The study of subject of Mergers and acquisitions in a corporate world is highly extensive and occupies a very strategic position in the functioning of any business unit. The decision towards taking this step by an organization is attached with many critical aspects and is driven by various forces existing in the market. Companies looking for economic expansion by consolidation of different segments into one forms to be one of the factors persuading corporates to undertake this decision of merging in a horizontal line of industries. Apart from the steps of the company to integrate on a vertical or horizontal basis in order to satisfy the need of expansion, another vital driving force is posed by the desire of diversification. The rationale behind undertaking this decision is to mitigate risk by investing in variety of areas or assets. This further enables the company to bring down the element of volatility in the business and further minimize its exposure to idiosyncratic risks which has the potential to hamper a specific asset by reducing its price or any particular area of the business. Such a kind of risks works in an unsystematic manner to deteriorate the conditions related to peculiar aspects of an enterprise. The decision of diversification leads to formation of conglomerates which in turn minimizes cash flow volatility of the company as it further reduces the vulnerability of conglomerates to risk from any specific industry. In other words, it enables the corporates to offset the effects of downfall in one industry with the other unconnected industry.
The concept of bargain hunting is another factor which leads to the decision of mergers and acquisition by the organizations. This can also be viewed through the term leveraged buy-out, which in essence take assistance of debt capital and such sources for acquisition were preferred to either destitute or undertake a simultaneous move of expanding and downsizing the businesses. The rationale behind such decisions was to reduce the immense debt obligations existing on the business units. This trend was primarily prevalent during the years of 1984-1989 and then witnessed a slow down in this market pursuant to 1989. Post 1990, the international market experiences a major boom and brought economical prosperity, with the major focus on Globalization. This era witnessed mergers and acquisitions beyond the geographical borders and hence emerged the concept of a significant trend which can be characterized as cross-border acquisitions and mergers. The emergence of this trend could be credited to the desire of corporates to make best utility of opportunities on a global level and enhance the growth of the business in terms of exposure and monetary. Hence, business units started looking outside the borders of their home to target some new and fresh markets of the world. Some of the mega deals which were witnessed during this era and were driven by the force of Globalization are that of Citibank and Travelers, Exxon and Mobil and so on . This led to technological innovations and redirected the companies to focus on the enhancement of their core competency, which in turn can enable them to attain a competitive edge in the market.
In pursuance to these trends shown by the Mergers and acquisitions market, the present report seeks to explain various factors which form the driving force for the corporates to undertake such strategic and critical decisions. It is an established fact that the main core of undertaking any decision by a business unit is based on the requirement of enhancement at the economical level and hence, the instant study shall elaborate on various aspects of the said economical forces, prevalent in the modern era.
Factors leading to merger and acquisition
Merger and acquisition of businesses generally takes place due to presence of many type of strategic reasons but the main reason is linked with economic condition where businesses have to utilize resources for enhancing overall performance in the market. Various economic reasons are present which are associated with merger and acquisition and they are discussed below:
Generally capability of any business enterprise increases through expansion into research and development activities. Further, in case if any organization acquires advanced technology then it enhances overall capability and in turn overall challenges present in the business environment can be faced easily. Apart from this, other main reasons involve businesses are interested in combining to leverage costly manufacturing operations. In case when any two organizations merge with each other then overall capability to carry out operations within the market enhances and this in turn acts as development tool for the business. As per view of Kemal and Shahid, in every sector concept of merger and acquisition is gaining importance and it has become one of the main reason behind success of businesses in the market.
Enhancing market share
It is regarded as one of the main reason due to which concept of merger and acquisition is gaining importance at faster pace. Apart from this, many time it is possible that companies are not able to operate efficiently in the new market due to lack of knowledge or expertise. According to Zerdin (2014) acquiring new businesses to enter into different market is considered as one of the most efficient way. This allows companies to enhance their market share and they can surely operate on broader platform in the market. Businesses are adopting the process of merge with the motive to gain better distribution network. Therefore, this reason clearly represents that need for merger and acquisition is increasing at faster pace in every market.
Diversifying product range
One of the main reason due to which merger of two companies takes place is to complement present product or service. Two businesses are indulged into practices of combining product range with the motive to enhance market performance. Apart from this, core competencies of the organizations are combined so that it can enhance long term strength of the businesses. This in turn brings favourable results for the companies in every possible manner.
Reducing overall cost and other type of expenses is one of the main motives of every business. As per view of Johnston (2012) strategic decision linked with merger and acquisition allows businesses to focus on the main areas where they can easily reduce overall cost and in turn performance can be enhanced easily. Apart from this, when two organizations merge then they are delivered opportunity to combine located and this in turn decreases level of opportunity cost through integration of support functions. Due to this basic reason firms are able to enhance their profit margin and this in turn leads to rise in level of overall performance in the market.
In the modern era due to presence of large number of challenges in the market it has become difficult for businesses to survive in the market. Merger of both businesses supports to deal with the survival issues like in the case of financial crisis organizations who merged with one another were able to survive in the market and rest have to face large number of issues (Buckley,J. P. and Ghauri, 2002). This represents that survival is one of the main factor which has encouraged organizations to merger with each other so that they can smoothly carry out all the operations and in turn this acts as development tool.
Therefore, these are some of the most crucial factors which have lead to merger and acquisition of businesses where main motive is to grab opportunities which are being present in the business environment and provides long term benefits.
Positive Side of Mergers and Acquisition
The process of Mergers and Acquisition is one of the most prominent decisions which is frequently been taken by the the corporate houses in the present world. Some of the key advantages leading to the expansion of this innovative and strategic form of restructuring, which it offers to the business world are immense in number.
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With the assistance of this restructuring measure, corporates can attain synergistic results which fundamentally is a result of a surplus power which is offered through this medium of expansion or divestment by a company. In addition, this is a means to achieve cost efficiency in the operations as it leads to a scenario wherein more than one company function together by combining its resources to produce tremendous financial gains and excellent performance. As also stated by Kaur (2005) this further empowers the business units to improve on their purchasing power while making orders in bulk. Furthermore, the volume of production also experiences an enhancement which is large and thereby leads to a positive effect on the profit margin being realized by the company. A reduction can also be made in the total workforce working for the resulting company, thereby further increasing the profit margin. On the strategical level, this enables the management to better understand some of the critical issues and policies and make an optimum utilization of the combined resources of the companies. It has also been observed that the resulting company is empowered to exercise a better control on the forces prevalent in the market, which in turn enables them to effectively face the severity of stringent markets. Further, an efficient risk management scheme can be developed as the market forces can be foreseen by the management. Moreover, the combining effect of the authorities of the two companies shall bring variance in the perspective of analyzing situations and taking decisions, thereby covering every aspect of a scenario and leaving no buffer space of discrepancies. A major enhancement can be realized in network of the resulting business unit, which would enhance and strengthen the hold of the entity in the market as well as increase the market reach (Projects, 2007). In consequence, new sale opportunities may be offered to reach some unexplored areas of the market or regions. Another area which shall experience an advancement can be that of technology, which in result may further enable the conglomerate to effectively fight against obsolescence and price wars. Therefore, this one of the prominent ways to gain power in the market and place the corporate at a higher position in the business world.
Negative side of merger and acquisition
Concept of merger and acquisition has many advantages but some disadvantage are also present. Negative impact of this concept has been discussed below
Merger and acquisition is regarded to be bad for consumers as when two businesses adopt strategic decision of merging with one another then level of competition reduces within the industry (Johnston, 2012). Moreover, the new firm may have power to charge higher prices
Overall level of imparting jobs decrease in case of merger. Further, in case if one company has acquired another one then it can surely lead to shut down of operations which is unfavourable of organization in every possible manner.
Merger and acquisition can lead to diseconomies of scale for the new business in the market.
Market saturation is considered as one of the main disadvantage of acquisition where two businesses operating together may find difficult to enhance sales volume along with the profitability level. Moreover, difficulty also arises in terms of strengthening customer base along with other form of operations being carried out by companies.
Cultural clashes also take place when companies undertake the concept of merger and acquisition (Mergers and Acquisitions., 2013). Different type of individuals work together who differ from each other in terms of religion and culture. Therefore, chances of conflict increases where all the individuals may not prefer to work with each other. This directly has negative impact on organizations and sometime productivity is also adversely affected.
Increased debt is one of the negative impact of merger and acquisition. Sometime business can borrow money to acquire another business and it is shown in the books of company. Therefore, to repay the entire amount back business has to earn higher income. Sometime it may not be possible to earn higher revenues.
So, these are some of the main disadvantages of merger and acquisition which businesses have to undertake for enhancing overall performance in the market. Further, by considering all the negative aspects companies can surely focus on long term development and it allows to deal with the challenges present in the external surroundings such as competition and all other barriers faced while carrying out operations. Effective strategies have to be built for dealing with the negative aspects of merger and acquisition.
It can be concluded from the study that Mergers and acquisition have increased importance since its initial appearance at the end of 19th century. The decision with respect to execution of such an strategy is associated with several crucial aspects. In addition to this it is being driven by several forces which are prevailing within the market. It has been inferred from the present report that the firms that are looking for economic expansion can opt for this as such can assist them in building sound image in the market. The study concludes that both mergers and acquisition can take place by the means of purchasing assets, common shares, exchange of shares for assets as well as exchange of shares for shares. It has been inferred from the study that Mergers and acquisition is regarded as important agent of change. Further it is crucial component of any organizational strategy. There is presence of various reasons that results in M&A among the businesses. This is comprised of enhancing the performance of the organization and accelerating its growth. Along with this it assist in diversifying the risk and assist in increasing the market share as well as positioning by providing broad access to the market.
M&A involves series of steps that facilitates the organization in attaining its aim of merger and acquisition. The study concludes that there is presence of various factors that results in failure of the particular strategy. It involves poor strategy fit. This can be because of wider difference among the objectives as well as strategies of the companies. In addition to it can be due to poorly managed integration. Often the integration is managed poorly without planning as well as design. Such results in failure of execution. Too optimistic project regarding the target market is the another reason that leads to bad decision and failure of M&A.
Cooper, C.L. and Finkelstein, S. eds., 2014.Advances in mergers and acquisitions(Vol. 13). Emerald Group Publishing.
Kemal, M.U. and Shahid, S., 2012. Mergers, acquisitions and downsizing: Evidence from a financial sector.Global Business and Management Research,4(1), p.112.
Ravenscraft, D.J. and Scherer, F.M., 2011.Mergers, sell-offs, and economic efficiency. Brookings Institution Press.
Buckley,J. P. and Ghauri, N. P., 2002. International Mergers and Acquisitions: A Reader. Cengage Learning EMEA.
Kaur, G., 2005. Corporate Mergers and Acquisitions. Deep and Deep Publications
Connell, B. R., 2008. Why Companies Do Not Pursue Attractive Mergers and Acquisitions. Cambria Press.
Hoang, Lapumnuaypon T. V. N. and Kamolrat., Critical Success Factors in Merger and Acquisition Projects, 2007.
Johnston, K., 2012.The Disadvantages of a Business Acquisition.
Mergers and Acquisitions., 2013.
Schlachter, T. C. and Hildebrandt, H. T., 2014. THE REASONS FOR MERGERS AND ACQUISITIONS.
Zerdin, M., The Mergers and Acquisition Reviews, 2014.
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