Mergers and Acquisitions of a Company - Essay Example

?Financial Management Part A. The two major objectives of the Panel on Takeovers and Mergers are as follows. First, this panel has been establishedwith an aim of ensuring fairness to the stockholders at the time of takeovers and mergers. And second, the panel aims at providing a methodical framework in which the events of takeovers and mergers are conducted. (Fisher, 2003) Although the Panel of Takeover and Merger is responsible for creating situations of fair trade, it does not take into account any kind of financial and commercial benefits or shortcomings that might arise during the course of mergers or takeovers, such as issues relating to compensation policy. Key principles that are followed by the Panel on Takeovers and Mergers are as follows: First, the panel follows the principle of equal treatment for every shareholder. According to this principle, every shareholder of the firm that is getting taken over should get equal treatment. Even if all the security holders do not posses adequate control on the operation of the company, each of them should be protected. Second, the panel strictly follows the rule of providing adequate advice and information timely to all security holders. Third, the panel can not allow the creation of any false market for the shares of the offeree firm. According to this principle, a company is allowed to announce a merger or takeover only once after it becomes completely ready for the event to conduct. Fourth, it is not possible for any firm to perform any unauthorized frustrating activities without having any approval from its shareholders. According to this principle, a firm can not issue or sell any share from its treasury without proper approval from its shareholders. (Fisher, 2003) B. The Economic reasons for mergers and acquisitions are some economic benefits that are obtained by means of mergers and acquisitions. The benefits are as follows: Efficiency: Mergers and acquisitions help firms to add up their assets. It helps in reducing production costs, hiking production volume, augmenting product quality, acquiring new production technologies, or providing different types of goods and services. Mergers and acquisitions help in augmenting efficiency through economies of scale as well as economies of scope. Besides getting efficiency at operational level, mergers and acquisitions also help in providing efficiency at management level to some extent. When a firm involves in the process of merging with another firm or taking over the assets of any other company, then it becomes possible to generate a market controlled by corporate. (Hunt, 2009; Sherman and Hart, 2006) Financial benefits: By taking over the assets of other firms, a business organization can follow the route of diversification of its earnings. This type of diversification causes a significant fall in the variation in the area of profitability of the company and thus helps in making a reduction in the risks of bankruptcy as well as attendant costs. Market power effect: Mergers and acquisitions is also helpful in providing greater amount of market power that in turn offers many benefits to the companies who involve in the process of merging. (Galpin and Herndon, 2007) Sometimes mergers and actuations become unsuccessful for the following reasons: First, mergers influence organizational culture to a large extent. On account of mergers and acquisitions the employees of the merging companies have to experience rigorous anxiety. This kind of anxiety causes a fall in the level of productivity. Second, frequently, mergers are done with wrong intentions. Often, mergers or takeovers are used for seeking glory or to express financial strength. Third, the success derived from mergers and acquisitions is frequently hindered by variations in the work cultures as well as corporate activities of the firm which are involved in the process of mergers and acquisitions. Fourth, once the process of mergers and acquisitions becomes complete, firms generally put their focus on the issues relating to cost reduction rather than issues relating to revenues and profit generation. (Straub, 2007) Part 2 Two major long term funding options for unquoted small and medium enterprises are as long term debt funding and long term equity funding. The debt funding generally refers to borrowing money from some credit lending agency and repaying over a particular period of time. In case of long term debt, the repayment period continues over one year. The equity funding, on the other hand, stands for obtaining money in exchange of a share of business. This kind of funding allows a business to obtaining funds without incurring any debt. These two methods of long term funding for SMEs have their own advantages and disadvantages. Advantages of long term debt funding are as follows: First, in case of debt funding it is not required to give up a portion of ownership or future profit of the business. Second, utilization of borrowed money in the purchase of business assets allows an SME to obtain profits, keep it to itself and use it for repaying debt and paying dividends. Third, interest that a firm is required to pay on its debt is tax deductible. (Madura, 2008) The disadvantages of long term debt funding are as follows: First, very large amount of debt results in impairment of credit rating. Second, if a large amount of debt is incurred, then most of the profits earned by the company are used for repaying the debt and thus leaving nothing to reinvest or provide dividends to shareholders. Third, if there is no adequate cash flow, then it becomes difficult for a firm to repay debt. Fourth, the credits that involve higher amount of risks result in payment of higher interest rates. Fifth, very often debt funding requires adequate collateral to secure debt. The collateral will be seized if the firm fails to repay debt in due course. (Madura, 2008) Now, the advantages of equity funding are as follows: First, in case of equity funding, there is no need to paying back the investors at the event of bankruptcy. Second, there is no requirement of using business assets as collateral for obtaining equity. Third, if a business is run with sufficient amount of equity, then it will look better to the investors as well as to the lenders. Fourth, if business activities are funded through equity funding, then more cash will be available for reinvestment and paying dividends as there will be no requirement for repaying debt. (Good, 2003) The disadvantages of equity funding are as follows: First, in case of equity funding, it is necessary to give up a portion of ownership to the new equity holders, and therefore, a portion of profit will have to be sacrificed in case of equity funding. Second, there may arise conflict of ideas at the time of running the business as the new equity holders may come up with different ideas for running businesses. Third, payments to the equity holders in the form of dividends are taxable. (Good, 2003) Part 3 a) Since total planned borrowing and total dividend for the firm is same, the direction proposed a plan of foregoing dividends to the firm’s shareholders and investing the funds thus saved instead of borrowing. The arguments for this kind of proposal of the direction can be s follows: First, if the firm foregoes its dividend, then it will no longer require for the firm to borrow any fund as the requirement of total borrowing exactly equals total dividends. Second, in the absence of any kind of borrowing for financing the business activities, the financial position of the firm will look good to the investors. Third, if a large amount of debt is taken, then there should sufficient amount of future cash flow from the business operations of the firm. If the firm fails to generate sufficient cash flow for repaying loans, then it would once again have to borrow to repay previous loans and this would continue and the firm would fall into the nasty circle of borrowings. Fourth, by foregoing dividend payments, the firm will be able to reduce a huge tax burden. Dividends are very often criticized for double taxation. While in one hand, the company has to pay taxes on its total income, on the other hand, the shareholders are also subjected to tax payments for their dividend earnings. Now, the arguments against the director’s proposal are as follows: First, dividends provide a regular source of income to the firms’ shareholders. If the company foregoes its dividends for its own investment purposes, then the shareholder will loose this source of regular income. Second, if dividend payments are foregone, then it might provide a wrong signal to the existing shareholders as well as potential investors of the company. Thus the existing shareholders may loose their trust on the company and may go for selling of their shares, while the potential investor will think twice before investing their money in the company. Third, if the firm fails to generate adequate profit from its investment, then it may have to foregone dividends in future as well which will not be good for the shareholders of the company. (Ross, Westerfield, and Jordan, 2005; Madura, 2008) b) Alternatives to cash dividends are stock dividend, spin-off shares, and Dividend Re-Investment Plan (DRIP). Stock dividend is very often referred to as stock split. Stock spit I one of the most widely used alternative of cash dividend. Stock split takes place when a company issues new shares to its current shareholders. As n alternative to cash dividends, companies sometimes offer other valuable assets to the shareholders. This is known to be as spin-off shares or property dividends. Instead of providing any cash dividends, a company may offer to its shareholders a DRIP (Dividend Re-Investment Plan). A DRIP allows a shareholder to reinvest the cash dividend in new shares of the firm without making any payment of brokerage fees. (Baker, 2009) c) Share repurchase is a kind of program where individual companies purchase back its own shares from the market, thus, causing the stock of outstanding shares to depreciate. Share repurchase leads to an increase in the earnings of each share. As earning per share increases, undervalued stocks regain its potential which in turns results in an increase in demand thus resulting in a hike in the price level of the stock. (Subramanyam, 2008) As excess cash goes out for purchasing the underestimated stocks, companies have a tendency in capitulating capital gains and minimize tax bills when stock price increases. Generally, companies announce this program at the time the stock starts getting reaped off thus taking an advantage of the discounted price. This provides long term security for the investors during bad times. (Subramanyam, 2008) Shares repurchase programs leads to a potential rise in profits. But before going ahead with such programs, it is always wise to gather complete information regarding the nature and timing to perform such programs because one may not get the expected amount of earnings per share. One must note that if a high price-earning ratio exists then there is no point in purchasing the stock at premium rates until and unless there is a scope of a substantial addition to the amount of its earning. Many people get misguided with the notion of a buyback announcement which may not be fruitful at all as it may only cause a boost in price rise without the actual happening of a buyback. (Subramanyam, 2008) References: 1. Fisher, J. 2003. The law of investor protection. Sweet & Maxwell. 2. Sherman, A. J. and Hart, M. A. 2006. Mergers & acquisitions from A to Z. AMACOM Div American Mgmt Assn. 3. Hunt, P. A. 2009. Structuring mergers & acquisitions: a guide to creating shareholder value. Aspen Publishers Online. 4. Straub, T. 2007. Reasons for frequent failure in mergers and acquisitions: A Comprehensive Analysis. DUV. 5. Galpin. T. J. and Herndon, M. 2007. The complete guide to mergers and acquisitions: process tools to support M&A integration at every level. John Wiley and Sons. 6. Subramanyam, P. G. 2008. Investment Banking:Theory&Prac. Tata McGraw-Hill. 7. Madura, J. 2008. International Financial Management. Cengage Learning. 8. Good, W. S. 2003. Building a dream: a Canadian guide to starting a business of your own. McGraw-Hill Ryerson. 9. Baker, H. k. 2009. Dividends and Dividend Policy John Wiley and Sons. 10. Ross, S. A., Westerfield, R. and Jordan, B. D. 2005. Essentials of corporate finance. McGraw-Hill/Irwin. Read More