Mergers & Acquisitions: Concepts, Examples, Case Studies

Mergers & Acquisitions: Concepts explained, also find examples and case studies.

The main idea behind mergers and acquisition is to form a bigger company that can grow faster, have access to newer markets, have newer strengths, and becomes a force to reckon with in the market. The two companies when merged together is worth more than the individual companies is the reasoning behind mergers.

• Merger involves combining multiple firms, by offering shareholders of one firm’s securities in the acquiring firm in exchange for the acquiescence of their shares. It creates a new holding company (European Central Bank, 2000, Gaughan, 2002, Jagersma, 2005).
• When two firms combine to create a new firm with shared resources and corporate objectives, it is known as merger (Ghobodian, liu and Viney 1999). It involves the mutual resolution of two firms to merge and become one entity
• After merger, the stockholders sometimes have their shares within the previous company changed for an equal amount of shares within the integrated entity.

There are several reasons for mergers. In most scenarios, it has been observed that mergers reduce cost and increase the profits, boosting stockholder values for each group of shareholders. Two or more firms merge to become one entity with the goal of making a bigger company that can grow faster (it’s also done for consolidation in a stagnant market).

While the belief is that mergers will create a profitable entity, some mergers can result in failure as well. There are several examples of mergers — one being the merger between AOL and Time Warner in the year 2000. In 2000 the merger between AOL and Time Warner was one of the biggest deals of the time; however, years later the merger was considered a failure.

Advantages

Business can gain significant advantages through Mergers and acquisitions. Here are some of the advantages.

• One of the most common reasons that firms decide to take the merger and acquisition route is to merge their strengths and get more control over the markets.
• It can make the new entity more efficient, arm it with new strengths, and result in cost savings. It can lead to overall cost reduction giving a competitive advantage. Economies of scale is formed by sharing the resources and services (Richard et al, 2007). In certain cases, the company may get tax benefits. (Hayn, 1989)
• You get access to skilled staff, knowledge is increased, and the company acquires other business intelligence as well.
• The company may access to additional funds or valuable assets that can be used for new development.
• Costs and overheads may get reduced because budgets get shared and the company is in a better position to ask for better pricing from suppliers, thus reducing costs.

Disadvantages

Not all mergers / acquisitions result in success, the best example is that of AOL and Time Warner, which years later, was considered to be a failure.

While businesses can gain significant advantages through Mergers and acquisitions, there are some pitfalls as well that companies will need to understand and plan for.

• Could result in loss of experienced & skilled workers, which can impact the profitability in the short term. The new firm may have to invest in exhaustive re-skilling of employees.
• There will be frictions and conflicts (and insecurities) as the companies are likely to have different working culture, which could hamper the productivity for some time.
• If due diligence is not proper, there could be more duplication within the company and over capability (of similar strengths) within the company that may need retrenchment
• Costs may increase if the process of merger and acquisition dealing is delayed
• The merger and acquisition (M&A) can reduce flexibility, assuming the new entity created is huge. It can be difficult to make a quick turnaround or swiftly introduce a new product, assuming its rival makes a new move.

Impact on Workforce

Business scenario change every few years, and could be the driver behind a person option for a merger or acquiring another firm. In most cases, M&A activities have some impact on the existing workforce, as some of the workforce could become redundant after the new entity is formed.

While most companies resort to cost-cutting exercises, including laying off people, HR/Recruitment teams also have the option of restructuring the Organization structure; post-merger/acquisition is the time when management can look for ways to streamline the structure. Most new organizations opt for merging groups, moving workers from one team to another, and having a matrix style structure.

A company needs to serious evaluate laying-off people because if those employees are making you a profit, not having them around will cost the company more money in the long run. When it comes to realigning business strategies, there are several things that a company can do, and one of them could be to restructure the organisation structure. HR specialists don’t work only in the area of compensations; they also play an active role in forming or restructuring the organizational structure.

Restriction & Restrictions for Mergers & Acquisitions

Rules around mergers and acquisitions may vary a bit depending on the company of operation, as the new company needs to adhere to the country’s business policies and regulations.

Rules around Mergers and Acquisitions in India
Companies involved in M&A should ensure the resultant company adheres to the various rules and regulations prescribed for doing business in India. They will need to reference these acts to ensure compliances.

• The Competition Act ,2002
• Foreign Exchange Management Act,1999
• SEBI Take Over Code 1994
• The Indian Income Tax Act (ITA), 1961

Restriction for Mergers in European Union
In earlier times, the enforcement rules in European Zone against mergers were totally different. Right from the beginning, the European Community was enthusiastic about mergers. The founders of European Economic Community believed that division of markets results in more unskilled workers, and for them a huge organization was never a problem (Bermann et al, 1993). They preferred regulating giant companies instead of de-concentration.

Over time, Mergers became generally accepted and cross-border mergers were most welcome by the European Union. The European Community started taking social control for mergers seriously, as they felt giant companies produced because of mergers could abuse market power (Eleanor, M n.d). Years later, the European Commission (EC) law felt that merger was a growing concern as once the companies merge, the market balance may get disrupted and the dominant position could be used for abuse. As a result, companies had to take approval from the European Union for mergers.

Questions and Answers

Question: Firms are increasingly exploiting the benefits of forming alliances and joint ventures. Discuss the various types of firm linkage and when each is most suitable.

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