FREE ESSAY ON MERGERS AND ACQUISTIONS

MERGERS AND ACQUISTIONS

Mergers and Acquisitions Since the 1980's, and even more now in the late nineties, it has
become a growing trend for companies, both large and small, domestic and foreign, to form
strategic alliances within their particular industries. There are many specific goals
that companies may be looking to achieve by dong this, but the main underlying reason is
to guarantee the long-term sustained achievement of fast profitable growth for their
business. They have to keep up with a rapidly increasing diversified global market and
increased competition. Nowadays, with the struggle for competitive advantage becoming
stronger and stronger, it is almost essential to form alliances. Diversifying and
expanding techniques such as mergers and acquisitions are very popular methods for
forming these alliances. Basically stated, a merger is a joining of forces and
acquisition is a purchase of a company, whether it is welcome or hostile. The two terms
are often used interchangeably. Much research and planning is required in the early
stages of these processes, which starts with an acquisition strategy used in trying to
find a suitable company to merge with. Advantages and disadvantages of the merger must be
thought out, as well as many other important aspects, such as risk factors and new
organizational structures that must be considered and closely monitored throughout all of
the stages of the merger or acquisition. It is of these competitive strategies, mergers
and acquisitions, as well as a recent case study following the conclusion, that will be
the focus of my paper. Before going further into the merger and acquisition process, a
more complete explanation is necessary. A merger is the combining of two or more
companies into a single corporation. This is achieved when one company or business
purchases the property or some other form of assets from another company. The result of
this action is the formation of one corporate structure. This new corporate structure
retains its original identity. An acquisition is a little different from a merger in that
it involves many problems being dissolved, and an entirely new company being formed.
There are different ways for a merger or acquisition to take place. One obvious method
involves the purchasing business making an absolute payment in cash or in company stock.
Other arrangements may be made such as the exchange of bonds. After the purchase has been
made, the purchaser acquires the assets and liabilities of the other firm. There are two
main types of mergers; horizontal and vertical. A horizontal merger or acquisition
combines firms that competed with one another at the same stage of production into a
single new firm. These mergers usually involve basic commodities. A vertical merger,
which is more common in producer-goods industries, takes the entire production process,
from raw materials to the end finished product, and combines them together under single
ownership. Throughout history, certain mergers and acquisitions have influenced modern
international finance. In the late 1800's, merger and acquisition techniques were being
abused and monopolies were starting to emerge. This led to the creation of The Sherman
Antitrust Act, which made monopolies illegal. More recently, large mergers and the birth
of new markets around the globe have affected international finance. When two major
corporations merge they form a company with a very large amount of economical and
political power. This has led to issues that deal with ethics and social responsibility
(Hirsch 15). Now we contemplate the first important question: Why merge or acquire? As
stated earlier, the overall goal is to ensure future stability and growth in the market.
But more specifically, each company has individual goals that it hopes to achieve. Many
times mergers are completed to save a failing business. Others reasons for mergers
include reduced competition and/or product diversification. These goals are closely
related to the possible advantages of mergers and acquisitions, and of course, in the
case of all risks, there are possible disadvantages as well. Many of the advantages have
to do with forming unique research and development skills. One major advantage is that a
merger would give a company the opportunity to expand by establishing their presence in a
host country. This invites the company to compete in other markets. Another possible goal
or advantage is being able to adopt technology from the other business rather than
spending the time and money to develop it themselves. In the long run, this would cut
costs and improve productivity. Economies of scale and scope can be gained with a larger
base and with this increased size come many competitive advantages (Eiteman 482). A
successful merger or acquisition may very well allow a business to reduce its foreign
exchange operating exposure by servicing a market with local manufacturing rather than
through imports (Eiteman 483). Some businesses merge to help alleviate some or all of
their debts (debts that will be taken over by the merging company) in hopes of getting
the chance to start over. Later in my report I will be discussing a cross-cultural
merger, therefore, the disadvantages I am about to discuss relate to cross-border
mergers. One major problem that may be incurred is cultural differences between the two
businesses. This may lead to tension, conflict, and stresses between the organizations,
namely its employees, lessening the chances of a smooth merger. Many times teams are
designed to deal with any possible conflicts that may arise as a result of the
differences in customs, values, and norms. In a few cases, there are negative political
reactions from the unfavorable host countries. When the possible disadvantages occur, and
these outweigh the benefits of the merger, it is possible that the merger be classified
as a failure. Failures could be a result of bad planning, lack of leadership, unrealistic
expectations, and/or inadequate due diligence. A more recent definition of this describes
poor returns to shareholders or a self-assessment that the company wouldn't repeat the
deal (McVinney 11). Failure rates stagger, ranging between 16% and 80%, depending on the
approach used to determine it. So now that a solid foundation has been laid, the next
question that needs to be answered is: So what steps do businesses actually take when
embarking upon a merger? The ten steps, in order, are: 1) Formation of an acquisition
strategy. 2) Defining the Acquisition Criteria 3) Searching for a Target 4) Acquisition
Planning 5) Valuing and Evaluating 6) Negotiating 7) Due Diligence 8) Purchase and Sale
Contact 9) Financing 10) Implementation A closer investigation of the steps is important
in obtaining a better understanding of the actual merger and acquisition process. The
first step is putting together an acquisition strategy and the second step is putting
together the acquisition criteria. These two steps are closely related. When thinking
about acquisition criteria, management answers the question, why buy? Possible answers
include to increase market share, broaden their product range, and to diversify by
entering into new markets. The third step is searching for the target. Things that a
corporation considers are particular business areas, products and services desired. The
buying corporation does research to find out all about the target company. This research
is done by making telephone contact, correspondence and by speaking with third parties
(notes). If things are looking good, a meeting between the two corporations will be
arranged. Next comes acquisition planning, the fourth step in the process. In planning,
top management must consider location, price range, profitability, return on capital
employee, and image compatibility. A very important factor taken into consideration at
this time is the scope of integration. It is important to examine this factor because it
could lead to failure. Step five is valuing and evaluation. This involves setting a value
and evaluating the potential company. The value is determined by examining the historical
nature of accounts, assets, and by referring to the Stoy Hayward Quarterly Index. Step 6
is when the negotiating begins. There are thoughts of sources and methods of funding the
business such as internal and external sources of funds. Step 7, Due Diligence, refers to
the management of the acquisition. At this point there is a space between the two firms
while the overall purchase plan is reviewed. The most important step may very well be
step 8, actively managing the acquisition. This involves the purchase and sale contract,
but it also involves the actions plan. Decisions have to be made about how the company is
to be run. Topics such as authority, responsibilities, and roles must all be defined.
This, along with the implementation of any new ways, will require extensive
communication. A major problem that must be addressed at this point is integrating
corporate systems, structures, and cultures. This is one of the most complex challenges,
especially when dealing with cross-cultural mergers. Problems arise because, not everyone
wants to adopt someone else's way of doing business. And when you start to form a third
culture out of the fabric two equally strong companies, the task is enormous, especially
if your trying to maintain high performance in the marketplace at the same time
(Leonard). To deal with any problems, special task-oriented teams are organized who will
specialize in this area. Step 9 deals with financing and finally, the tenth and final
step in the successful acquisition process is the actual implementation of your plan as a
company. When the steps are followed and everything goes as planned, the result is a
successful merger. There will be good operating and market synergy between the buyer and
seller, and the newly merged companies will understand the importance of sharing
eachothers capital, markets, and technology. After researching mergers and acquisitions,
I have come to understand the importance of these two growth strategies. Today's business
environment is being dominated by mergers and fast growth. In order be a player in the
highly competitive markets, expansion of firms is necessary. It is almost impossible to
achieve high profitability all alone. This growth is achieved through new product
development, acquisition of new plants and more machinery, and business development
activities. Firms are merging due to pressures from their competitors. Corporations today
must understand the financial and technological difficulties as well as the complex
problems associated with the actual interaction of peoples and plans when participating
in mergers, and they must strive to execute all of their plans to their maximum
potential. CASE STUDY Renault and Nissan join forces to achieve profitable growth for
both companies... On Saturday, March 27th, it was announced that Renault, a French car
manufacturer, would be teaming up with Nissan Motor Corporation in a $5.4 billion deal
that created the world's fourth largest automaker. This deal gives Renault a 36.8% stake
in Nissan, a company that has been struggling financially for the past few years. The
$5.4 billion deal between Renault and Nissan hands over effective control to the French
automaker in exchange for badly needed cash (Wwodruf). There are other agreements within
the contract, but they will not be discussed in much detail at this time. Both of these
corporations plan on benefiting from the merger. This alliance will resolve Nissans very
substantial financial problems. Renault will be given the opportunity to join the
automotive big leagues at a time of global expansion in the auto industry (Marks). Market
expansion will be possible because Nissan is strong in Japan, Taiwan, Thailand and North
America- markets where Renault has no presence. On the other hand, Renault is one of the
top marketers in Europe, while Nissan is just a small player. Nissan is strong in trucks
and luxury cars, and Renault is strong in small, mass-market cars. Even though the deal
sounds great, it does not come risk-free. Many skeptics believe that the teaming up of
two struggling automakers will not result in profitability or flourishing. Renault is
taking a risk because it has just recently begun being profitable, and the company may
not yet be stable or strong enough to save Nissan from its great debts. Just as any
proper merger should have, Renault-Nissan has already disclosed some of their strategies
for achieving a smooth merger. Renault is counting on its expertise in cost-cutting to
turn Nissan around. This expert team is going to be led by Renault executive VP Carlos
Ghosn. The rest of the team consists of 40 Renault managers who will be responsible for
helping Nissan improve efficiency and reduce spending (Marks). The new joint venture will
be led by a global alliance committee of top managers from each company. Since there will
be a clash of cultures, Ghosn's task may not be easy. His techniques of cost cutting are
exactly what Japan is against. Many other teams have been formed as well. Eleven Cross
Company Teams will be assigned the task of promoting all possible synergies to be
implemented by each of the partners (Renault 2). Each team will be in charge of something
different, from product planning and strategy to purchasing and logistics. As a result of
the merger between Renault and Nissan, they estimate they will save $3.3 billion in 3
years. Sharing purchasing costs and auto platforms will be used to achieve this.
Renault-Nissan will now operate together in hopes of competing in a globally diversifed,
competitive automotive market. Works Cited Eiteman, David K. Multinational Business
Finance. Addison-Welsey, Co: Reading, MA, 1998. Pp. 480-496. Hirsch, Jared Brett. Mergers
and Acquisitions: A Different Perspective. Kimball Publishing: New City, NY; 1996. Pp.
13-15, 18,19, 31-56. Leonard, Daniel R. Global Markets.  Mergers and Acquisitions.
Shermerhorn Johnson Company: New York City, NY; 1997. Marks, B. Global Automotive Report.
Detroit News. 1999. Http://www.detnews.com/1999/autos.htm. (28 Mar. 1999). McVinney,
Michaels.  A guide to mergers and acquisitions. 1998. http://www.michelsmcvinney.com (29
Mar. 1999). Renault. The Agreement. 1999. Http://www.renault.com. (28 Mar 1999). Woodruf,
David. Deals. Nissan, Renault in $5.4 B Deal. CNNFN. 1999.
Http://www.cnnfn.com/hotstories. (28 Mar 1999).