Mergers And Acquisitions Essay

1. Introduction

Mergers and Acquisitions (MandA) is well known as one of significant business activities all around the world which have attracted the attention of every business administrators in the economic competition. In the intense competition, companies have to tackle many difficulties and desire to become profitable, active and efficient ones. They could not be the winners in market share’s volume competition without added capital, technology and human resources, especially from M&A activities. Besides several different noticeable methods to get more resources such as strategic alliances, technology transfer and joint ventures, M&A is greatly considered as the most powerful relationship between company and its partner in the deal. Noticeably, the considerable increase in the number of M&A deals in several recent years let the foreign capital investment into some Asian developing countries such as: Vietnam, Philippines… rise dramatically.

It is obvious that M&A creates thousands of must – buy opportunities for businessmen, which add remarkably the huge value to the global economic growth. M&A effectiveness is undiminished and it depends on the depth of resources of both sides as well as the experience in restructuring companies after the deal. Many research showed that the main percentage of M&A cases take place in banking and finance sectors when banks and financial firms want to approach to new market; pharmaceuticals or software technology when one firm might merger with the other companies in their production system. There are many deals between thousands of the largest and most successful global firms such as Daimler Chrysler, Chase-J.P. Morgan, NationsBank- Bank of America… regarded as the impressed deals in M&A history. However, there are still some arguments that suspect the benefits of M&A and emphasize too many firms which could not reach to the intended results. Therefore, I think that we should consider the benefits of M&A carefully and help companies be confident when they conduct M&A deals. Particularly, I write this essay to study more specifically what companies receive in M&A cases.

The main body is divided into four parts: Definitions and types of M&A, Reasons for M&A, Noticeable M&A cases in last three months and Benefits of M&A.

2. Definitions and types of M&A

2.1 Definitions

According to Google, a merger can be defined as a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity. The merger of equals between Sprint and Nextel is an example. Meanwhile, an acquisition can be understood as the business activity in which one company purchase an asset such as a plant, a division, or even other company. For example, Procter & Gamble made a major acquisition in 2005 when it purchased The Gillette Company, Inc., in order to extend its reach in the consumer products industry.

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The above definitions are supposed as basic definition for mergers and acquisitions. It made the readers have a brief review about mergers and acquisitions. M&A is known as the purchase one company of other company in a merger case or just one division is controlled by other firm. This definition is common, easy to understand and bring the overview to everyone. However, it does not emphasize to the existence of the acquired companies as well as types of mergers and acquisition cases.

Gaughan (1996:7) states that “A merger is a combination of two corporations in which only one corporation survives and the merged corporation goes out of existence. In a merger, the acquiring company assumes the assets and liabilities of the merged company. There are several kinds of a merger: statutory merger, subsidiary merger”. It has been pointed out that there is only one company after the merger deal and they have the better resources than ever before with new added advantage from the merged company such as: capital, market advantage, human resources, chain stores and so on.

Nevertheless, people tend to misunderstand between the definition of merger cases and acquisition ones. It has been stressed that a merger mentions to the case in which two companies join together (usually through the exchange of shares) to become one while an acquisition typically has one company which called the buyer purchases the assets or shares of the seller by cash, the securities of the buyer or other assets of value to the seller.

2.2 Type of M&A

2.2.1 Type of mergers

Due to the range of mergers, mergers cases have been categorized as horizontal, vertical or conglomerate mergers: (1) Horizontal merger in which two companies that are direct competitor and share the same product lines and markets, for example, Procter and Gamble and The Gillette Company, Inc., they are have the same market in consumer products, (2) Vertical merger: are combinations of two companies in which one company is the seller, another one is the buyer in produce procedure; one such merger occurred between Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, and other programming, (3) Conglomerate merger: two companies that have no related business areas; the deal of Walt Disney Company and the American Broadcasting Company is the noticeable case for this kind of merger.

Hagedoorn (2002:70) states that the main number of successful M&A cases belongs to horizontal merger and vertical merger cases, not conglomerate merger ones. Noticeably, the related merger, including horizontal merger and vertical merger, are expected to benefit from economics of scale and scope than the conglomerate merger deals.

Due to the types of financing for mergers, there are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

– Purchase Mergers: this kind of merger happens when one company purchases another and they pay in cash or the way to solve debt. This transaction is taxable.

– Consolidation Mergers: a brand new firm is formed and both companies are combined under the new entity. The tax terms are the same as those of a purchase merger.

In a merger, data gathering and due diligence are two-way and mutual, with each party positioning its contribution to the post-merger entity to justify its respective equity share, management, and control of the new company.

2.2.2 Type of acquisitions:

There are two types of acquisitions which depend on the kind of payment:

– When the buyer purchase the seller in stock, those stocks are not necessarily combined with the buyer’s current company, but often kept separate as a new subsidiary or operating division.

– In an asset purchase transaction, the assets conveyed by the seller to the buyer become additional assets of the buyer’s company, with the hope and expectation that the value of the assets purchased will exceed the price paid over time, thereby enhancing shareholder value as a result of the strategic or financial benefits of the transaction.

3. Reasons for M&A cases

There are several possible motives and reasons make the directors want to conduct M&A transaction. They expect to reach the better business results if they are successful in M&A case: (1) Restructure the industry value chain, (2) Access to the greater resources of the acquiring company, (3) Revenue enhancement, (4) Reduction of cost or obtain cost through economics of scale, (5) Growth pressures from investors, (6) Reduction of the number of competitors, including: increase market share and reduce price competition, (7) Get more range of products and know-how, technology procedure, (8) Cut off stores in the same market areas, (9) Create the bigger product with the same capitals, (10) Obtain tax benefits

Mergers and Acquisitions (M&A) is considered as one aspect of corporate strategies, which is more and more popular all over the world based on its effectiveness of economics of scale and scope. These activities are conducted to reach to the assistance of finance as well as resources that could help the director of the acquiring firm overcome the difficulties. M&A is a strategic tool used to create the bigger market share or product volume with the modern technologies, efficient human resources and others.

According to Thomson Reuters (2010) [1] , M&A activities reached the noticeable results in the final second quarter in 2010.

The value of global mergers & acquisitions (M&A) reached US$1.1tr during the first half of 2010, an increase of 9% over last year, the strongest opening six month period for M&A since 2008. Emerging Markets M&A accounted for 32% of global M&A volume, up from 19% last year. The Energy & Power sector proved the most active, taking 19% of announced M&A. Private equity backed M&A totaled US$73.4bn, the largest opening period since the first half of 2008. Goldman Sachs tops the global M&A rankings with $213.4bn in deals advised.

However, conducting M&A transaction successfully requires a huge attempt for both boards of two (or more) sides. In last 10 years ago, there are thousands of failures of M&A cases let us witness the broken benefits of shareholders calculated for time and opportunity costs. M&A should be considered as an activity targeted to strategic objectives because of the considerable risk of M&A.

4. Noticeable M&A cases in last three months

4.1. Lavazza and Onda Coffee Break

Lavazza: http://www.lavazza.com/corporate/en/

Onda Coffee Break: http://www.onda.bg/

Onda Coffee Break prides itself with being the first coffee shop chain in Bulgaria. Particularly, they founded business in 2003, and nowadays there all are about 11 cafes in the capital city. On the other hand, Lavazza Group is one of the biggest coffee producers in the world with the respect of expanding its reputation and high quality coffee to many different regions all over the world in order to guarantee excellent coffee.

In May 2010, Lavazza has offered Onda Coffee Break, which is the famous Bulgarian coffee shop chain for an acquisition. It has been confirmed by The Board of Lavazza that if they conduct this case successfully, they would expand market share and hold the number one position in Bulgaria, where the consumption of espresso coffee is increasing dramatically. Particularly, Lavazza attempt to raise the visibility of its brand on Bulgaria in the store chain of Onda Coffee Break, for it really wants to turn these coffee shops for advertising authentic Intalian espresso in Eastern Europe. Onda Coffee Break was controlled by Global Finance, the largest private equity fund in the region, together with local smaller shareholders. M&A International Inc.’s Italian member Arietti & Partners together with the Bulgarian member Entrea Capital originated the deal and assisted Lavazza throughout the acquisition process, proving once again the value and competitive advantage of M&A International Inc. in cross-border acquisitions.

Felix Abba acquires Kalev Chocolate Factory

Felix Abba: http://www.felixabba.fi/

Kalev Chocolate Factory: http://www.kalev.eu/?id=28299

According to Felix Abba’s official website, Felix Abba is one of the leading Finland’s food manufacturers which have production plants in Turku and Lahti. Their main products are pickled vegetables and herrings, dairy products and spreads, fish products and so on. Interestingly, they respect to become the leading position in every product group and one of the most profitable companies of the Finnish food industry. In contrast, Kalev Chocolate Factory is Estonian chocolate company created and maintained sweet-making traditions in two centuries. In June 2010, Felix Abba has required Kalev Chocolate Factory from the Estonian holding Luterma, so they will take over 100% shares in Kalev Chocolate Factory, including production equipments and the related trademarks. They desire to take an important step into Estonian market and provide a platform for expanding business in Finland and the Baltic region. This is really the wonderful idea of Felix Abba when they want to reach quickly to new market and improve their own brand in Europe.

5. Benefits of mergers and acquisitions

Ahern (2007, p5) [2] said that “Mergers increase value when the value of the combined firm is greater than the sum of the pre-merger values of the independent entities. One of the advantages of combining firms is that capabilities can be added more quickly than by internal programs. With greater turbulence in the economic environment, the pressures to adjust to change rapidly are increased. Mergers enable a firm to adapt to change more rapidly than internal organic growth. Hence, more rapidly changing environments create a greater potential role for M&As”. It is clear that the acquiring firm receive the certain value when they conduct the M&A deal with the expectation of solving the current problems or improving the productivity quality.

The first benefit is the new technologies and new range of products companies receive when they achieve M&A deals. Hagedoorn (2002:68) shows that the effectiveness of M&A cases will be proved by using new process – related technologies and new product-related technologies. Moreover, Research & Development (R&D) activities are also have the opportunities to reach new level of improvement. In many years ago, people rarely noticed to the technology motivation in M&A, but now perhaps M&A is a significant element in the technology acquisition strategy of companies, especially in high-tech 21st century. Taking these together, if the acquiring firm and the acquired firm want to get the best results that bring an expected benefit or overcome current difficulties, both sides have to ensure the M&A could let to “strategic fit” and an “organization fit” that enable M&A partners to collaborate in future activities. It is actually demonstrated in reset all human resources as well as the corporation between the Board and employees of companies. Therefore, if M&A deal has a lot of technology elements, that deal could reach to success more easily.

The M&A transaction is almost certain to be one of the most complicated deals in business market, which requires a lot of energy from the Board of the buyer and the seller. Targeting the final successful result, both sides have to prepare well for the deal, draft the plan, due diligence, and refer law consult of tax. Sherman (2006; pp. 8-9) states the following:

To be successful, a transaction must be fair and balanced, reflecting the economic needs of both buyer and seller, and convey real and durable value to the shareholders of both companies. Achieving this involves a review and analysis of financial statements, a genuine understanding of how the proposed transaction meets the economic objectives of each party and recognition of the tax, accounting, and legal implications of the deal.

We believe that M&A will bring a huge benefit for both sides if they have the positive attitude, ready for the negotiation and achievement to the same target.

The second benefit that everyone respects to get in M&A deal is the effective and efficient way to enter a new market, improve a new product line and expand distribution system. The buyer can touch customers in the different religion with the low cost and the strong brand identify through the current chain store of the seller. Instead of building totally new subsidiary, distribution system, even recruiting new employees, the acquiring company could improve the current above resources of an acquired firm and then impressed the customer in new market with lower cost. For example, when Lavazza want to expand the market to Europe, they choose the way to acquisition with Onda Coffee Break in Bulgari. They desire to dominate the coffee market in Europe through the current chain store and customers of Onda Coffee Break as well as people who love coffee in this region.

Thirdly, the obvious value that both sides could recognize immediately when they have an idea of M&A is the keeping of intellectual property. Currently, knowledge of employees is the most valuable property that requires each company have to promote days by days. Interestingly, they could promote the current talent employees in the acquired firms and make them become to loyalty staff. Moreover, many deals are now fueled by the desire of taking more access to new sources of energy, such as gas, oil and other limited resources, so they could improve the previous limited material input and promote competitive advantage than ever before. It has been claimed that thousands of deals tends to buy brand loyalty and customer relationships. Buyers are paying a premium for this intangible asset on the balance sheet, which is often referred to as goodwill. In today’s economy, goodwill represents an asset that is very important but which is not adequately reflected on the seller’s balance sheet. Veteran buyers know that long-standing customer and other strategic relationships that will be conveyed with the deal have far greater value than machinery and inventory.

There are some statistics about the change forces related to industries, according to Ahern (2007:7)

Change Forces

Industries

Technology Change

Broadcasting, Entertainment

Internet

Packaging & Containers

Computers

Telecommunications

Tire & Rubber

Retailing

Defense

Globalization

Apparels, Textiles

Metals & Mining

Financial Services

Packaging & Containers

Tire & Rubber

Wireless

Commoditization

Chemical

Pharmaceuticals

As we know, entertainment and telecommunications are two of the most dynamic sectors that change everyday due to the development of modern facilities and the brilliant technology. Today they could be the biggest corporation in this field but they could be the out of date corporation in the next few days unless they update new technology as well as new ideas. However, changing technology and having new ideas are still the hard missions for the Board in the intense competition because they perhaps do not have enough capitals and time to research days by days. Therefore, M&A is the useful method to improve the competition ability against competitors on the same market by collecting the current advantages of the acquired firms.

Meanwhile, financial services and packaging and containers are two famous industries that get benefit from M&A through globalization. It is believed that in those industries, businessmen have to connect many different areas, different market, so they have to update the existing services and find out the way to impress new customers with high quality services. They could reach to the huge profit by cooperating with the local companies. Therefore, mergers and acquisitions attract the businessmen steadily in the intense competition.

6. Conclusions

Mergers and acquisitions activities are pointed out as the key role in a company’s growth. The benefits of M&A really improve and support for the long term development scheme. Perhaps the effectiveness of M&A depends on the strategies of the Board, the flexibility of negotiation period and enthusiasm of parties, but they could reach to the target if they are well prepared and target to conduct mergers and acquisitions successfully.

The achievement of certain corporate goals and objectives may involve the external acquisition of assets and resources needed for growth, a step that may be more efficient than internal expansion. If a buyer pays exactly what the business is worth on a stand-alone basis, then any benefit obtained from the planned changes (i.e., synergy) is profit to the buyer. Conversely, if a buyer adds no value to the seller’s operations, then paying fair value does not provide the buyer with particular advantage and disadvantage. Therefore, we should make a careful consideration before conducting M&A, avoiding the unfortunate consequence of capital and time. The Board of both sides could use law consulting services of law firms or finance consulting services at KPMG, PwC, and so on to improve the quality of preparation and negotiation periods.

In conclusion, I want to emphasize the importance of M&A to the development of corporations. M&A is really confirmed to be one of the most useful methods to overcome current difficulties and improve the development of companies. M&A really support for the growth of global economics, for it make companies in crisis become bigger in capitals, human resources. Therefore, the competition advantages of companies bring them to success and prosperity. Mergers and acquisitions are extremely noticeable ways to tackle with difficulties in the 21st century.