Category: Acquisition

Abstract

This paper focuses on the peculiarities of efficient implementation of M&A. First, various measurement strategies are analyzed, and it is acknowledged that researchers come to different conclusions due to the use of different methodologies. The existing measurement methods involve stock-market-based measures, accounting-based measures, managers’ perceived performance strategies, expert informants’ assessments and divestment measures (Wang & Moini, 2012). Zollo and Meier (2008) identify two major dimensions: the level of analysis (with task level, transaction level, and firm level) and the level of time (short-, medium- and long-term levels).

The paper also addresses main execution issues such as the lack of communication, unclear and unrealistic expectations and goals, too many compromises associated with organizational structure, the absence of the strategic plan and concepts, the lack of top management commitment, the lost momentum, and the failure to address IT issues in a timely manner. The two integration imperatives (urgency and execution) are also considered.

Finally, the acquisition plan developed is enhanced in accordance with one of the metrics mentioned above. Major execution issues are analyzed. It is concluded that the new plan manages to address all the issues effectively.

Different Methods Employed to Assess the Performance

Mergers and acquisition (M&A) have been seen as effective strategies to improve companies’ performance. However, researchers stress that the findings concerning the effectiveness of this approach may differ due to the different measurements. Wang and Moini (2012) and Zollo and Meier (2008) identify and evaluate major methods utilized to assess M&A.

Event Studies

For instance, Wang and Moini (2012) note that event studies or the stock-market-based measures has been employed since the 1970s. This approach identifies abnormal stock price effects (if any) related to M&A as stock reflects all the changes during the following period based on the new information (Wang & Moini, 2012). There can be short- and long-term event studies. The event study is grounded on three basic assumptions. First, the stock prices change when the information concerning the event becomes available to the stakeholders (traders, investors, and so on).

Secondly, the event is not expected, but M&A can often be anticipated. Thirdly, there were no other influential factors during the window period. It is clear that these assumptions unveil certain limitations of this approach. Other disadvantages include the fact that expected instead of actual synergies are measured, it cannot be applied to private companies, it focuses on the company level. The advantages of the method include the fact that the information can be assessed publicly. More so, the approach is relatively objective, abnormal return is measured, some outside effects can be evaluated.

Accounting-Based Measures

Accounting-based studies compare accounting statements before and after M&A as it is assumed that the benefits associated with M&A will be reflected in accounting statements. According to Wang and Moini (2012), the advantages of this measurement include the focus on realized synergies, it is easier to carry out than the event study, more data can be obtained to measure the company’s benefits (cash flow, productivity, sales rates, assets, profit/sale ratio, and so on). The shortcomings of this approach involve the focus on past (not present) expectations, the fact that accounting standards often change which make accounting data less relevant, the effects of other factors are included, accounting data can be manipulated, the performance of the entire organization rather than M&A effects are evaluated.

Managers’ Perceived Performance

This approach focuses on the executives’ perspectives concerning the realization of their objectives several years after M&A. Zollo and Meier (2008) note that this is not a widely used method. The advantages of this approach include the use of private data, reduction of “the outside noise,” the executives’ perceptions often affect the strategies they use, the method can be used in all types of M&A. The downsides of the managers’ perceived performance are as follows: it is often biased, the results can be distorted by inaccurate recollection, the original objective of M&A can affect executives’ perspectives.

Expert Informants’ Assessment

Wang and Moini (2012) identify another type of assessment. This approach is similar to the previous one, but instead of executives’ opinions, expert informants’ perspectives are utilized. Some studies focus on assessments of a security analyst, while others often employ a set of data obtained from several analysts as well as executives. The advantages and disadvantages of this method are similar to the ones mentioned above. However, it is necessary to add that another downside is the lack of information while the advantage is the ability to assess M&A on the project level.

Divestment Measure

Another approach identified is divestment measure. The method implies that the acquired company is divested after M&A. Wang and Moini (2012) note that researchers reported different data on divestment, but it is clear that from one-third to a half of the companies were divested after M&A. This approach is simple to employ as detailed data are unnecessary.

Other Measurement Paradigms

Zollo and Meier (2008) identify slightly different measurement paradigms. The researchers first put two dimensions to the fore. The first dimension is the level of analysis. They point out that researchers can measure M&A on the task level. This means that researchers analyze the effectiveness of every process included into M&A. Thus, the extent to which goals are met defines the effectiveness of the overall M&A. The transaction level implies the focus on the value generated by M&A. Zollo and Meier (2008) stress that the evaluation of goals is analyzed as they were set during the transition.

The firm level is the dimension that concentrates on the performance of the company before, during and after M&A. Zollo and Meier (2008) add that this is the most common approach. The second dimension is the “time horizon” (Zollo & Meier, 2008, p. 58). In this dimension, three measurement types exist. These are short-, medium- and long-term measures. Short-term metrics cover one or two years after the completion of M&A. It is quite difficult to draw particular boundaries for the other two types (Zollo & Meier, 2008). The researchers also try to use major levels to obtain empirical data and find that the paradigm is rather effective but still needs to be improved.

Major Execution Problems

Arthur, MacDonald and Herd (2003) explore main problems that can undermine the effectiveness of M&A. Different management styles employed by the merging companies (or the acquirer and the target firm) also cause many problems and may affects the entire process negatively. One of these negative factors is the inability to employ strategic leadership. Some companies fail to develop the strategic vision and see M&A as an operational issue handled by particular groups. There should be a strong leader committed to implement the process within the set timeframe and goals set. Arthur et al. (2003) also stress that the leader should be able to articulate the goals as well as methods that will be utilized. Otherwise, other stakeholders will feel lost or uninterested. Of course, the agenda articulated should be complete realized. It is also important to take into account possible legal issues that can affect the process of M&A.

Another crucial aspect to consider is communication, which has to be effective with all the stakeholders. Proper communicative patterns should be utilized to make employees engaged. The leader should make sure that the employees understand the need for M&A, the peculiarities of the process as well as possible negative conditions. It is essential to monitor key staff losses, and try to prevent them. It is vital for the acquirer as well as the target company which will operate more efficiently if committed and experienced people continue working. Proper communication strategy is also central to the development of relationships with customers. Customer retention should be one of the major priorities. They should also understand the benefits of M&A, and they should be ready to or, at least, informed about possible impairments in work (fewer services during a particular period).

Ironically, culture can be a significant obstacle as the clash of organizational cultures is likely to disrupt the M&A process. The inability to focus on quick gains and prompt results makes M&A inefficient as the majority of M&A projects are effective if they are completed within a year or two. Some companies are “overly ambitious” as they try to acquire companies although other acquisitions are not accomplished (Arthur et al., 2003, p. 43). They lose the focus on proper execution of M&A, which leads to failure.

Two M&A Integration Imperatives

According to Arthur et al. (2003), urgency and execution are two main integration imperatives. As for the first imperative, it has a number of dimensions. First, the process should be implemented within a short period (one to two years) or it is likely to fail. If a company decides to merger with or acquire a firm, it should be done at once. The focus on short-term wins is beneficial for this process. The sense of urgency is another dimension. The leader should create the sense of urgency for the change. The leader should inform all the stakeholders involved about the benefits of M&A. Arthur et al. (2003) stress that the leader should mention some problems that may arise, which will make other stakeholders more focused, committed and engaged.

The other imperative is execution. The researchers emphasize that the vast majority of failed M&A became a result of inefficient execution. M&A requires strong leadership that has a particular strategic vision. Strategic leadership is associated with the development of manageable goals and terms. It is also imperative to follow the plan developed. The leader should be ready to address the following problems: improper communication, unrealistic/unclear synergy expectations, too many compromises associated with the organizational structure, a missing major plan, missing momentum, the lack of top management commitment, unclear strategic concept, IT issues addressed in an untimely manner (Arthur et al., 2003).

Another important aspect is proper articulation of the plan. The leader should provide major details to all the stakeholders. Employees should be motivated and committed, which can be achieved through the provision of all the necessary data on the benefits of M&A as well as associated risks. There can be no room for uncertainty as it tends to lead to staff turnover. Arthur et al. (2003) also add that customer should be aware of the peculiarities of M&A. Benefits as well as risks should be voiced.

Enhanced Execution Plan

The execution plan developed earlier can be enhanced with the use of a modified metrics offered by Zollo and Meier (2008). The researcher developed a measurement metrics that included seven major components: integration process performance, employee retention, customer retention, overall acquisition performance, accounting performance, financial performance, short-term event study measures. However, it can be beneficial to change the last component to ‘urgency’. These seven components will help evaluate the effectiveness of the suggested plan (see fig. 1). Notably, the measurement will involve expected synergies.

The initial M&A process included the initial stage of planning, which is the development of a detailed strategic plan. This critical stage affects the overall efficiency of M&A (Arthur et al., 2003). The development of the working group should still imply the existence of the strong leadership. Estimation of the potential synergies should be accompanied by the analysis of possible risks. These data should be available to all the stakeholders (employees as well as customers of both firms). Addressing the target company should be implemented in terms of these changes. The leader should also create the sense of urgency through articulation of major aspects to the stakeholders.

The leader should pay specific attention to opinions of employees (especially the key staff) and customers. Employees should understand that acquisition will not lead to redundancy. On the contrary, it can result in certain growth as the target company will have to provide additional services (associated with the delivery of specific materials). The target firm’s employees should also understand that they will obtain training in such spheres as communication, IT, project management and so on, which will be a part of the merger (Lasher, 2016).

Thus, they will be able to develop additional skills. The target company is a comparatively small local firm but it has loyal customers who should also understand that they will be able to obtain high-quality services in the future. As for the communication with customers, these stakeholders should be aware of the goals, benefits and possible impairments in the provision of some services. The should be informed about possible delays that can arise in the course of integration (IT issues and so on).

Importantly, the overall process should be reduced to one year or 18 months. This is the period when the company can realize main synergies (Arthur et al., 2003). During this period, the following phases should take place: business plan, acquisition plan, search, screen, first contact, negotiation, integration plan, closing, integration and evaluation (DePamphilis, 2015).

Initially, a lot of effort was planned to be invested in the staff training. This is an important and beneficial measure. It will make the employees aware of the changes (benefits as well as potential risks). It will also be instrumental in avoiding the clash of cultures. The target company is rather small but it has an organizational culture (About us, 2014). The cultures of the two companies are quite similar and due to the size of the target company as well as similarity of values the clash of cultures can be avoided.

It is possible to assess the efficiency of this project using the mangers’ perceived performance measurement. There can be certain bias but it can be reduced through the analysis of such objective components as the company’s revenues and so on. As has been mentioned above, a seven-component measurement can be employed (see fig. 1). As seen from the graph, the project is expected to be efficient. The most challenging areas will be the financial and accounting performance as they acquirer does not expect dramatic changes in the financial and accounting performance as the target company will cover only a part of operations. The project will add flexibility to the company but will not cover all the supply chain issues. However, the goals set are consistent with these expectations.

Such components as urgency, employee retention, and customer retention will be the most successfully implemented due to effective communication and strong leadership. The leader will create the sense of urgency and will explain benefits as well as possible downsides of the project. This will make the stakeholders more positive about the project and more committed.

The New Plan and Execution Issues

According to Arthur et al. (2003), insufficient communication is one of the most crucial execution issues. The new plan addresses the issue quite effectively. The leader articulates the objectives, expected benefits as well as potential risks to the stakeholders. Specific attention is paid to key staff and customers who will be aware of the changes. Of course, the information concerning the acquisition will also be provided to the acquirer’s employees who will be ready to develop proper communication channels with the target firm’s personnel. The issue of the lost momentum is effectively avoided as the project is implemented within a short period (12 months), and leader manages to create the sense of urgency.

The issues concerning unrealistic or unclear goals is also met. First, the goals are quite clear as the acquirer sees the acquisition as a way to improve its flexibility associated with the supply chain management. The expectations are also rather realistic. The acquisition is not expected to affect the performance of the acquirer dramatically but will lead to such synergies as reduced costs, better image and so on. The target company also expects to realize such synergies as the investment (manifested in training, possible staff growth and technological upgrade) as well as improved image as it will become a part of the big local enterprise.

The issue concerning the organizational structure is unlikely to occur due to the size of the acquirer and the target firm. More so, there is no need in reorganizing the target company as it will operate as a provider of particular services rather than a specific part of the company. The issue related to the absence of the ‘master plan’ is avoided through the use of a detailed strategic plan that addresses all the stages of the project. This plan also helps the company to have a clear strategic concept. Finally, the issues associated with the sphere of IT are also addressed as the integration process involves training, upgrade of the necessary hardware and software.

References

About us. (2014). Web.

Arthur, B., MacDonald, T., & Herd, T. (2003). Two merger integration imperatives: Urgency and execution. Strategy and Leadership, 31(3), 42-49.

DePamphilis, D. (2015). Mergers, acquisitions, and other restructuring activities. San Diego, CA: Academic Press.

Lasher, W.R. (2016). Practical financial management. Mason, OH: Cengage Learning.

Wang, D., & Moini, H. (2012). Performance assessment of mergers and acquisitions: Evidence from Denmark. E-Leader Berlin. Web.

Zollo, M., & Meier, D. (2008). What is M&A performance? Academy of Management Perspectives, 22(3), 55-77.

Introduction

Background of the study

Mergers and acquisitions (M&A) have been considered very instrumental factors as far as the shape of business activities in any economy is concerned. The mergers and acquisition phenomenon has been rampant in the United States of America but is now common in most parts of the world (Jean-Claude & Siham 2013).

For example, there have been cases of mergers and acquisition in the European market that has characterized lack of activity across the borders of Europe and domestically following the effect of the recession experienced between 1980 and 1981 that led to the passage of the deregulation law within the financial services sector, as well as the availability of new markets and financial instruments.

Consequently, the effects of this recession and the development of markets that initially did not exist catalyzed a merger wave in Europe. Several studies have been conducted that focus on the emergence of mergers and acquisitions in the world and have shown that all continents have fallen victim of this phenomenon (Chuang 2014). The increased rate of mergers and acquisition is attributable greatly to the technological changes witnessed all over the world (Deshpande, Svetina & Zhu 2012).

Also, mergers and acquisitions are becoming more complex due to the introduction of deregulation laws and the acceleration of the innovation process within the financial sector (Dutta, Saadi & Zhu 2013). On the other hand, there is a growing demand to ensure that shareholders have value in their respective firms, and this significantly influences mergers and acquisition. According to a study carried out by Conn, Cosh and Hughes (2005), the primary objective of mergers and acquisitions is to create shareholder value. Nevertheless, according to past trends, it is more likely that most mergers and acquisitions occur within national borders.

The decision to enter into a merger or even be engaged in an acquisition is very important as far as the performance and success of firms are concerned (Fu, Lin & Officer 2013). Mergers and acquisitions have been used by corporations as a gateway to the expansion of ownership boundaries, while in other cases, corporations enjoy more benefits through the separation of public ownership whereby different business segments are involved (Kiliç 2011; Kohli & Mann 2012).

Theoretically, it is considered that mergers and acquisition lead to the creation of synergies, cutting of costs, expansion of operations, as well as a considerable gain of economies of scale (Jo, Byun & Lee 2011). Also, most investors consider M&A as a pathway to more market power. According to proponents of mergers and acquisitions, firms can enjoy high revenue in comparison to the price premiums they incur (Cartwright & Schoenberg 2006).

Despite this, there are cases whereby mergers and acquisitions have adverse effects, especially whereby there are flaws and associated inefficiencies. Although numerous studies have been conducted to ascertain the returns following a merger, mixed result exists with some scholars and researchers asserting that acquisition is associated with abnormal returns. The lack of consensus, in this case, is an indication that there is a need for more research to shed light on the effects of mergers and acquisition as far as the performance of corporations is concerned.

Mergers and acquisition have significant effects on the performance of the structure and general operations of the affected firms (Amernic & Craig 2006). Over the years, there has been a considerable evolution of the existing literature on M&A, which has led to the proposition of a few theories to explain the concept of mergers and association.

Nevertheless, most of the existing literature, as well as the understanding of the effects of mergers and acquisition, is aligned to scenarios in developed markets like in the case of Canada, United Kingdom and the United States (Eckbo & Thorburn 2009; Bhagat, Malhotra & Zhu 2011). For a long time, the effects of mergers and acquisition in the case of emerging markets have been neglected until lately.

For example, there have been a lot of concerns to understand the degree of impact of mergers and acquisitions in developing economies such as China following the realization that emerging markets have an enormous contribution to the economy of the world (Lau, Proimos & Wright 2008). In recent years, China has witnessed a growth in the number of listed companies. Nevertheless, the corporate control market is growing at a slow rate (Callahan, Gabriel & Smith 2008). Mergers and acquisitions activity in China was commenced in 1993 following the China Bao’an (SZ)-Shanghai Yan Zhong Industrial (SH) deal.

This study seeks to provide in-depth details on the effects of mergers and acquisition on the shareholders’ wealth and the performance of corporations through a case study of Chinese listed firms between 2003 and 2013.

Statement of the problem

Over the past decades, China has experienced a high number of mergers and acquisition despite the state of corporate control in the country. For example, China recorded a 20% growth rate in mergers and acquisition in 2008, with trends showing potential for more growth in recent years (Muehlfeld, Weitzel & van Witteloostuijn 2011). Developments in China have shown that the country has a high potential for growth to the extent of becoming a world leader in the future (Lübbers 2008).

If such potentials are realized, the capital markets will have a significant influence on corporate control activities as well as in the world economy. Nowadays, the global marketplace is dominated by Chinese enterprises, implying that the effects of Chinese mergers and acquisitions are felt globally. Also, state-owned enterprises are dominant in China as opposed in the cases of developed countries (Leeth & Rody 2004). For this reason, it is more likely that the operations of state-owned enterprises are tied closely to the government’s economic policies, which adversely affects the growth of mergers and acquisition in the country.

The government of China has set up platforms that facilitate outbound and inbound acquisitions leading to the maximization of the scale of operations by state-owned enterprises, as well as an improvement in the performance of management and allocation of resources (Lin, Wang & Chen 2009). Such a platform opens ways for more mergers and acquisition in the future. On the other hand, the mergers and acquisitions market in China is domestic even though there are high numbers of transactions occurring across the borders (Louis 2004).

In most of these cases, state-owned enterprises act as the acquirers with their target being on private firms. For this reason, there is an increased level of government’s control within the capital market in China (Okafor, Ofoegbu & Ohwovoriole 2011). Therefore, there is need for detailed research as far as the corporate control market of China is concerned for providing more insights on whether or not mergers and acquisitions affect shareholders’ wealth and the performance of corporations.

Objectives of the study

The primary objective of this study is entire to find out the effects of mergers and acquisitions on the shareholders’ wealth and the performance of corporations. However, the study also has various specific objectives including:

1. To find out whether mergers and acquisitions are likely to lead to value creation for shareholders of the affected firms.
2. To find out the factors, which influence the wealth of shareholders as well as the performance of the acquirer in the case of an acquisition.
3. To find out the comparison between mergers and acquisition in developing and developed countries.

Research questions

The use of research questions in any study has been considered to be an appropriate approach through which researchers can effectively cover the phenomenon under study because they act as guidelines. In the case of the current study, several research questions are used to ensure that all necessary areas are covered as far as the concept of mergers and acquisition in Chinese listed companies is concerned. Therefore, the study has the following research questions:

1. Is there a significant relationship between mergers and acquisitions and the creation of value for shareholders of the affected firms?
2. What are some of the factors which influence the wealth of shareholders as well as the performance of the acquirer in the case of an acquisition?
3. How do mergers and acquisitions compare in developing and developed countries?

Dissertation outline

Having provided the background of the study on the effect of shareholders’ wealth and the performance of corporations following mergers and acquisitions, statement of the problem, research objectives and research questions, the rest of the paper is divided into various sections. The next chapter, literature review provides an in-depth analysis of the study phenomenon for a chance to provide more details on the impacts of mergers and acquisitions on the shareholders’ wealth and performance of affected corporations. This is achieved through an investigation of related literature.

Chapter three provides the research design and methodology adopted for the study. This section provides the various techniques used to collect and analyze data on mergers and acquisitions in Chinese listed companies, and sampling methods used to arrive at the sample size adopted. Also, this section provides information on the market performance of acquiring firms (shareholder wealth effect), as well as the measures of operating performance (long-term corporation performance, 3 years after a merger and acquisition has occurred).

Chapter four provides the results and findings from the study, while chapter five offers a summary of the entire study, discussion of findings, as well as conclusions.

Literature review

Theories on Mergers and Acquisitions

Numerous studies on mergers and acquisitions have been conducted in most of the world’s developed markets. According to the findings of these studies, mergers and acquisitions are used to catalyze the restructuring and integration of industries within a given market.

For this reason, such activities are instrumental in championing for changes in the performance of firms within a given market. M&As are very important in any market; a factor that has increased the interests of researchers to explore deeply the subject of corporate finance from various perspectives. As such, researchers have been more fascinated by empirical studies as well as theoretical models in corporate finance.

Several theories try to offer an in-depth explanation of the concept of mergers and acquisitions (Powell & Stark 2005). However, these theories are divided into either value-maximization theories or the non-value maximization category.

In the case of the value-maximization, the theories explain the motives of mergers and acquisitions strategy that is similar to investment decisions whereby investors expect an increase in the cash flows of their investments in the future (Rahman & Lambkin 2015). On the other hand, the non-value maximization category comprises of theories that consider the interest of the managers of an acquiring firm, whereby the self-interests of the managers affect the acquisition decisions.

Generally, theories about mergers and acquisitions have shown that there is more benefit to the acquired firms than to the acquiring firms as far as the returns of the shareholders are concerned (Ryu 2010). According to the synergy motive, the occurrence of any takeover is based on the benefit of combined value since the combining resources for two companies are better when compared to the resources of a single firm.

Theoretically, firms engage in mergers and acquisitions to gain a larger market value (Seo 2008). Various explanations have been given regarding the benefits of mergers and acquisitions as portrayed by the synergy motive of M&As. These explanations include the collusive synergy, the financial synergy and the operational synergy.

According to the agency theory, because managers under non-value maximization category focus on their self-interests, it is more likely that the decisions they make are aimed using the resources of the concerned firm at the expense of the shareholders (Sharma & Raat 2016; Walker 2006). As such, they end up destroying the value of shareholders instead of creating it.

However, based on the agency motivation, a corporate control hypothesis has been postulated that suggests that it is possible for managers under the control of any firm in which they have not invested any wealth to come up with resolutions aimed at the maximization of shareholders’ market value (Wan & Wong 2009). This is attributable to the fact that decisions by managers who are shareholders in a given firm can be diverted by self-interests as opposed to sticking to the existing shareholders’ interests.

Another theory on mergers and acquisition is the free cash flow theory that was postulated by Jensen in 1986 and emphasizes on the ability of mergers and acquisitions to destroy the value of shareholders as opposed to its maximization. The rationale of this theory’s argument is that there is a high possibility of managers who have large cash flow that is free to participate in projects that are not profitable to the firm in the long-run.

For this reason, mergers and acquisitions activities involving such firms are likely to lead to low or negative returns to the affected firms (Moeller & Schlingemann 2004). According to the hubris hypothesis, the combined returns for merged firms is always zero or insignificant. As such, it important for firms to be careful when evaluating target firms for takeovers to avoid making mistakes that would lead to zero returns in the long run. If such cases occur, the shareholders of the acquiring companies experience negative gains which offset the positive gains of the acquired firms.

It can be seen that the hubris hypotheses offers a credible background to explain the non-positive returns by mergers and acquisitions. First, the hypothesis postulates that it is likely for managers to overestimate a target firm’s market value presently if they are driven by the urge to provide much to the target firm. On the other hand, the hypothesis’ implication is that the wrong decisions by managers of acquiring firms lead to zero returns for the merged firms (Moeller, Schlingemann & Stulz 2005).

Thus, basing the argument on the provisions of this hypothesis, it suffices that mergers and acquisitions only lead to the transfer of value to a target firm from a bidder in cases where such M&A are misguided. Such a scenario implies that acquiring firms get lower returns in a situation whereby the projected gain for the target firm is high.

An overview of the evidence on the worldwide mergers and acquisitions cases

Most of the existing literature about the performance of mergers and acquisitions in terms of finances emphasizes on the percentage of returns that firms get within the merger announcement period (Mulherin & Boone 2009). Moreover, most of the studies that have been carried out focus on developed markets such as the U.K and U.S. Globalization has had a lot of impact on the operations of corporations. This is attributable to the fact that globalization is considered to be a process that cannot be avoided as it entails integrating global cultural, political and economic systems (Powell & Stark 2005).

For this reason, globalization has been considered to have an enormous effect on the emergence of mergers and acquisitions, especially in cross border scenarios. On the other hand, the occurrence of mergers and acquisitions can be described as globalization’s attributes and consequences, which have reverse reinforcement effect (Schwert 2006). For more than thirty years, the popularity of mergers and acquisitions has increased in the aspects of corporate development. For example, more than thirty thousand complete acquisitions were recorded in 2004 all over the world.

However, on a general view, theories on mergers and acquisitions can be viewed from two perspectives including value destruction and value maximization. In the case of value maximization, the motivation behind M&A revolves around synergetic gain through combining two companies while the value destruction category comprises of deals whose motivation is based on agency considerations (Sudarsanam & Mahate 2003).

In this case, the interests of managers have a significant effect on the directionality of the mergers and acquisitions activities, especially where the motive is to destroy the value of shareholders (Van-Schaik, Steenbeek & Mahlerplein 2004). According to extant evidence and theories, shareholders in any firms targeted for M&A are likely to benefit. Despite this, the shareholders of the acquirer firm do not benefit from corporate control.

There are numerous cases of mergers and acquisitions all over the world. For example, a review of the state of mergers and acquisitions in Europe reveals that a large amount of money has been used in M&A as evident in 1997 whereby six hundred thousand M&A deals were recorded as completed.

The occurrence of mergers and acquisitions is attributable to several reasons including the need to increase the value of affected firms through creating avenues for large economies of scale and reducing the cost of operations by putting several firms under single ownership (Awolusi 2012). Also, through mergers and acquisitions, firms can expand their markets thereby enjoying various benefits such as tax savings due to favourable domestic regulations.

Recent studies have shown that there is mixed empirical evidence regarding the impact of wealth on the acquiring firms (Billett, King & Mauer 2010). For example, several scholars and researchers have investigated the wealth effects in the case of U.S markets and found out that shareholder returns are either positive or zero (Masulis, Wang & Xie 2007; Faccio, McConnell & Stolin 2006). On the other hand, a few other researchers found out that the shareholder returns are negatively abnormal especially during the date of the announcement.

In the case of the UK’s market, several studies have provided negative returns on shareholder wealth effects while others have recorded positive shareholder returns during announcement dates (Croci & Petmezas 2010; Cao, Tang & Yuan 2013).

However, examining the wealth effects and shareholder returns during the announcement date, various researchers have shown that there is a high probability that the shareholders of the affected companies do not earn any abnormal returns. In support of this, Bruner (2002) compared the results from 130 studies based on the period between 1971 and 2001 and concluded that bidders at the announcement date of mergers and acquisitions earn zero returns.

Nevertheless, the shareholder returns are different for developed markets such as Canada. Unlike in the case of U.S, shareholders earn positive abnormal returns in Japan, Canada and other developed European markets (Faccio, McConnell & Stolin 2006). While there are numerous studies on mergers and acquisitions about developed markets, the case is different for developing markets.

Zhu and Malhotra (2008) in their study investigating the case of international mergers and acquisitions in developing economies found out that there is a high possibility of shareholders earning positive returns in the short run following a merger and acquisition activity. Martynova and Renneboog (2008) asserted that long term evaluation of the shareholder returns is not likely to provide reliable results due to errors in the methodology adopted.

An examination of the wealth effects of mergers and acquisitions for two years after M&A announcement has been made has revealed zero to insignificant returns in the case of M&A targeting a public firm (Charlety, Fagart & Souam 2008). However, the returns are significantly negative whenever a private target is involved.

It is also important to review the progress of firms after an acquisition activity. Several studies have been carried out to assess the performance of acquiring firms several years after a successful acquisition (Chen & Zheng 2014). However, the studies are based on different measures and benchmarks implying that the evidence provided inconclusive when comparing developing and developed markets.

The fact that different markets have different accounting policies is very instrumental in the difference in the overall information collected about the performance of firms operating in different markets. For example, evaluation of the long-term performance of acquiring firms in the U.S market based on their cash flow shows that the firms do not improve their performance (DeYoung, Evanoff & Molyneux 2009). Based on this assertion, it can be concluded that the acquisitions in the U.S market in the long-run are not based on maximizing the value of shareholders and thus no evidence of improvement in performance.

Similarly, a review of the UK market shows that acquiring firms do not improve in terms of performance when assessed in the long-term. Despite this, several studies provide evidence of improvement in performance based on acquisitions dating in the eighties (Conn, Cosh & Hughes 2005). Unlike in the case of developed markets, studies focusing on various developing economies have shown significant improvement in the performance of acquiring firms as evident in the study conducted by Rahman and Limmack (2004) on 1988-1992 Malaysian acquisitions.

Additionally, Ramakrishnan (2008) reported significant improvement amongst Indian mergers between 1993 and 2005. In the case of European mergers and acquisitions, Martynova and Renneboog (2008) found out acquiring firms experience positive returns averagely. However, the shareholder returns in the case of French firms are insignificantly positive. On the other hand, mergers and acquisitions in Japan lead to positive abnormal returns during the post-acquisition period.

An overview of the evidence on the Chinese mergers and acquisitions cases

Over the past two decades, the literature on Chinese financial activities has become popular following the country’s rapid economic growth. Such popularity can be attributed to the increased need to gain more understanding of the mergers and activities undergoing in the country (Nogata, Uchida & Goto 2011). There have been notable developments in China with one of them being the continuous search for market-oriented changes to ensure that Chinese firms have a competitive edge over other countries’ firms whenever compared over a global scale (Petmezas 2009).

As such, the changes in the market and economic policies are aimed at encouraging the participation of Chinese firms in cross-border investments as opposed to concentrating in inward foreign investments that take place within the borders of the country. Resultantly, there has been a high rate of entry into cross-border activities among Chinese firms; a move that has led to various successful mergers and acquisition across the borders of China. For example, a review of the period between January 2000 and December 2004 shows that there were successful twenty-seven outward merger and acquisition deals in China.

However, according to anecdotal evidence, there is a high possibility that the number of outward merger and acquisition deals that were completed within this period were more than twenty-seven (Rhodes–Kropf, Robinson & Viswanathan 2005). This is attributable to the fact that some of the deals involved companies that were not listed with the stock markets of China, implying that it was hard to get the right information about them.

As noted from above, merger and acquisition activities differ significantly according to how a market is developed. The implication is that mergers and acquisitions that involve companies from countries with developed economies are more probable to enjoy monopoly as well as other internationalization benefits in comparison to the companies from countries that are still undergoing development (Schiereck, Sigl-Grüb & Unverhau 2009).

As such, companies from developed companies have a form of motivation that pushes them towards the exploitation of own resources, while companies in developing markets engage in meagre and acquisition activities as a way to benefit from resources from another market (Shimizu, Hitt & Pisano 2004). For this reason, it suffices that mergers and acquisitions deals that occur comprising of companies from developing markets as in the case of China are based on the need for resources and other intangible assets from the companies they are agreeing to merge with.

Most firms in China use mergers and acquisitions as the pathway through which they can achieve improved performance by boosting their core competencies as well as filling the strategic gap (Von-Eije & Wiegerinck 2010). Despite the high cost of M&A, firms benefit from expanded knowledge as well as the organization’s competitive advantage.

However, there are limited studies that focus on China’s corporate control market as compared to the case in developed markets such the U.S. There are high numbers of cross-border merger and acquisition deals in China, implying that most of the studies on corporate control market in China focus on issues of cross-border mergers and acquisitions (Bi & Wang 2014). Empirical evidence shows that most of the Chinese listed companies; especially state-owned enterprises are focusing on engaging in acquisitions across the borders.

Boateng, Qian and Tianle (2008) provide a comprehensive review and evidence of Chinese mergers and acquisition whereby the study analyzes several Chinese cross-border mergers and acquisitions that took place between 2000 and 2004. In this study, the researcher was interested in finding out how Chinese firms performed in the short-term after successful mergers and acquisitions.

As such, Boateng, Qian and Tianle (2008) examined the abnormal returns of the 27 Chinese companies sample and found out that all the acquiring firms in China benefit from cross-border mergers and acquisitions in that such M&A are known for value creation. In another study, Wen (2004) examines the various reasons for Chinese mergers and acquisitions, as well as whether or not such deals are effective in the long-run. In this study, Walker (2006) analyzed the relationship that exists between the valuation, performance, earnings management and the governance of acquiring firms, and found out that mergers and acquisitions in China focus on the realization of hubris or agency motives.

A study carried out by Chi, Sun and Young (2009) focused on the examination of the features of mergers and acquisitions in China as well as their overall performance with special focus on deals that occurred between 1998 and 2003. According to the findings of this study, it was evident that acquiring firms are likely to benefit from positive abnormal returns before and after a merger and acquisition deal is announced (Chi, Sun & Young 2009).

However, the same firms experience insignificant abnormal returns after six months of acquisition. On the other hand, a review of the performance of firms investigated in this study revealed that various factors affect the performance of acquiring firms (Cummins & Weiss 2010). Such factors include cash bids, cross-provinces mergers and acquisitions, and political factors. Based on the findings of this study, it can be concluded that the fundamentals of acquiring firms in China do not increase as a result of mergers and acquisitions especially in the short-run.

Several studies in China have been conducted that examine the operating performance of Chinese acquiring firms in the long-term (Frederik & Hong 2014). Despite this, most of the studies vary in terms of results and findings. For example, some studies have found out that the performance of acquiring firms change over a certain period, whereby it is more likely that there will be improved performance during the first and second years of acquisition but a decrease in performance would be expected in the following years (Sung, Kiyoung & Doseong 2013).

On the other hand, Walker (2006) concluded that acquiring firms experience decrease in their operating performance upon acquisition over a long period. Boateng and Bi (2013) carried out a study on the characteristics of acquirers in the context of the Chinese market using 1370 M&A that was completed between 1998 and 2008 and assessed their returns.

After analysis of the returns for between one and three years, the Boateng and Bi (2013) found out that most Chinese acquiring firms record abnormal returns between 14.29% and 121% due the pre-acquisition period. On the other hand, the findings of the study showed that there is no difference in the performance of the acquiring firms after an acquisition has been made.

Chinese capital market

Overview of the capital market of China

China’s economy is experiencing tremendous growth over recent years. Such growth has placed the country at a position such that China has become a key player in the rebalancing of global finances (Matthew, Tao & David 2004). The emerging markets, China included, have a significant role to play in the economy of the world (Dodoo & Han 2015). For example, according to recent trends, emerging markets account for more than 35% of the global gross domestic product. Despite this, such markets are only accountable for 7% of the total number of foreign investments in the entire world (Ghosh & Peltier 2009).

As such, it can be considered that the growth of emerging markets is set towards growth through a financial landscape that has changed conditions (Fich, Nguyen & Officer 2009). China has become a key player in the shifting post-crisis financial era. However, the capital market of the country requires a few reforms if China is to get established as a major player in global finance. For such objectives to be achieved, there is a need for deep and well-developed domestic financial markets in the country, as well as an increase in the number of returns that households, corporations and the government earn (Nitin 2015).

Numerous barriers affect investments by individuals and corporations in China (Gu & Reed 2016). As such, the removal of such barriers can be a suitable approach towards well-developed capital market and the creation of avenues for growth (Han 2014). Also, there is a need for the country to build trust with international investors as a way to attract foreign investments.

The capital control regime in China is very extensive although the country has been selectively restricting such control. For example, there are cases whereby the capital inflows, as well as the outflows, have been let loose (Joshi & Desai 2010). Despite this, the capital account in the country can be considered to have become highly open.

The government of China has established several structures, which are aimed at ensuring that there is control in the capital market (Li 2016). The establishment of such plans has led to the generation of numerous financial openness “benefits that touch of the development of both international and domestic financial portfolios while at the same time ensuring that there is free movement of capital in the country”.

The capital market of China dates back in the nineties when its creation was based on the re-establishment of the Shenzhen Stock Exchange and the Shanghai Stock Exchange (Li & Jiang 2014). These two stock exchanges have remained to be key players in the capital market of China to date. However, several futures exchanges were introduced into the market, which includes the Zhengzhou Commodity Exchange, Shanghai Future Exchange, and the Dalian Commodity Exchange. Additionally, one financial futures exchange was also established. On the other hand, the Chinese emerging market trades in commodity futures, warrants, investment funds, securities, bonds, and stocks.

The capital market in China is young. Despite this, the market has experienced rapid growth over the last two decades (Massa, Ferreira & Matos 2010). For example, the regulatory system in China has improved while participants in the market have gained a lot of experience and continue to be active. This can be evident from recent reports such as in the case of 2007 whereby more than 1500 companies had over 2200 trillion shares and participated in various stock exchanges of China more than it was in the previous years (Rani, Yadav & Jain 2015). Following such increase in the participation in the Chinese capital market in 2007, the total market capitalization was $4.33 trillion putting China in position three when compared to the stock market of other countries of the world.

The enactment of rules and regulations that govern the capital market practices in China is the responsibility of the China Securities Regulatory Commission (CSRC). This regulatory body was introduced in 1992 and offers regulation to the securities markets of China (Masulis & Swan 2009). Over time, the China Securities Regulatory Commission has experienced an expansion in its functions (Resti & Siciliano 2009). This can be attributed to the numerous reforms that have been carried out within the capital market of China, which have strengthened and clarified the functions of the CSRC.

The primary responsibilities of the CSRC revolve around direct leadership in matters concerning the securities market through the establishment of a central system that can supervise the securities markets of China effectively (Restrepo 2010). A centralized system has been very instrumental in developing the capital market of China in that it formulates the right standards and policies to govern the operations and the participants of the market (Mutaitina 2006). Initially, China was under a planned economy with the participants of the market being mainly state-owned enterprises (Rizvi 2016).

However, with time the economy changed from the planned system to a market-oriented economy, which has been very significant in the development of China’s financial portfolio. The change in the Chinese economic system has been possible through numerous reforms, which have yielded various results (Rani &Yadav 2012). To begin with, it has become possible for managers to work towards growth and profit following the authorization of the state-owned enterprises to do that.

The reforms of the capital markets led to the separation of the management and ownership of companies to ensure that the responsibility of a firm’s profits and loss is left to the managers (Selmier 2013). Such decisions allow the managers to work extra hard to ensure that the operations of their firms are aimed at making profits. The rationale behind such a decision is that the managers are required to account to the shareholders of the concerned company in case of loss or profit (Tauseef & Mohammed 2008).

Also, more reforms have set grounds for the transformation of firms whose scale of operation is large into modern corporations. For example, during the third phase of the market reforms, various state-owned enterprises in China made to the list of Chinese Stock Exchanges (Tham 2011). Nevertheless, the government of China has active and majority control of the state-owned enterprises that are listed in the stock exchanges of China.

The stock market of China has various characteristics that are distinct such as the classification of the common stocks in the country into the H-shares, B-shares and A-shares (Verma & Sharma 2015). Often the A and B shares are common in the stock exchange markets of Shenzhen and Shanghai. The major form of currency used in the A-shares trade is the Chinese currency, and according to the market rules, the A-shares are only availed to investors domestically (Tingley, Xu & Milner 2015). The B-shares, on the other hand, are available for trade among domestic and foreign domestic investors and in the form of foreign or domestic currencies. The last class of stocks, the H-shares, is available within the stock exchange market of Hong Kong whereby any global investor is allowed to trade.

Recent studies on the performance of capital markets as well as the operations of corporations have revealed that the structure of the market is very important in the overall success of participants in the concerned market (Wen 2004; Zhu 2016). In the case of China, the country’s capital market has a very distinct share ownership structure.

This structure which is based on share segmentation, allows firms to enjoy several shares’ categories including the state-owned shares, legal person shares, as well as the A/B-shares. Corporations hold legal person shares, while the state holds state-owned shares and individuals hold the A and B-shares (Manuel, Carvalho & Martinho 2012). The capital market reforms have significantly led to a reduction of the number of shares that are cannot be traded among listed companies in the stock exchanges of China.

It suffices that the trend of reforms alongside the growth of the economy of China has been very instrumental in the promotion of the introduction of the capital market in China. The government has also been very active in ensuring that the market develops. Such efforts have seen the expansion of the market, optimization of the market’s function and structure as well as the improvement of the construction of the market’s system. Even though the capital market of China has not yet acquired an international standard, trends show that with time the market will achieve such standards.

Developmental phases of the capital market of China

A review of the history of China in terms of economy and stock market reveals that the developments that have been witnessed in the country are subject to the economic reforms in the country. Following such reforms, the economy has been liberated and it is now undergoing a tremendous evolution and increase in the demand for such types of markets. The growth and development of the capital market of China have passed through several phases to get to the position it is nowadays.

The first phase was between 1978 and 1992 during which the country experience full-scale economic reforms. This phase set the grounds for the development of the capital market of China as well as the introduction of Chinese enterprises. The second phase occurred within the period 1993-1998, which according to Wen (2004), was “the development of the CSRC to ensure effective regulation of securities markets and various activities within the capital market”.

This phase entailed the integration of a supervision regime with the already introduced capital market. The third phase of the development of the capital market of China can be examined from 1998 onwards, which saw the establishment of the securities law, which provided additional strength and formality to the capital market of China. Besides, various reforms were also introduced to ensure that the market further developed.

Overview of China’s stock market

A review of the economy of the world shows that the global marketplace is dominated by Chinese enterprises, implying that the effects of Chinese mergers and acquisitions are felt globally. Also, state-owned enterprises are dominant in China as opposed in the cases of developed countries. For this reason, it is more likely that the operations of state-owned enterprises are tied closely to the government’s economic policies, which adversely affects the growth of mergers and acquisition in the country (Čiegis & Andriuškevičius 2013).

The government of China has been instrumental in the growth of the stock market of China. For example, the government of China has set up platforms that facilitate outbound and inbound acquisitions leading to the maximization of the scale of operations by state-owned enterprises, as well as an improvement in the performance of management and allocation of resources (Halabi, Colombage & Hellings 2008). Such a platform opens ways for more mergers and acquisition in the future.

On the other hand, the mergers and acquisitions market in China is domestic even though there are high numbers of transactions occurring across the borders. As pointed out earlier, the stock market of China has tremendously developed. For example, the country had more than 2600 companies listed in the stock exchanges of China by 2012, which brought out more than 200 million investor accounts. Such a high number of firms in the list of China’s stock exchange led to an improvement value of China’s capital market. The figure below shows the state of the Stock Exchange of Shenzhen and Shanghai in terms of listed companies and total market capitalization between 2003 and 2012.

As evident from the figure above, China has been experiencing an increase in the number of listed companies from 2003 to 2012. Resultantly, the total market capitalization in the country has seemed to increase and get concentrated with an increase in the number of listed companies in the stock exchange of Shanghai and Shenzhen.

On the other hand, a review of the turnover returns of the stock market in China shows an improvement from 2003 to 2007. However, the share turnover decreased in 2008, which can be attributed to the global financial crisis of 2007/08. Nevertheless, the returns improved thereafter following various reforms and adjustments within the market to ensure that the stock markets recovered quickly from the crisis’s shocks (Jory & Ngo 2011). The figure below summarizes the state of China’s stock market through the example of the Shenzhen Stock Exchange and Shanghai Stock Exchange between 2003 and 2012.

Overview of the Bond market of China

The bond market of China has had various challenges dating back in 1981 following the resumption of the treasury bonds issuance (Kumar, Kuo & Ramchand 2008). Over the past ten years, the bond market of China has experienced tremendous growth in the number of bonds and the balance volume. For example, in the previous years, the bond market recorded more than 20 trillion CNY in terms of total bond balance. At the same time, the bonds’ number was more than 3500 in the same year. The figure below offers a summary of the number of bonds as well as the bond balance within the bond market of China between 2003 and 2012.

There has been an improvement in the bond market of China in terms of bond numbers as well as the balance of bonds as evident in the figure above. However, various innovate markets have been introduced in the bond market of China during the past decade which has contributed immensely to the growth of the bond market. Some of these products include the Small and Medium Enterprises private debt, asset-backed securities, convertible bonds, and corporate bonds.

Structure of the capital market of China

The structure of any capital market plays a significant role in the success of the market’s activities (Li, Carline & Farag 2007). In China, the capital market follows a multi-level structure. This type of structure is very important as far as the construction of the capital market of China is concerned. Such a structure ensures “growth and strengthening on the primary board, acceleration of SME board’s development as well as the success of the ChiNext stock market’s construction, before active exploration of the OTC market construction”. The capital market of China has significantly improved as a result of an effective structure. The figure shown below offers a summary of the multi-level capital structure of China.

The capital market of China comprises of various participants including agencies, listed companies and investors. Over the past decades, there has been a year by year increase in the number of investors thereby leading to an increase in the market participation. As such, the capital market of China has been very instrumental in the management of wealth for investors and shareholders.

Listed companies also play a significant part in the development and success of the capital market (Ma, Pagán & Soydemir 2012). In China, there has been an increase in the number of companies listed in various stock exchange markets, which has led to a subsequent increase in the market capitalization. Nowadays, the stock exchanges of China hold more than 2300 companies. The figure below offers an overview of the number of listed companies in the Stock Exchange markets of Shenzhen and Shanghai.

The other group of participants in the capital market of China is the intermediary agencies. This group has experienced various changes in the recent years in terms of total assets, net capital and number of customer transactions.

A comparison of the capital market of China and other countries

The size of China’s capital market has grown significantly in comparison to other global markets. Presently, it is considered to be one of the largest developing securities market (Manasakis 2009). For example, a comparative analysis of the global securities market carried out in 2012 ranked the capital market of China the second. Additionally, the market has recorded a rapid increase in the number of listings over recent years. The figure below shows the 2012 rankings of global capital markets in terms of market value.

According to the figure above, China’s capital market compares significantly with Japan’s and Britain’s capital market in terms of market value. During the same year, China had a value of share trading of $4,968 billion, second after USA’s $23,227 billion, and above Japan’s $3,606 billion.

Testable hypotheses

In the analysis of the concept of the shareholders’ wealth effect as a result of mergers and acquisitions, the study will involve several hypotheses. First, in the case of the current study, the development of the hypothesis focuses on the existence of shareholders’ wealth effect as a result of mergers and acquisitions. As such, to achieve the objectives of the study, it would be important to examine how the capital market of China is structured in terms of ownership.

Notably from above, majority of the participants in the Chinese capital market are the state-owned enterprises whose control comes from the state alongside other legal person corporations. The implication of the dominance of the state-owned enterprises within the capital market of China is that the number of public targets for acquisition is few because most of the listed firms are owned by the state (Schiereck, Sigl-Grüb & Unverhau 2009). Also, most of the mergers and acquisitions that take place in China are likely to involve cash because the government wishes to control the interests of all its enterprises.

According to the empirical literature, it is evident that shareholders of acquiring firms enjoy abnormal positive returns, especially if the focus on private firms (Tsagkanos 2010). This shows that the wealth of shareholders is significantly affected by mergers and acquisitions activities. However, most of the existing literature focuses on developed markets. In the case of this study, the focus will be whether mergers and acquisitions of Chinese firms affect the wealth of shareholders.

Secondly, the objectives of the study revolve around finding out how firms behave in terms of their performance following mergers and acquisitions. As pointed out earlier, the majority of the participants of mergers and acquisitions involve takeovers by state-owned enterprises. Additionally, it was noted that the performance of acquiring firms vary with time.

In this case, the study hypothesizes that acquiring firms enjoy positive abnormal returns whenever non-state-owned enterprises are involved, and abnormal returns that are non-negative for acquisitions that involve stock, while for cash transactions, the returns are hypothesized to be abnormally positive. As such, the primary focus of this study is to examine how the performance and operations of firms change upon M&A, and whether such changes affect the wealth of shareholders.

Chapter conclusion

The literature review chapter has extensively covered various aspects of mergers and acquisitions as well as the capital market of China. According to the objectives of the study, various studies were reviewed to provide more insights into the phenomenon under study. For example, the chapter examined the various studies to ascertain evidence of mergers and acquisitions activities of the world and specifically in the case of China.

It was evident that there is extensive literature on mergers and acquisitions in developed economies but limited in the case of developing markets such as China. Nevertheless, a few studies provided the necessary evidence of the growth and development in China’s economy and capital market, as well as the emergence of cross-border mergers and acquisitions.

An in-depth analysis of the findings of various studies revealed that mergers and acquisitions are driven by various motives including the need to destroy or maximize the value of shareholders in the involved firms. On the other hand, the chapter reviewed the background of China’s capital market and found out that its development has undergone three phases between 1978 and 1992 (full-scale economic reforms), between 1993 and 1998, (development of the CSRC) and from 1998 onwards, (the establishment of the securities law). Overly, the chapter has been extensively covering most aspects of the study phenomenon.

Research Design and Methodology

Introduction

Creswell (2009) noted that the success of any research depends extensively on the study design and methodology adopted. The study design refers to the outline that research follows in the execution of objectives of the concerned study as far as the collection and analysis of the necessary data are concerned. Researchers can use a variety of study designs depending on the scope and objectives of any given study. On the other hand, a research methodology entails the procedures and techniques that a researcher adopts to gather the required information for any given study.

The research design and methodology chapter for the study provides a discussion on the plan, techniques and procedures followed in the examination of the shareholders’ wealth effect and the performance of firms following a merger or an acquisition. As such, the chapter outlines the research designs, the population used for the study, the methods of collecting and analyzing information on shareholders’ wealth effect and corporation performance. Also, the chapter covers aspects of sampling techniques used to achieve the size of the sample used.

Study design

The primary focus of this study is to explore the concept of Chinese capital market concerning mergers and acquisitions to find first whether or not there exists shareholder wealth effect and secondly, whether the occurrence of mergers and acquisitions affects the performance of the affected corporations in the long run. As such, a lot of emphases will be given on the existing literature to explore what is already known about Chinese mergers and acquisitions and the operations of corporations following such activities.

Additionally, the study will make use of quantitative data concerning the shareholder wealth effect and the performance of acquiring firms after M&As. To achieve the objectives of this research, the study was comprehensive and applied the descriptive research design. The use of the descriptive research design in any study is considered appropriate especially in the provision of answers to adopted research questions (Neumann 2007). In the case of this study, several research questions were adopted and thus the descriptive design was chosen to ensure that all the research questions were answered accordingly.

Besides, the descriptive design of the study is suitable for this study due to its ability to index variables and well as providing suitable grounds for the collection of reliable data that can be used in making conclusions about a given study phenomenon. There is a need to ascertain the effects of mergers and acquisitions on the performance of acquiring firms, as well as on the shareholders’ wealth.

For this reason, the descriptive study was adopted to offer tangible evidence regarding the effects of mergers and acquisitions. On the other hand, a second research design, the cross-sectional design will be used in this study as a complementary design to the descriptive research design. This is attributable to the fact that the descriptive research design relies entirely on instrumentation and measures, which are subject to errors. As such, the use of the cross-sectional research design for this study would ensure the realization of valid and credible information that can be used for comprehensive conclusions.

Target Population

A study’s target population entails the total number of subjects and/or objects used in a study to provide the necessary information that can be used in explaining a societal problem or scenario under study. In the case of the current study, the focus is on the mergers and acquisitions in China and the effects such activities have on the performance of corporations and the wealth of shareholders. China is a large country with one of the highest population in the world. Through its capital market is young, the country has very many listed companies in various Stock Exchanges.

As such, the study would require a large amount of data for the credibility of the results and findings. For this reason, the study targets the entire capital market of China, with a specific interest in the companies that have undergone successful M&As. There are three stock exchanges markets in China, which include the Hong Kong Stock Exchange, the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

These will form the primary sources of the required information for this study. Creswell (2009) pointed out that the selection of the population to target in a study largely depends on the scope of the study and the phenomenon under study. Thus, the target population in the study is the listed companies in China that have completed M&A deals.

Sampling Design

A sample refers to a section of the targeted population in a study and is used to represent the entire target population. Thus, to achieve a highly representative sample, Kothari (2005) noted that the appropriate sampling techniques ought to be used. This is attributable to the fact that a sample should bear all the characteristics of the people or units forming the target population.

Sampling frame

The sampling frame refers to the working population in any given study. In the case of the current study, the sampling frame is the listed companies that have either merged with other firms. However, the exclusion criteria for the sampling frame focuses on a few factors. For any company to be considered for inclusion in the sample, it ought to be listed publicly in China’s capital market. Secondly, the date of announcing the M&A should lie anywhere around January 1^st 2003 and December 31^st 2013.

Lastly, the merger and acquisition deals to be studied should be in the list of successful M&A deals. Several target populations are excluded such as those that do not qualify the exclusion criteria. For example, there are M&A deals that were successful but the announcement date of the deals does not lie between January 1^st 2003 and December 31^st 2013. Also, various deals were successful but they are not listed in China’s stock exchanges. Such deals will be excluded from the sample.

Study’s sampling techniques

A sampling technique refers to the procedures that a researcher uses to arrive at the sample size to be used for any given study. Several sampling techniques can be used in any study. However, the choice of a given technique depends on the scope of data and sample needed (Mitchell & Jolly 2010). The convenient sampling procedure is applied in this study.

The choice of this method is based on the need to have an inclusive, sample given that the scope of the study focuses on a large capital market that has numerous listed companies. As such, the convenient sampling technique is suitable for this study since it allows all the companies a chance of being used in the sample. Additionally, this method of sampling is effective in that it is flexible especially in terms of time, distance and finances. The sample selected through this sampling method is often convenient as it avoids all forms of restrictions as the researcher makes decisions on what data sources to use.

Sample Size

The size of a sample to be used in any study varies from small to large depending on the required data, availability of resources to use in the study, as well as the aim of the study. This study aims to explore various aspects of mergers and acquisitions in the context of Chinese capital market to establish the effects that such activities have on the wealth of shareholders as well as on the performance of acquiring firms in the long-run. As such, the sample size should comprise of units that in the collection of valuable information to achieve the aim and objectives of the study. The size of the sample used in a study matter especially in the determination of research’s level of precision and accuracy. In the process of obtaining the sample size for this study, the following formula will be used:

n=N/

Whereby, e and N represent stand for the degree of freedom and target population respectively.

Data collection

As noted earlier, the primary aim of this research is to provide more insights into the effects of mergers and acquisitions on the performance of acquiring firms as well as on the wealth of shareholders. For such objectives to be achieved there is a need for data collection methods that would lead to the collection of valuable data to draw comprehensive inferences.

Various research questions have been adopted to ensure that all the objectives of the study are met. Secondary sources such as journals and online databases that have information on Chinese mergers and acquisitions form the main sources of data for the study. However, a lot of emphasis in the study is given on the market performance of acquiring firms and the measures of operating performance of the firms.

Data, Results and Findings

Characteristics of M&A deals, 2003-2013

Based on the methodology and research design highlighted above, the study focuses on specific mergers and acquisitions listed in the Chinese stock exchange markets. According to the proposed methodology, secondary sources of data such as journals and online databases are used in the collection of the required data. In this case, online databases containing information on mergers and acquisitions in China such as the SDC Database are used. As such, the necessary information about the M&A deals is collected including data about the status of the deals, effective and announcement data among other fine details.

As outlined previously, this study focuses entirely on the impacts of mergers and acquisitions on the acquiring firms’ performance as well as on the shareholders. For this reason, it is important to examine the characteristics of firms in terms of their operations, performance and returns within the pre-acquisition period and post-acquisition period.

Since numerous mergers and acquisitions deals match the selection and inclusion criteria for the study, firms that have a stake of below 50% in the targeted companies are excluded. However, to reduce the challenge of dealing with large sample size, the study targets 100 deals that match the inclusion and exclusion criteria stated in the previous chapter. Using convenient sampling and the formula n=N/ , the sample size for the study is calculated as follows where n is the sample size, N, the target population and e the degree of freedom (0.05).

n=100/ (1+100 (0.05²))

n=100/1.25

n=80

Characteristics of M&A deals, 2003-2013

Table 1: Characteristics of M&A deals, 2003-2013

The table above provides a summary of the characteristics of the mergers and acquisitions deals sampled. According to the data on the table, it is evident that there is a growth in the number of mergers and acquisitions in China. This is based on the fact that 20% and 80% of the mergers and acquisitions occurred in 2003-2007, and 2008 -2013 respectively, accounting for 60% increase in the percentage of M&A deals between 2003 and 2013.

Secondly, the table above shows that the number of cash transactions is high when compared to deals involving other forms of payment such as stock only, or cash and stock. The empirical literature on Chinese mergers and acquisitions found out that the majority of China’s M&A deals are carried out by firms owned and controlled by the state (Yong 2010). Expectedly, the section of the status of ownership shows that majority of the acquirers (90%) are state-owned enterprises.

On the other hand, the analysis of the number of cross border and domestic deals showed that between 2003 and 2007, there were more domestic mergers and acquisitions than cross-border ones. However, the number of cross-border M&A deals exceeded the domestic ones in the following years, which can be attributed to the existence of successful reforms within the capital market of China.

The last section of the table above highlights the characteristics of the sampled deals in terms of the target firms. Notably from the literature review, most of M&As in China target the private sector with nearly no target on the public or state-owned enterprises. This is attributable to the fact that most of the listed companies in China are state-owned. The sample shows that majority of the target are subsidiary firms, joint venture firms, or private firms.

Market performance of acquiring firms (shareholder wealth effect)

The first hypothesis of this study is based on the examination of the existence of shareholder wealth effect. As such, the study will use the sampled units to examine the market performance of acquiring firms to establish whether or not mergers and acquisitions affect the wealth of shareholders. The study adopts the standard event study methodology in the measurement of the shareholders’ wealth effect. The Cumulative Abnormal Return, often abbreviated as CAR is used in the computation of the number of returns that a given firms during the announcement period of M&A deal.

To achieve credible results, the calculation of the cumulative abnormal return is carried out over several event windows after the date of the announcement. However, there are cases when information of mergers and acquisition is available to the public before the announcement date. During such cases, manipulation of stock prices can be done thereby providing the wrong returns. As such, to take care of such case, it is always advisable to calculate the cumulative abnormal returns based on several days before the announced date (often considered -1, since 0 is taken as the announcement date).

In the case of this study, the study is based on the market portfolio of the value-weighted index as recorded by either the Shenzhen stock exchange or even in the Shanghai stock exchange. Additionally, it is important to examine the buy-and-hold abnormal returns (BHARs) of the sampled firms in the long-run based on the value-weighted index of the Shenzhen or Shanghai stock exchange. The use of matched-firm benchmarks or even the calendar time approach is not appropriate for this study due to cases of data limitations.

The calculation of the cumulative abnormal returns in the short-run is based on the day-to-day abnormal returns for the acquirers’ firms. In this case, the market model is used as the benchmark model and is calculated as follows:

R_it = α_i+ß_iR_mt + e_it;

In this equation, the daily return realized for any given stock i, on a given day, t. The value-weighted market return for each day is represented as Rmt for day t. The value e_it, is considered to be the error term accounting for any computational errors that might occur. Based on the above formula, it follows that the abnormal return for any given stock i can be calculated as follows;

AR_it = R_it – (α_i+ß_iR_mt), whereby (α_i+ß_iR_mt) represents the number of normal returns expected from the given stock i, for any specific day t which can be represented as E (R_it) implying that the above equation changes to;

AR_it = R_it – E (R_it)

Thus, the cumulative abnormal returns (CAR) for any firm can be calculated as a summation of the total abnormal returns over a specified number of days (t), implying that;

CAR_it =∑AR_it

Over the long-term, the abnormal stock returns are measured based on BHAR. The difference in the calculation of BHAR and CAR is that the measurement of the BHAR is based on the differences between returns of a benchmark portfolio investment and a buy-and-hold investment.

Measures of operating performance (long-term corporation performance) (3 years after M&A)

The examination of the operating performance of various corporations within the sampled units can be a suitable way to establish whether mergers and acquisitions activities affect the performance of acquiring firms in the long-run. Therefore, the investigation of the operating performance, in this case, will be evaluated for three years for comprehensive inferences.

Several financial tools can be used in the measurement of the operating performance of firms. Nevertheless, a suitable approach is the investigation of the growth of the given firms in terms of sales as well as their profitability. Some of the indicators of company’s growth in sales and profitability include profit margin, the return on equity (ROE) as well as the return on asset (ROA), and are discussed below in the context of this study’s objectives.

The first ratio is the Return on Equity (ROE), which is an expression of the total net income that a company gains from the total number of invested shareholders’ equity and is expressed as follows;

Secondly, the Return on Assets (ROA) is used in explaining the potential of a firm’s asset to cater for the debts of the company’s debts by examining the earnings of the concerned firm over its total assets’ value

The other financial ratio of interest, in this case, is the profit margin, which is significant in explaining the profitability of a given firm by examining its net income in comparison to collected revenue.

On the other hand, for more comprehensive results especially considering that the generation of cash flow in a frim can be reflected through a firm’s growth, the study examines the growth of the firm. This is done to ascertain the performance of the firms concerning the objectives of the study. As such, the growth in sales is expressed as a percentage of the difference in sales as shown below:

Whereby, the sales in year two reflect the sales in the current year, while year 1’s sales reflect the sales of the previous year. According to the empirical literature, the structure of capital in any given market significantly affects the performance of firms especially in developing markets such as China and Canada (Eckbo & Thorburn 2009). For this reason, the objectives of the study can be effectively met if the debt capacity of the firms is examined to find out the actual performance of the concerned firms. This can be done through the calculation of the leverage ratio, which acts as a reflection of the debt capacity of a given firm. The leverage ratio is calculated as follows:

Market performance analysis

To effectively analyze the performance of various firms in the sample, the Ordinary Least Square method is used. It is a type of regression model and it is adopted to help in the analysis of how various cumulative abnormal returns and, deal characteristics leverage changes and the performance of firms before acquisition relate. In this study, the calculation of the cumulative abnormal returns is done concerning several days prior and several days after the announcement date. As such, the dependent variables for this study are set at CAR (-1, +1) within three days and CAR (-2, +2).

According to the previous discussion above on measures of the operating performance of firms, variables that indicate the performance of firms in terms of profitability and sales growth are used. As such, the study analyzes the pre-return on assets, pre-return on equity, pre-profit margin as well as pre-sales growth to ascertain the performance of firms before acquisition activity. Also, the effects of profit margin, the return on equity, the return on assets on the abnormal returns of the firms are noted.

Dummy variables are appropriate in this study as control variables. As such, the study adopts variables that have a close relation to the deal variables used. For example, in a case whereby the target firm and its acquirer share an industry, the study will adopt a same-industry dummy variable that is equal to 1 or 0. Secondly, whereby the acquiring firm is state-owned (SOE), the appropriate dummy variable for such a firm is SOE is equal to 1, or otherwise, 0. The same trend is followed for payments, and border or domestic M&As.

Empirical results and findings

Wealth effect of shareholders (short-term)

This section of the dissertation provides the stock price data analysis based on the standard event methodology to ascertain the effect of announcing mergers and acquisition on the value of acquirers firms within the Chinese market. As noted earlier, the dependent variables used in this study are CAR (-1, +1), and CAR (-2, +2), whereby the announcement day is represented by 0.

Using various event windows such as (-5,-2), (-2,0), (-1,0), (0,), (0,+l), (-1,+I), (-2,+2), (+2,+5), (-5,+5), (-10,+10), (-42,-1), (0,+ 126), (-42,+ 126), the cumulative abnormal returns are calculated based on 42 days before the announcement dates of mergers and acquisitions and 12 days after the announcement date in order to take care of any leaked information.

The mean CARs following the announcement of a merger and acquisition deal are significantly similar to zero. For example, the analysis of the CAR within 2-5 days after M&A is announced gives a mean of -0.69%, while the CAR after six months is -2.52%. On the contrary, the mean CARs when the event window ranges from 3 to 5 days are 0.67% and 0.74%.

Statistically, the mean is significant and positive. From these results and the findings from the review of literature, it can be concluded that there is a high potential that before the announcement date of M&As, acquirer experience a significantly large part of run-up over a short period before day 0. This is based on the fact that the gains in returns are significantly small when CAR means are calculated over the event window of (-42,-1).

Generally, and according to empirical results, it can be seen that the mergers and acquisitions in China result to significant positive Cumulative Abnormal Returns around day 0 of M&A and that the shareholders do not experience any loss in their wealth until six months of the takeover. The implication from this assertion is that mergers and acquisitions are beneficial to shareholders of acquiring firms in the short run.

These results are in line with some previous studies’ findings such as in the case of Chi, Sun and Young (2009), as well as evidence from other countries like Japan. Despite this, the findings of this study contrast with evidence on wealth effects in developed markets especially in the West. As such, it is important to ascertain the robustness of the above findings concerning firm-specific characteristics and deal-specific features. In this case, the interest is on the form of payment, the status of ownership and types of deals.

In the analysis of the various categories of firm-specific characteristics and deal-specific features of mergers and acquisitions, it is an event that firms within China’s capital market whose acquisition target is joint-ventures are likely to experience abnormal returns. As such, the analysis records cumulative abnormal returns that are significantly positive for the case of bidder’s and their target’s industry readiness.

Such results reflect CAR within more than six months and between 2-1 before day 0. Also, consistent results are found over the 3-days, 5-days and 21-days window, whereby the mean cumulative abnormal returns are statistically significant. The implication from this finding is that joint ventures mergers and acquisitions deals lead to a positive reaction within the market.

Secondly, when assessing the impact of cash transactions on the cumulative abnormal returns, the study finds that there is a significant effect on the wealth of shareholders whenever cash is used as the form of payment during M&As. Such finding aligns with findings from various studies. The use of cash in such transactions indicates that there are possible returns for shareholders of the acquiring firm especially days before the announcement day and shortly after (at most two days) announcement.

Contrary, when firms use a stock exchange as the form of payment during a merger and acquisitions deal, the shareholders suffer from negative mean CAR especially on day 0. According to the analysis, the CAR is -0.45%. Additionally, firms are also likely to experience such cumulative returns over event windows of (+2, +5), (-5, +5), as well as for (-10, +10).

Such cumulative abnormal returns are statistically significant, while windows of (-42, -1) and (-5, -2) provide insignificant cumulative abnormal returns. Despite this, there is a lot of difference whenever stocks are used as a form of payment for windows s (-2,0), (-1,0), (0,1), (-1,+I), (-2,+2), (0,126), and (-42,126) as these lead to positive cumulative abnormal returns that are statistically significant.

The attitude of the bidder, whether friendly or hostile, affects the shareholders’ wealth. Results on the analysis of such effect show that a friendly merger and acquisition deal leads to significantly positive returns. However, where the deal is neutral, the shareholders of the affected companies experience no returns.

Analysis of the effect of cross-border mergers on the wealth of shareholders shows that the shareholders do not experience any significant abnormal returns over the pre-acquisition period, 21-day period, 11-day window, 5-day window or even the 3-day window. Therefore, according to the sample used, it suffices that cross-border deals are no different in that mergers and acquisitions that involve cross-border firms only receive normal returns.

Despite this, there exists an indistinguishable performance of the market in cases involving cross-border deals. According to Boateng, Qian and Tianle (2008), the expectations of many firms prospecting for cross-border mergers and acquisitions is that they will lead to value creation for the Chinese firms.

The reasoning behind the normal rate for cross-border deals is that there is a high potential for a loss during the early stages of acquisitions, which explains why most investors consider the unavailability of any significant relationship between the merger and acquisition event and the performance of the resultant firm in the future. In the case of recent cross-border mergers and acquisitions, political factors have a significant effect which explains the normal rate of returns for shareholders. The implication is that most of the deals are not aimed at the maximization of the wealth of shareholders but its destruction.

On the other hand, domestic mergers and acquisitions have a positive reaction from firms. The results in this category show that the mean cumulative abnormal returns in the case of M&A deals involving domestic firms are significantly positive.

The literature shows that domestic takeovers are favourable in China, as the firms have the potential to grow as well as acquire larger economies of scale through capitalizing on the weaknesses of the acquired firms as well as the integration of operations of the merged firms. A suitable example of a successful domestic takeover is the case of TCL, a company that has successfully acquired and boosted the performance of firms labelled as non-performers.

Even though there is high growth in cross-border mergers and acquisitions in China, evidence shows that most of the deals do not turn out as expected in the long run. This, according to Boateng, Qian and Tianle (2008), is attributable to the setting of high expectations without evaluating the conditions in the market. As such, there are numerous challenges when it comes to cross-border mergers and acquisitions in China. This aligns with the study’s findings that still China is developing its cross-border mergers and acquisitions.

It was important, based on the objectives of the study, to examine the effect of the status of the acquiring firms on the market. As such, the study carried out an analysis of such effects focusing on mergers and acquisitions involving state-owned firms against the non-state owned ones. According to the results of the short-term analysis of the shareholders’ wealth for both case, it is evident that shareholders of mergers and acquisitions involving state-owned enterprises experience positive stock returns within the announcement of mergers and acquisitions.

More specifically, based on the sampled units, the cumulative abnormal returns are significantly positive 1 day, and over 2 days before the announcement date. On the contrary, mergers and acquisitions involving firms that are not owned by the state experience a normal rate of returns. Investigating the form of acquisitions, it becomes evident that acquiring firms in any mergers and acquisitions deal experience positive abnormal returns.

From the foregoing analysis of the wealth effects of shareholders over a short term in the event of M&A, it is evident that a positive announcement effect exists concerning the abnormal stock returns. The implication is that the occurrence of any takeover increases the wealth of the acquiring firms’ shareholders in the short run. This aligns with previous studies’ findings, which indicate that M&A is used as a means of maximizing the value of a given investment especially for the shareholders of the acquirer firm.

Also, there is a difference between the effects of the forms of payment when stocks or cash is used during M&A, as well as in the case of cross-border and domestic deals. However, such difference is insignificant in the case of the Chinese capital market. Despite this, there is a distinguishable impact on the wealth effect of Chinese firms in the case of bidder’s attitude towards mergers and acquisitions. According to the findings of the study, it was evident that friendly takeovers lead to high returns for acquiring firms’ shareholders as opposed to the case of neutral takeovers.

According to the existing literature on Chinese, little evidence exists on mergers and acquisitions involving state-owned enterprises as the acquirers’ high and positive returns in comparison to the non-state-owned acquirers. Moreover, according to the findings of this study, mergers and acquisitions involving private and joint-ventures have high returns to the shareholders of acquiring firms.

As such, the shareholders of firms involved in joint-ventures enjoy a high rate of return on their investment during the announcement period of M&A. The results on the reaction of China’s market concerning the mode of payment in the event of M&A are inconsistent with findings of past studies in this category.

Performance of acquiring firms (Long-term)

One of the objectives of this study was to examine the performance of acquiring firms in the long-term. As such, the study investigates such performance for three years. Results of the study show that during the pre-acquisition period, shareholders of acquiring firs experience an abnormal return of 16.04% over (-12,0) window, and highly significant positive abnormal returns for (0,+12), (0, +24) and (0, +36). Analyzing the characteristics of the mergers according to the status, type of acquirers and the means of payment the study has the following results.

First, the findings show that the performance of acquiring firms that use cash as the means of payment, over the long term is high when compared to firms that make use of stocks.

Secondly, the attitude of bidders has a significant effect on the performance of firms in the long term. The study found out that friendly acquirers experience rate of abnormal returns that is high in comparison to neutral acquirers. However, in case of the type of acquirers, the study finds contrasting evidence when comparing between the short term and long term performance of firms. In this case, shareholders in either non-state owned enterprises or state-owned enterprises have the potential to experience high abnormal returns in the long term.

From the foregoing findings, the study documents that there are no significant difference in the wealth of shareholders over the long term for stock and cash payment, neutral and friendly deals, state-owned-enterprises and non-state-owned enterprises acquirers. As such, it can be concluded that even though no distinguishable difference is noted for the characteristics examined, acquiring firms in China show high performance thereby creating normal or positive returns on stock for their shareholders over the long run, in this case, three years. Nevertheless, such cases do not apply in developed markets such as the U.S.

Operating performance of firms after acquisitions

There are high concerns on whether or not the operating performance of acquiring firms is affected by mergers and acquisitions activities. As such, there is a need to examine the effect of M&A on the operating performance of acquiring firms in the long term. For effective analysis of this concept, the operations of the firms before and after M&A can be examined through the use of various indicators of growth such as the return on equity, return on assets, sales growth, the profit margin alongside changes in the debt to total assets ratio.

The analysis of the profitability of firms before and after M&As indicate that during the pre-acquisition period, there is a decline in the growth in sales, profit margin and return on equity following the announcement of a takeover deal. However, the study finds that during the announcement year, an increase in the growth in sales, profit margin and return on equity is noted. Despite this, the growth in sales and profit margin significantly declines after the acquisition. Contrary to this scenario, the leverage ratio declines during the pre-acquisition period and significantly increases at the announcement date onwards.

Averagely, the results on the performance of firms after an acquisition do not provide evidence that the operating performance of firms following mergers and acquisitions improves. On the contrary, acquisitions lead to a decrease in profitability for the acquiring firms. This can be attributed to the fact that the mean return on assets is low during the post-acquisition period as compared to the pre-acquisition period.

The implication is that assets of the concerned firms are not in a position to offset the firm’s debts. This is reflected in the debt to asset ratio, which increases following an acquisition. From these findings, it can be concluded that mergers and acquisitions negatively affect the operating performance of acquiring firms as leverage increases instead of decreasing while profitability decreases instead of increasing.

Summary and Conclusions

The primary aim of this study was to explore the effects of mergers and acquisitions on the performance of acquiring firms as well as on the wealth of acquiring firms’ shareholders. As such, the study had several specific objectives such as examining whether or not M&As are likely to lead to maximization of value for shareholders of the affected firms, establishing the factors which influence the wealth of shareholders as well as the performance of the acquirer in the case of acquisitions and carrying out a comparative analysis of M&A in developing and developed countries.

The study used a sample size of 80 listed mergers and acquisitions in China and adopted the Least Square method to analyze a few aspects of the sampled deals. However, as pointed out earlier, a lot of interest was on the operating performance and the wealth effect of shareholders in the long run. The analysis of the study concerning the highlighted objectives provided the following results.

First, the study found out that there is limited literature on mergers and acquisitions for developing markets such as China. Despite this, it was evident that most of the mergers and acquisition deals carried out in China are often friendly, and make use of cash as the primary means of payment. Besides, a great percentage of the M&A deals in China involve state-owned enterprises due to their increased dominance in the country, and such deals often target the joint-ventures, subsidiaries and private firms operating within the same industry.

Secondly, the study found out that mergers and acquisitions in China are considered to be a suitable way of increasing the value of shareholders as evident from the analysis that most acquirers gain abnormal returns. Moreover, evidence shows that firms that engage in buy-and-hold stock experience positive abnormal returns for three years.

Thirdly, according to the analysis of the operating performance of firms affected by mergers and acquisition, the performance does not improve significantly. Such results align with the case in the US. However, there is a notable improvement in the operating performance of acquiring firms during the announcement period.

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HR Difficulties after Compaq Acquisition

Mergers and acquisitions have important implications for the human resource (HR) department, some of which may adversely affect the smooth operations of the company and its strategic plan (Schuler & Jackson, 2001). The acquisition of Compaq by HP, for example, presented HR professionals with integration challenges as they had to develop a cultural and organizational structure that was conducive to employees from the two companies.

The HR department was also faced with difficulties in integrating HR policies, aligning compensation programs to fit employees from the two companies, dealing with cultural differences initiated by the acquisition, aligning information systems with the business strategy, and dealing with stress and feelings of anxiety among employees of the acquired firm. If not adequately addressed, these difficulties have the capacity to trigger adverse organizational and employee outcomes such as suboptimal productivity and performance, management problems, high staff turnover, and low employee morale and motivation (Schuler & Jackson, 2001).

Balancing Low-Cost Mandates with Innovation Aspirations

As a benefits manager at HP, it is important to develop and implement HR strategies that will be effective in enhancing alignment among diverse groups of employees within the company with the view to ensuring that the new entity is able to achieve its specific competitive objective. Owing to the fact that the two companies pursued different strategies to achieve their competitive advantage, it would be imperative to develop an approach that improves the company’s innovation capability and lowers costs through a combination of low-cost-oriented product development, first-to-market benefits, and high product functionality (Bengtsson, Haartman, & Dabhilkar, 2009). Such an integration strategy must ensure that enough resources and personnel are committed toward ensuring that the new outfit is able to maintain its innovation-oriented, high product functionality, and fast time-to-market capabilities while keeping product development costs at a sustainable level.

Structuring Items

Communications can be structured around technology platforms that encourage employee interactions and collaboration with the view to spurring innovation, efficiency, and knowledge-sharing. Such technology platforms are not only critical to innovation by virtue of allowing many people to work together toward developing innovative solutions, but are also cheaper compared to traditional communication approaches (Ting, 2015).

Cost savings or controls can be developed around a feedforward control mechanism that provides a basis for control at the point of action and defines the centers of responsibility in a way that allows employees some leverage to experiment with innovative ideas and report their progress using the laid down procedures and standards. New design issues can be effectively handled through the use of a systems approach to product design and development, which incorporates a holistic and sustainable design approach in the domain of product design (Luthe, Kagi, & Reger, 2013). This approach is known to lower production costs and enhance the innovative capacity of employees to come up with new ideas aimed at improving product quality.

Challenges

Lastly, the challenges of mixing a low-cost strategy with an innovative strategic orientation include the inability of companies to continue with innovative practices at a lower cost, lack of adequate resources to drive the hybrid strategy, personnel issues as many innovative employees want to work for companies that allocate huge sums of money to product design and development, and misalignment in business and strategic objectives. These challenges need to be sufficiently addressed if the hybrid strategy involving low-cost and innovative approaches is to succeed in enhancing competitive gains for the company.

References

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Luthe, T., Kagi, T., & Reger, J. (2013). A sustainable approach to sustainable technical product design: Combining life cycle assessment and virtual development in the case of skis. Journal of Industrial Ecology, 17(4), 605-617.

Schuler, R., & Jackson, S. (2001). HR issues and activities in mergers and acquisitions. European Management Journal, 19(3), 239-254.

Ting, C. (2015). Business contingency, strategy formation, and firm performance: An empirical study if Chinese apparel SMEs. Administrative Sciences, 5(2), 27-45.

Introduction

A corporate acquisition is a transaction involving the purchase of one company, known as the target company, by another company, known as the acquiring company (Gitman & Zutter, 2012). Acquisitions may be of two types; friendly and hostile acquisitions. A friendly acquisition is performed with the cooperation of the management while a hostile acquisition is performed against the will of the management. Acquisitions may also be classified by motive, where we have strategic and financial acquisitions.

Analysis

There are various reasons for acquisitions. The most common reason is seeking growth. The acquiring company may be seeking to expand its business or to acquire a dealership in a different line of products or services. Purchasing a going concern with a reasonable value and growth prospects would be better than starting a business from scratch. Acquisitions are also done in order to take advantage of economies of scale, a state is known as synergy.

A company may also buy another company with higher liquidity in order to raise funds. The presence of special employee skills and technology in a company could make it a potential target for acquisition. The presence of tax losses in a company may also attract a potential acquiring company that intends to gain a tax advantage (Gitman & Zutter, 2012).

The negotiation stage follows the identification of a target company and involves the determination of terms of the transaction such as purchase price and take-over process. The stage requires both parties to fully understand their objectives and aim to increase shareholder wealth. This is, unfortunately, not always the case. The acquiring company may lack a realistic valuation of the target company, simply relying on what they can afford to pay.

The presence of a counter-offer from another company could also increase the purchase price of the target company (Pearson Education, 2012). Mistakes such as over-reliance on the financial statements for due-diligence and purchasing companies simply because they are undervalued also cause acquiring companies to pay more for an acquisition than it is worth to them (Gome, 2007).

Despite both the real and perceived advantages of acquisitions, the majority of them end up decreasing shareholder value, with the greatest losers being shareholders of the acquiring company (Harshberger, 2009). In a study conducted on mergers and acquisitions in the US, Moeller, Schlingemann & Stulz (2005) observed that the acquiring firms lost twelve cents per dollar in aggregate value on their acquisitions. They attributed this loss to ‘negative synergy’ between both companies.

In order to avoid the losses to shareholders arising from acquisitions, both parties must plan for and communicate on the deal and consider integration factors such as the difference between the two companies’ cultures (Harshberger, 2009) after the acquisition process is complete.

References

Gitman, L. J., & Zutter, C. J. (2012). Principles of Managerial Finance, 13th ed. Upper Saddle River, New Jersey: Prentice Hall.

Gome, A. (2007). Why acquisitions fail: Top 6 blunders. Web.

Harshberger, M. (2009). How to create shareholder value through acquisitions. Web.

Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2005). Wealth destruction on a massive scale? A study of acquiring-firm return in the recent merger wave. The Journal of Finance , 757-782.

Pearson Education. (2012). Why Acquisitions Fail – the 20 Key Reasons. Web.

Executive Summary

The process of acquisition is associated with some complexities, and the primary goal of this paper is to develop action plans that can be used as responses to two situations. The first case scenario focuses on the fact that rumors in organizations spread information about no possibility of a takeover in the recent future while leading to a high degree of absenteeism and low levels of productivity. In this instance, the executive of the company has to organize a meeting to discuss this problem, conduct risk assessment, and propose changes concerning the mission statement and the function of HRM.

Highlighting the significance of integrity, innovation, productivity, and transparency in the company’s values will guide the HR department and help organize interesting corporate events and present rewards for outstanding performance.

As for the second situation, the employees of two companies are not eager to collaborate due to the lack of managerial initiative and substantial differences in corporate cultures. A combination of these factors also results in a low level of productivity and a lack of motivation. Apart from the need to develop the Acquisition Committee, give more power to the HR department, and monitor progress, it is vital to inform the employees, conduct a SWOT analysis of business cultures, and utilize these findings to ensure the integrity of the companies and design an effective organizational structure.

Subsequently, it is rational to use the structure of the acquiring company and introduce separate units responsible for strategy and different types of the audit while adapting a leadership style of the enterprise with the governmental structure will help reach a balance. In the end, despite the differences in these situations, they help understand that transparency and constant communication with the employees have to be prioritized during the process of acquisition, as they are the major definers of corporate success and superior financial performance.

Introduction

Today, many companies consider takeovers as one of the instruments for expansion and sources of innovative growth (Bena & Li, 2014). For example, one of the benefits is a well-balanced expenditure on R&D and patent development (Bena & Li, 2014). Nonetheless, they are also associated with a plethora of challenges and difficulties. In this instance, apart from the inability to calculate a sufficient value of takeover leading to under or overpayment, the most common problems include the lack of competences of executives during the implementation process, insufficient integration, drastic differences in organizational cultures and structures, and loss of market share (Singh, 2012).

Based on the factors and trends reflected above, it could be stated that the management of the acquiring companies has to design an effective action plan to take advantage of the described benefits and diminish the effect of negative consequences.

Consequently, the primary goal of this paper is to design effective action plans that will have a favorable impact on the disruptive implementation of a merger. In this instance, hypothetical situations are simulated, and detailed aspects of contingency plans are provided to ensure the sufficient flow of the decision-making process while avoiding failures of a takeover. In the end, the conclusions are drawn to summarize the main findings of the paper to understand the rationale for the described enterprise-wide actions of a top executive.

Response to Situation 1

Summary

To begin with, it is essential to provide a general overview of the situation. In the first case scenario, noise and rumors could be considered as the main sources of dissonance in the organization. Meanwhile, its major outcomes could be described as a continuously escalating degree of absenteeism, loss of productivity, and absence of motivation. It remains apparent that a combination of these factors hurts the quality of the products provided to the final consumers while adversely affecting the financial stability and performance of the enterprise. Consequently, resolving it and avoiding similar cases in the future could be discovered of paramount importance.

Action Plan

Situation 1 implies that the core of the problem is a high level of uncertainty among the employees about the actual implementation of the acquisition or takeover. In this case, the main phases will cover discussion and evaluation of issues and risks, analysis of challenges and opportunities, contingency planning, implementing changes concerning integrity and mission, growing importance of Human Resource Management (HRM), and monitoring changes of the proposed actions with the help of KPIs (Key Performance Indicators) and KPIs (Key Financial Indicators). The subsequent sections will describe each phase in detail and provide logical reasoning for the suggested actions.

Step 1: Organizing managerial meeting about issues

Initially, it has to be mentioned that the Acquisition or Change Committee was designed previously while covering the representatives of different departments to support the understanding of the problem from different angles. Apart from that, it is vital to include shareholders in the process. The primary reason for this matter is the fact that any changes in the value of the company or modifications in assets have a direct impact on their financial wealth and effectiveness as decision-makers (Li, 2015).

They play a pivotal role in stimulating the company’s growth and innovation and can be considered as vital actors of the Acquisition Committee. Consequently, discovering them as critical participants of the meeting is of paramount importance since, otherwise, the solution may not cover their viewpoint.

After gathering all important members of the decision-making team, a series of meetings will be organized, as they have to cover a plethora of questions such as employees’ attitude, motivation and levels of absenteeism, and implementation of changes associated with the acquisition. Due to the need to resolve these problems rapidly, the meetings will be organized once a week, and each session will cover one of the themes described above. Using this strategy and simultaneous brainstorming of different corporate players will assist in resolving the issues indicated above promptly while reviewing the situation from dissimilar angles.

Step 2: Risk assessment and development of an action plan

Another step implies that it is vital to review the beneficial features of risk evaluation during the process of acquisition. The critical impact of this method cannot be underestimated, as it can help discover dissimilar situations that may incur during the implementation and cultivation of organizational changes. At the same time, it is one of the essential tools to assess different internal and external threats, and, in this case, reviewing opportunities of the labor market, working environment, and atmosphere in the organization is critical.

Understanding the essentiality of these features can help resolve different types of conflicts while increasing the productivity and efficiency of various departments. The overall process of the risk assessment will be rather simple, as it will include gathering information about risks (internal and external), assessing potential and existent case scenarios, and proposing diverse solutions to boost organizational productivity.

The outcomes of the previous discussion of the current issues and risk assessment can be regarded as a basis for constructing an effective action plan that will increase the effectiveness of the acquisition. It remains apparent that a combination of these evaluations underlines that the core of the problem that lies within the mission statement has to be discovered in detail, as this aspect forms a profound image of an actual situation in the organization (see Step 3). The following phases imply modifying the involvement of HRM in the decision-making process, but the detailed action plan will be provided in the subsequent sections (see Step 3). Nonetheless, generally speaking, the main steps will include

• Proposing changes to mission statement based on risk assessment;
• Discussing the role of HRM within an entirely new framework;
• Introducing and implementing changes related to mission statement;
• Actions of the HRM department;
• Using different qualitative and quantitative measures to evaluate progress.

Step 3: Introducing changes to the mission statement and increasing the involvement of HRM

As a consequence of Step 2, the next step will include two major modifications that are redesigning the mission statement and increasing the importance of HRM in the implementation process. Speaking of internal value proposition, it has to expand its features and, apart from productivity and integrity, foster the growth of transparency and innovation (see Figure 1). Innovation, a higher level of integrity, and escalating production capacity are common benefits associated with the acquisition (Bena & Li, 2014).

Meanwhile, transparency and disclosure have to be viewed as vital components of new corporate culture, as they will improve the overall effectiveness and accountability of the leadership framework and support the sufficient integration of companies while avoiding conflicts (Fung, 2014). In the case of Situation 1, focusing on these matters will be beneficial since these principles will be used to develop goals and objectives for different levels of subordination and be addressed in HRM actions such as rewards and recognition (Step 4).

Another aspect of this step will focus on the growing role of HRM in the decision-making and coordination processes. A plethora of studies conducted in the past claims that successful integration is highly dependent on the actions of the HR manager (Correia, Cuhna, & Scholten, 2013). For example, HRM’s centrality has an advantageous impact on the organizational performance while contributing to the effective integration of policies and values of the acquired and acquiring companies (Correia et al., 2013).

Consequently, the involvement of HRM has to be increased substantially, and it has to take an active part in the development of mission statements, KPIs (Step 5), and communication with the employees. Its major activities will be described in the subsequent section in detail.

Step 4: HRM and other actions

As was stated earlier, one cannot underrate the critical importance of HRM, as the management of this department plays the role of the mediator between the executives of the company and employees. In the first place, the HR entity has to focus on motivating the workforce, as it is one of the main functions of HR and problems in the case organization. Motivation is often associated with training, professional growth, and recognition for outstanding performance and commitment (John Wiley & Sons, 2015).

Meanwhile, Figure 2 portrays that a combination of the factors indicated above is a vital part of the “maintenance phase” of the employment cycle (John Wiley & Sons, 2015). At the same time, Figure 2 displays that aspects such as induction have to be viewed as significant as other matters since the employees have to be successfully integrated into an entirely new corporate structure and environment (John Wiley & Sons, 2015).

It could be stated that diminishing absenteeism is also linked to the matter of commitment and inspiration, as its degree can be decreased with the help of either stimulating employee motivation or introducing an influential mechanism of sanctions and punishments. In this case, a detailed action plan covering the matters concerning employee motivation will be mentioned below in detail.

Unfortunately, apart from direct interactions with the workforce, and the HR function is more complex during the process of acquisition, as it pertains not only to informing and motivating the employees but also reorganizing the flow of information in the organization along with allocating human resources effectively. The previous sections present the actions that have to be taken from the theoretical perspective while the practical action plan will be described below. It will cover the following steps:

• Participation of the HR department in the meetings during Step 1;
• Evaluating structural changes that have to be made and proposing a strategy to allocate resources sufficiently;
• Using acquired information to design relevant solutions and propose a detailed action plan for HR department;
• Discussing the changes with the Acquisition Committee;
• Along with the phases mentioned above, informing employees about the process of acquisition by organizing meetings once or twice in two weeks;
• After the approval of the Acquisition Committee, starting allocating the resources and organizing training sessions;
• Using employee satisfaction survey and interviews to evaluate their attitudes based on their performance and responses;
• Assessing the results and introducing the most appropriate goals, performance appraisal system, motivation strategies (such as pay per hour), rewards for outstanding performance, and development programs;
• Introducing different corporate events to restore organizational spirit (see Figure 3).

Step 5: Monitoring changes in employee attitudes

Lastly, to control any progress in a positive direction related to the introduced HRM practices, it is vital to develop different types of KPIs, KPIs, and other qualitative and quantitative instruments. In the context of the presented situation, they have to cover modifications in employee attitudes, motivation, and productivity. In the context of this paper, they may refer to

• Quantitative measures
  • KPIs (Quick ratio, ROI, ROE, and Gross Profit Margin)
  • Employee productivity (Actual Revenue/Expected Revenue, Manufactured Products per Person/Expected Goals)
  • Employee motivation (Likert scale);
  • Employee satisfaction (Likert scale, multi-dimension evaluation).
• Qualitative measures
  • Interviews with the employees;
  • Interviews with the management;
  • Notes during meetings with the Acquisition Committee.

Using a combination of these measures will have a beneficial impact on understanding the company’s performance quarterly. This complicated set of measures is a necessity since any changes in employee motivation have a direct impact on sales, performance, and financial productivity of the enterprise. Lastly, applying qualitative and quantitative information and statistics instruments will provide deep insights into the topic and help redesign the strategy if any negative or positive changes incur.

Response to Situation 2

Summary

On the contrary to the first situation, the employees are aware of the acquisition, but they do not actively support this idea of integration since it implies an organizational restructuring of the companies. It could be assumed that the major trigger of this situation is the lack of initiative of top management in merging diverse departments due to the entirely different corporate cultures of business entities, as one supports entrepreneurial spirit while another one is governmental. It is vital to resolve this situation promptly, as it hurts the productivity and size of the market share.

Action Plan

To diminish the consequences indicated above, it is vital to address the issues from dissimilar angles and viewpoints of various stakeholder groups. In this instance, it has to cover the creation of the Acquisition Committee, development of the action plan, informing the employees, implementation of structural changes, resolving issues with the workforce, ensuring the integrity of different business cultures, and continuous monitoring of various stages. Each phase will be described briefly while introducing a universal framework that can be used in similar situations.

Step 1: Development/Expansion of the Acquisition Committee

It could be assumed that the Acquisition Committee responsible for the implementation of change was previously developed. Thus, in this case, it is vital to ensure that the representatives of different departments are included in the decision-making team. Figure 4 provides the assumed structure of the company that is interested and responsible for acquisition or takeover. In this case, as it was indicated in the solution to the previous case, shareholders tended to play a critical role in the decision-making process, and including representatives of this stakeholder group was vital (Li, 2015).

Simultaneously, due to the complexity of the acquisition process, it is critical to consider the managers of different business units and departments, as the expected changes will affect the entire structure. Consequently, the main members will include the CEO (Chief Executive Officer), CFO (Chief Financial Officer), COO (Chief Operating Officer), and Heads of Manufacturing, Marketing, and Project Management.

Step 2: Actions of the Acquisition Committee

After the establishment of the Acquisition Committee, it will be essential to organize several meetings to determine the overall flow of the acquisition process and suggest the most relevant restructuring approach while considering the differences of business cultures. The need to modify the company’s structure is often discovered as a positive sign, as it implies the company’s growth, innovation, and development (Ramdas & Kumar, 2014).

In the context of the presented situation, this process will be more complicated than usual, as integrated companies have entirely different corporate cultures. Nonetheless, any organization has to start with redesigning mission statements and corporate values to comply with a completely new perspective of doing business. All actions mentioned above have to be applied in practice after discussing with shareholders, as they are discovered as the company’s investors.

The theoretical information provided above can be used to develop a detailed action plan that the Acquisition Committee has to follow in the context of this case. In this instance, the main steps will include

• Comparing business cultures of the companies (see Step 6);
• Evaluating the current company’s organization and a mission statement (the framework of the mission statement from Situation 1 can also be applied in this case);
• Organizing a meeting with Shareholders about the changes (structure and leadership style);
• Informing employees;
• Implementing changes concerning mission statement and structure including appropriate monitoring tools;
• Introducing different supporting activities of the HR department;
• Measuring progress with the help of KPIs and other instruments.

Step 3: Informing the employees about the implementation of the merger

Step 2 displays that despite evaluating the company’s performance and implementing changes, it is vital to have meetings with the employees concerning the actual process of acquisition. Many scholars refer to the fact that this step is important since it defines the ability of the enterprise to cultivate change successfully and ensure the successful integration of the organizations (Kansal & Chandani, 2014).

In this instance, the employees become highly adaptive and responsive to system dynamics, and this matter allows the acquiring organization to introduce sufficient monitoring and control mechanisms that comply with changes (Kansal & Chandani, 2014). Figure 5 presents a framework that can be used to inform the workforce. Utilizing this strategy will help the workers understand that the takeover is in progress, and the company considers them as valuable resources by informing them about the changes weekly and quarterly.

Step 4: Implementing structural changes

Apart from introducing changes related to the mission statement (the framework of the mission statement from Situation 1 can also be used in Situation 2), it is vital to propose organizational modifications, as they will be necessary during this process due to escalating corporate needs and continuous development (Kansal & Chandani, 2014). For example, along with the increasing importance of HRM and integrity, it will be essential to introduce separate internal and external audit departments and the unit responsible for strategy (see Figure 6).

Establishing a distinct auditing department will assist in continuously assessing and monitoring the needs of the acquired company. It will become an essential part of the Acquisition Committee since it will help suggest valuable modifications to the existent corporate culture and strategy.

As for Strategy, this unit is essential since having a separate department responsible for business strategy and corporate culture will decrease the levels of pressure put on executives and contribute to well-balanced and weighted decisions leading to a high return on investment. Nonetheless, before implementing these changes, the company has to evaluate the cost-effectiveness of these alterations and distribute financial resources effectively according to the needs of the departments.

It remains evident that the overall concept of Figure 6 is entirely copied from Figure 4, and this fact implies that it will be rational and cost-effective to adjust the entrepreneurial way of organizing the business. Nonetheless, to ensure the cultural integrity of both organizations, some events and techniques can be borrowed from the governmental approach. At the same time, it is vital to underline the importance of the employees and explain the need for changes and the significance of their contribution, but these actions will be presented in detail in Step 5. The overall process of Step 4 can be summarized as:

• Discussing the proposed changes and evaluating financial capacity with the Acquisition Committee;
• Informing employees and explaining the need for changes (see Step 3 and Step 5);
• Implementing changes including the modifications of leadership style.

Step 5: Actions of HRM

This phase will focus on describing the actions of HRM, and it could be said that due to the similarities of Situation 2 with the first one, the majority of the approaches indicated in Situation 1: Step 4 can be implemented in this case. Nonetheless, some matters will be added, and they will include designing different collaborative events and team-building activities since these elements will contribute to the effective integration of two completely different business cultures. In this case, the main steps can be summarized as

• Informing employees about the process, the changes, and their allocation (Step 3);
• Providing the required training and allocating the employees;
• Introducing award and recognition systems based on changes;
• Organizing different team building events and training sessions to ensure the understanding of a new mission statement, goals, and integrity (see Step 6).

Step 6: Integration of diverse business cultures

The described case scenario mentions that one of the critical problems is the necessity to combine different business approaches, as one of the companies relies on entrepreneurial business style while another one emphasizes the significance of its functioning as a governmental entity. In this case, these matters have to be clearly described in the mission statement of the company and underline the paramount importance of shared values, initiatives, and goals. This process is complex, and it will include an extended range of steps, and they are

• Addressing the importance of culture in Step 1;
• Collecting reports about the corporate cultures of acquiring and acquired companies by consulting HRM departments (Deloitte, 2009);
• Discussing critical challenges with specific cases that may incur in both firms;
• Conducting a SWOT analysis of both cultures and using this evaluation to design an entirely new model that will address the needs of both entities;
• Assessing the decision-making style of each company and its reference to culture;
• Creating equal employment opportunities for both acquiring and acquired companies while focusing on the creation of internal brand (organizing different corporate events such as lunches, parties, and sports venues) (Deloitte, 2009);
• Ensuring that organizational environment, leadership, and teams support cultural change and development.

Step 7: Continuous monitoring and control

The last phase implies using different KPIs and measurements that address the productivity of the employees, their motivation and satisfaction, and financial performance. The evaluation has to be conducted monthly during the process of merger. The measures may include

• Finance (ROE, ROA, ROI, and Gross Profit Margin);
• Motivation and satisfaction (Likert-scale to measure job satisfaction and absenteeism);
• Productivity (Actual Revenue/Expected Revenue and Costs/Designed Budget).

Overall, it could be said that the introduced KPIs have to be applied simultaneously, as they provide a multi-faceted image of the organizational performance. At the same time, using them as a combination is a necessity due to the interdependence of these elements and their mutual impact on financial productivity. Applying them effectively can enhance organizational performance and support successful change implementation while controlling the stages stated above.

Conclusion

Overall, the situations mentioned above are the most common ones in the context of mergers and acquisitions. Both of them cover the issues of integration that majorly focus on the lack of the desire of the employees to adapt and accept changes leading to smooth and slow implementation. Due to this matter, action plans tend to have some similarities. For example, both of them underline the significance of HRM and its connection with the success of the acquisition and emphasize the need to expand the coverage of its activities. At the same time, Situation 1 and 2 clearly state that the company should not underestimate the importance of its employees and cherish transparency of the acquisition process.

Nonetheless, apart from the similarities, Situation 2 tends to be more complicated, and when resolving it, the company has to focus on differences in corporate cultures and introduce structural changes. It will be rational to maintain the original organization of the acquiring enterprise while adding Audit and Strategy and using some concepts of the leadership style of the acquired firm. This matter will help reach the successful integration of the business cultures and support financial prosperity.

References

Bena, J., & Li, K. (2014). Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), 1923-1960.

Correia, M., Cuhna, R., & Scholten, M. (2013). Impact of M&A on organizational performance: The moderating role of HRM centrality. European Management Journal, 31(1), 323-332.

Deloitte. (2009). Cultural issues in mergers and acquisitions. Web.

Fung, B. (2014). The demand and need for transparency and disclosure in corporate governance. Universal Journal of Management, 2(2), 72-80.

John Wiley & Sons. (2015). Chapter 5: The human resource management function – The employment cycle. Web.

Kansal, S., & Chandani, A. (2014). Effective management of change during merger and acquisition. Procedia: Economics and Finance, 11(1), 208-217.

Li, T. (2015). A study of the impact of mergers & acquisitions on shareholders’ wealth and efficiency. SHS Web of Conferences, 25(1), 1-5.

Ramdas, R., & Kumar, J. (2014). Effect of corporate restructuring on shareholder’s value in the information technology sector. International Review of Research in Emerging Markets and the Global Economy: An Online International Monthly Journal, 1(1), 33-40.

Singh, P. (2012). Mergers and acquisitions: Some issues & trends. International Journal in Innovations in Engineering and Technology, 1(1), 1-9.

The book gives a guide on how to buy effectively and procedurally a business. It is obligatory to classify the type of buyer one is, and learn the fundamentals in obtaining businesses. There is dissimilarity between trading assets, and buying an entity; thus, exceptional attention must be paid to the reassigning of intellectual possessions, and whether one will fully own the business. All lawful conditions and dangers affecting the trade must be realized.

Before beginning, it is necessary to classify the most apposite business. Individuals should search for business in their immediacy, as there may be attractive business offers. One can recognize this through gossips, commercials and agents, through which their credentials may be communicated to the seller.

The significance of a business cannot be identified instantly, as there are several modifiers altering its value. The asset-based and the income valuation methodologies are legitimate methods to verify the worth of a business. Appraisers, notaries, and brokers can facilitate the provision of information desired in choosing a fair price.

When preparing to make the procurement it is imperative to know the opportune strategies of backing the contract. How to disburse in parts, and the complexities concerned in obtaining loans must be grasped. The purchase must be structured to resolve how involved the vendor would be after the acquisition.

It is necessary to inspect the trade and the demeanor of the seller. Apt paperwork to show the credibility of the business must be provided before administering confidentiality agreements. One should consult with exterior sources and comprehend the objective of the seller. A communication of intent, which is well formatted, is then drafted. Prudence must be taken when signing the binding documents.

When organizing the legal documents, it is indispensable to study the sales accord and other interrelated lawful documents which must be well summarized in the plan. The text further elucidates how to arrange attachments to the sale contract and how revisions may be made. Recognizing the traders and what business is being transacted is significant.

The sales value and fees are agreed upon, stating the deposit and how the security would be supervised. The meaning of a promissory memo and the dimensions of compensation are outlined. The millstones in both the asset and entity sale are identified to give insight on the magnitude of the dealings. The buyer’s and the seller’s representation and their weight is elucidated by the writer.

There are noncompete accord and consultant arrangements which must be adhered to, for example, the seller must consent not to battle with the trade after the sale, and agree on the current employees of the business being recruited. All the indispensable clauses and arrangements in the sales agreement must be clearly unstated and devised. All the required signatures and the distinctive formats for signing the union are outlined.

Procedures on the groundwork of a promissory note and other repayment documents are delineated by the writer. The design of the promissory note, the security conformity, the financing declaration and harmony for entity sale must be evidently tacit before making any purchases. A pledge must be made not to compete, and contracts for owners and outworkers be satisfied.

When concluding the pact, it is obligatory to have viewers and avail all the required documents for relocating the assets. After acquiring the business, secure trade practices and excise requirements should be pursued. The business should be indemnified, and a complimentary lease conferred. The book closes by steering the shopper on how to realize permanence of the assemblage.

Article Report

The purpose of this report is to examine the Wall Street Journal’s article “StubHub Acquisition Puts Co-Founder Back in Charge” and assess the business strategy of StubHub. According to the article, Eric Baker was a pioneer in creating an efficient way to buy tickets online (Steele, 2019). In 2000, he co-founded an American-based ticket retailer company StubHub, and in 2006 he launched Viagogo in Europe after quitting StubHubs’s management. In 2007, the American company was sold to eBay, and in more than a decade, it is being sold back to Viagogo. Both companies’ co-founders long planned on this deal and managed to buy his brainchild back with far-reaching intentions in mind.

StubHub managed to leave the parent-subsidiary relationship with eBay to create an equity alliance with Viagogo. The friendly acquisition will contribute to both companies’ value creation strategy (Loukianova et al., 2017). American and European-based companies are going to combine to be able to sell globally, which makes an economically promising strategic alliance, on condition that Viagogo takes measures to make their business more transparent. European ticket seller specializes in the distribution of tickets for sports matches, while StubHub offers tickets for a broader range of events, including concerts, theater, and comedy. The consolidation is going to provide a better differentiation advantage in the long perspective (Cohen & Lee, 2019). Therefore, acquisition and product-market diversification are the corporate strategies chosen by StubHub management.

StubHub is a company that competes rather a on differentiation than on costs. Accordingly, several steps need to be taken to conduct the value chain analysis. It is necessary to identify StubHub’s value-creating activities that contribute the most to their customers’ value. As it was a pioneer in reselling tickets, its main strength is in the extensive database that allows for achieving an economy of scale in the industry of ticket selling for live events. The significant value for the customer is that StubHub is a platform where a customer can purchase a ticket for an event that has already been sold out. The company ensures that the ticket is legitimate; otherwise, it refunds the buyer. Another value provided to customers in handling the payment transaction, ensuring that it does not break down.

As for vertical integration and its two types, it should be considered through the prism of upcoming consolidation. Eric Baker set the goal to distribute globally: “We want fans to be able to get to any event, anywhere, anytime” (Steele, 2019). The orientation towards sales and satisfaction of customers’ needs indicates the forward vertical integration rather than the backward integration that implies focusing on design and manufacturing stages. The forward vertical integration is supposed to improve the quality of service, facilitate planning procedures, and investments in specialized assets of the consolidated company (King & Walker, 2014). However, the new consolidated company, which is to become a powerful force in the booming industry of ticket selling, might perform a backward integration by rebranding and developing a new design and brand name.

Overall, StubHub is implementing a complex business strategy in all three dimensions. It provides vertical forward integration by expanding its sales and facilitating customer service. Alongside this, the company is going to expand the variety of services by consolidating two ticket retailers and, simultaneously, extend the geographic scope of its work by combining American and European businesses. In this case, the acquisition, as a corporative strategy, proves beneficial for both parties.

References

Cohen, M. A., & Lee, H. L. (2019). Designing the Right Global Supply Chain Network. Web.

King B.G., & Walker E.T. (2014). Winning hearts and minds: Field theory and the three dimensions of strategy. Strategic Organization. 12(2), 134-141.

Loukianova, A., Nikulin, E., & Vedernikov, A. (2017). Valuing synergies in strategic mergers and acquisitions using the real options approach. Investment Management and Financial Innovations, 14(1), 236-247.

Steele, A. (2019). The tale behind StubHub’s sale: How Eric Baker bought back the ticket seller.The Wall Street Journal. Web.

Introduction

Mergers and acquisitions are common strategies that companies often use to expand their operations to new markets. The oil and gas industry has witnessed numerous mergers and acquisitions as they struggle to expand their operations beyond their national borders. As Whitaker (2016) explains, this strategy offers a company a unique opportunity to expand rapidly within a given market using an already established business system.

The ability of a merger to achieve success depends on numerous factors. Some mergers are often successful, while others end in failure because of the approach taken. In this study, the researcher will compare some of the successful mergers in the past several years. The merger of Standard Oil of Ohio and British Petroleum in 1978 and the acquisition of Sonnen GmbH byRoyal Dutch Shell in 2015 will form the focus of this study.

Objectives

The objective of this study is to investigate the changing trends and compare0 mergers and acquisitions in the oil and gas industry over the past decades. According to Dringoli (2016), strategies and beliefs that guided mergers and acquisitions in the 1980s may be different from those in modern society. It is necessary to understand these changes so that companies can understand the approach they need to use when they opt for mergers and acquisitions as the appropriate strategy for expansion.

The study will review the amount of information available to the public regarding these major mergers. The research will also focus on the regulator’s point of view concerning these mergers. It is necessary to understand why they would approve some mergers and acquisitions but reject others. The study will also review the rate of mergers in the industry, the value that this strategy has, and its prevalence in public and private sectors.

Analysis

Mergers and acquisitions have been in existence for the past several decades as a strategy for market growth. The approach not only creates instant new markets for a firm but also eliminates competition. Instead of the two firms competing, they can work as a unit, combine their resources, and focus on achieving a common goal in the market. The merger between the Standard Oil of Ohio and British Petroleum enabled BP to become one of the largest oil and gas companies in the world (Jacobs, 2016). It has enabled the company to expand its operations to the global market.

The recent acquisition of Sonnen GmbH by Royal Dutch Shell has also made it possible for the shell to cement its position in the market as a dominant player (Shepherd, 2015). A comparative analysis of the two mergers shows that in both cases, the goal was to help the acquiring firm to enter specific markets. It is evident that in both cases, the regulators did not view the mergers as a threat to having a competitive market. International Competition Network approved the acquisition of Sonnen GmbH by Royal Dutch Shell. Although there is plenty of information available to the public in the merger between the Standard Oil of Ohio and British Petroleum, that between Sonnen GmbH and Royal Dutch Shell was done in secrecy. In both cases, there was a value addition to the resulting companies after the mergers. Both firms are public limited companies.

Conclusions

When a firm is operating in a highly competitive business environment, it is important to choose the most appropriate strategy that can guarantee its growth. The oil and gas sector is one of the most volatile and highly competitive industries in the global market. The ability of a firm to be successful depends on how effectively it can protect its current market share while at the same time exploring new markets.

Mergers and acquisitions have become a popular strategy that companies in this industry are using to gain new markets. However, studies have shown that not all mergers and acquisitions are successful. The compatibility of the two firms is one of the main issues that define the ability of a firm to be successful. The two firms must have a common vision and compatible business structures.

References

Dringoli, A. (2016). Merger and acquisition strategies: How to create value. Cheltenham, United Kingdom: Edward Elgar Publishers.

Jacobs, D. (2016). Blowout: The inside story of the BP deep-water horizon oil spill. Washington, DC: Brookings Institution Press.

Shepherd, M. (2015). Oil strike North Sea: A first-hand history of North Sea oil. Edinburgh, United Kingdom: Luath Press Limited.

Whitaker, S. C. (2016). Cross-border mergers and acquisitions. New York, NY: John Wiley & Sons.

In its attempts at expansion and exertion of greater influence onto its target market, GE has acquired several companies to establish a better presence in its market. Baker Hughes and Ship Express are the largest acquisitions that GE has made in the past few years (Rahadjeng, 2018). The acquisition of Baker Hughes was a necessary step given the rise of the e-market’s influence (Canpanelli, 2016). Baker Hughes, in its turn, has helped GE to enter the digital market safely and become a part of it comparatively fast (Canpanelli, 2016). ShipXpress, GE’s earlier acquisition, was also an important strategic move since it led to the increase in the firm’s supply chain opportunities (“GE acquires ShipXpress to expand digital rail offerings,” 2016). Thus, with the two acquisitions mentioned above, GE has managed to address some of the challenges that it has been facing in the global energy market.

Although the acquisitions mentioned above are quite different in their nature, the reasoning behind each is quite similar for GE. The main reasons for GE to acquire ShipXpress concerned the opportunities for improving the speed of communication and information management across its supply chain (“GE acquires ShipXpress to expand digital rail offerings,” 2016). Indeed, by the time that GE started considering acquiring the company, ShipXpress had already created a rather strong reputation for itself in the global market, having built a unique and very impressive supply chain. Therefore, the rationale behind the acquisition of ShipXpress was the necessity to expand into the e-market and incorporate innovative tools into GE’s system of managing its operations and relationships with its customers. The fact that most competitors of GE had already established innovation-based supply chains also enhanced the transition from the traditional approach toward managing the company’s functions to the use of electronic tools (Gaustad, Krystofik, Bustamante, & Badami, 2018). Thus, GE gained enough momentum in the target market to shape its supply chain and adapt to the new requirements.

Baker Hughes, in turn, had a firmly established framework for navigating the digital market, which GE could not boast of at the time, hence the decision to acquire the organization and establish a presence in the online economy (Canpanelli, 2016). Therefore, both acquisitions were reasonable given the change in the market trends and provided GE with new opportunities in the power generation industry. In addition, the support of Baker Hughes implied additional educational opportunities for employees since Baker Hughes also contained a plethora of training courses and seminars that could help in building a vast range of competencies for staff members to acquire (“Program details,” n.d.). Given the lack of focus on talent management at GE and the increasing necessity to promote employee engagement by offering people opportunities for professional growth, it was vital for GE to agree to the acquisition and include Baker Hughes into the range of its partners (Canpanelli, 2016). As a result, GE gained a chance to improve its HRM techniques and focus on building a team of professionals with a high range of competencies and skills.

Despite the apparent advantages of the acquisitions described above, GE had to face numerous challenges when acquiring ShipXpress and Baker Hughes. The inconsistency in the perspectives of GE and ShipXpress was one of those difficulties that jeopardized the management of the acquisition process. Although both organizations were geared toward innovative solutions and expansion as the men of embracing a wider spectrum of customers, the focus on enhancing the strength of the industry., which ShipXpress promoted, was not quite in line with GE’s idea of attaining excellence and embracing every opportunity (“GE acquires ShipXpress to expand digital rail offerings,” 2016). Similarly, there were some frictions between GE and Baker Hughes during the acquisition process due to the differences in the organizations’ goals (Canpanelli, 2016). For example, although both companies viewed the concepts of integrity and responsibility as the main pillars of decision-making, Baker Hughes seems to have been focusing on innovation to a much lesser degree than GE (Rahadjeng, 2018). Nevertheless, the companies reconciled their differences, which made further acquisition possible (Canpanelli, 2016). By creating a shared system of values, GE and Baker Hughes built the foundation on which their cooperation and communication channels could be built.

Overall, the analysis of GE’s recent acquisitions has shown that it is important to target continuous development and seek support from other organizations to provide mutual assistance and collaborate in the global economy. In addition, the analysis of GE’s acquisitions has proven that the decision to acquire other organizations has to be based on profound and meticulous research. Thus, an organization that acquires a firm can ensure that the outcomes of the specified transaction will lead to eventual success and that the expenses taken to acquire a company and align the processes of each firm with each other will eventually be justified. In addition, the assessment of GE’s experiences in acquiring other organizations has shown that acquisition can be a tool for increasing the performance of staff members by offering them knowledge-sharing opportunities and prompting collaboration among them.

References

Canpanelli, D. (2016). GE buys supply chain software company ShipXpress. transportation. Web.

Gaustad, G., Krystofik, M., Bustamante, M., & Badami, K. (2018). Circular economy strategies for mitigating critical material supply issues. Resources, Conservation and Recycling, 135, 24-33.

GE acquires ShipXpress to expand digital rail offerings. (2016). Web.

Program details. (n.d.). Web.

Rahadjeng, P. A. (2018). Firm evaluation: A case study on the acquisition of Baker Hughes by General Electric. Bulaksumur: Universitas Gadjah Mada.

Research Questions

When a firm is faced with the reality of exiting a given market, Ramady argues that it is important to choose the optimal strategy that would protect the interest of stakeholders.¹ The primary goal is always to exit in a way that shareholders, employees, the management unit, and any other relevant stakeholders feel protected. The process must also meet the legal requirements. It was necessary to develop a research question that would inform the nature of the data in the study based on the research topic. The following are the questions that guided the process of collecting and analyzing data from various sources.

1. What is the appropriate exit strategy for private businesses in Saudi Arabia?
2. How can a firm choose between initial public offerings and mergers & acquisitions?
3. How can a firm overcome the valuation premium issues when planning an exit strategy?

The researcher intends to use both primary and secondary data to answer the questions above.

Literature Review

The Kingdom of Saudi Arabia is one of the fastest developing economies in the Middle East and North Africa (MENA) region. The government has been keen on promoting business growth as a way of diversifying its economy. According to Ramady, since independence, the country has heavily been relying on the oil and gas sector to sustain its economy.² Although the petroleum industry is still the main source of income for the economy, efforts have been made to ensure that there is growth in the other sectors of the economy as well. The government has been supporting the private sector through various initiatives as a way of diversifying the economy.³ The infrastructural development in the country has promoted the growth of various other sectors of the economy such as banking, transport, manufacturing, entertainment, and agriculture among others. Tsounta explains that despite the attractive economic growth and great support that the private sector players enjoy in this country, it is important to appreciate that sometimes it is prudent to come up with an exit strategy.⁴

According to Tsounta, numerous factors may make it necessary for a firm to exit the market.⁵ Stiff competition is often the main reason why a firm may consider exiting the market. When competition is stiff, unfavorable market practices such as price wars may emerge. In such an environment, making profits becomes almost impossible, especially for small and medium companies that lack the financial capacity to sustain protracted price wars.⁶ Another factor may be the introduction of new government policies that that may make operations in the market unfavorable for specific firms. Saudi American Bank (Samba) was one such firm that realized that the business environment in the Kingdom of Saudi Arabia was no longer favorable because of the strained relations between the United States and Saudi Arabia.⁷ The company had to find the optimal exit strategy that would take care of the interest of its shareholders. Business owners may also be interested in pursuing different ventures locally or in other foreign countries.⁸ As such, the only option that they might have would be to exit the market in the best way possible.

Finding an optimal exit strategy in the market for corporates and start-ups is critical, as Espinasse observes.⁹ It starts by identifying the reason why the firm must exit a specific market. When it is established that exiting a given market is the only option that a firm has, then the management must find ways of protecting the interest of the shareholders. According to Espinasse, the primary aim is always to ensure that the investments made by the business owners, yield the best returns during the exit strategy.¹⁰ During the valuation process, it is a common business practice for a buyer to undervalue a product, while the seller would want to provide a higher value. The sale of a firm can only go through if there is an agreement between the two parties on the actual value of the product despite the conflicting interests.¹¹ It means that when trying to set the highest value for the product possible, the management should ensure that the interest of the other parties is not ignored. In this section, the researcher would focus on initial public offerings, mergers, and acquisitions as some of the most preferred exit strategies for both start-ups and large corporate entities in the Kingdom of Saudi Arabia.

Initial Public Offerings

The initial public offering has become a popular way of sourcing funds among rapidly expanding companies in various parts of the world. Ramady and Mahdi argue that although an IPO may be viewed as a way of entrenching a firm’s operations in the local market, it may also be considered a market exit strategy.¹² It would be considered an exit strategy because the few owners, which sometimes maybe the government, would relinquish their exclusive ownership of the company and invite members of the public to help in sourcing for additional revenue. According to Ramady and Mahdi, in an initial public offering, owners would sell part of their shares in the business.¹³ In other cases, they may sell all their shares in the firm, relinquish their ownership to the shareholders, and use the proceeds of their income for personal reasons. The fact that it allows business owners to sell their shares to members of the public confirms that it is one of the most effective ways of exiting a market.

The Saudi Stock Exchange, popularly known as Tadawul, is the country’s stock exchange market where firms seeking to go public often make their shares available to both local and foreign investors. According to Meglio and Park, going public is one of the best ways of exiting the market.¹⁴ It provides various options to the shareholders who want to leave the market. The first option is to reduce their responsibilities in the firm while remaining as the main shareholders in the firm. After completing the process, a board would be created responsible for the corporate management of the firm. If they aim to reduce their involvement in the business, the board will take over such roles and appoint individuals who will be responsible for the normal operations of the company. Meglio and Park explain that sometimes the interest of the original owners may be to sell all their shares and move to other businesses.¹⁵ In such a case, IPO offers them the best opportunity to achieve their goals. One of the main benefits of this strategy is that even if they consider exiting the market, the business model, the name and core features they created will last even after their exit. Hooke believes that the greatest challenge when using this strategy is the valuation process.¹⁶

According to Hooke, it all depends on the ability of the owners to convince members of the public about the current value of the firm.¹⁷ Although speculative business practices are prohibited in Shariah laws, the process of valuing the price of a stock in the market is primarily based on speculation. A small company with a relatively small smaller profit may have a higher stock valuation than a larger firm that has a larger profit and revenue in the market if stock traders are convinced that the smaller company has a higher likelihood of achieving success in the market.¹⁸ As such, the level of success of an IPO significantly depends on the ability of the business owners to convince the public about the current and expected value of the firm. The Saudi Stock Exchange has strict policies that have to be followed before a firm can be approved to go public. One such policy is meant to ensure that the company stock price is based on its actual and perceived value in the market. However, once the firm goes public, the company would have no control in determining the actual stock price. Forces of demand and supply and the perceived value of the company would determine the price.¹⁹ As such, this strategy is one of the most effective for a firm that is keen on going public in the market.

Mergers and Acquisitions

The management of a company can consider mergers and acquisitions as another optimal market exit strategy. Like initial public offering, mergers and acquisitions may be considered as an exit strategy or as a way of entrenching a firm’s operations in the market depending on the strategy that a firm takes. According to Ramady, mergers and acquisitions are often motivated by the desire to deal with stiff competition in the market.²⁰ As new firms continue to emerge in the market, all struggling to capture the same customers in the market, companies are subjected to intense pressure to redefine their operational activities to remain sustainable.²¹ Some of the practices that firms may be forced to embrace to overcome stiff competition may not be feasible in long term. As such, two or more companies may be forced to merge as a way of overcoming some of the common challenges in the market. A merger creates an environment where two large firms operate as one entity. The management of the two companies must reach an agreement on how to share in the management and revenues of the company based on their input. One such merger recently happened between Saudi British Bank and Alawwal Bank.

According to Meglio and Park merger is a common strategy among small and medium-sized companies keen on strengthening their position in the market.²² They merge their resources to give them the strength to compete favorably in a highly competitive business environment. However, the strategy is not exclusive to small and medium-sized companies.²³ The merger between Saudi British Bank (SABB) Alawwal Bank was a major indication that large corporate institutions consider the strategy effective in overcoming market challenges. The Saudi financial sector is one of the most competitive industries in the country. The booming oil and gas sector in the country has attracted financial institutions from all over the world. Firms have been keen on developing unique products as a way of overcoming stiff competition. Saudi British Bank and Alawwal Bank opted to merge as a way of overcoming the stiff competition and strengthening their position in the market. The strategy propelled the two companies to form the third-largest financial institution in the country by market capitalization. In this deal, the shareholders of Alwwal Bank would own 23% of the shares of the new company, while those of Saudi British Bank would own 73% of the shares.

The acquisition is another common strategy that a company would consider when planning to exit the market. Unlike mergers where executives of two firms agree to form one entity with shared responsibility and sharing of profits, the acquisition allows one firm to buy out another and take full control of its business operations.²⁴ In normal cases, a large and financially empowered company would acquire small but ambitious companies in the market. In this case, owners of the smaller company would be exiting the market after completing the sale agreement. According to Meglio and Park, the acquisition is one of the most common ways of exiting a market.²⁵ In Saudi Arabia, the competition board has rules and regulations that must be met, before one firm can acquire another. In such a scenario, the acquired firm relinquishes its ownership to the acquiring firm. After the merger, the owner of the new firm will be at liberty to retain the original name and structure of the acquired firm or to restructure it in a new way to meet specific interests. One of the most recent examples of such initiatives was Careem’s acquisition by Uber, which is discussed in chapter 4 of this paper.

Research Methodology

In the previous chapter, the researcher provided a detailed review of the literature to help understand the optimal exit strategy for start-ups and corporate entities. In this chapter, the focus is to discuss the method used to conduct the study. When planning research, Brennen explains that one should have a careful plan on how to collect data from various sources.²⁶ In this study, the primary aim is to determine the optimal exit strategy for corporates and start-ups. In particular, the study compares the effectiveness of initial public offerings and acquisitions as some of the most common market exit strategies. The study also focuses on how to overcome the challenge of valuation when there is a merger deal or when a firm decides to go public.

Research Approach

One of the first factors that one has to consider when conducting a study is to define the research approach. Inductive and deductive reasoning are some of the main reasoning approaches that one can choose based on the nature of the study. Based on the research question and the aim of the study, the inductive approach was considered the most appropriate. In this strategy, a researcher is expected to start by making observations or conducting tests based on the set questions or objectives. The researcher would then be required to observe patterns.²⁷ In this case, the patterns would be determined by monitoring the preferred market exit strategy between initial public offering and acquisition within Saudi Arabia. The researcher would then be able to develop a theory or new knowledge based on the pattern observed. In this case, it will be possible to determine the optimal exit strategy for local firms. This approach was also considered effective when trying to explain the valuation puzzle. One needs to monitor patterns of valuations based on the past acquisitions and initial public offerings in the country over a given period. Figure 1 below shows the pattern of reasoning that this approach embraces.

Research Strategy

When the research approach has been defined, it is important to identify the strategy that would be used to collect data, as Denscombe explains.²⁹ One can consider the use of surveys, archival data, case studies, face-to-face interviews among others, based on the constraints that one is facing. The researcher opted to use face-to-face interviews, online research of reputable websites, and a case study. According to Denscombe, a face-to-face interview is one of the most effective methods of collecting data.³⁰ The physical interaction between a researcher and respondents often helps in emphasizing the significance of the study. It reminds participants that their input is highly cherished and as such, the researcher had to find time to engage them.

Denscombe explains that during such an interview, a researcher can collect non-verbal cues through facial expressions and body language of those being interviewed.³¹ Non-verbal cues help to determine the perception and feelings of an individual towards a given issue. The physical interaction also reduces cases where a participant deliberately provides misleading information. One can easily request the participant to clarify an unclear issue to enhance the validity and reliability of data. However, Kara notes that such interviews are often time-consuming and require a significant amount of resources to conduct.³² The researcher identified a small group of respondents who helped in the collection of the needed information.

Online research also helped significantly in collecting information needed in the study. Tadawul.com.sa was an important website that was used to collect information about some of the recent initial public offerings in the Kingdom of Saudi Arabia over the last ten years. The website provided information about the performance of firms, which are already listed on the Saudi Stock Exchange. The World Bank website also provided valuable information about IPOs and acquisitions in the country over the past few years. Local and international newspapers also offered information needed about the two exit strategies in the country. Information about the impending mega initial public offering of Aramco Company is widely published in the local, regional and international newspapers and magazines. Kara explains that one of the main benefits of using newspapers is that they offer current information about a given issue, unlike books that may take a while before they are published.³³ Important statistics used in the study were collected from these online sources. As Kara advises, when relying on online sources, one should countercheck the information by verifying facts from different sources.³⁴ It helped in ensuring that the data collected were accurate.

The case study was the third strategy used to collect data. According to Kara, the use of case studies is often critical when trying to explain a given phenomenon.³⁵ It makes it possible to understand factors that led to a certain event, how different parties played different roles in a given event, and the outcome. McNabb explains that case studies go beyond statistics by providing an example of a specific event that happened.³⁶ In this case, the researcher provided a case study about a merger and an initial public offering that took place in Saudi Arabia. Comparing the two cases, one can easily determine the optimal exit strategy for corporates and start-ups in Saudi Arabia. They provide facts about the status of the firm before, during, and after these events. One can also determine how the initial owners of the business benefited from the exit strategy.

Data Collection

Data used in this study were collected from both primary and secondary sources. Secondary data was collected from books, journal articles, and reliable online sources. Information from books and journals formed the basis of the literature review provided in the previous chapter. McNabb argues that a researcher should review the works of other scholars to find out the existing knowledge and address gaps and contradictions that exist. Information that was obtained from reliable websites provided critical data used in the analysis section of the paper.³⁷ Using keywords and phrases such as mergers, acquisitions, and initial public offerings in Saudi Arabia, the researcher was able to access critical data that helped to inform the study.

Primary data was collected from a sample of respondents who know the issue under investigation. The researcher was interested in interviewing industry experts, individuals working in Saudi Stock Exchange, and business executives who have been involved in mergers or initial public offerings in the country. Given the small number of respondents needed for the interview, the complex nature of identifying and convincing them to be part of the study, and the broad nature of their specialty, purposive sampling was considered appropriate for the study. It is a judgmental sampling where a researcher selects specific individuals based on whether they meet specific criteria needed in the study. Those who were selected for the study had to meet the criteria explained above.

A simple questionnaire was developed to help collect data from the participants in a standardized format. McNabb explains that a questionnaire is critical whether one is conducting qualitative or quantitative research.³⁸ Developing a set of questions before the actual interview helps a researcher to prepare adequately for the process. It eliminates cases where one gets confused or forgets about critical questions during an interview. It also ensures that a researcher asks the same questions in a similar format to help develop a pattern. The questionnaire had two sections. The first section focused on the demographics of the participants to determine the level of their authority in this topic based on their level of education and experience. The second section focused on issues relating to the optimal exit strategy in the country.

Data Analysis

When data has been collected, the final stage is to conduct an analysis that would help in answering specific research questions. The researcher chose mixed-method research because of the nature of the topic and research questions. Using both qualitative and quantitative research methods made it possible to provide a detailed understanding of the issue. Regression analysis made it possible to compare variables in the study. Comparing the number of acquisitions and IPOs in the country through statistical analysis makes it possible to establish the optimal exit strategy between the two options. On the other hand, the qualitative analysis explained the data. Through this method, it was possible to understand from the industry experts and players why business executives preferred a specific exit strategy. The information was crucial when making a conclusion and recommendation about the optimal exit strategy in Saudi Arabia.

Ethical Considerations

When conducting this investigation, the researcher was keen on observing various ethical considerations. According to McNabb, one of the most important ethical concerns that should be considered when conducting such a study is the protection of subjects.³⁹ It is possible that one can be intimidated or discriminated against by colleagues or those in authority if they have a conflicting opinion from that of the majority. To avoid such undesirable occurrences, the researcher made sure that the identity of those who took part in the interview remained anonymous. Instead of using their real names, the researcher opted to assign each one of the codes to help in their identification. Before starting each interview, participants were informed about the use of codes instead of their actual names. They were also told that participation was voluntary and that if they felt there were compelling reasons to withdraw, they had the liberty to do so. As an academic study, the researcher had to observe rules and regulations set by the school. The research had to be completed in time. Any form of plagiarism was avoided when writing the paper.

Statistical Analysis

In the previous chapter, the researcher provided a detailed explanation of the method that was used to collect and analyze data. In this chapter, a researcher focused on the analysis of data collected from sampled respondents and statistical information collected from various sources. The primary aim of this chapter was to conduct statistical analysis to confirm or refute information obtained from secondary sources. The researcher used both qualitative and quantitative analysis to determine the optimal exit strategy for start-ups and large corporate entities operating within the Kingdom of Saudi Arabia. The analysis focused on comparing initial public offering and mergers & acquisitions based on the recent trends in the country.

Initial Public Offering Versus Mergers and Acquisition

In the literature review, an initial public offering was identified as one of the most popular exit strategies among companies in the Kingdom of Saudi Arabia. In this section, the researcher analyzed primary data to compare the number of completed IPOs, as a dependent variable, against economic cycle phases as the independent variable. The analysis focused on determining the popularity of this strategy in different phases of the economy (peak, recession, and growth).

Number of completed IPOs (dependent variable) for last 10 years in Saudi with the economic cycle phases (peak, recession, and growth) as an independent variable

The researcher conducted a regression analysis of the two variables over the last ten years and figure 2 below shows the outcome. The economy of the country has been going through different phases over the last ten years. During an economic boom (peak), the number of completed IPOs is likely to be high. Saudi Arabian GDP was at its highest in 2018. In that year, the country had the highest number of completed IPOs, at 26. During the recession of 2008/2009, the number of completed IPOs dropped from 13 to 11. It is important to note that a few rare cases exist where a drop in GDP does not directly translate to a drop in the number of completed initial public offerings.

In the review of literature, it was established that mergers and acquisitions are some of the most effective means of exiting the market. The researcher collected data from various sources to determine the effectiveness of the strategy in the Saudi Arabian market. It is also evident that the value of completed IPOs is directly proportional to the number of initial public offerings made within a year and market returns as shown in figure 3 below.

Number of successful M&A deals in Saudi for last ten years as Dependent V and the economic cycle phases (peak, recession, and growth)

As shown in figure 4 below, there is a directly proportionate relationship between the number of completed mergers and acquisitions (dependent variable) and economic phases (independent variable). During the recession, such as that of 2008/2009, the number of completed mergers and acquisitions dropped. When the economy started to grow from 2009 to 2011, the number of IPOs also started to increase. When the country’s gross domestic product peaked in 2018, the country registered the highest number of mergers and acquisitions, at 782. It means that during the period when the economy is performing well, a high number of firms consider mergers and acquisitions as a way of exiting the market or strengthening their position in the country.

A comparative analysis of IPOs and M&A in the Kingdom of Saudi Arabia shows that most firms often consider mergers and acquisitions as the easiest way of exiting the market. In 2008 when the economy peaked, the number of IPOs in the country was 26, against the number of M&A, which stood at 782. It was established that on average, there are 20 mergers and acquisitions for every initial public offering in Saudi Arabia. Hooke explains that the exit strategy is more popular because it is simple and only needs the two parties involved to reach an agreement.⁴⁰ Initial public offerings are strictly controlled by the Saudi Stock Exchange, making it a little more complex way of entering the market. Figure 5 below shows that the value of mergers and acquisitions directly depends on the number of M&A irrespective of the growth of the economy. The market returns depend on the negotiated value for the M&A.

Aramco IPO and Its Impact

Saudi Aramco is an oil and gas company that operates in the global market and has its headquarters in Dhahran in the Kingdom of Saudi Arabia. Founded in 1933, the company has registered impressive growth in the market over the past decades to become the most profitable company in the world.⁴¹ It is also reported that it has the second-largest daily oil production and second-largest known oil reserves in the world.⁴² The company is valued at between 1.2 to 2 billion dollars and it has networks in North and South America, Europe, Asia, and Africa to facilitate its export activities. The government announced the initial public offerings of the company, which is yet to take place. Given the strategic significance of the company, its huge market value, and the number of investors that it has attracted, Saudi Aramco is set to register the largest IPO in history. In case the IPO is completed based on the government plan and projected figures, it will become the largest initial public offering in the world, almost three times larger than that of Alibaba Group, which is currently holding the top spot. The statistics are shown in figure 6 below.

Careem’s Acquisition by Uber

Careem Inc. is an Emirati transport company that was founded in March 2012.⁴⁴ The company has its headquarters in Dubai and operates in 100 cities across the Middle East, South Asia, and parts of Africa. According to Tsounta, Mudassir Sheikha and Magnus Olsson founded this company while they were still working for McKinsey & Company.⁴⁵ They borrowed the concept from Uber and realized that the Middle East and North Africa (MENA) region has a huge potential because of the popularity of taxis. The company started its operations in Dubai and expanded rapidly to major regional cities such as Abu Dhabi, Riyadh, Cairo, Baghdad, Tehran, Mecca, and Istanbul among others.

When it started its operations in 2012, the company did not face stiff competition in the market from local players. Its managers were able to understand the local needs of its clients and develop mechanisms for meeting them. As it expanded its operations, the management decided to expand its line of products. In 2015, it acquired a Saudi Arabian home-delivery service company as it sought to reduce competition and increase its market share in the region.⁴⁶ In February 2018, the company announced that it had acquired RoundMenu, a fast food outlet that was operating in different countries in the Arab world.⁴⁷ The firm also went ahead to acquire Cycle, a Dubai-based bike-sharing company, and rebranded it as Careem Bike.

When Uber made an entry into the Middle East and North African market, Careem started facing a new challenge in the market. The competition was getting stiff as the new firm started taking part in Careem’s market share. The shareholders decided to embrace the optimal exit strategy to ensure that they protect their investment. According to Meglio and Park, the management of Careem agreed with Uber, in a deal that allowed the American firm to wholly own the start-up App Company.⁴⁸ The Emirati firm was acquired for $ 3.1 billion under certain specific terms of the agreement. The two companies agreed that after the merger, Careem would continue to operate under its original brand name and logo. It was also agreed that the firm would retain its management unit to ensure continuity and maintain an innovative team of employees who were responsible for the rapid growth of the company. Meglio and Park note that Careem has remained an innovative firm even after the acquisition, coming up with unique products that meet the various needs of its customers.⁴⁹ Its ability to understand the needs of its local customers has enabled it to expand its market share beyond the Middle East region.

Conclusion and Recommendations

The economy of Saudi Arabia is growing rapidly over the past three decades following deliberate attempts by the government to reduce overreliance on the oil and gas industry. The service industry, construction, real estate, communication, transport, and automotive sectors have developed rapidly in the country. As shown in the review of the literature and analysis of primary data, massive infrastructural development, improved security and the decision by the government to open the economy for both local and foreign investors have contributed immensely to the growth of different sectors of the country’s economy. Despite these positive changes, the study has shown that sometimes it may be necessary for a firm to exit this market. Choosing an appropriate market strategy is critical for the management of a firm to ensure that the interest of all its shareholders, especially the employees and stockholders, is protected.

The study has conducted a detailed analysis of both primary and secondary data to determine the appropriate exit strategy for a firm operating in the Saudi Arabian market. The analysis focused on two popular methods of exiting the market. On the one end, a firm can opt to use an initial public offering as a way of exiting the market. The strategy allows a firm to invite the public to help in generating more capital for the firm. In return, the original owners would relinquish ownership of the firm to the board of directors and major shareholders of the firm. The strategy was considered effective for a rapidly expanding firm where owners are keen on expanding its capital base by inviting members of the public to be part of the ownership of the firm.

Mergers and acquisition is another strategy that owners of a firm can use to exit the market. In this strategy, owners of the business can opt to use two approaches based on what is more optimal for the shareholders. The first strategy is to have a merger with one or more firms in the same industry. In a merger, two firms sharing interest enter a deal to operate as a single entity. It eliminates competition and gives the merging firms greater bargaining power in the market. The second option is the acquisition of one firm by another. In cases of acquisition, a larger and financially empowered firm would acquire a smaller firm in the market to expand market coverage, eliminate competition in the market. Owners of the acquired business would have to relinquish all their interest in the firm. The acquiring company will have the liberty to decide on the fate of the firm that has been bought out.

Initial public offering, mergers, and acquisition all have their strengths and weaknesses that have to be considered. However, mergers and acquisitions are more popular in the country than initial public offerings. When choosing the optimal exit strategy in Saudi Arabia, numerous factors should be considered. As shown in the review of the literature and analysis of primary data, no single strategy is optimal for all firms considering exiting this market. Each firm will encounter different market forces that must be considered before deciding on the strategy that should be used. The critical factor that should be considered is to protect the interest of shareholders, employees, and any other relevant shareholder. The deal offered must provide maximum value for the owners without jeopardizing the ability to exit the market within the desired period. The following recommendations should be considered:

• Exit strategy in Saudi Arabia should be chosen based on the current factors that a firm is facing and external forces in the market.
• When planning an exit strategy, the team should protect the interest of all stakeholders, especially during the valuation of the firm.
• Both corporates and small start-ups should understand that some of these strategies such as mergers and initial public offerings create growth opportunities.

Bibliography

Brennen, B., Qualitative Research Methods for Media Studies. London, UK, Taylor & Francis Group, 2017.

Bryman, A., and Bell, E., Business Research Methods. Oxford, UK, Oxford University Press, 2015.

Denscombe, M., The Good Research Guide: For Small-Scale Social Research Projects. New York, NY, Open University Press, 2014.

Espinasse, P., Ipo: A Global Guide. Hong Kong, HKU Press, 2014.

Hooke, J., M & A: A Practical Guide to Doing the Deal. Hoboken, NY, Wiley, 2015.

Kara, H., Creative Research Methods in the Social Sciences: A Practical Guide. New York, NY, Cengage Learning, 2015.

McNabb, D., Research Methods for Political Science: Quantitative and Qualitative Methods. New York. NY, Routledge, 2015.

Meglio, O., and Park, K., Strategic Decisions and Sustainability Choices: Mergers, Acquisitions, and Corporate Social Responsibility from a Global Perspective. Boston, MA, McMillan, 2019.

Ramady, M., Saudi Aramco 2030: Post Ipo Challenges. Cham, Springer, 2018.

Ramady, M., and Mahdi, W., Opec in a Shale Oil World: Where to Next? Dhahran, Springer, 2015.

Tsounta, E., Slowdown in Emerging Markets. Washington, DC, International Monetary Fund, 2014.

Footnotes

1. M. Ramady, Saudi Aramco 2030: Post Ipo Challenges, Cham, Springer, 2018, p. 90.
2. Ibid, p. 47.
3. E. Tsounta, Slowdown in Emerging Markets, Washington, DC, International Monetary Fund, 2014, p. 43.
4. Ibid, p. 64.
5. Ibid, p. 85.
6. P. Espinasse, Ipo: A Global Guide, Hong Kong, HKU Press, 2014, p. 57.
7. Ibid, p. 84.
8. Ibid, p. 112.
9. Ibid, p. 39.
10. Ibid, p. 48.
11. M. Ramady and W. Mahdi, Opec in a Shale Oil World: Where to Next? Dhahran, Springer, 2015, p. 59.
12. Ibid, p. 65.
13. Ibid, p. 37.
14. O. Meglio and K. Park, Strategic Decisions and Sustainability Choices: Mergers, Acquisitions, and Corporate Social Responsibility from a Global Perspective, Boston, MA, McMillan, 2019, p. 70.
15. Ibid, p. 76.
16. J. Hooke, M & A: A Practical Guide to Doing the Deal. Hoboken, NY, Wiley, 2015, p. 68.
17. Ibid, p. 112.
18. Ibid, p. 71.
19. Ibid, p. 73.
20. M. Ramady, p. 89.
21. Ibid, p. 58.
22. O. Meglio and K. Park, p. 78.
23. Ibid, p. 84.
24. Ibid, p. 96.
25. Ibid, p. 101.
26. B. Brennen, Qualitative Research Methods for Media Studies, London, UK, Taylor & Francis Group, 2017, p. 46.
27. A. Bryman and E. Bell, Business Research Methods, Oxford, UK, Oxford University Press, 2015, p. 37.
28. Ibid, p. 54.
29. M. Denscombe, The Good Research Guide: For Small-Scale Social Research Projects, New York, NY, Open University Press, 2014, p. 83.
30. Ibid, p. 34.
31. Ibid, p. 56.
32. H. Kara, Creative Research Methods in the Social Sciences: A Practical Guide, New York, NY, Cengage Learning, 2015, p. 58.
33. Ibid, p. 76.
34. Ibid, p. 48.
35. Ibid, p. 98.
36. D. McNabb, Research Methods for Political Science: Quantitative and Qualitative Methods, New York, NY, Routledge, 2015, p. 75.
37. Ibid, p. 83.
38. Ibid, p. 90.
39. Ibid, p. 101.
40. Ibid, 98.
41. Ibid, 92.
42. M. Ramady, p. 84.
43. O. Meglio and K. Park, p. 67.
44. E. Tsounta, p. 80.
45. Ibid, p. 98.
46. Ibid, p. 121.
47. E. Tsounta, p. 55.
48. O. Meglio and K. Park, p. 69.
49. Ibid, p. 62.