Business Success through Acquisition - Essay Example

Business Success Through Acquisition Business Success Through Acquisition College A business acquisition means the process of achieving either complete or partial control of one business by another business for certain strategic objectives. In acquisitions, the ownership is being transferred from one firm to another firm. Acquisition not only helps the acquirer to increase their market share or profits but also helps to achieve the retention of learning, codification of skills and the conscious creation of a talent pool that actively attempts to introduce the development strategies of the firm. Thus , acquisition helps to attain a strategic capability which includes a typical know-how , a set of skills , or a special insight that creates high returns and competitive advantage , fosters organizational agility that is difficult to duplicate.( Bruner, 2004,p.914). Acquisition will not only lead to revenue growth but also help to enhance the prosperity through synergistic gains. A study by McKinsey Consultants has revealed that companies can undertake non-synergic acquisition deals to their advantages. It has found that a diverse group of business organizations like Sara Lee, Thermo Electron and Clayton, Dubliner & Rice have developed astonishingly and seized continued returns of 18 % to 35% per annum by venturing into non-synergic business acquisitions. Further, a study conducted by Harvard Business School also corroborates that companies can venture into non-synergistic advantageously. Hyan (1989) revealed that about fifty percent of all acquisitions are planned to be only partially taxable or to be completely tax-free. Gonzalez et al (1998) held that more probable to be targets of acquisition by foreign companies were undervalued U.S companies. Kish and Vasconcelos (1998) viewed that a formidable relationship existed between exchange rate movements and acquisition activity. (Bruner, 2004, p107). As competitive businesses tackle globalization while attempting to remain competitive and to maintain productivity when confronted with emerging markets, they encounter demoralizing difficulties particularly when attempting to expand internationally. (Sinha , Khanna & Phalepu 2005). Acquisition has become an active strategy nowadays as it enables the fear of being taken over and corporate revitalization keeps managers on their toes. (Japanese firms 2007). (Lloyd, 2006, p1). Research Questions As per various earlier empirical studies, a business acquisition helps to attain a strategic capability which includes a typical know-how, a set of skills, or a special insight that creates high returns and competitive advantage, fosters organizational agility that is difficult to duplicate. Whether the acquisitions have transformed the real objectives of the acquirer? It is to be noted that “ Mckinsey Consultancy “ had found that out of two-third acquisitions have failed to generate even fifty percent of the anticipated synergy. This research study aims to analyse the success rate in business acquisitions in general and how companies have attained synergies by resorting to acquisitions in an exhaustive manner. Introduction In 1984, Chevron’s acquisition of Standard Oil was considered to be the largest merger in business annals. However, in 1990s, a lot of changes have taken place like the onset of capitalism in China, the breakup of the Soviet Union and the onset of internet revolution. (Strauss :168). Due to this , business started to expand their authority and control through acquisitions . Some successful business acquisitions are listed below: Illustrations of Some Famous Business Acquisition: Rank Year Acquirer Target Transaction Value (in Mil. USD) 1 2000 Merger: America Online Inc. (AOL) Time Warner 164,747 2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961 3 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co 74,559 4 2006 AT&T Inc. BellSouth Corporation 72,671 5 2001 Comcast Corporation AT&T Broadband & Internet Svcs 72,041 6 2004 Sanofi-Synthelabo SA Aventis SA 60,243 7 2000 Spin-off: Nortel Networks Corporation 59,974 8 2002 Pfizer Inc. Pharmacia Corporation 59,515 9 2004 Merger: JP Morgan Chase & Co. Bank One Corporation 58,761 10 2006 Pending: E.on AG Endesa SA 56,266 Source: Institute of Mergers, Acquisitions and Alliances Research, Thomson Financial Business Acquisition and Stock Performance Name of the Company Stock Performance Number of Acquisitions Made For the year 2006 IBM 20% 14 Microsoft Corporation 16% 12 Hewlett –Packard Co 45% 7 Research In Motion Limited 94% 1 General Electric Company 9% 20 Yahoo Inc -36% 2 Google Inc 11% 6 CISCO Systems Inc 60% 9 Apple Inc 18% 0 For the year 2007 Intel Inc -17% 0 3M Company 3% 13 Dell Inc -16% 1 eBay Inc -30% 2 Southwest Airlines Co -7% 0 Amazon Com Inc -16% 1 Starbucks Corporation 18% 2 Target Corporation 5% 0 Wal-Mart Stores Inc 0% 2 The Procter & Gamble Co 13% 1 America Movie 56% 2 Source: Creative and innovative blogspot.com From the above table, one can understand that those businesses that have been engaged in the acquisition have prospered well while those who do not undertake acquisition as a strategy to grow have witnessed a drop in their stock performance. BUSINESS ACQUISITIONS IN USA Year No of Acquisitions Value in excess of $ billion 2010 21 1.5 2009 52 17 2008 66 5.7 2007 58 19.9 2006 57 10.7 2005 72 26.1 2004 57 22.8 Source: www.fenwick.com/docstore/publications/Corporate/M&A_List.pdf SELECTED BUSINESS ACQUISITIONS IN USA IN 2010 ACQUIRER COMPANY ACQUIRED COMPANY DEAL VALUE Broadcom Corporation Teknovus , Inc $123 million Diamonds Food , Inc Kettle Foods $ 613 million Informatica Corporation Siperian , Inc $130 million SuccessFactors , Inc Inform Business Impact $40.5 million Source: www.fenwick.com/docstore/publications/Corporate/M&A_List.pdf Types of Acquisitions Horizontal: A business acquisition where two businesses in the same industry combine together in an attempt to attain economies of scale. Vertical – An acquisition process where on business purchases a supplier or another business that is very close to its existing clients or customers in an effort to control distribution or supply channel. Conglomerate- A merger in which two businesses in unrelated business merge together with a goal to diversify the business by coalescing uncorrelated income and assets streams. International or Cross-border M & As- An acquisition is involving businesses from two different nations. Objectives of Study Tall claims are being made by the acquiring companies that they will be able to utilize various prospects available in the guise of synergy with target companies. Whether the acquisitions have transformed the real objectives of the acquirer? It is to be noted that “Mckinsey Consultancy “had found that out of two-third acquisitions have failed to generate even fifty percent of the anticipated synergy. This research study aims to analyse the success rate in business acquisitions in general and how companies have attained synergies by resorting to acquisitions in a detailed manner. Literature Review Business acquisitions are made to attain any one or mixture of the following strategies: To receive rights to particular patents, products, brand names or copyrights. To offer growth opportunities in the related or same markets. To develop new distribution conduits To obtain further or supplementary production capacity in tactically located manufacturing units. To add R& D capability. To obtain access to process, proprietary technologies and skills. (DePamphills 2009:154). If a company wants to set its foothold in a foreign country, it can do it in two ways. It could set up a manufacturing facility in a foreign nation either by establishing a new subsidiary in such foreign country, or it can have a joint-venture operation. Otherwise, companies could grow by acquiring the existing foreign firms. For instance, Japanese automobile manufacturers made a chain of acquisitions of automobile plants in USA like the acquisition of the Rockefeller Center in New York. However, in quantitative terms, external growth (acquisitions) could happen much larger than the establishment of new manufacturing plants abroad (internal growth). Many companies may not like to venture into internal growth as the process of growth is very slow. Of late, a company’s growth through a merger with the subsisting business activities of a foreign company has attained mammoth attention as a substitute to internal growth. (Kim et al,2002,p418). There are two theories of business acquisition. One is known as the neoclassical hypothesis and the other is behavioural hypothesis. According to Myers (2003), under a neoclassical hypothesis, a merger wave happens when businesses in industry retort to “shocks’ in their operating atmospheres. Shocks could mirror such incidents like the materialization of novel technologies, substitute products or distribution channels, deregulation or a prolonged increase in prices of products. Under the behavioral hypothesis, managers employ overvalued stock to buy the assets of lower –valued business. As per Rhodes-Kropf (2004), managers, whose stock prices are considered to be over-valued, move along side to acquire those businesses which shares are under quoted. (DePamphills, 2009, p13). Google established a clean sweep over Yahoo in net revenue as its net income was $592 million while Yahoo’s net revenue was only just $160 million. With help of huge internal accruals, Google is able to make You Tube acquisitions in 2006 for $1.65 billion and Double-click acquisition in 2007 for $3.1 billion all in cash, whereas Yahoo completed one acquisition of Right Media, for $688 million in 2006. (Daal, 2009, p.99). Further, Harvard University research on the subject reveals that many LBO (Leverage Buyouts) firms begin with fairly high debt loads and however, they minimize their debt burden to relatively customary magnitude of about 65% of debt to total assets within 1 to 3 years immediately after acquisition. The findings of Harvard is corroborated by the earlier study made by John Kitching who made research study on about 110 buyouts and found that by the second year onwards immediately after acquisition, debt repayment by these LBO firms surpassed by over six hundred percent. (Harvard Business Review, 1998, p57). Some companies choose to observe the target company by purchasing an interest in the company, assuming a board seat and normally get acquainted about the target business before concluding the full blown acquisition. Shockley and Arnold (2001) demonstrated that Anheuser-Busch successfully utilized this strategy in their overseas acquisition. (Bruner, 2004, p.432). Nelson 1959 classic research study of acquisition waves indicated that bombshell changes in demand for a product could trigger company’s acquisitions for additional capacity mainly through M&A. According to Gort (1969) acquisitions is only one branch of the make or buy decision and indicated that the “economic volatility “triggered by industry surprises would induce a chain of acquisition activity where it has become cheaper to buy rather than to make. (Bruner, 2004, p.80). In some cases, acquisition has some financial side effects. Acquisition through cash deals may draw down the cash reserves of the acquirer and may compel them to issue of equity or debt instruments. Some intriguing acquisitions may require the release of mezzanine securities and in such case, acquisitions may impact the company’s future capability to raise funds simply because the style the deal was financed. The classic illustration of the breakdown of financial flexibility is the leveraged acquisition of Revco Drug Stores in 1986 which engaged on sale of its assets to fund its acquisition. Due to mismatch of fund management, the company declared bankruptcy after one and half years of the acquisition. (Bruner, 2004, p.533). According to Porter (1987), there was a high quantum of divestiture in the periods following acquisitions and about fifty –three percent of acquisitions divested within a few year of acquisitions. According to Weston (1989, this high quantum of divestiture could be demonstrated by a variety of reasons like the harvesting of mature investments and antitrust enforcement. (Bruner, 2004, p.533). In 1984, Electrolux acquired Zanussi with an aim to domain strengthening and to rationalize the resources. ICT acquired Beatrice Chemicals and there existed cultural differences at the time of acquisition but later it became more and more interdependent as the cultural gap sinks down. In 1979, BP acquired Hendrix, a Dutch based animal feed company with an intention to diversify away from oil yet in the area of protein where BP wished to enhance its learning. Earlier, BP had taken initiatives to foray into synthetic production, especially from oil. The main objective of BP’s acquisition strategy is to accumulate learning and to study about an industry which is completely a new domain and to divulge the acquirer company to venture into a diverse business that may be pertinent to its core business activities. (Walter, 2004, p.108). Some companies are using acquisition route to attain growth if the company wants to enter into some other geographical regions or other parts of a country or to enter into foreign markets. For instance, a US based company wish to enter into European Union market and in such cases, acquisition is not only less risky but also quicker. (Gaughan, 2007, p118). Some companies acquire their competitor’s business to rather than to outperform them by employing internal growth. The best example is Johnson & Johnson, a $ 55 billion company and during the decade 1995 to 2005, it successfully engineered over fifty acquisitions as part and parcel of their development through acquisition strategy. Johnson & Johnson instead of on the vanguard of every chief area of innovation, it endeavored to pursue those companies who had introduced successful and innovative products. Company Acquired by Johnson & Johnson Primary focus Year Acquisitions size in Billions $ Neutrogena Skin and Hair Care 1994 0.9 Biopsys Medicals Breast Cancer 1997 0.3 Depuy Orthopedic devises 1998 3.6 Centocor Immune –related diseases 1999 6.3 Alza Drug Delivery 2001 12.3 Inverness Med .Tech Diabetes Self -Management 2001 1.4 Scios Cardiovascular diseases 2003 2.4 Gudiant Implants 2005 25.4 Closure Topical Wounds 2005 0.4 Peninsula Pharmaceuticals Life-threatening infections 2005 0.3 (Gaughan 2007:118). Vertical Acquisition This strategy engrosses the acquisitions of business that are closer to the ultimate consumer or the source of supply. A best example of a shift toward the source supply was the acquisition of Gulf Oil by Chevron in 1984. The reason for Gulf’s acquisition by Chevron was primarily intended to increase its oil & gas reserves, a cause described to be backward integration. Mobil, in 1984 itself, acquired Superior Oils for analogue purposes. Though, Mobil was strong in marketing and retailing but low on oil and gas reserves, whereas Superior had a huge quantum of gas and oil reserves but lacked both marketing and refining operations. An illustration of forward integration would be if a business with huge reserves acquires another business that had a vibrant retailing and marketing talents. (Gaughan, 2007, p.154). Roll-up is a strategy under which a buyer as a holding company will target an industry which may be conducive for consolidation within a given market niche or region. It may be vertical or horizontal in nature but originally engrosses the belligerent acquisition of competitors in a particular market to accomplish synergies, operating efficiencies and market dominance. In roll-up acquisition strategy, anti-trust laws are considered to be problematic as some acquisition may be hostile and some will be friendly. In these types of acquisition strategies, the buyer will usually will look to the given acquisition on the earnings, taxes and valuation of the consolidated technologies. If the acquirer is a public company or very near to a public issue, then they must also give consideration to the reaction of the business media, the Wall Street and the investment bankers to each transaction. (Sherman and Hart, 2006, p.124). An ESOP (Employee Stock Option Plan) is a substitute available to sellers for selling out their business venture, which gives some tax advantages to both lender and the seller. In this type, an ESOP will be established either to purchase all or substantially all of the company employing deferred compensation strategy. (Sherman and Hart, 2006, p.125). Methodology According to Saunders et al (2006), two broad varieties of methodological approach are widely applied in the research field, and they are inductive approach footed on qualitative data and the deductive approach which is based on quantitative data. In this research study, quantitative approach is used so as to have so many views and approaches on the success or failures of business acquisition. Further, Kinnear and Taylor were of the opinion that this kind of studies is more proper and in particular is applied in the business research field as they evaluate the association among some variables, and they evaluate the likelihood of projection among them without in any case explaining the association between results and reasons. This research study will carry out a review of research and the meta-analysis on the basis of literature reviews of various previous empirical studies on the subject, concepts and data from scholarly books and articles written by eminent authors who have made vast research on business acquisitions and its success or failures. Expected Outcome Acquisition not only helps the acquirer to increase their market share or profits but also helps to achieve the retention of learning, codification of skills and the conscious creation of a talent pool that actively attempts to introduce the development strategies of the firm. Thus , acquisition helps to attain a strategic capability which includes a typical know-how, a set of skills, or a special insight that created high returns and competitive advantage, fosters organizational agility that is difficult to duplicate.( Bruner, 2004,p.914). Acquisition will not only lead to revenue growth but also help to enhance the prosperity through synergistic gains. METHODS OF DATA ANALYSIS: Sources: Leedy & Ormrod (2005), {based on Creswall 1998}. Sampling Method Due to limitations on cost and time, in this research I have not employed for collection of data any direct sampling method. I have employed all data obtainable through secondary sources. I will cite the results examined in the past empirical surveys to substantiate my findings on the subject. Further, I have also employed secondary data available from the real case studies which are existing on the subject to reinforce my findings on the subject. Further, the research on data on successful business acquisitions has been analysed and I have quoted all my references on the reference section of this research essay. Timescale 01 May - 07 May 2010 08 May – 15 May 2009 Introduction Literature Review. 16 May 2010 – 21 May 2010 Plan the methods and research strategy. 21 May 2009 – 30 May 2010 Data collection. 1 June 2010 – 07 June 2010 Data analysis. 08 June 2010 – 15 June 2010 Writing dissertation. 16 June 2010 – 30 June 2010 Final review and Submission. References Bruner, Robert F. (2004). Applied Mergers and Acquisitions. New York: John Wiley & Sons. Dalal, Sanjay. (2009). Creativity and Innovation in Business. Silicon Valley: Creation and Innovation. DePamphills, Donald M. (2009). Mergers, Acquisitions and Restructuring Activities. New York: Academic Press. Gaughan, Patrick A. (2007). Mergers, Acquisitions and Corporate Restructuring. New York: John Wiley & Sons. Harvard Business Review. (1998). Harvard Business Review on Strategies For Growth. Harvard: Harvard Business Press. Kim, Suk H, Kim Seung Hee & Kim, Kenneth A. (2002). Global Corporate Finance: Text and cases. New York: John Wiley & Sons. Lloyd, Sonia G. (2006). Knowledge in Acquisition of a Small Hydrology Business. New York: Universal Publishers. Sherman, Andrew J & Hart, Milledge A. (2006). Mergers & Acquisitions From A TO Z. New York: Amacom. Strauss, Steven D. (2008). Small Business Bible: Everything You Need to Know to Succeed in Your Business. New York: John Wiley & Sons. Walter, Ingo. (2004). Mergers and Acquisitions. What Works, What Fails and Why. Oxford: Oxford University Press. Read More