Good Strategic Challenges Involved In Mergers And Acquisitions Essay Example
Part 1 - The History, Evolution and Relevancy in Today’s Business World 2
The Main Concept - Mergers and Acquisitions 2
Distinction between Mergers and Acquisitions 2
History and Evolution of Mergers and Acquisitions 3
The Great Merger Movement: 1895–1905 3
The Period from 1916 to 1940 4
Part 2 - Practical Application of the Concept 5
General Electric’s Acquisition of Alstom 5
Merger of Media General’s with LIN Media 6
Strategic Challenges Involved in Mergers and Acquisitions
Part 1 - the History, Evolution and Relevancy in Today’s Business World
Before discussing the real life application of the strategic management concept under review, it is necessary that Mergers and Acquisitions should be thrown a light upon based on its meaning, concept, history and evolution through different eras. All this is achieved in this section whose last part includes analysis of whether the concept of Mergers and Acquisitions is still relevant and applicable to today’s challenging business world or not.
The Main Concept - Mergers and Acquisitions
In corporate finance, management and strategic management, Mergers and Acquisitions (M&A) deal with activities of dividing, combining, buying and selling of either similar entities or different companies. This activity is pursued as it helps an organisation rapidly grow within its sector or in a new location or field, without creation of a subsidiary or joint venture. This concept of Mergers and Acquisitions represents certain kind of restructuring that result in reorganization with ambition of providing positive value or growth.
This rationale of application of Mergers and Acquisitions is particularly lucrative to businesses during tough (such as recessionary) times. Strong organisations attempt to buy other entities (whether competitor or not) for creation of a more cost-efficient and competitive business. Sometimes, companies come together and form an alliance with a hope for gaining greater market leadership and achievement of greater efficiency. Due to these promising benefits offered by Mergers and Acquisitions, target companies often agree to be taken over, bought or to form an alliance when it is perceived that they can never survive the market competition alone .
Distinction between Mergers and Acquisitions
Either way, the restructuring could result in the financial and economic consolidation of two separate and distinct entities. If Chief Executive Officers (CEOs) of two different companies agree that the consolidation or joining the powers is in the best interest of both the parties, this will be known as "merger of equals" where the deal is friendly in nature. However, when the targeted business does not wish to be taken over or acquired, this deal will be called an "acquisition" because the deal is of an unfriendly nature. In this case, one business takes over the other and the new entity is formed to be known as acquisition. Legally, the acquired company ceases to exist but the acquirer’s stock continues to be traded in the share market .
History and Evolution of Mergers and Acquisitions
The Great Merger Movement: 1895–1905
The history of merger activity between firms started 1898 to 1905 with its first stage of evolution as dictated by the Great Merger Movement of businesses in United States. During this time period of 1895 to 1905, small businesses possessing little market share combined their powers, by forming powerful and large institutions, with similar firms that dominated the domestic marketplace. In light of this merger activity, approximately eighteen hundred small firms disappeared due to consolidations into and formation of a new and large entity.
Till 1900, small businesses merging with one another constituted about twenty percent of the total Gross Domestic Product (GDP) when new entities were formed using vehicles known as Trusts. With the passage of time, the value of mergers declined where this activity constituted about three percent of the total GDP in 1990, whereas between 1998 and 2000, merging activities gained their momentum to form about ten to eleven percent of the total GDP .
The greatest historical example of merger activity during the Great Merger Movement is the consolidation of US Steel, General Electric and DuPont which combined their powers to dominate the market leadership through to 1929. This large scale merger helped these companies to grow their market leadership by introduction of technological innovations of their products and services, patents as well as brand recognition by the targeted consumer base.
Apart from this, there were other businesses in 1905 holding much of the market share but suffered from the lack of competitive edges in the market as possessed by General Electric and DuPont. Such companies that possessed market leadership but no competitive advantages included American Chicle and International Paper. Their market share, however, started to decline in 1929 because majority of small companies were joining their forces through mergers and formed a new venture that exposed older firms to intense competition in the marketplace. This is true because the small firms that entered into mergers were mass producers of standardised products having potential to exploit the operational efficiency of high-volume manufacturing by other companies. All this merger activity was capital intensive and had a competitive advantage to maintain the production of same number of output while reducing per unit prices. These ventures, formed by mergers, outperformed the other big firms in 1929 when demand for products fell sharply and fixed costs increased dramatically.
All this is true because during the Great Merger Movement, the activity pursued in this era concerned “quick merger” where small businesses entered into merger with those companies unrelated to their line of business, technology and contained completely distinct managerial practices. All these mergers and acquisitions were outcome of and motivated by favourable economic variables such as macroeconomic settings, rise in the Gross Domestic Product, fiscal policies and higher interest rates. These favourable variables not only triggered the Merger & Acquisition activities but also played a prominent role to lay the strategies between targeted and bidding firms.
It is important to note that during the period of the Great Merger Movement of 1895 to 1905, much of the merger and acquisition decisions were taken to combine the powers of those businesses which had no competition with each other. This strategic management activity was pursued in unrelated industry. Most of the businesses dominating the market belonged to the profitable sectors such as railways and electricity etc. During the period from 1897 to 1904, most of the merger and acquisition in the construction, metal and steel industries were of horizontal integration in nature.
Since most of the mergers and acquisition were pursued in unrelated line of businesses and industries, many firms failed to create synergies and the combined activity was not successful because they were unable to gather similar expertise and achieved no operational efficiency. Due to the emergence of this corporate issue, the global financial system decelerated in 1903. This was followed by and resulted in the stock market crash during the year 1904. To restore the equilibrium in corporate sector, a directive was issued by the apex judiciary body to de-merge the anti-competitive mergers by implementation of the Sherman Act .
The Period from 1916 to 1940
Unlike the previous phase which lasted from 1895 to 1905 during which the merger and acquisition activity was pursued by anti-competition firms, during the second stage of evolution, much of the strategic management activity emphasised mergers and acquisitions between oligopolies or business rivals. As competitors started to combine their powers through mergers and friendly acquisitions, they were able to find more competent approaches to run the business and achieved operational efficiencies for expansion. This resulted in innovation and improvement in the field of science and technology. Much of this activity was witnessed infrastructural development providing a wide variety of services in transportation (logistics) industry. During the 1920s, financial institutions such as private and government banks played a prominent role in supporting the mergers and friendly acquisitions processes to provide a cushion to the corporate ambiance.
Most of the mergers and acquisitions which happened from 1916 to 1929 were multinational and horizontal in nature because competitors were now combining their business powers to form a new entity for achieving operational efficiencies. Interestingly, they were automobile tools, metals, chemicals and food commodities industries in which most of the merger and acquisition activity took place. However, when the stock market crashed again in 1929 accompanied by great depression, the second historical phase of merger and acquisition ended but various tax exemptions provided in 1940s motivated many conglomerates to involve themselves in merger & acquisition processes.
The third stage of evolution for mergers and acquisitions lasted from 1965 to 1970 which marked the horizontal integrations and were motivated by increase in interest rates and developments in stock markets. Most of the mergers and acquisitions processes undertaken during this five year period were financed by equity stakes. Most of the deals were financed by less debt or borrowing activity and the involvement by financial institutions (like banks) in the business was kept to a minimum. However, in 1968, due to poor and underperforming performance of merged ventures, the authorities decided to de-merge some of the multinationals. Afterwards, from 1970 and onwards, small businesses started displaying good performances which gave birth to the merger activity again. Those individual businesses which made their mark and then entered into mergers again included ESB merging with INCO, United Technologies with OTIS Elevator and Garlock Industries with Colt Industries.
During this period, much of the strategic managerial activity was witnessed relating to acquisition processes made among businesses bigger in size and turnover comparative to firms in previous phases. Industries like banking, oil, aviation, pharmaceuticals and gas, combined their powers to run the business with their domestic rivals and counterparts in the international market. Cross-border buyouts were mostly initiated and majority of acquisition processes were unfriendly in nature. This phase ended when anti acquisition laws were introduced, fiscal organizations were restructured and the Gulf War appeared.
This is the fourth stage of evolution for merger and acquisition activities which is still active since 1992. This stage is normally dictated and stimulated by stock market boom, deregulation policies and increase in globalisation. Most of the mergers and acquisitions seen in this era are concentrated between industries like banking and telecom giants whose deals are financed by equities rather than debt borrowing. The strategic management activity is normally pursued to achieve long term profitability instead of short-term benefits. Investments by corporate, revised government policies and promising economic growth are some of the key factors contributing to the unusual rise of merger and acquisition managerial strategies.
Part 2 - Practical Application of the Concept
Under this section, the practical examples (one each) of mergers and acquisitions will be discussed which will demonstrate the initial situation, issues faced by the acquiring company and post-activity performance of the business.
General Electric’s Acquisition of Alstom
On 30th April of 2014, General Electric acquired its acquisition target, Alstom which deals in thermal, renewable and grid businesses with a deal value of approximately $17 billion. On the said date, General Electric took over Alstom’s (a French company) gas and steam turbine business after the board of Alstom selected General Electric’s revised bid and rejected the joint bid from Mitsubishi and Siemens Heavy Industries.
In light of this action, General electric took over power and grid businesses of Alstom for a deal of $17 billion. But the major issue which General Electric initially faced was that the French government rejected the acquisition offer. This was because by acquiring the segments of Alstom, General Electric could become giant and monopolist in its operating sector. Due to acquisition the management of Alstom was supposed to be replaced by that of General Electric. The French Government anticipated dramatic increase in unemployment across France and feared that an iconic French-based brand will dissolve .
Another issue was that General Electric revised its bidding deal after which the European Commission initiated an in-depth investigation to confirm if the acquisition deal is in alignment with EU Merger Regulations. This investigation concluded that the acquisition will raise potential market competition concerns in an industry where heavy-duty gas turbines are used in gas-fuelled power plants. The European Commission and the French Government rejected the acquisition bid earlier because the deal will drive three major competitors of General Electric (the world's leading producer of heavy-duty gas turbines) out of the business and will reduce competition due to monopoly.
The deal was also rejected because the authorities to the competition policy were mainly concerned about the drastic increase in prices due to monopolistic nature of General Electric after acquiring Alstom. Customers would have been left with little choices to make among brands from only fewer competitors that will lead to less innovation in the sector. It was challenging and necessary to maintain competitive actions in the market of heavy-duty gas turbines production .
Merger of Media General’s with LIN Media
One most popular and recent example of mergers is that Media General combined its business powers with LIN Media and run the whole business with the name of Media General Inc. LIN Media LLC agreed to be taken over (in a friendly) manner by and merge with Media General Inc. against a deal value of $1.6 billion. Media General Inc. engaged itself in this strategic management concept because it wanted to gain more competitive advantage of increasing cable fees from cable services providers.
Therefore, the company merged its business with that of LIN Media to collect a local television station in its product base . The merger deal gave Media General Inc. numerous financial and strategic benefits which included significant free cash flow, a diverse geographic footprint and a strong balance sheet followed by opportunities to expand business operations by acquiring one more TV station . Media General Inc. possesses the most diverse and largest digital media business in the industry whose portfolio includes LIN Mobile, LIN Digital, Dedicated Media, BiteSizeTV, HYFN, and Federated Media .
Media General Inc. decided to merge the business of LIN Media into its product base because the former possessed thirty two fully-powered TV stations, over one hundred low-power stations and twenty two Class A stations whereas the latter had thirty nine power televisions stations. After merger, Media General Inc. became more powerful by having sixty eight fully powered stations apart from LPTVs and Class A stations. After merger, Media General Inc. can now be able to display market leadership thereby surpassing intense completion in the market. By acquiring more TV stations, Media General Inc. can benefit from fees charged by cable service providers to customers against the supply and subscription of a television channel . In all, Media General Inc. now owns seventy four local TV stations across the United States and can now reach twenty three percent of the overall household sector to serve 26.5 billion viewers .
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