Mergers and Acquisitions
1. Introduction
Mergers and acquisitions are generally used to describe various forms of management or specific strategic alliances. These forms are an area of increasing importance as international competition grows and as companies feel more pressure as a result of globalization. Due to this globalization, the market place is becoming more and more competitive, and as a result, it has become more difficult for a company to grow and succeed. With this in mind, successful mergers and acquisitions are a way to drastically improve a company’s position and help it to succeed in today’s global marketplace.
Definition of mergers and acquisitions: “Merger” is defined as two companies combining into a new single entity. On the other hand, an acquisition (a hostile takeover if the other company does not agree to the acquisition) is defined as one company buying a majority interest in the share capital of another company, thus taking control over it. There are some differences in what actually constitutes a merger, but the two types of activity are legally the same thing. Instead, it depends on whether the agreement is hostile or friendly and the wording used in the agreement. Both involve two companies agreeing to move forward with a singular intent. This intent goals include improved competitiveness and increased shareholder value. It is expected that at least one of the companies will achieve both of these goals, or it is a sign that the activity was/will not be successful.
1.1. Definition of Mergers and Acquisitions
A business strategy, acquisitions and mergers, are activities that are included in the life of business that seek to create business, stakeholder and shareholder value through the explorations of various types of agreements that involve several companies. Because of the effects these agreements have on the companies on both sides of the deal, it is important to have a clear understanding of the objectives that are sought after through the agreement. Unfortunately, knowing the objectives does not guarantee the desired results, thus one must be prepared for all possible end results. Hostile takeovers are a common result of mergers and acquisitions, this is where the buying company bypasses the board of directors and purchases the target company’s shares directly from the market. In doing this the goal is simple and cost efficient; gain control of the company in order to bolster the company’s position in the marketplace. Agreements are forms of mergers and acquisitions where both companies willingly combine their efforts and resources towards a common objective. Joint ventures are similar to agreements, however they maintain a separate identity from the other company involved. A common method of acquisition in recent years, due to its high success rate and its ability to avoid inconsistencies is the management acquisition. This occurs where managers purchase the company they have been managing. The end results of mergers and acquisitions are vast. Creating rapid growth, global expansion and providing channels for change or redirections in organizational strategies and objectives are just some of the benefits that can be reaped from an effective merger or acquisition. However, the opposite is also plausible, with failure being a result that may significantly damage or even destroy a company.
1.2. Importance of Mergers and Acquisitions in Business
The purpose of mergers and acquisitions is to enhance the competitive advantage for the companies being merged or acquired, and extensive in-depth study of the reasons leading up to ever-increasing these inter-firm alliances states that the primary goal of this activity is to increase shareholder wealth. Other reasons include the synergy in the form of tax benefits, revenue enhancement, and an increase in cost efficiency. The firms that involve themselves in these actions do so due to the various factors concerning the accomplishment of firm-specific and financial synergy. The strategic decision-makers believe that mergers and acquisitions can be very proactive through the altering of the market structure in a manner that can certainly enhance the firm’s long-term competitive position. The end results have often led to increased globalization and greater entry into emerging markets in the scope of altering the competitive landscape. With an increasing rate of activity in mergers and acquisitions in today’s economy, it appears that this trend is to continue into the long-term future. An increase in research on mergers and acquisitions would strongly contribute to a better understanding of this event, which to this day is still clouded and to the generalized failure of its expected results.
1.3. Historical Overview of Mergers and Acquisitions
M&A activity was at a moderate pace until the era of the 1920s. It was during the 1920s that the modern form of acquisition came into existence. There was a shift from unfriendly acquisition attempts to friendly acquisitions. It was in the best interest of both companies involved in the acquisition. During the 1920s, M&A activity reached its peak with 3000 acquisitions taking place in the year 1929 with a combined value of $3.5 billion. Mergers and acquisitions had gained immense importance in business. Vertical acquisitions were preferred over horizontal acquisitions. After the Great Depression, activity of mergers and acquisitions declined during World War II. With the end of World War II, a new era for mergers and acquisitions began. The 60s was the decade of conglomerates in the United States, which were a mix of different business lines under one corporation usually formed by a series of acquisitions. This period saw an increase in the acquisition of firms at high premiums. Acquisitions were backed with debts and were not financially efficient. The performance of acquiring firms was not good. This trend faded away in the 70s with demergers and corporate refocusing. The 80s saw a hostile takeover era with a new breed of acquirers known as corporate raiders. This era saw some famous leveraged buyouts. The 90s saw an unprecedented M&A activity with a record amount of mergers and acquisitions, and cross-border activity was at its peak. With the new millennium, M&A activity faced a temporary setback with failures of some high-profile mergers and acquisitions, but with the sure recovery of the global economy, M&A activity is expected to rise again.
Mergers and acquisitions have their roots in the United States. The United States has always provided a good climate for mergers and acquisitions because of the business-friendly environment there. Mergers were popular during the end of the 19th century and beginning of the 20th century. Horizontal mergers were popular among the companies producing similar goods. One of the biggest mergers during that era was the merger of United States Steel Corporation. It was a horizontal merger between two complementary and competing firms. The acquisition of one company by another was a rare event in the 19th and early 20th century. The first major acquisition took place at the turn of the century. The target firm was International Harvester, which was acquired by Kennard and Company. The acquisition activity was not much of a success because of the lack of professionalism and information.