizational culture. Take for instance the merger between Daimler and Chrysler in the 1990s. Daimler was a German car manufacturer of Mercedes-Benz, and it decided to merge with the American car manufacturer of Chrysler (Sherman and Sherman, 2011). This merger was able to illicit a lot of media coverage, and it was dubbed as a merger of equals. However, because of the incompatible cultures of the two companies, the merger between Daimler and Chrysler was not successful. Differences in their cultures emerged because of issues such as their operating styles, pay and expenses, formalities, and the companies’ philosophies (Schief, Buxmann, and Schiereck, 2013). The culture of Germany became very dominant, and the level of satisfaction and motivation of employees working for Chrysler became very low. DePamphilis (2010) denote that this led to a massive loss of the company’s revenue, and a significant drop in the shareholders value. This was later witnessed by a significant loss of jobs, in the year 2000, leading to the sale of Chrysler by Daimler to a company named Cerberus Capital Management. The company was sold to a tune of 6 billion US dollars (Dutordoir, Roosenboom and Vasconcelos, 2014). Nicholls (2012) denotes that it is always the responsibility of the management to create the culture of a company. On this basis, it was the responsibility of the management at Daimler to make the culture of its company, to be compatible, with that of the culture of Chrysler. This is because; the company had a majority stake in the merger/acquisition (Mergers & acquisitions, 2012). Under this basis, Nicholls (2012) further goes on to denote that had the management used the autocratic style of leadership, then chances are that this merger/acquisition would have been successful. For instance, Steve Jobs proved that the use of authoritarian style of leadership can be successful, in certain situations that face the company. Due to this authoritarian type of Leadership, Steve Jobs was able to transform Apples into one of the most successful technological company in the world, surpassing even Microsoft in terms of market leadership. Based on this account, Scholars denote that the management of Daimler/ Chrysler is responsible for the failure of the merger/acquisition. However, Nicholls (2012) denote that this idea of authoritarian type of leadership is not tolerated in the country century. This is because of the various laws that protect employees from unfair labor practices, and an example, the equality act of 2010 in the United Kingdom, which spell out the various rights of employees. Weber and Tarba (2014) denotes that authoritarian type of leadership will most likely lead to de-motivation, and this is dangerous for a business organization. This is because de-motivation will make employees of a business organization to fail in producing high quality work that satisfies the target customers of the business organization. On this basis, the managers of Chrysler/ Daimler were rational in not using authoritarian type of leadership in their management of the merger. However, in as much as most mergers are not successful, there are a few mergers that are always successful. An example is the 1999 merger between Exxon and Mobil, which was worth 82 billion dollars (Nicholls, 2012). This merger made the company to be one of the largest in the world, and made it a leader in the oil business. One of the reasons advanced for the success of this merger, is the similar organizational cultures that the companies had (Tarba, 2014). In conclusion, most of the acquisitions and mergers that occur are not always successful. However, there are those people who believe that mergers and acquisition will cut on the operational costs of business organizations, and on this basis, they will lead to an increase in the shareholders value. It can always seem a simple issue to combine the computer systems of business organizations, combine few departments of organizations, and as a result, enjoy the benefits associated with economies of scale. In theory, this practice is very simple, and very attractive. However, on most occasions, things do not go well with the mergers and acquisitions. The size of the organization can be advantageous, and managers can use this to their advantage. Nevertheless, the success of the merger depends on a variety of issues, and this includes the compatibility of the cultures of these organizations, how well an organization integrates the employees of this merger into the various functions of the new organization, etc. On this basis, the success of a merger does not only depend on the managerial capability of organizations leaders, but on all the stakeholders of the organizations under consideration. Bibliography: Arnold, G. (2009). Corporate finacial management. New York: Pearons. Berk, J. & De Marzo, P. (2014) Corporate Finance (3rd ed.); Boston, Macmillan Publishers. Custódio, C. (2013). Mergers and Acquisitions Accounting and the Diversification Discount. The Journal of Finance, 32, n/a-n/a. DePamphilis, D. M. (2010). Mergers, acquisitions, and other restructuring activities an integrated approach to process, tools, cases, and solutions (5th ed.). London: Academic. DePamphilis, D. M. (2012). 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