Category: Acquisition

Introduction

In the recent past, many organizations have established mergers to improve the level of competition in the global markets. In the banking industry, various banks have established mergers to improve performance in the markets and to establish competitive strategies. Some of the mergers, which have been established in the banking industry in the last decade, are JP Morgan and Washington Mutual, well Fargo and Wachovia. In this paper, the author provides a discussion about mergers. In addition, the author has examined the reasons why banks are adopting the strategy of establishing mergers. Lastly, the problems facing mergers in the banking industry have been explored.

According to Andrew (2010), a merger is explained as the combination of two or more companies to conduct business like one company. As such, the liabilities and the assets of the acquired firm(s) become part of the acquiring firm (Andrew, J.A., 2010). Consequently, there are several benefits of mergers; for instance, firms can penetrate new markets. Additionally, the market share of a company increases. Firms acquire new technologies once they merge with other companies. It is also notable that firms gain competitive advantages after merging with other firms in the market (Moyer & McGuigan. 2012).

Reasons for a wave of mergers between Banks

Andrew (2010) opines that some companies fear establishing mergers with other companies. This has been caused by cultural conflicts, which have affected mergers in the global scene. It is a common scenario that, in the global markets, different cultures exist. This causes conflicts when people from different cultures work together. This means that firms differ in the way of doing things. Therefore, how much the merging firms try to merge the conflicting groups, the success of mergers may be impossible. Therefore, the result may not yield the best outcomes as expected because of the conflicting cultures among the merging firms (Andrew, 2010).

Another problem, that faces mergers, is the personal interest of various stakeholders of the merging firms. For instance, when a merger has occurred, employees fear that they may be retrenched. Workers also fear that the work terms and conditions may change, and adversely affect their tenure.

Resultantly, employee turnover may be experienced when mergers are made (Moyer & McGuigan. 2012). Therefore, it is evident that mergers may not be as successful as it seems. The performance of the employees and that of the company may drop after establishing mergers. As such, banks may wave mergers because corporate managers may fear losing control and avoid conflict that may rise as a result of a merger.

Difficulties that Acquiring Banks may face in the future

When banks establish mergers, poor corporate governance may be experienced. This means that the acquiring company may experience poor leadership in the future after acquiring other firms. The resources of an organization may be poorly managed, and decision-making tends to favor individuals rather than the company (Moyer & McGuigan, 2012).

Moreover, a fall in the value of shares may be experienced when mergers are created. In the long run, the value of shares may fall when the mergers fail to perform as expected (Andrew, 2010). This is a result of the unwillingness of a majority of investors to trade in a company that is not performing. Each investor would like to get the best returns out of his or her investment.

Confusion may also be experienced when creating mergers. This is because the number of reporting units will increase as a result of having too many departments within the company. In addition, poor technology may be acquired by the acquiring firm (Moyer & McGuigan, 2012). This may make the company ineffective and inefficient and consequently reduce productivity. Hence, this may discourage investors and may place a company at risk of collapsing.

Conclusion

Based on the discussion above, it can be observed that, despite having many benefits of mergers, there are also some difficulties. It is evident that banks should be careful in establishing mergers in the future. Appropriate strategies should be established when creating mergers to avoid cultural conflicts and other problems associated with mergers.

References

Andrew, J. A (2010). Mergers & Acquisition. New York: Library of Congress.

Moyer, R. C. & McGuigan. R.J. (2012). Contemporary Financial Management. New York: Library of Congress.

Introduction

Integration in a given firm and/or industry refers to the process of organizing production based on organizational unification as well as technology of different production processes. The management of any given firm should employ a method of integration which offers the specific company technological efficiency. A firm is said to be technologically efficient if it produces a certain quantity of output by employing the lowest amount of production factors and / or inputs. Integration method employed should also offer a given firm economic efficiency. Economic efficiency is the ability of a given company to produce a specific output level using the lowest possible costs. Production can be organized in three different ways (Craig and Campbell, 2005, p. 114).

Firms diversify in various means. They integrate vertically, horizontally or agglomerate. Vertical integration involves mergers of firms in the vertical; line of production. A firm can merge with other firms up or down the line of production. Mergers up the line of production are called forward vertical integration while mergers down the line of production, the backward vertical integration. Horizontal integration involves mergers between firms at the same level of production.

Conglomerate integration involves the merging of companies in different line of production. The benefits of the above diversification methods are that firms are able to improve their performance hence growth and increase in capacity. They increase their market shares, synergies, and due to large-scale production, they realize economies of scope and economies of scope. Low production costs lead to maximized profits. This study examines the impact of mergers and acquisition on the performance of Santander Group of banks between 2002 and 2010.

Santander Group

Banco Santander SA is a multinational corporation that operates n many countries including Spain, U.S., UK, EU and other countries. The group provides many financial products to its clients. The company operates in four main segments that are UK, Sovereign, Latin America and Europe. The bank is involved with business in retail banking, wholesale banking, insurance and management of assets. The bank began its operations as a small business entity and expanded to become the present multinational corporation with many branches in different countries.

Literature Review

Mergers and Acquisition

According to Rajeev and Yun (2009, p. 3), diversification is the process through which an organization enters new processes of business in the market with the possibility of manufacturing new products. Mergers and acquisitions are a form of entry that a firm may use to enter a market. Many firms in the financial industry have utilized this means to enter new markets. Mergers and acquisitions can take the form of vertical integration, horizontal integration or conglomerates. Horizontal integration is a form of integration in which firms combine at the same stage of production.

Ison and Griffiths (2001, p. 75) note that horizontal integration may help a certain company to increase their share value. Firms that undertake horizontal integration do benefit from economies of scale that result from capacity expansion, technical economies of scale, social economies of scale, financial economies of scale, marketing and managerial economies of scale.

Vertical integration is the ability of the firm to own subsidiaries downstream and upstream it line of production. Vertical mergers involve backward and forward linkages in an industry. Backward vertical integration occurs when firms merge or acquire subsidiaries that supply it inputs. Firms that undertake vertical integration realize reduced transaction costs hence increased profitability.

Conglomerate integration occurs when an enterprise combines with other companies, which operate in different line of production. Companies Conglomerate to diversify their portfolio and hence spread the risk. These types of diversification are not common in the banking and financial industry. The most common types of mergers and acquisition in the banking industry are horizontal diversification where banks merge with other banks in other countries.

Financial institutions such as banks do diversify through mergers and acquisitions because of many reasons. Banks can diversify with the aim of increasing their financial performance, exploiting the available business opportunities or other reasons. According to Shimizu, et al. (2004, p. 341), financial institutions may be influenced by the profit that their competitors are making in the global industry to engage in mergers and acquisitions. Diversification in form of mergers and acquisitions can enable banks to exploit many opportunities in the global economy. For instance, the advance in technology has enabled firms to be managed from different places cheaply.

Therefore, banks can undertake mergers due to the ability to management subsidiaries from far. Other reasons for mergers and acquisitions include ability for growth, need to reduce operating costs and increased competition in domestic market. In a study conducted by Badreldin & Kalhoefer (2009, p. 5), it was established that banks that participated in mergers and acquisitions increased their financial performance. Despite these findings, the study also established that integration is costly when integrating firms have dissimilar terms of loans and size strategies among other factors.

According to Altunbas & Marques (2008, p. 15) the ability of a strategic fit is an important element in determining the success of mergers and acquisitions in terms of performance. It is important that merging banks have similarities in their balance sheets. A survey by Altunbas & Marques (2008) to measure the importance of strategic similarities in mergers and acquisitions indicates that the size of the bank is important in determining the post merger performance of the bank.

A large size for a domestic merger compared to the size of the bidder results in lower post merger performance. However, for cross border mergers, a large size for the target firm is important because it results in high post merger performance for the bank. Empirical literature indicates that a high pre-merger return on capital has a negative effect on the performance of the bank after the merger both for domestic mergers and cross border mergers. Therefore, banks that perform well before the merger may not be able to improve their performance after merging because their base rate of performance was initially high.

The analysis of efficiency of banks measured in terms of cost to income ratio indicates that they are counter productive in performance perspective. This is due to the difficulties that banks face in integrating the different their cost structures that are different in the short term. According to Altunbas & Marques (2008, p. 17), the differences in capital structure between the merging banks enhances the post merger performance. Capital structure differences for cross border merger is useful at low performance levels. It is difficult for banks involve din cross border mergers to integrate institutions with capital structure that are different. Return on earnings (ROE) is usually positive after mergers.

Recent History of Mergers and Acquisitions

Mergers and acquisitions can be traced to many years ago when companies began integrating at different levels. Since mergers have occurred in different periods and involving different levels of capital, the mergers are known by their history. There are five merger waves with the fifth having occurred in the 1990s. The first merger wave occurred between 1897 and 1904. This fist merger was characterized by the transformation of firms from small firms to large dominant corporations. The first wave occurred about ten years after passing the Sherman antitrust act. The courts had a difficult time in interpreting the act leading to lack of antitrust enforcement. However, the situation changed in 1914 when the Federal Trade Commission was established.

The second wave of mergers occurred between 1916 and the first economic down turn in 1929. Horizontal integration was very common during this phase leading to increased oligopolies. The phase ended with the market downturn. The third wave of mergers was witnessed between 1965 and 1969. The phase witnessed conglomerate acquisitions that were witnessed because organizations wanted to expand but were limited by antitrust laws. The fourth wave of mergers was witnessed in the 1980s while the fifth was realized in the 1990s. All of the merger and acquisition waves happened during periods of economic expansion while they ended during period of economic slump.

The current conditions for mergers and acquisitions are still the same. However, there are challenges that affect the merging firms. Firms have mismatch in expectations. As one firm may expect the valuation of the firm after a merger to rise, the other may be expecting the valuation to decrease. The business environment is still risky and raising enough capital for carrying out mergers and acquisitions is challenging. Since financial institutions are valued highly, raising enough capital for acquisition of a given company is challenging. In the U.S and other countries such as India, the Post poll policies affect mergers and acquisitions.

Firms are uncertain of the policies after elections and therefore, the rate of mergers and acquisitions is affected. Major legal challenges facing mergers and acquisition in the world today are issues related to regulation, tax liabilities and guidelines to pricing.

Santander Group has always utilized mergers and acquisitions to exploit the existing opportunities in the banking industry throughout the world. The recent history of Santander group mergers and acquisitions include the acquisition of Banco Santiago in 2002, acquisition of Italian consumer finance company in 2003, Abbey National bank in 2004 and a merger with Sovereign Bancorp in 2005. In 2007, the bank merged with Fortis SA/NV and The Royal Bank of Scotland Group plc to acquire ABNAMRO Holdings. In 2008, the bank bought British mortgage bank Alliance and Leicester plc. The bank was also nationalized in Venezuela in 2008.

As the effects of the global economic crisis was being felt over the world, the bank managed to acquire some insolvent banks such as Bradford & Bingleys client deposits (Banco Santander, 2010). In 2009, the bank sold part of its Brazilian unit while in 2010 the bank bought back 24.9% of Santander Mexico from the Bank of America. From all these mergers and acquisitions, the bank exploited banking and business opportunities in different countries.

The long-term performance of the stock of the bank has been good since 2002 to 2010. The performance of the stock of the company as indicated in the graph below shows that the stock of the bank performed well until the year 2009 when the stock price decreased. It seem that the stock price of the bank is improves when the merger has a positive impact on the performance of the bank and decreases when the bank performance is poor due. This is the reason for the low fluctuations in the stock price. However, the large decrease in the share price in 2009 can be attributed to the global economic crisis rather than mergers and acquisitions.

Empirical Support

Mergers have always led to better performance of involved companies. According to Altunbas & Marques (2008), banks that diversify through mergers and acquisitions usually perform better. Empirical evidence from Santander Group corresponds to these findings from past studies. To prove the impact of mergers and acquisitions to the performance of banks, this study will analyze five ratios from the bank.

Efficiency Ratios

The efficiency ratios indicate the level of receivable in an organization, the repayment period, equity usage and the use of machines and inventory in the bank. The Santander Group has been involved in many mergers over a period. Since 2002-2009, the bank has realized fluctuating efficiency even after mergers and acquisitions. From the table below, the efficiency of the Santander group has been fluctuating over years. Efficiency of the bank decreased consecutively since 2002 from 52.28 to 47.44 in 2004. However, efficiency of the bank began to increase again in 2005 after the Santander Group merged with a U.S. bank Sovereign Bancorp. However, the subsequent mergers and acquisition that were made by the bank did not improve the efficiency further, but led to its gradual decrease from 52.82 in 2005 to 41.7 in 2009.

Table 1.

Return on Assets ratios

The return on assets ratio indicates the profitability of the bank when compared to the assets of the firm.

The return on assets ratio indicates that initial mergers made by the bank in 2002 and 2003 led to increased performance of the bank. The return on assets increased from 0.81 in 2002 to 1.02 in 2004. However, the merger of the bank in 2004 led to reduced performance in 2005 as is indicated by reduced return on assets. The ration rose to 1.0 in 2006 and then declined again gradually to 0.86 in 2009.

Gross Profit Margin

The gross profit margin indicates the profitability of an organization. The gross profit margin of Santander as indicated in table 1 fluctuated for the eighth years between 2002 and 2010. The ratio fell from 3.41 in financial year 2002 to a low of 1.95 in 2004 and began to rise again to a high of 3.36 in 2009. The fall and rise in the ratio indicates that initial mergers did not help in improving the profit of the company. However, subsequent mergers helped the company improve its profit.

Return on Earnings

This ratio measures the income that the bank realizes on invested shareholders equity. Fig. 3 below provides the return on equity ratio for Santander Group since the year 2002. From the figure, it is clear that the mergers and acquisitions that the bank made led to the increase in performance that in turn led to increased return on investors equity. Return on equity rose from 12.42 in 2002 to 19.61 in 2007 before declining to 13.9 in 2009. The increase in the ration can be attributed to the mergers made by the bank during the period 2002 to 2006.

BIS Ratio

The solvency of a given financial institution such as bank is given by the BIS ratio. The ratio provides the capital of the bank that is risk bearing and the risk weighted assets. The BIS ratio is an international standard that measures the stability assets and capital of internationalizing banks. The ratio maintains a balance between assets and capital.

The BIS ratio for Santander Group decreased from 12.64 in 2002 to 12.43 in 2003 before increasing to 13.01 in 2004. The ratio then continues to increase in subsequent years reaching a high of 14.2 in 2009. This indicates that although some mergers led to the decrease in the solvency of the bank, later mergers and acquisitions that were conducted by the bank led to increased solvency of the bank by increasing its capital adequacy.

Non-Performing Loans Ratio

This ratio measures the level where loans are at default due to lack of performance. The ratio for the Santander group fluctuated over time. It initially reduced from 1.89 in 2002 to 1.05 in 2004 only to increase again to 1.89 in 2005, 0.78 in 2006 and 3.24 in 2009 (see table 1).

Non-Performing Loans Coverage ratio

The NPL coverage ratio measures any loss that a bank may realize resulting from loss of non-performing loans. The ratio is calculated by the division of probable non-performing loans by the total non-performing loans of the bank. The NPL coverage ratio of Santander has been improving over years especially since 2002 to 2009. The ratios was 139.94 in 2002 and it kept on improving to as low as 75 in 2009 (see table 1). The reduction in the ratio indicates the positive effect of mergers that have led to reduced loss that the bank could suffer from non-performing loans.

Conclusion

Santander Group bank has been involved in various mergers and acquisitions as outlined in the study. In all the mergers, the bank sought to exploit the available opportunities in the business environment in the banking industry. although some barriers such as insufficient capital has affected the merging and acquisitions of the bank leading to the sale of some of its subsidiaries, the group has always managed to come back and merge with other banks.

The above ratio analysis indicates that mergers and acquisition of Santander Group had some effect on the performance of the bank. Santander Group has been involve din a number of mergers and acquisitions that have led to improved financial performance of the bank. Just as the literature review indicated that mergers and acquisition could lead to improved performance of the firm, the empirical findings of Santander group confirmed the findings. The ratios analysis indicated that not all mergers could improve the financial performance of the bank. While some mergers led to improved profitability performance that is designated by increased ROE, ROA and solvency, some mergers can lead to reduced performance indicated by fluctuating efficiency. In conclusion, mergers and acquisition lead to improved performance of an organization.

References

Altunbas, Y. & Marques, D. 2008. Mergers and acquisitions and bank performance in Europe: The role of strategic similarities. Journal of Economics and Business, 60(3). 204-222.

Badreldin, A. & Kalhoefer, C. 2009. The Effect of Mergers and Acquisitions on Bank Performance in Egypt. German University in Cairo, Working paper No. 18.

Banco Santander, 2006. Key Group Figures. Web.

Banco Santander, 2010. Spain Bank Merger and Acquisitions (Banco Santander). Web.

Craig, T. & Campbell, D. 2005. Organizations and the business environment. London, UK: Butterworth-Heinemann.

Ison, S. & Griffiths, A. 2001. Business economics. London, UK: Heinemann publishers.

London Stock Exchange, 2011. Banco Santander S.A. Web.

Rajeev, S. & Yun, Z. 2009. Benefits and Costs of Diversification for Firms in Chapter 11. Web.

Shimizu, K. et al. 2004. Theoretical Foundations of Cross-Border Mergers and Acquisitions: A review of Current Research and Recommendations for the Future. Journal of International Management, 10, 307353.

The article discussed in this summary declares acquisitions and cash stockpiling to be among the most beneficial strategy for improving total shareholder returns (TSR) of 2012. S&P 500 companies that engaged in the practices actively outperformed their more passive counterparts substantially throughout the year. However, this success cannot be used to indicate that acquisitions are universally superior tools for increasing TSR. Milano (2013) highlights studies that find acquisition-related declines in price and cash building-associated TSR reductions. However, he also makes the case that the utility of acquisitions is often underestimated. The success in 2012 was at least partially associated with lower activity, which led to reduced competition and improved prices. Hence, in a market where every company targets acquisitions, prices would inflate dramatically, negating the advantages. As such, the practice is situational, with the potential to produce impressive TSR growth in a favorable situation but limited general applicability.

To understand the shareholder impacts of the three items described in the article in a general scenario, additional information is required. For acquisitions, the price-to-book ratio, which was used by Milano (2013) as an example, could be a valuable indicator. A lower one would mean that the company can acquire new resources at an attractive price, and vice versa. To evaluate stock buybacks utility, the company should assess its share price growth, as advised by Milano (2013). They may be used when there is a consistent growth pattern, though this trend is not a reason to start buying back as many shares as possible. Lastly, before cash stockpiling, the company should consider its current potential uses for that cash. It is usually preferable to invest the money into growth opportunities if there are any attractive ones, as the returns will contribute to a higher TSR.

Reference

Milano, G. V. (2013). The envelope, please: The 2012 capital-deployment awards. CFO Magazine. Web.

In 2004, Lenovo was Chinas largest computer manufacturer, while IBM was famous for inventing the personal computer (PC) in 1981. That is why the business world drew significant attention to the case when Lenovo acquired the IBM division in late 2004. Thus, the given paper is going to demonstrate that the deal occurred because it should have offered benefits for the two parties, but Lenovo also challenges after the acquisition and problems coming from China.

To begin with, one should explain why IBM wanted to sell its PC business and why it found Lenovo a suitable buyer. 1981 witnessed as this IBMs division invented the PC, contributing to the worlds further technological development. However, the company decided to focus on consulting services in the early 21^st century, which made it reasonable to sell its unprofitable business. Simultaneously, Lenovo was Chinas leading computer manufacturer that wanted to expand globally because of increased domestic competition. The organization even joined the Olympic Partner Program in 2004 to become a sponsor of the 2006 Turin Winter Olympics to gain international popularity. Consequently, it is possible to mention that the deal under analysis implied possible consequences to both the buyer and the seller.

Even though the acquisition should have provided Lenovo with some benefits, the company faced significant challenges after the deal. Firstly, they related to the idea of how customers would respond to the merger. There was an opinion that the deal would hinder innovation, which would decrease product quality. Thus, there was a threat that IBM loyal customers who had accustomed to products and services of the highest quality would move to competitors. The rationale behind these thoughts was that the computer industry had not had examples of successful acquisitions by 2004. Secondly, an issue referred to the fact that executives from China and the USA should participate in teleconference meetings, which was challenging due to the 12-hour time difference between the states. It denotes that Lenovo had to deal with both organizational issues and customers skepticism.

Furthermore, it is reasonable to comment on whether Lenovo had a problem coming from China. Since the company had not been known outside Asia before 2004, it needed a new marketing and branding strategy. On the one hand, it was necessary to become a more famous brand throughout the world, and sponsorship of the 2006 Turin Winter Olympics was a suitable option. On the other hand, Lenovo had the objective to overcome the media and customers perception that the firm was associated with the Chinese government. This connotation denoted that potential buyers expressed less trustworthiness to businesses from China because of this countrys political system.

The paper has explained that Lenovos acquisition of IBM promised to generate essential benefits for the two because IBM wanted to sell its unprofitable division, while Lenovo had a desire to expand internationally. However, it does not mean that the deal did not offer any challenges. For example, Lenovo was forced to address the customers skepticism regarding the successful outcomes of the merger. Furthermore, executives were both from China and the United States, meaning that a time difference between the countries was a challenge. It is also reasonable to emphasize that Lenovo required a new branding strategy to enter the global market efficiently. Even though the business faced many challenges, the modern state of affairs demonstrates that Lenovo has successfully dealt with them.

The greatest cross-border acquisition in the developing world occurred in Bharti Airtel. It was in June 2010 when Bharti Airtel, the largest mobile communications provider in India, spent $10.7 billion on the African assets of Bahrain-based Zain Telecom (Palepu & Bijlani, 2012). Bharti senior management aimed to provide the same increased, low-cost communications paradigm they had developed for the Indian people to the African continent. However, once they began to merge the organizations, Bhartis executives discovered several unexpected difficulties, including cultural differences between their Indian and African staff members and stiff competition (Palepu & Bijlani, 2012). They also realized a monopolistic distribution system, worse infrastructure than they had anticipated with higher costs, a companion natural environment, and a business that stopped responding to tariff reductions.

Early in 2012, after one year and six months, the company had established a positive brand image throughout the continent and had acclimated to its new environment. It had contracted its telecommunications, information technology, and client service functions to India. Market share and profit margins are two crucial corporate measures showing improvement. But the company executives eventually faced challenges in Africa that drew them back economically.

Another significant issue for Bharti Airtel was the need to make the massive expenditures in IT infrastructure required to support its rapid membership expansion. The investments, which are capital expenditures, are often balanced by the prospective program income they permit. However, in addition to the normal risks involved with a huge fixed investment, Bharti Airtel also faced a financial risk from the ongoing decline in Indias average revenue per user (ARPU) for mobile telecom products. It was the result of policy rate changes that made it  at just under $8 per month  one of the least ARPUs within that region (Palepu & Bijlani, 2012). Bharti Airtel realized that while investing in its growth prospects was unquestionably important, factors unique to the Indian market greatly increased the likelihood of attracting capital expenditure.

Reference

Palepu, K., & Bijlani, T. (2012). Bharti Airtel in Africa. Harvard Business Review.

Introduction

To avoid conflicts of interest, comply with the set laws and standards and bring credit to the profession, the contact managers are expected to hold a specific code of ethics in line with the profession. The skills and competencies needed vary depending on the details of creating and administering the contract. In this paper, the discussion will be about defining, explaining and defending the importance of the code of ethics in contract managers.

Background

Ethics is a core value in the operation of any business as it determines the right, appropriate and wrong according to the set laws and standards. The code of ethics is a moral guideline that stipulates the expected behavior when faced with certain events or situations. It sets the expectations, standard of practice, and conduct principles, with clear penalties for the members who violate the established rules and guidelines. The National Contract Management Association provides contract managers with outlined principles, processes, rules, and regulations to comply with during contract acquisition (Ferrell et al., 2019). This guidance must be found during the administration processes and contract formation. The general obligations for the contract managers in the code of ethics are integrity, confidentiality, accountability, professionalism, and moral values such as respect, kindness, fairness. The violation of these ethics leads to penalties and punishments such as membership revocation, termination, or permanent disqualification (Ferrell et al., 2019). Upholding these codes of ethics helps establish good relationships with customers and contract partners and helps avoid lawsuits or any other related legal issues.

Conclusion

Every profession has its principles and rules that the members should comply with, which applies to the contract managers. The set guidelines and rules must be adhered to during the contract formation and administrative process to avoid any legal issues or punishments that may lead to disqualification. The code of ethics protects the business operations and ensures the employees are clear on the companys guiding principles.

Reference

Ferrell, O., Harrison, D., Ferrell, L., & Hair, J. (2019). Business ethics, corporate social responsibility, and brand attitudes: An exploratory study. Journal Of Business Research, 95, 491-501. Web.

The largest four companies and their brands in the coffee industry include Procter & Gamble (with Folgers as a brand name), Philip Morris (with its Maxwell House brand name), Sara Lee (with its Hills Brothers brand name) and Nestle (with a brand name of Tasters Choice) (Starbucks Coffee Company, n.d.). These companies influenced the quality of coffee and consumption patterns. In order to participate in the specialty coffee boom, large manufacturers acquired small roasters in 1990s. Consumption patterns in America showed a shift towards utilization of better and more expensive beans. Starbucks, being a coffee company, valued social responsibility. Employees were seeking to work with companies with strong values and consumers demanding more quality. There has been evident that consumers were willing to support companies with corporate responsibility (75-80% of consumers). Consequently, the company was willing to pay for being a responsible corporation for some reasons. These included increased shareholder value, using a reputation by competitive advantage, using quality suppliers, and increasing employee satisfaction. Many opportunities lie in the merging with companies as well as acquisitions. Such includes access to more market, chances to enjoy more economies of scale, and an opportunity for expansion. The company would be willing to merge with companies that share the same vision, or that can easily realign with their vision. Companies look for benefits in trying to merge with others. Starbuck would be willing to join with a company that already commanded a big market in order to access more market. As far as it concerns expansion of market, the company would benefit by joining with companies such as Procter & Gamble which has already been mentioned as one of the leaders in the coffee industry in history. Nevertheless, the company has since then expanded to other operations including in the e-commerce, solons, perfumes and pharmaceuticals industries. Joining with this company would offer an opportunity to access more market, since Procter & Gamble sold its products in more than 180 countries around the world. Diversification in the market is also an advantage that would benefit the merging because they would gain more money by selling more than one commodity. Procter & Gamble also deals with products in the areas of beauty, grooming, healthcare, snacks and pet care, fabric care, home care, family and baby care (Procter & Gamble, 2009). The coffee product is included in the category of snacks and pet care. Procter & Gamble had similar goals with Starbucks in that it had a high regard for providing goods of superior quality and value to its customers. Procter & Gamble aimed at increasing presence in developing markets, aiming at increasing affordability, accessibility, and awareness to improve on the amount of sales in the market.

Financing a merger or a takeover depends on the financial capacity of the company. There are various alternatives to financing a merger or acquisition and in this case (Business Finance, 2010) I choose revolving line credit because Starbucks is not as strong in terms of financial ability to be able to purchase Nestles. This type of financing will avail an opportunity for the company to get a loan from a bank and sign to allow similar amount of finances latter on. A bridge loan may also be useful in financing mergers and acquisition. This is where the company finances the full amount, little by little. Companies such as Starbucks may use the strategy to merge or acquire larger corporations than them, such as Nestle.

A quick outlook into the performance of the company may help in determining the strengths and weaknesses existing, as well as predict the coming performance. A company can use this to quickly judge between the viabilities of the company and thus the possible better merging partners. The following analysis compares performance between Sara Lee and Nestle, which are among the top performing companies as discussed earlier. It must be noted that analysis into the possible merger partner is a bit complex and requires more analysis than the one provided below. Nestle attained a sale increase of 3.8% during the quarter of 2009 hence falling way behind that of Sara Lee as will be seen latter. The real internal growth improved with 1% in the third quarter for the same year (Lesotha, 2010). The shares for Nestle were selling more than those of Sara Lee ($0.75 per share for Sara Lee by February 16 this year, while that of Nestle 46.96) Sara Lee attained a net sales of $ 2.6 billion while its adjusted net sales decreased by 2.5%. The adjusted operating income in the third quarter rose by 14.1% to reach a total of $62 million. Nestle would therefore be a second better merging partner for Starbucks because of better performance while Sara Lee would be the third option.

References

Business Finance. (2010). Merger and acquisition financing. Business Finance. Web.

Lesotha, P. (2010). Nestle ups buyback while sales fall 2%. Marketwatch. Web.

Procter & Gamble. 2009 Annual Report. Procter & Gamble. Web.

Tuck School of Business. (n.d.). Starbucks Coffee Company. Tuck School of Business, 1-28.

Introduction

Varied reasons motivate a firm to acquire other entities. Firms acquire others as a form of investment, which is expected to generate future returns. The main objective of firms is to maximize the shareholders capital, and thus companies acquire others for the same reason. Halliburton is one of the world largest multinational oil companies with it headquarters at Houston, Texas. Halliburton has more than 80 subsidiaries worldwide. Halliburton deals with petroleum and natural gas as its major market segment.

In 2014, the companys shareholders voted unanimously to approve a merger with its major rival, Baker Hughes. This merger was motivated by the ongoing downturn in oil prices and stiff competition in the market. It is intended to create competitive advantage to Halliburton by eliminating competition in order to take on the market leader, Schlumberger Corporation.

The deal is estimated to be $34.6 billion of the total Bakers Hughes equity stocks (Yahoo Finance, 2015). This paper explores strategies used to merge Baker Hughes with Halliburton. It also evaluates potential mergers and acquisition that can increase Penn Virginia Oil and Gas Corporations shareholders value. In the second case, this paper explores and evaluates both business and corporate-level strategies of Penn Virginia Oil and Halliburton Oil and Gas Corporation.

Strategies used to merge Halliburton with Baker Hughes Oil Company

Firms can either acquire related or unrelated businesses depending on the nature of their operations. There is no evidence to support that acquisition of a related business is likely to yield more returns than acquiring unrelated entities.

This issue has elicited hot debate concerning related and unrelated businesses. Despite disagreement on the issue, Singh Mann and Kohli (2008) argue that companies are motivated to acquire others in order to expand their markets, lower production costs, reduce competition, and improve production efficiency. A strategic merger leads to synergies in terms of cost saving, production efficiency, and competitive advantage, thus creating value.

Creating value is of strategic importance to both shareholders and managers. It ensures a firms future profitability is secured by reducing competition and unnecessary costs. Baker Hughes is the main rival of Halliburton and merging the two will create value by reducing competition. The merger of Baker Hughes will ensure that Halliburton Oil Corporation increases sales revenue by experiencing high revenue from the merger. Halliburton managers have been in a position to identify that falling oil prices have affected many firms in the industry.

Both firms are facing financial challenges and in order to survive, they have to merge. The merger will involve the integration of Baker Hughes into a wholly owned subsidiary. Therefore, the Halliburtons management team believes that the two firms will save an estimated $2 billion in operation costs (synergy). This integration will be settled by Baker Hughes shareholders receiving 1.12 shares of Halliburton and $19 in cash per share of Baker Hughes (Baker Hughes, 2015).

Halliburton and Baker Hughes arrangement is a cash stock deal. Al-Sharkas, Hassan, and Lawrence (2008) note that when oil prices dwindle, valuation goes down, thus giving large companies a strategic opportunity to acquire smaller companies in the same sector. In the late 1990s when oil prices went down below $50 per barrel, big companies acquired smaller firms (Stahl & Mendenhall, 2005). For example, Conoco merged with Phillips Petroleum and the British Petroleum acquired Amoco Corporation.

The timing of this merger is critical since smaller companies such as Baker Hughes have little capacity to absorb losses due to the global oil crisis. Baker Hughes value could be affected by many factors such as breaks fee, regulatory approval, and Halliburton confidence in the merger.

Therefore, Halliburton must be careful to ensure that it acquires the targeted firm at a positive acquisition value. In some cases, mergers may lead to poor financial and operational management. Consequently, the acquirer might regret paying a premium for the acquisition of another firm. In fact, some scholars believe that paying a premium price is not reasonable in most case. Most firms overestimate the amount of synergies to be created by mergers.

It is estimated that in most mergers and acquisitions, the acquirer pays a premium of 10-35% over the market value of the targeted firm (Moeller, 2013). Some analysts believe that Halliburtons deal is overestimated, as they hold that the merge will only create $250 million (Bodnar, 2015). Therefore, Halliburton might be buying Hughes shares at a premium beyond a reasonable price. Moreover, some analysts believe that Halliburton is very aggressive to make the deal without considering the true value of their target (Bodnar, 2015).

The current market price, as at 17^th November 2014 when shareholders agreed on the deal, was Baker Hughes (BHI) $62.67 and Halliburton (HAL) $43.36 (Bodnar, 2015). However, although there is an expected capital gain in the short term, investors are concerned that the merger is still overestimated. Furthermore, considering the 40% drop in oil prices, growth is not guaranteed. The OPEC has maintained it production, which means that oil prices are expected to fall in the future.

Therefore, in the future, it will be difficult for Halliburton and Baker Hughes to make a profit from drilling and natural gas. However, today, the proposed merger will protect Halliburton and Baker Hughes by increasing HAL market share by 23 per cent of shale drilling (Bodnar, 2015). Despite the synergies created, global forces and unforeseeable risks will outweigh the advantages.

Merger between Penn Virginia and Abraxas to create potential synergies

Mergers and acquisition is one of the most complex and risky business transactions in the contemporary times. It is estimated that over 80 per cent of mergers and acquisition fail (Bodnar, 2015). Therefore, it is critical for a business to evaluate targeted enterprise in order to ensure they add value to the company. Penn Virginia Corporation (PVA) is a gas and oil company engaged in the exploration and production of oil domestically in Eagles shale Texas (Penn Virginia Corporation, 2015). PVA can either acquire another firm in the industry when the business conditions are favorable.

Due to the current global oil crisis, Penn Virginia can potentially merge with it rival Abraxas Petroleum Corporation. A potential merger between Penn Virginia and Abraxas Corporation is likely to create synergies. Given that OPEC has declined to lower production, it is expected that the profitability of both Penn Virginia and Abraxas will shrink in the future. In order to survive, the two companies can merge to share production costs and reduce competition in the future. Continued low oil prices will distress Penn Virginia potentially, thus forcing it to either upload or sell assets to raise capital.

Some small to medium size companies that do not merge are shedding exploration assets to raise capital. For instance, Hess Corporation has sold some of its asset related to refining (Stokman, 2014). Falling oil prices will lower the value of small and some medium exploration companies to the extent where market capitalization is greater than the value of assets. In order to overcome such challenges, Penn Virginia can merge with Abraxas, which can potentially save huge operation costs (synergies).

Halliburton business and Corporate Level strategy

Halliburton is one of the best oil and gas companies in the world. This company has been in a position to retain its competitive advantage due to its ability to offer excellent quality products and services. Moreover, Halliburtons competitive advantage stems from its ability to specialize in equipment and develop processes at low cost. This aspect has enabled the company to gain strong and loyal customer base all over its subsidizers while increasing profitability. Finally, Halliburton has been in a position to invest in research and development over the years, which facilitated the development of unique products and services.

However, Halliburtons management can improve business performance by going beyond benchmarking in order improve the decision-making processes. Managers should connect incentive with performance to ensure accountability and increased productivity within the organization. Finally, managers should be educated on mergers and acquisitions to be in a position to evaluate such businesses based on value creation rather than isolated business opportunities.

Business and Corporate level strategies of Penny Virginia Oil Corporation

Competitive advantage is critical in the oil sector due to global falling oil prices. Penn Virginias management should focus on effective project execution to save cost and improve customer service delivery. In addition, Penn Virginia should focus on domestic exploration and increasing gas and oil reserves in order to compete with the rapid growing oil and gas production in the US. Moreover, the firm should also concentrate on consolidating resources in upstream operation in order to enhance long-term sustainability.

In particular, Penn Virginia should concentrate on natural gas production to meet market demand in future and to expand into a new market niche. The firm should consolidate and develop convention and non-convention natural gas in order to maintain supply and push forward profitability in the end. In order to improve innovation and take advantage of shared costs, managers should encourage joint investment in oil and gas production. By doing so, Penn Virginia will take advantage of new inventions at low cost and strengthen production in all domestic sites.

Conclusion

Mergers and acquisitions are complex to execute due to various obligations that have to be fulfilled before a final deal is reached. However, mergers and acquisitions can greatly improve a firms performance and especially if the proper valuation is well determined. Investors who intend to take advantage of potential mergers and acquisition must bear in mind that before a final deal is agreed upon, there is no guarantee that a final offer will be made.

Nevertheless, merger and acquisition in the oil sector such as Halliburton and Baker Hughes can greatly reduce operation costs and improve production and service delivery. Managers should invest in research and development in order to develop creative ways of producing well-refined natural gas to meet the growing market needs both in the short term and in the long term.

References

Al-Sharkas, A., Hassan, K., & Lawrence, S. (2008). The Impact of Mergers Acquisitions on the Efficiency of the US Banking Industry: Further Evidence. Journal of Business Finance & Accounting, 35(2), 50-70.

Baker Hughes: Baker Hughes announces April 2015 rig counts. (2015).

Bodnar, N. (2015). Examination of the Halliburton, Baker Hughes Merger: Part 1.

Moeller, S. (2013). Coping with Equity Market Reactions to M&A Transactions.

Penn Virginia Corporation: Penn Virginia Corporation Announces First Quarter 2015

Results and Provides Updates of 2015 Guidance and Operations. (2015).

Singh Mann, B., & Kohli, R. (2008). An Empirical Analysis of Bank Mergers in India: A Study of Market Driven versus Non-Market Driven Mergers. Journal of Financial Services Research, 35(1), 47-73.

Stahl, G., & Mendenhall, M. (2005). Mergers and acquisitions: managing culture and human resources. Stanford, CA: Stanford Business Books.

Stokman, H. (2014). Why Hesss Spin-Off Is Exactly What The Firm Needs.

Yahoo finance: Baker Hughes Declares Quarterly Dividend. (2015).

Introduction

In 1921 at the age of 19 Joseph Armand Bombardier opened a garage in Val court Quebec where he earned his living as a mechanic. After observing the problems people were faced by (during the winter season) he wanted to find a way that would make movement easier.

For about a decade he used his garage to develop multiple prototypes of a vehicle that would solve his winter problems and it was until 1937, he submitted his B7 prototype for patent approval (Bartlett, Beamish, & Ghoshal, 2008).

After the submission he received an initial order of 20, whereby he assembled his friends and family to manufacture the B7s whose customers included doctors, veterinarians, telephones companies and foresters.

In 1942 Bombardier incorporated his business as L’auto-Neige Bombardier Limited (ANB) shortly thereafter the company received orders from the Canadian government for specialized tracks to be used by the army during the 2^nd world war though this expedition was not that profitable it allowed the company to refine his manufacturing process and develop competence in government relations.

1950s saw technological advances in lighter engines, improved tracking and high performance synthetic rubber and this was climaxed in 1959 when ANB achieved his long time dream by developing a one passenger snow mobile. Joseph Armand Bombardier died in 1964 leaving a Cdn$10 million to his son, Germain (Bartlett, Beamish, & Ghoshal, 2008).

In 1966 Germain passed the presidency to his 27-year-old brother-in-law, Laurent Beaudoin, and in 1967, the company name was changed to Bombardier Limited. In 1969, the company went public with the intention of utilizing the funds to vertically integrate and increase its manufacturing capability.

Under Beaudoin leadership, the company pushed into the lucrative U.S. market, unveiled new products and utilized aggressive marketing initiatives to drive the business.

The Best Business, Cultural and Legal Practices

Global expansion forces companies to develop at least three types of capabilities knowledge about foreign markets, skills at managing people in foreign locations, and skills at managing foreign subsidiaries. He notes that without these companies are likely to remain strangers in a strangers’ land posing a risk in global expansion (Gupta, Govindarajan & Wang, 2008).

The bombardiers used the culture of first identifying the strategic positions to invest in while incorporating new business ideas. The culture of acquisitions was applauded by many as in its diversification this meant jobs were always protected.

During acquisitions BBD never replaced the existing staff instead it used its personnel to teach successful approaches and manufacturing methods developed elsewhere in the organization (Bartlett, Beamish, & Ghoshal , 2008). Despite the similarities in operating strategy BBD’s businesses differed in important ways.

Bombardier’s rail was counter cyclical versus other businesses in the company. An event such as energy crisis would affect the rail industry differently than recreation or aerospace. Also different was technology and product development. The main imperative for bombardier transporters to globalize was to increase their market share as can be seen in the various acquisitions and product diversifications as evidenced below.

Integration of the Organization into the Market

In the process of integrating and establishing itself in the market the BBD used acquisitions as a way of penetrating to the markets as shown below:

In 1970, the company completed the acquisition of Austrian-based Lohnerwerke GmbH. Lohnerwerke’s subsidiary, Rotax, was a key supplier of engines for Bombardier Ski-Doo snowmobiles and also a tramway manufacturer. This provided BBD with its first entry, albeit involuntarily, into the rail business

Thus, in an effort to expand BT’s presence in the global rail equipment industry, executives at BBD completed successful negotiation for the acquisition of Adtranz from DaimlerChrysler for US$725 million. This not only increased its revenue but also geographical scope, its competencies in propulsion systems and train controls completed its product portfolio as note in (Bartlett, Beamish, & Ghoshal, 2008).

To improve the company standings the Chief Executive Officer held one on one meeting designed to measure strengths and weaknesses of his manager and also discussed operation and strategic priorities to further integrate themselves in the market the company opted for:

Diversification of Its Products

With the acquisition of Adtranz which was organized around product segments which made the structure and allocation responsibilities quite foreign to BT the CEO Laurent Beaudoin realized that in order to reduce cyclical risks and ensure its long time survival, the company needed to diversify into other products beyond snowmobiles.

He began to seek out opportunities for BBD within a more broadly defined transportation industry. In the following two decades BBD made several strategic acquisitions.

Diversification was in:

Transportation

In 1974 snowmobiles represented 90% earnings of BBD revenues by securing a contract with Montréal city to supply the local transit authority with 423 subways it made its first major move to diversify revenues from the snow mobile business. Working on the positive reviews of Montreal commuters, further contracts followed as evidenced.

With mid 1980s being a turbulent time in the rail transportation industry, BT capitalized on industry uncertainty by purchasing companies and growing its market share by these acquisitions.

Examples of the new acquisitions were Pullman technology in1987, Transit America in 1988, Concarill in early 1990s and Urban Transportation Development Corporation (UTDC) in Canada. This made BT establish itself as one of the leading supplier of rail cars and cemented its international reputation (Bartlett, Beamish, & Ghoshal, 2008).

Aerospace

In 1973 BBD entered into aerospace business with the acquisition of controlling interest in Heroux limited which designed aeronautical and industrial components at its two Canadian plants. In 1986 in a bidding contest BBD acquired struggling Canadair from the Canadian government.

By applying aggressive market tactics, cost cutting measures and tight controls BBD was able to turn operations around to increase its market share subsequent acquisitions of Short BrotherPLC an aircraft producer in Northern Ireland in 1990, controlling stake in Dehavilland in1992 and the remaining interest in 1997 entrenched BBD in the civil aircraft industry.

Many more acquisitions followed as noted in the book (Bartlett, Beamish, & Ghoshal, 2008).

Creating and Maintaining A Competitive Edge Over Rivals

The Bombardiers growth philosophy enabled them create and maintain a competitive edge over its competitors. As shown above the company sought acquisition opportunities that allowed it to add value to business through the application of its competencies.

These acquisitions were a way for BBD to compliment or strengthen its existing businesses (Bartlett, Beamish, & Ghoshal, 2008). As evidence shows BBD was never afraid of walking away from a deal if it meant overpaying for a business but once entered in a business it was always patient in the integration of the acquired company.

BBD had strengths in product costing, tendering and an extensive experience in product assembly. Whether aircraft, recreational products or rail products most products were assembled as opposed to manufacturing. BBD always sought ways to control product technology and design, assembly and distribution while outsourcing other non core functions (Bartlett, Beamish, & Ghoshal, 2008).

Thus with these practices BBD always had an upper hand over its rivals. As noted in 2004 when company seemed to be disjointed with its customers to restore consumer confidence they rationalized the parts supply chains, integrated operations focusing on core competencies, and outsourced other responsibilities(Anon, 2004).

Conclusion

We can conclude thus that diversification was a key to Bombardier’s success. It’s strategy to consistently look for markets where the growth potential was significant in order to balance other sectors, which were declining due to competition and life cycles. Diversification as a strategy was also supported by the introduction of new products, the company’s successful entry into new markets, and gains in market share (Aurora, 2004).

References List

Anonymous, (2004). Business Transformation at BOMBARDIER AEROSPACE. Web.

Aurora, S. (2004). Order boom lifts profit margins at Bombardier: Bombardier is stepping up production to fill its record backlog of orders. Web.

Bartlett, A. Beamish, W. & Ghoshal, S. (2008). Transnational management: Text, cases and Reaadings in cross Border Management, Fifth Edition. New York: McGraw-Hill.

Gupta, A., Govindarajan. V., Wang, H (2008). The Quest for Global Dominance. New York: John Wiley and Sons.

Introduction

The main goal of this paper is to analyse the two market exit approaches initial public offering (IPO) and mergers and acquisitions (M&A). The theoretical analysis is done along with the detailed comparison of two approaches. The choice of a firm between going public (IPO) or be acquired (M&A) depends on many underlying factors. This theoretical analysis ca play a significant role is very significant in findings of emerging financial literature on IPOs and M&As. The main focus of study is on venture capitalists backed businesses decisions of acquisitions and going to public. The practical examples of technological companies exit decisions through IPO and M&A are discussed in detail to evaluate the potential and suitability of both approaches.

Venture capitalists whose main job is to make capital investment in companies owned by individuals not governed by any public authorities create their maximum income from companies that are open to people or registered with the stock exchange. A Venture Economics (1988) survey proves that “a $1 investment made in companies that gets registered with the stock exchange gives a normal profit of $1.95 more than the amount of primary investment if normally invested for a period of 4.2 years. The second most excellent option is an investment made in a purchased organization which gives a profit of simply 40 cents for the investments for a period of 3.7 years” (Gompers & Lerner, 23). Whereas study proposes that an IPO is more beneficial outlet plan for venture capitalists, it has been observed that in some organization, venture capitalist preferred an M&A above an IPO. In order to clarify this extraordinary event we will have to investigate the skill of the management functioning which influenced this choice of the venture-backed organization.

Financers, while financing in a new firm has to go through a lot of risks but doubt considerably increases as soon as the company starts functioning in technology-intensive organization. In such organizations, financiers and predictor or forward planner do not have technical information whereas the present possessor or proprietors of the company have full and widespread knowledge concerning not merely the in-house process of the industry but also have broad awareness not simply of the in-house practice of the industry but also its modernization capability.

The organization which is classified by specialized information, although if the financiers have full knowledge concerning the organization they might be incapable of understanding such particulars or details. In a different way we can say, although the proprietors are forced to make available precise and full details of the company’s functions, the financiers might not have the ability to construe these data if it needs to have the knowledge of the company’s professional abilities (Capron, 104).

Theoretical Background

In the last twenty years the researchers of management and finance have arrived to an immense perception with regard to the function of venture capitalists in the formation of new organizations, the formation and control of venture investment firms, and basically on the whole venture investment phase as an observable fact, from beginning to end (Gompers and Lerner, 99). In the collective information about venture investment, researchers and intellectuals have recognized how venture investors and their firms vigorously take part in the lapses of private organizations on account of board of director’s perceptions (Lerner, 299), the performance of the combination of venture resources in investment surroundings , the formation of positive governing privileges, and regular VC-CEO communication. All of these methods have been created as an outcome of possible organizational dilemma, such as ethical risk and poor choice, due to proportioned knowledge in the market vicinity the kind of organizations looking for venture investment, frequently on initial phase, innovation-based or technology-driven firms.

An initial public offering or IPO, is a commercial act in accordance with which a company offers initially its normal shares to the people with the motive of getting investment and generate liquidity for its present shareholders (Ritter and Welch, 1799), as well as venture investors, who helped the firm during its expansion and progress. Venture investors are mostly important financier having strong equity status, who vigorously manipulates the IPO procedure by organizing the company to make perfect use of their open capital investment as well as help them to decide when they should make access in the market.

Market situations are vital for deciding that the company must go for an IPO or take a substitute, look for amalgamation or purchase of a recognized company. For a biotechnology, Lerner (299) established that in a test of 350 private venture-backed biotechnology organizations, experienced venture investors show by and large of being an expert in taking the public companies close to the market heights. He established that in 1978 and 1992 venture investors took their biotech firms to the public markets (IPO) when the price were at peak and engaged additional private equity investments instead of when prices were lower (Lerner, 04). Hence, from previous text we can say that it becomes obvious that not only venture investors has a dynamic part in the commencement and enhancement of an immature company, but also in the way out plan for financiers and the management of these organizations.

Mergers & Acquisitions

A well known business forms a strategy to inquire amalgamation or combination for project industrialists. In order to Boost rating in organizations, companies have new technical advancement which may be eye catching as they are the key factor of developed organizations. This decision lets organization an opportunity to get many benefits like uncertainties in organizational decisions are avoided and innovation is encouraged.

In huge organizations merger and acquisition is perceived as a productive option in initial public offering in technological based companies. As these industries encourage technological moves and rise due to their sequential processes in development. Small organizations after going to public are opted for mergers or acquisition in order to capitalize the market offerings. This strategy is followed by technology intensive companies more rigorously to materialize their technological edge for large corporations.

Technology Diversification, Cumulativeness and the M&A Decision

This piece of work examines the industrialist believing on innovation and technology and the impacts of merger and acquisition decisions. The already established studies indicate that companies who regard technological advancements differ with those who disregard it with respect to the competences in their research and development department. Technology has significant impacts on the inception of a novel organization in general terms and in calculative terms.

The industries in industrial paradigm differ with each other on theoretical and empirical grounds. Whenever resolving an issue or offering new dynamics are thought about, the technology assists as it provides dimensions that are applied on people and organization as a whole to meet their needs and to facilitate processes in a better way. The enhancement in technology has no limits and the industries that have potential to adopt novel technology are ahead in the line by leaving other industries behind. By viewing and considering previous experiences, the company regards for present and future activities using their technological knowledge and participation in this regard.

The variations existing in industries as regards the circumstances narrated earlier have been linked to industry density. Marleba and Orsenigo (293) contend that industries which offer elevated number of technological opportunities would exhibit higher industry concentration. The greater number of technological opportunities would permit an uninterrupted access to new entrants but the recognized businesses would most probably advance their comparable innovativeness, which would ensure that the less profitable rivals are removed from the business arena. The reputable businesses have an edge due to the store of information and skill sets they have already acquired, especially in an environment of greater scientific cumulativeness. Therefore, in such an atmosphere, new players will not enter the field.

There is a general contention that the variations existing amid industries impact whether business enterprise capitalists leave their technology-intensive venture-backed firms by taking them public (IPO) or by selling the business. More to the point, we advocate that the level of technological diversification and technological cumulativeness in a particular field would impact this decision. Due to the whole environment of high technological diversification and high technological cumulativeness would result in greater density, mergers and acquisitions would be the preferred mode more often than IPO. In other words, technological diversification and cumulativeness would possibly bring about an increased level of industry consolidation which would hint at and facilitate a greater number of M&As.

Firm Age and the M&A Decision

Earlier studies have established the fact that businesses are consistently good at pursuing certain skill sets and competitive Merits. They also prefer to adhere to certain technological trajectories as compared to other because scarce resources and bounded rationality. Certain businesses also outsource information and data services in order to stay ahead in the race of innovation and the increased diversification required in order remaining at the top of the game. Taking help from another firm’s skill sets and data repositories can strengthen a company in ways which working independently may not facilitate. It follows that new firms, while mostly focusing on combing knowledge within their limits, can increase their profitability and likelihood of survival by searching for needed competencies in the external environment.

It would also be logical to think that as firms are established and mature, the chances of its survival are improved because inside their own boundaries, they have achieved the maximum possible competencies and need to look outside so as to stay ahead. This possibility may also decrease after a certain span because maturity would mean lesser chances of M&As. If the decision to leave the arena is put off, it may communicate to the market that the business is not a viable option. It would become very tough to find a profitable enough bid to be able to leave the industry and the seller may have to wait till the public is more receptive to IPOs.

Signaling and the M&A Decision

The fact that the intensity of rivalry in technological industries is high, coupled with the fact that nothing in R&D is cut and dried, makes investment in new entrants more risky. This is exacerbated by the problem of the shorter life spans of such enterprises and the long wait before they become profitable as a result of initial R&D. However, investors may base their decisions to invest in such firms by focusing on their potential, in spite of all the certainty and risks associated with backing a business which may or may not yield returns (Nerkar & Paruchuri, 25). One reason for such decisions may be the perceived strength of such businesses. The investors may have to evaluate the clearly apparent qualities of the continuous innovation and growth possibility of such enterprises because the quality of such firms may not be apparent in tangible ways. These positive proofs may include the reputable and creditable profiles of the VCs which are investing in these firms, along with the total leverage that the firm already has. Stated in other words:

This amount, along with the profiles of the investors and the credibility that they have in the market are seen as proofs that such firms are viewed to be viable options and would yield good returns. In other words, holding everything else constant, we think that a greater amount of financial leverage would be related to a better chance of an IPO as compared to an M&A due to the fact that the market would view the firm as a good prospect because of the amount and investment it has already attracted. Also, a new entrant which already has an impressive history of sales has a greater chance of inspiring investors’ trust. In other words:

At the end of the day, a bigger VC business has a bigger profile, with a more expansive business. Specifically, researchers have established that a greater number of business contacts are needed for entering new markets and starting new technology firms and that such inter-business and industry contacts impact the firm’s ability to attract more resources for expansion and growth. Even more so, the investment cycle itself is dependent upon established and time honored contacts among the various players of the field, which bring about industrial and geographical trends and ties of investment which are formed through partnerships and investment networks (Sorenson and Stuart, 1555). Therefore, it is logical to reason that the bigger a VC firm’s network is, the more possibility that it would be in a position to find a good M&A business, especially in an arena which relies heavily on close ties.

Merits and Demerits of IPO and M&A

Every organization desires for a top position in market. Initial public offering (IPO) is associated with good position and good luck. The approach to success with respect to Initial Public Offering has been intimately described in professional writings and social network pages. Companies are striving in their way to competing world and innovative minds are taking the lead.

On the other hand, privately owned organizations consider that asking general people for business related decisions is not the good choice. On the other hand, an acquisition decision or merger and sale may be the suitable resolving point to fulfill the organizational requirements and to offer end term consequences to the top management.

Initial Public Offering (IPOs)

Merits

• Convenience in forecasted money supply for future growth and expansions
• Developing organizational perspectives as a public entity with broader management vision
• Steps in share factors provide convenience in business decisions
• Forecasted merger and sale options after going to public

Demerits

• Based on the fulfillment of demands of management and market investors
• Not in the range of costs as additional costs are incurred during IPO processing
• Disturbances in daily transactions due to auditing and other legal requirements for IPO
• Adequate leakage of data when required due to public access to undisclosed data.
• Small duration based activity can be affected by change in economic or political environment
• Internal management’s stock factors affected on the market stock prices
• Stocks pertaining to market place are subject to change according to trend of market

For an illustration, if any option like this is available, it may lead to number of pros. Initial public offering is subject to forecasted money arrangement decision faster, swift, convenient and cheaper. The organizational portfolio is developed and enhanced vision is offered to investors, clients and intermediaries. Other plans stock related programs offer amazing Merits to customers. In short, the initial public offerings are subject to enhancing the future based merger and sales plans.

Issuing shares in general public for the first time may bring adequate cost related issues. For example, it is one of the time and efforts taking process. The costs in terms of outer cost management should be regarded carefully disturbing this process and transactions of organizations on a long duration as many employees will be assigned special tasks. On the other hand, when the organization goes public it has to commence and follow the rules and regulations of security federal laws. Back in time, the implicit data pertaining to employee’s compensation were supposed to be known. Associated with that, the decision for going public, the management was focused on short-term durational activities and the main concern was the organizational move on quarterly assessment instead of five-year durational plan. Another concern was about the investors view point on quick development of investments. The shareholder’s options needed definite time as viewed by underwrites and needed ‘lock-up’ process with minimum time range three months and the maximum extended to several years. An offer was made regarding the internal management’s decision to stock factors. Last but not the least; an organizational decision revolves around the market place moves. Our evaluation may be underlined based on number of opinions; some are mutually exclusive to company moves. For example, any up or down in environment by large or the company trends in a market.

Mergers and Acquisitions

Tracing back in times, some past years have observed an increasing trend of mergers and acquisitions in private companies similarly like public companies. The phenomenon is dependent on merger and acquisitions activities based on an exit plan associated with management and considerable improvement chances for organization.

There are many pros of the exit strategy when we view it in broad terms. Firstly, you may enjoy quicker development, as this involves low time duration than the general process of asking public for buying shares. It also does not restrict the owner to be confined to ‘lock up’ conformity to compel him to keep stock for long duration. Secondly, company wind up is certain to a large extent before the prices go down; owners have an opportunity to sell out the company. The agreement also includes the terms of purchasing based on cash with no provisions related with ‘earn out’. Considerations are already set up in a seasonal based organization when pricing matters are discussed. Thirdly, initial public offering information leak out does not allow acquisition and merger related options to disclose information. In conclusion, winding up business involves a choice given to top management owe companies on contrary of asking general public. Even though, the organization has irregular and unreliable outcomes, there yet are chances of finding a buyer or you may go to a bank to ascertain underwriting matter.

Merits

• Quicker strategies related with exit plans can be executed in less time with available resources
• Pricing strategies are accounted for low costs and maximum benefits in less time
• Removing barriers in disclosing certain information as the information is limited to the management of acquiring company
• Merits achieved as a result of merger with huge organizations to share the established brand equity and market share.
• The advantage of synergies as various sister concerns can support each others business.

The performance of an organization rises when it is associated with acquisition and merger activities. It is hectic for lots of smaller organizations to maintain their positions in a marketplace as consumers are prone to dynamic variation in their choices. Consequently, numbers of small companies sell to large companies and they develop potentials to deal with negotiation in large organizational set up. The top decision makers of a company as well go into the decision of taking Merits from synergies broadly with strong companies. Earnings and expenses are the focal point in this decision making. The earnings may result from operations of a company that involves advertisement and promotion in an effective way, a strong allocation of association and a balanced product mixing decision. It may also be subject to Merits the selling party with regard to product or offering valuable services. Besides that, economical scale is assisted in connection with huge organizations, innovative minds arrive and technologic advancements are shared. The public companies are inclined toward merging with other successful companies to get the hold.

Recent observed Trends

The proportion of acquisitions and mergers in private firms has been considerably increased in last few years. In last decade, private firms have been opted to be acquired rather than going to public. The ratio of acquisitions to IPOs among private firm exits has increased. National Venture Capital Association (NVCA) reported in its research that venture capital based companies exit through M&A more than that through IPO. In 2005 alone, acquisitions amounted to 78% of the total venture capital firms exit. Also in 2006 and 2007, the volume of 269 acquired firms worth 11.890 billion as compared to the 37 venture supported IPOs value of $3.486 billion.

The financial crunch and severe crisis of 2008–09 temporarily decreased the ratio of M&A in USA and other European countries, but this decline has increased the future opportunities for acquisitions. Since companies started restructure and consolidate at high speed after recession due to the company strategic move or government pressure. Companies with excess cash in recession took advantage of acquiring companies with financial incapacities. For instance, in pharmaceutical sector alone in 2009, Roche forwarded bid of US$40 billion to Genentech, Wyeth was offered $68 billion by Pfizer, and Schering-Plough recovered offer of $41 billion from Merck.

Tech Companies IPO vs. M&A Analysis

In case of technology companies, the decision of going to public needs proper thinking and appropriate strategies. Since the trend for small and big venture backed firms is gaining more benefit through mergers and acquisitions. During the phase of recapitalization, an IPO is event of financing which cannot be treated as a means of liquidity. For the supporter of this strategy, it is remarkable that in information technology sector, 112 IPOs have offered globally in 2010 as compared to 79 in 2009, but this fact does not prove that best exit strategy is IPO. In reality, the picture of IO is not very fascinating as approximately 80% of these IPOs are trading below offer value at present in US and Canada. Some of the examples of this worst trading is of QuinStreet at 33% less than that of IPO offer value, TeleNav at 37%less, Convio at 9% less, and Meru Networks at 24% less thanthat of IPO value in US stock exchanges. Only few IPOs have seen bearish trend after exit decision of the company.

Therefore, it can be said that one size cannot fits everybody as every company and industrial sector has specific considerations when going to decide for exit. In some cases, it is before time that a new company goes for IPO therefore for small size and age Macon is a good option. In order to see the private equity availability for technology companies, the M&A volumes and deals for other industries also need to be analysed. Therefore, the comparison of recent IPOs performance or lapses is essential to understand the conditions of market. This background knowledge is useful for the shareholder of new public owned companies which can see better opportunities in post IPO acquisitions in near future.

According to the statistics of NVCA, in 2010, 310 companies undergo M&A agreements mostly involved a purchase of small private owned company by a large public acquirer or private capital company in Canada and USA. This shows the highest M&A run rate in one decade which includes the maximum deals in software and information technology businesses, digital media houses, and hi-tech services sector. The average worth of these private owned technology companies M&A deals is comes to about $37.5 million.

Conclusion

In conclusion, An IPO option needs to be used by the company only if it has observed a consistent growth in sales for many ears and have established a firm position in respective industry. Therefore, the choice between IPO and acquisition is made on the basis revenue, size, market conditions, diversification, and strategic policies of the companies. It is recommended that those companies which achieved the excess revenue of $100 million at the minimum and have highly experienced and skilled management team. The management of the company should have expertise of running a public limited company in present scenario of public markets. These companies are capable of attracting proficient underwriters and security analysts who can estimate and promote the stock of company in stock exchanges by using recapitalization methods.

Due to the cyclical nature of IPO markets, the options are not found open for majority companies when they want to do it. The cost of going public is also very high as compared to M&A, includes insurance, audit expenses, compensations arrangements, legal, and governance. These costs force companies to think properly before going to public offerings. The range of these costs varies in the range of $1.5 million to $3 million per annum approximately. Therefore, M&A is more simple and cost effective strategy for companies where management and investors seek liquidity and profitability in short run.

Although, M&A strategy has faced a two year low in financial crisis of 2008-9, now the buy out activities and conditions are remarkably improved for small profitable tech companies in USA. Companies need technology resources and effective human resources as they come out of the severe recession. Acquiring a tech company is one of the most viable solutions in 2010. Accumulation of cash in public limited companies provide s the opportunities for expansions and strategic alliances.

Finally, each firm has to be analysed on its resources, strengths and available opportunities. For technology sector, above analysis shows tat M&A is a more viable option than IPO or going to public. The size and volume of recent deals prove the importance of strategic planning, market opportunities, and management styles of companies. Private owned companies should take benefit of the competition among the groups of strategic acquirers and venture capitalists in the business. The target of the company is to increase the equity of shareholder and brand equity of the firm in the long run whether it can be achieved through IPO or M&A.

References

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