Mergers & Acquisitions - For Growth and Diversification
Posted in Finance Articles, Total Reads: 1010
, Published on 02 December 2015
Almost every day, we come across media reports about Mergers and Acquisitions (M&A): the forthcoming ones or the completed ones, the mergers that have fallen through, or the ones that appear to be successful or unsuccessful and so on. So, exactly what Merger and Acquisition is? Are these two words used interchangeably or different?
With the competition intensifying across the globe, companies are facing an intensive challenge to sustain and survive. With this comes the hard realisation: Size Does Matter. In a world dominated by companies of global reach, the big is always beautiful. Business houses like AV Birla Group and Tata demonstrate the power of acquisition-led growth strategy. These companies accelerate their growth by acquiring smaller companies, which are either forced to be a part of Mergers and Acquisitions or chose to be.
Mergers and Acquisitions are two different concepts of strategic management used by companies, the term got fame in India in the year 1988. In Merger, two companies voluntarily agree to combine their operations into a single entity. While in Acquisitions, one company overtakes or purchase another company, sometimes without the consent of another company. The company acquires 100% or nearly 100% of assets of the acquired company. In the former case, new company could be formed by merging but in the latter case, no new company is formed.
So, what makes a company to merge with or acquire another company? The main reason behind this is the desire to compete or survive in the market. Besides this, companies agree to merge in order to gain market strength, to limit the competitor’s power, to make access to the market in a more effective manner and it also helps companies to lower the costs by using same production facilities and transferring technologies. There are a lot more reasons, why two companies merge together. Sometimes, investors hope to purchase companies whose products are undervalued in the market, in order to increase their values and to add value to their targets.
Merger &Acquisition is a very good option for the companies that want to accelerate its growth and expand its business operations by adding product profiles or operations of other company. Diversification of business is a very used strategy for accelerating growth nowadays. By merging, companies do have a lot of advantages in the market over other smaller companies. It creates more shared decision making models where it gets easy to resolve staff issues. It provides more resources to the company, better skills and talent base, reduces commercial risks, good contacts in the markets and a competitive edge over other competing firms. Acquisition helps as a saver for the company which faces downfall.
Tech giant Microsoft merged with Nokia in an effort to make its position in the smartphone market. Despite the marriage of Nokia hardware and Microsoft software, Lumia series continued to lag behind the Apple IOS and Samsung android smartphones. But on April 25, Microsoft purchased Nokia’s smartphone business for $5 billion as well as the companies patents of worth $2.18 billion. In this case, we can see that earlier two companies were merged together but after a while, when the Nokia was facing downfall, Microsoft acquired Nokia for a grand total of $7.2 billion. Besides the reason of mobile success, the merger was also motivated by the troubled financial state of Nokia’s mobile market. Microsoft not only lends a helping hand to Nokia but also proved that Microsoft is a trusted and reliable business partner. The CEO of Microsoft Steve Ballmer called the merger a “bold step into the future” and continued on saying that the deal will “accelerate the share of Microsoft and profits in the smartphone market”.
As for Nokia, though the smartphone company has dissolved, the company will go on with its other projects, which include Nokia HERE which is an innovative mapping system and its telecommunication service Nokia Solutions and Networks.
Other well-known M&A’s are:
• Bank of America’s merger with Fidelity Bancorp
• Tata Steel takeover on Corus in 2007
• Jeff Bezzos’ e-commerce giant Amazon acquired Washington Post ($250 billion), Sunpharma acquired Ranbaxy
• Flipkart and Facebook acquired Myntra and Watsapp respectively.
India is becoming a highly sought destination for M&A deals. India must concentrate upon increasing the simplicity in the business environment. The rules and regulations related to the Indian business environment are easing. Indian corporate sector witnessed M&A deals worth $67 billion in 2010.
“In an inter-connected world, competition is all pervasive and businesses will have to think big, act fast and transcend geographic boundaries by mergers and acquisitions to stay globally competitive,” Adi Godrej, chairmen of Godrej said in a conference.
On the other hand, it seems logical to expect that shareholders of acquiring companies receive positive returns from the mergers; this did not appear to be the case. In fact, a research indicates the opposite: shareholders of acquired companies enjoy significant positive returns while, on average, shareholders of acquiring companies received a zero return. Some of these acquisition activity resulted in negative returns and a trend towards restructuring in many companies.
So, there is always a dark side of everything if that is not implemented wisely.
This article has been authored by Gunjan Tiwari from Symbiosis Institute of Management Studies Pune
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