Mergers and Acquisitions
Mergers and acquisitions have become an important medium to expand product portfolios, entering new markets, which would enable the company, compete on a global scale (Yadav and Kumar, 2005). However, there have been instances where mergers and acquisitions are been entered into for non value maximizing reasons i. e. to just build the company’s profile and prestige (Malatesta, 1983; Roll, 1986). However, it is important to note that mergers and acquisitions do not regularly create value for shareholders. Many mergers and acquisitions fail as well.
Failure occurs and it deteriorates the wealth of the shareholders when the integration process for mergers and acquisitions does not work in proper flow. Almost two thirds of the firms who enter into mergers and acquisitions result into failure, which leads to divestures at a later stage (Schweiger, 2003). 1. 1 Definition of Mergers and Acquisitions While the terms mergers and acquisition are often used interchangeably, these two terms are different. In the academic literature, there are a number of authors who define merger, acquisition and takeover differently.
A merger is said to occur when two or more companies combine into one company. (Sudarsanam, 1995). The shareholders of the combining firms often remain as joint owners of the combined entity. In mergers, there is complete combination of the assets and liabilities as well as shareholders’ interests and businesses of the merging companies. However, according to Sherman and Hart (2006), a merger is a combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm.
Gaughan (2002) looks at a merger as a process in which two corporations combine, only one survives, and the merged corporation ceases to exist. Mergers or amalgamation mat take two forms: Merger through absorption and Mergers through consolidation. Absorption is a combination of two or more companies into an existing company. All companies except one lose their identity in a merger through absorption; On the other hand, consolidation is a combination of two or more companies into a new company. In this form of merger, all companies are legally dissolved and a new entity is created.
In a consolidation, the acquired company transfers its assets, liabilities and shares to the new company for cash or exchange of shares. An acquisition on the other hand, is the purchase of an asset such as a plant, a division or an entire company. Sudarsanam (1995) defines acquisition as an ‘arms- length deal’, where one company purchases the shares of another company and the acquired company is no longer the owner of the firm. An acquisition therefore is an act of acquiring effective control over assets or management of a company by another company without any combination of businesses or companies.
While a merger is a transaction between equal partners, acquisitions are used to denote a transaction where a substantially bigger company (the bidder) takes over a smaller company (the target). A substantial acquisition occurs when an acquiring firm acquires substantial quantity of shares or voting rights of the target company. Therefore, two or more companies may remain independent, separate entity but there may be change in control of companies. A distinction between takeover and acquisition is made. The term ‘takeover’ is sometimes understood to connote hostility.
Generally speaking takeovers means acquisitions. When an acquisition is a forced or unwilling acquisition, it is called a takeover. According to Gaughan (2002), a takeover occurs when the acquiring firm takes over the control of the target firm. An acquisition or takeover does not necessarily entail full, legal control. . Despite this need to clarify the distinction between these terms which is in line with common practice in academic literature on this subject, Chiplin and Wright (1988) suggests that the terms ‘mergers’ , ‘acquisitions’ and ‘takeovers’ can be used synonymously in an academic study situation.
Additionally, as Sherman and Hart (2006) proposes a similar approach arguing that, at the end, the differences in the meaning may not really matter since the result of these processes is often the same i. e. two companies that had separate ownerships are operating under the same roof, usually to obtain some strategic and financial objectives. 1. 2Motives for Mergers and Acquisition Mergers and acquisitions are strategic decisions leading to the maximization of a company’s growth by enhancing its production and marketing operations. The combination of two companies facilitates: 1. 2. Synergy: Another commonly cited motive for mergers is the pursuit of synergistic benefits. This is the new financial math that 2+2=5 (Pearson, 1999) That is, as the equation shows, the combination of two firms will yield a more valuable entity than the value of the sum of the two firms if they were to stay independent. (Sherman, 1998). Synergies can be further discussed as being financial, operating or managerial synergies. * Operational Synergy: Operational synergies refer to those classes of resources that lead to production and/or administrative efficiencies (Peck, Temple 2002).