Philadelphia Gas Works (PGW) corporation’s Parts & Labor Plan provides its customers the support and protection of their appliances in case of malfunctioning and breaking. The project’s primary aim is to attract customers in different market segments. For example, families who do not speak English can be a significant problem. This segment requires the unique approach of the customers’ acquisitions. Primarily, the families without proper language skills, are represented by the foreigners. In other words, the international acquisition strategies can be implemented in order to impact the customers’ decision-making.
One of the major factors in dealing with customers who cannot speak English is to define the customer acquisition cost. It is vital because of integrating the technologies-based tools that can help the customers cope with the language barrier. The implementation of different applications or special devices for translation into various languages. As far as the technologies require additional funding, the customer acquisition cost is one of the essential factors in this segment. It usually consists of the dependence of the general acquisition spend on the number of customers acquired during a particular period of time. Analyzing the particular expenditures based on this parameter can significantly improve the level of customer acquisition.
This segment is especially vital to be previously calculated in order to access the risks. Ethnical diversity of the state should also be considered in case some of the customers have difficulties with English speaking and comprehension. The state where the research was conducted has a 15,2% Hispanic population, and a part of them speaks only Spanish. If the household members are Spanish speakers, the company can provide them with a technician who knows Spanish and could explain all the specialties of gas utilities in their home. That makes the approach of the Parts & Labor Plan client-oriented and detailed. Such actions require immediate actions to respond to the problem. Thus, the allocation of additional resources is required. That is why the customer acquisition cost is vital for consideration. The new employees and technologies are necessary to work with the foreign customers.
The second approach can positively affect the decision-making process. It is primarily based on proposing the ethnicity-neutral policies and values of the company. As far as the families who cannot speak English are especially foreigners, they should understand that the company respects their culture and traditions. Moreover, the acquisition also includes the attention attracting theories through the advertisement. Different banners, posters, and other managers should be designed based on practical experiments. The company should implement neutral colors, designs, and details. Such a situation is correlated with the problem of racial and other types of discrimination. All the mentioned aspects are primarily associated with severe issues which should be addressed. The well-developed system of values includes the international element. By developing this approach, managers will contribute to the changes in the decision-making method of the customers. The translation of the company-related materials into different languages can also enhance the acquisition of customers who cannot speak English.
The retention of the contract can be supported by implementing the special personal sales. The enchantment of future communication will definitely be under the current conditions. Through the community, the foreigners can learn English better and develop communicational skills and feel like a part of the big family. Such a metaphor is vital because one of the prior aims of any company is to ensure efficient communication. Therefore, the retention techniques can be efficiently used when integrating the foreign customer.
Initial acquisition cost refers to the actual costs associated with the procurement of an asset. The initial acquisition cost of an asset takes into account all the items that are attributed to its purchase and its utilization (Gissel, 2016). These costs include the purchase price and factors associated with its purchase, such as transportation fees, appraisals, warranties, and back taxes. Initial acquisition costs can be used in valuing an asset type.
Acquisition cost = (Purchase price+ Additional direct expenses relative to acquisition) – (Depreciation + Amortization + Taxes + Impairment costs)
= (25,000+ 3.00 + 1.150) – (122) = €24,882.15
Amortization fees refer to the accumulated portion of the recorded cost of a fixed asset that is charged to expense via amortization or depreciation. It reflects the consumption of an intangible fixed asset over its useful life and ratably reducing its cost (Gul et al., 2003).
Amortization fees = Total interest amount/period in the debt’s life
Maintenance cost includes the total costs for maintenance parts, working hours, and other costs associated with the maintenance effort.
Cost derived from daily maintenance = 250*12*10
= €30,000
IAS 36. Impairment of Assets
Impairment of assets is concerned with ensuring that a firm’s assets are not carried at more than their recoverable aggregate. Firms are required to carry out impairment tests where there is an indication of impairment of an asset (Goex & Wagenhofer, 2009).
Impairment loss of Camera 1 = Carrying cost – Recoverable amount
= €1.750 – € 575 = € (573.25)
Impairment loss of Camera 2 = Carrying cost – Recoverable amount
= €3.500 – €1.500 = €2
Impairment loss of Camera 3 = Carrying cost – Recoverable amount
= €1.950 – €750
= € (748.05)
Impairment loss of Accessories = Carrying cost – Recoverable amount
= €4.550 – €2.200
= €2.350
IAS 38. Intangible Assets
Intangible assets are assets that are not physical in nature and may include brand recognition, goodwill and intellectual property including, patents and copyrights (Denekamp, 1995). They are calculated as follows.
Acquisition of the asset:
March 1, 2016
Dr
Cr
Patent
7,500
Bank
7,500
At Year end:
December 31, 2016
Dr
Cr
Patent
1,500
Revaluation Reserve
1,500
December 31, 2017 devaluation of 1000 euros
Dr
Cr
Revaluation Reserve
1,000
Patent
1,000
The assumption is that Normally Patents are not valued within the revaluation model as they are unique, and they do not have an active market. In the question, we assume it fulfills the revaluation criteria (Lirios et al., 2018). On March 1, 2016, the patent will be recognized as cost. Patent will be revalued, its gains and losses calculated at the end of the year. There is a gain of €1,500 as at December 31, 2016, which is transferred to a revaluation reserve account. There is a revaluation loss that will adjust any prior accumulated gains first as of December 31, 2017, and then charged to profit and loss as revaluation loss. Since there is an excess gain of €1,500 and an entire loss of €1,000, they will be adjusted in the revaluation reserve account.
References
Denekamp, J. G. (1995). Intangible assets, internationalization and foreign direct investment in manufacturing. Journal of International Business Studies, 26(3), 493-504. Web.
Gissel, J. L. (2016). A case of fixed asset accounting: Initial and subsequent measurement. Journal of Accounting Education, 37, 61-66. Web.
Goex, R. F., & Wagenhofer, A. (2009). Optimal impairment rules. Journal of Accounting and Economics, 48(1), 2-16. Web.
Gul, F. A., Chen, C. J., & Tsui, J. S. (2003). Discretionary accounting accruals, managers’ incentives, and audit fees. Contemporary accounting research, 20(3), 441-464. Web.
Lirios, C. G., Espinosa, F., & Guillén, J. C. (2018). Model of intangible assets and capitals in organizations. International Journal of Research in Humanities and Social Studies, 5(6), 1-12. Web.
Effect of Mergers and Acquisitions on Environmental, Social, Governance Performance and Market value
The importance of the article is that it will give insight into the effect of acquisitions and mergers on the performance of the environment, society, and governance. It dictates that investors should pay attention to the ESG performance because the higher the ESG performance increases the market value of the ESG. To enhance corporate values, ESG performance can be improved by firms when the M&As strategy is used. The empirical analysis shows that the performance of the ESG mainly increases in the post-merger stage. However, the article explains that the value of a post-merger market of the acquirer increases in case of an increase in the performance of a post-merger.
In recent years, there has been an increase in the evolution of the SRI market, thereby increasing the need to develop metrics that many investors widely accept. In RSI, the metrics are important because they help in measuring performance sustainability. Research shows that many investors value a firm according to its ESG report, resulting in more returns in the stock market. Therefore, companies that publish ESG reports have higher stock returns than those that do not.
The Effect of Market Valuation on Mergers
This article will summarize and evaluate whether market valuation affects mergers. The data in the report portrays that a union has a relationship with how the market is valued. Almost all the firms have a market value that is higher or lower than the actual value of the respective firm. The private information of the target or bidders’ firm can tell them whether a market is over or undervalued but cannot find the reason for the under or over valuation. However, sometimes the target may use all the information they have to evaluate the market value correctly to spot all the misevaluations. Merger waves, therefore, occur when high synergies are accessed by the target, especially when the market is misevaluated.
From the statistics, it’s evident that there is an increase in merger activities when the market is overvalued. For example, between the years one thousand nine hundred and sixty-three and the years one thousand nine hundred and sixty-four, there was an increase in merger activity because the market was overvalued during this period. There is a big difference between mergers involving securities and cash takeovers because of the valuation problem in mergers. Sometimes, the valuation process becomes problematic till the court is used as a mediator to ensure that only the highest bid is accepted.
However, this problem can be approached differently because all the parties involved have private information on the other party and slight details on the market structure and condition. When overvalued, a target expects that the cause of the overvaluation is partly because of the market structure and the firm itself.
Reasons why Firms Merge then Divest
The article pays close attention to why firms merge then later divest. The concept talked about in this article applies to financially stable companies and those experiencing financial difficulties. Lack of proper financing prevents companies that are economically unstable from executing profitable projects. As a result, these companies have a high chance of participating in conglomerate mergers to help them get the funding to engage in promising projects. This conglomerate merging will stabilize the financially distressed firm, thereby excluding the union to avoid coordination costs. The disadvantage of this method is that managers of companies with financial stability will be more willing to participate in the coalition than managers of small companies even though they will not get many profits from the merge.
Diversified firms can have an extensive range of loan amounts that they can borrow from banks, thereby making them escape the tax associated with the deduction of interests. When two companies are combined, the loan tax they pay is considerably low compared to when they are on their own. This is because mergers can support positive projects that could not have been possible with standalone firms. According to this model, refocusing is the firm’s response to the shift in profitability.
Disadvantages of Conglomerate Mergers and Divestitures
The article mainly focuses on the insightful conclusions and the disadvantages of divestitures and conglomerate mergers. In summarizing this model, the empirical divestitures and conglomerate model have been contradicted. Empirically, a conglomerate merger is high during times when the economy is stable. The model contradicts it because the model states that the conglomerate merger increases when a firm’s profitability has reduced and the firm is financially distressed. In the article, that was the only weakness that I noticed, and it makes me feel that the authors did not talk about the issue adequately.
The study will talk about the purpose of chief executive hubris in giving insight and explaining the large number of premiums paid for acquisitions. It is found that the higher the number of investments done by CEO hubris, the more the losses accumulated by the shareholders. Premiums have a poor reflection of a firm’s prospects and resources and believe that they can increase the matter. The importance of bonuses is that they have a direct impact on the performance of acquisition. The returns are higher when then the premiums paid are slightly lower.
The article has widely discussed the relationship between the premiums paid on acquisition and the CEOs’ characteristics. The personalities of CEOs affect the high amount of dividends paid in the case of the target firm. To get a more detailed sample, the authors should have also investigated the impact of gender on the values of the premiums paid. This would have adequately exhausted the entire topic of discussion in the article. However, the amount of compensation is directly affected by the characteristics of the CEOs, especially when dealing with uncertainties that may arise from the merger.
Summary of the Four Articles
In summary of the four articles, the first article talks about the effect of the SRI report on investors and stock output. The second article talks about the impact of market valuation on mergers. It explains that the target may sometimes use its private information to estimate the value of the market to know whether they are overvalued or undervalued. However, the firm may not exactly know the cause of the misevaluation. This makes them accept the bid. The entire article is based on the fact that both the firms involved in a merger have private information on each other, which helps in detecting the misevaluation.
In the third and fourth articles, the reason firms merge then divest later is established and gives insightful conclusions on the disadvantages and advantages of conglomerate mergers. The second article shows that companies with low financial capabilities do not have the power to engage in profitable projects, thereby luring the managers into a conglomerate merger. The merger helps the companies achieve financial stability, making them divest to avoid paying the coordination costs.
However, this article contradicts the fact that conglomerate merging is high when the economy is stable. It instead states that mergers rise when a firm has a reduced profit margin. The three articles relate to each other because they collectively discuss the merging of firms, why they can divest, and the differences between a conglomerate merger and a divestiture. They give a proper understanding of merging between firms and their disadvantages.
The merger and acquisition of GIG AXA Acquisition is a crucial business deal between two large companies in the insurance sector. The deal was announced in October 2020 and was expected to close in 2021. This acquisition marks a significant move for both companies. GIG Group has been expanding its presence in the insurance sector, and AXA has been looking to reduce its exposure to the Gulf region.
The case analysis should start by stating that the acquisition of AXA’s insurance business in the Gulf region by GIG Group is considered a strategic move for both companies. With the purchase, GIG Group will be able to expand its presence in the area and gain access to AXA’s existing customer base (Kale & Singh, 2004). GIG Group will also benefit from the increased scale of operations and market share.
Furthermore, for AXA, the acquisition will allow it to restructure its operations in the Gulf region and reduce its exposure to the region. One should note that AXA will also gain access to GIG Group’s strong financial position and the merger’s ability to generate cost savings (Haspeslagh & Jemison, 1991). The sale of its insurance business in the Gulf region will allow AXA to focus on other areas of its business. The growth of GIG Group’s business portfolio as a result of this acquisition, which gives them a presence in the lucrative insurance industry, is one of the transaction’s main benefits (Johnson et al., 2014). Additionally, the acquisition enables GIG Group to gain market share and enhance its standing in the sector by utilizing AXA’s experience and brand name. Also, GIG Group has access to AXA’s vast network and resources, which can help the company become more competitive and create cutting-edge goods and services.
Besides, it is necessary to pay attention to the fact that the acquisition of AXA’s insurance business in the Gulf region by GIG Group is expected to bring numerous benefits to both companies. The acquisition will give GIG Group access to AXA’s existing customer base, which will help it to expand its operations in the region. Furthermore, GIG Group will benefit from the increased scale of operations and access to AXA’s strong financial position and the ability to generate cost savings.
For AXA, the acquisition will allow it to restructure its operations in the Gulf region and reduce its exposure to the region. AXA will also gain access to GIG Group’s strong financial position and the ability to generate cost savings through the merger (Bower, 2001). The sale of its insurance business in the Gulf region will allow AXA to focus on other areas of its business.
However, there are some potential drawbacks associated with the merger and acquisition. The risk involved with integrating the operations and employees of the recently acquired company into GIG Group’s current business, on the other hand, is a drawback (Bresser, 1988). To ensure a seamless transition and little interference with the acquired company’s activities, this can be a complicated process that needs careful planning and execution (Dyer et al., 2004). In addition, GIG Group may need help acquiring the necessary regulatory approvals for the acquisition in the Gulf region. For AXA, selling its insurance business in the Gulf region may lead to a decreased market share and reduced profits.
In conclusion, the merger and acquisition of GIG AXA Acquisition is a crucial business deal between two large companies in the insurance sector. The acquisition is expected to bring numerous benefits to both companies, such as the increased scale of operations, access to a more extensive customer base, and cost savings. However, some potential drawbacks are associated with the deal, such as increased expenses and difficulty obtaining regulatory approvals.
References
Bower, J. (2001) “Not all M&As are alike – and that matters”, Harvard Business Review, pp. 93−101.
Bresser, R. (1988) ‘Matching collective and competitive strategies,’ Strategic Management Journal, 9(4), 375- 385.
Dyer, J. Kale P. & Singh, H. (2004) ‘When to ally and when to acquire’? Harvard Business Review, 82(7/8), 108- 115.
Haspeslagh P. & Jemison D. (1991) Managing Acquisitions: Creating Value Through Corporate Renewal. Free Press.
Johnson, G., R. Whittington, K. Scholes, Angwin D. & Regnér P. (2014) Exploring Strategy: Text and Cases. Harlow: Pearson.
Kale, P., & Singh, H. (2009) ‘Managing strategic alliances: What do we know now, and where do we go from here?’ Academy of Management Perspectives, 23(3), 45-62.
In August 2011, Hewlett-Packard (HP), a giant technology company based in California, publicized its intentions to buy Autonomy, a software firm from the United Kingdom, for US $42.11 per share. The boards of directors of both firms jointly backed the deal, and the Autonomy board suggested to its owners that they take the proposal (Afsharipour & Laster, 2018). This resulted in an unprecedented flop in the Silicon Valley giant’s shares the disintegration of its employees’ culture and agency conflicts, among other inefficiencies. A breakdown of the key events and challenges resulting from the acquisition forms the basis of discussion for this paper.
Reason for HP’s Pursuit of Autonomy
HP hired Leo Apotheker as its new CEO in November 2010. He was supposed to help the company’s expansion by executing value-adding acquisitions and led its takeover of Autonomy within a year after joining the company. HP’s acquisition of Autonomy would mark a significant shift in approach. While the former excelled in the console market, they were woefully lacking in the software and computer niches. As a result, Apotheker intended to expedite HP’s entry into the software business by purchasing an already well-established organization. The section below highlights part of how the deal was unveiled.
Restructuring and Timing of the Acquisition Deal
HP began considering merging with Autonomy in May of 2011, enlisting the help of Barclays Bank as a consultant. Before the acquisition, share prices usually enter an accumulation period, implying that prices have slightly increased due to more buying orders being set. When HP offered a premium to buy Autonomy, those who knew about the deal from leaked news and business insiders triggered this accumulation phase. The board of directors established purchase rules, including the price, and agreed on a due diligence procedure during that time. At the end of the two days, it was resolved that negotiations should begin. However, the acquisition led to a disruption in the leadership structure, even though HP strived to take charge.
Consequent Governance Issues and How They Were Resolved
After HP bought Autonomy, human resource experts faced integration issues because they had to create a cultural and organizational framework welcoming to employees from both firms. HP’s courteous, sluggish bureaucracy and Autonomy’s aggressive sales culture became more evident. Concurrently, Lynch did not relate well to his new subservient status. He consistently kept HP management out of crucial decisions and opposed complete integration with HP in keeping with his company’s identity (Navarrete et al., 2018). As a result, a conflict of interest emerged between shareholders and management, compelling the matter to end up in litigation, as explained in the following section.
Outcomes of the Deal
HP’s shares plummeted by more than 13 percent in response to harsh pricing criticism. Apotheker was fired after only a few weeks, and Lynch and his new HP bosses were in strife within months. The two companies’ union was tumultuous from the start, with HP’s shareholders blasting the 79 percent premium paid as exploitative (Hopkins & Yemen, 2021). Hewlett-Packard declared an $8.8 billion write-down of its Autonomy investment on November 20, the following year, claiming severe accounting indiscretions and blatant misstatements. The fraud claims were refuted by Autonomy’s former chief executive, Michael Lynch. This signaled the start of a horrendously nasty public relations war between Autonomy’s dismissed CEO and its board of directors that dragged auditing firms such as Deloitte into it.
Party to be Blamed
Deloitte served as the deal’s independent accounting advisor, while HP entrusted its audits to KPMG. Financial Reporting Council (FRC) regulators began investigating Deloitte after the scandal broke. The hearing, initiated on October 10, went on for eight weeks. According to the indictment, it was discovered that Deloitte failed to dispute the company’s disclosure about its treatment of distributor agreements, resulting in a misleading picture of rapidly growing revenues from successful software sales (Aalbers et al., 2021). The fact that Autonomy was the most valuable customer of Deloitte compromised its impartiality, leading to the conclusion that the auditing firm was not critical enough of management’s financial statements, thus bearing most of the blame.
Measures Taken to Address Acquisition Aftermath
Autonomy functioned as a distinct business segment, with Lynch as its director. According to the company’s 2012 report, HP’s offer to buy the outstanding Autonomy shares remained open. On the other hand, technology platforms that foster employee contact and cooperation were designed by HP around its communications channels (Narayanan, 2019). These digital platforms allow many individuals to collaborate on generating creative ideas while being less costly than conventional modalities. Some of the measures from the litigation have been included below.
Conclusion
Dr. Lynch and other former Autonomy managers were accused by HP and US authorities of fraudulently inflating the software business’s revenues and profitability in 2011, resulting in HP overpaying for their company. Business schools study the HP acquisition as one of the worst financial decisions of the twenty-first century. The merging, alongside other takeover guidelines, forms a crucial framework that firms can use to assess risk-free business partnerships.
References
Aalbers, R. H., McCarthy J. & Heimeriks, K. (2021). Market reactions to acquisition announcements. Long Range Planning, 54(6), 102-105.
Afsharipour, A., & Laster, T. (2018). Enhanced Scrutiny on the Buy-Side. Ga. L. Rev., 53, 443.
Hopkins, J., & Yemen, G. (2021). HP and Autonomy: Who’s Accountable?
Narayanan, S. (2019). Analysis of merger & acquisition frameworks from a deal rationale perspective. (Doctoral dissertation, Massachusetts Institute of Technology).
Navarrete, J., Yang, T., & Yoon, S. (2018). Accrual Based Earnings Management and Stock Returns in Mergers and Acquisitions. Pan-Pacific Journal of Business Research, 9(1), 1-16.
Mergers and acquisitions (M&A) help a firm to grow by venturing into new markets. Mergers are a combination of two or more companies who join together to achieve some strategic or financial objective (Sherman A. et al 2006).
Acquisitions involve the purchasing of assets or shares of a company in order to have control of that company (Sherman A. et al 2006). M &A can take place peacefully or can sometimes be a difficult process for the companies involved.
Having given the definition of M&A, this report focuses on how they develop and the reasons why companies pursue M&A. Then focus will be made on the types of M&A along with the threats and opportunities.
This report will further examine the factors that affect M&A with the support of real cases. Finally a conclusion will be drawn from the research.
Trends of mergers and acquisitions
In the 1970s, there was increased formation of M&A. This trend was persistent and resulted in increased, globalisation. Firms are incorporating the concept of internationalisation in their operation. The current boom with regards to M&A in the 21st century has similarities with older conglomerations of the 1990s.
However, the trend has affected firms in economic sectors (Hijzen et al 2008, p. 852). The financial markets are no longer the major factors in determining formation of mergers or acquisitions.
Furthermore, there is a cause to believe that the current surge is progressed by strategic choices of businesses in light of opportunities offers by the economic prowess.
Most cross-border M&A are mostly experienced in the same industry with few variations where new investors are involved.
Reasons for acquisitions/mergers
The primary motivation for coming together or purchasing another business has been to ensure creation of corporate profits hence maximising the shareholder’s value (Bösecke, 2009, p. 46; Campa & Hernando, 2004, p. 56).
In addition, firms also enter into strategic alliances (business relationship between 2 or more parties with the objective of attaining a critical business objective such as acquire the skilled employees, products and intellectual property).
Companies such as Googles, Cisco and Yahoo have all formed acquisitions over the years. M&A may also take place because of a rapid change in technology, fierce competition, changing consumer preferences, control costs and a reduction in demand (Sherman A. et al 2006).
This means that a company cannot keep up with the changing situation and thus, it resorts to this measure. In addition, firm’s share all the risks involved. However, the individual firm’s remain independent. When venturing in to new markets companies encounter problems.
Cultural Factors Affecting M & A
When firms from different national origin interact through M&A, they are bound to experience very different and incompatible cultural characteristics (Alvesson, 2002 p. 74).
Cultural differences are major components to be considered because cultural clash is considered to be a major obstacle that often causes failed M&A (Häkkinen et al 2004, p. 28).
Various studies have revealed that the existence of cultural differences in different companies greatly contributes to failure of M&A (Alvesson 2002, p. 76).
In the process of implementing M&A, managers assess the key cultural differences that exist in the merging/aquiring firm (Marmenout 2008, p. 75). To reduce the cultural differences interference with synchronization, managers are encouraged to have mergers with firms operating in the same industry.
Analysing cultural differences will aid in increasing the probability of the merger succeeding (Mercer 2006, p. 134).This arises from the fact that the necessary harmony in the merger is established (Sudarsanam 2010, p. 135).
Culture conflict translates into misunderstanding in the firm (Gitelson et al 2004, p. 1). , Hence, the merging firms experience inefficiencies and time wastage (Frensch 2007, p. 112). A number of aspects such as valuable resources, employee benefits, decision-making process, communication and measures are affected (Gertsen et al 2004, p. 123).
Therefore, there is a need to establish harmony among a new firm since cultural differences can affect the synchronization process and hence reduce the intended synergy. The degree of complexity in M &A is high if two countries are involved due to cross-cultural disparity.
Despite M&A involving firms in the same industry being easy, the workforce could respond to comparable situations in a completely different way (Mercer 2006, p. 134). Therefore, consideration of cultural differences prior to the merger is necessary (Gitelson et al 2004, p. 123).
Firms should also conduct harmonisation of the M&A which entails ensuring that their operation strategies are similar. Strategies of harmonization are very critical for managing cultural differences. To achieve this, an efficient communication within the organisation should be adopted to minimise chances of resistance (Gitelson et al 2004, p. 123).
Other disadvantages of M&A
Apart from cultural differences, other disadvantages relate to attainment of a bad reputation. This mainly occurs if one firm acquires a firm which has a negative publicity. This may have a significant effect in the success of the new entity established.
Thus, the management team should conduct a comprehensive analysis of the potential partner so as to determine the reputation it has established.
In addition, the firm may experience diseconomies of scale. This arises from the fact that the firm may grow in its size leading into an increment in unit costs. M&A may also result into a decline in the employees’ level of motivation because some employees especially those in the management level may be rendered redundant.
M&A may also result into conflict of objectives between the two firms. The resultant effect is inefficiency in the firm’s operation.
Cross-Border M&A
M&A involve are formed with a common goal of sharing resources in order to achieve a particular goal. Sharing resources means that each firm benefits from the resources of the other firm and the new firm established is able to attain synergy (Sudarsanam 2010, p. 138)..
For example, one party may have a skilled human capital while the other may have adequate financial resources. A cross border M & A entails two firms that operate in two different national economies or two companies that operate in the same economy but they belong to different host nations (Andrade et al, 2001, p. 106).
Global Trend
According to Hijzen et al (2008, p. 852), the high rate of globalisation is forcing firms to incorporate the concept of internationalisation. Other factors include increased deregulation, corporate restructuring and privatisation (Marmenout 2008, p. 75).
Understanding the threats and opportunities of cross-border is essential in M & A activities and the nature of global strategy. Formation of cross-border M&A is costly (Bruner, 2004, p. 89).
The price being offered is a critical determinant of the success of the acquisition, there is no intrinsic reason why that can cause failure for the properly-conceived strategic mergers.
Evidence gives quite contradictory outcomes. For instance, the BP and Mobil merger was aimed at gaining market power by competing with other larger oil corporations in the market and to cut down significant expenses through elimination of duplicate facilities, reducing work force and other overheads (Carleton et al 2004, p. 103).
Some mergers may not have significant integration problems, it seems that it had a strong strategic logic and it’s regarded as a blueprint for other similar ventures among rival firms like Amoco and Shell.
It is also quite unusual strategy because, the merger only consolidated market resource in Europe but the firms remained rivals in other places.
Theories for International Expansion
There are three theories that offer probable reasons why firms expand their businesses to the global market (Madura, 2006, p. 56). They include comparative advantage, product cycle and imperfect markets theories. The internalisation theory has also been highlighted by several researchers.
Comparative advantage theory purports that a company/ country has a totally different comparative advantage of producing when it is able to run a cheaper production with minimal opportunity cost compared to other firms or countries (Finkelstein, 2009, p. 109).
Thus, western nations invest in China due to its large population, China a source of cheap labour and market; however, it has had a totally different cultural background making integration very challenging (Finkelstein, 2009, p. 109). This theory further explains that the two firms engaged in M&A could draw great benefits from each other because of these cheap production process and free trade.
For example, Fresenius Kabi acquired APP pharmaceutical company to enter into the American market and supply generic drugs to US and Canada. Through the acquisition, Fresenius Kabi expanded its operation hence becoming a global leader of IV generics status (Mullin, 2008, p. 9).
Other important examples of comparative advantages include the emerging economies that have great advantage in certain fields (Frensch, 2007, p. 212).
Brazil has an advantage of investing in bio-fuels, Russia in energy, while Indians have captured the information technology industry and taking it to a very competitive level (Hoskisson et al, 2000, p. 454).
China as a new strength in the economy enjoys comparative advantage of manufacturing, where most of products are made in china because of availability of cheap labour (Hoskisson et al, 2000, p. 455).
Imperfect market theory asserts that countries are usually differing with the amount of resources that are accessible for production. These resources are not transferable to another country in a cheaper way or freely (Hoskisson et al, 2000, p. 458).
This means that there could be a lot of obstacles and expenses that are attached to the transferring factors for production.
In essence, if there were no such barriers or if the factor were transferable without restrictions, then there won’t be comparative cost advantages hence there will be no reason for the international or cross-border M&A (Chari et al, 2004, p. 126).
Market imperfections help cross-border M&A to grow and exploit international transactions which would be purely for domestic industries (Rossi & Volpin, 2004, p. 278).
Product cycle theory purports that whereas a company will initially produce products and services that are able to satisfy the demand in the domestic country, with time, the market becomes mature and saturate. This may force the firm to expand its market in the foreign market (Rossi & Volpin, 2004, p. 278).
This explains why firms are very innovative. It’s through such dynamics that Big Pharma was motivated to acquire Biotech in order to venture into new drugs and equipment after its patent expired.
Basell acquisition of Lyondell chemicals led to growth in the size of the firm (Salmon, 2010, p. 27). The firm was able to improve its market position by diversifying its operation and also to attain economies of scale.
Internalisation theory explains that when M&A enables a company to exploit the benefits of intangible assets like branding, management skills, marketing strategies, patents, superior expertise and goodwill (Chari et al, 2004, p. 129).
These assets are influenced by the size of the business. They also have immobility and limited information and basically founded on proprietor information (Rossi & Volpin, 2004, p. 279).
Such obstacles can be bypassed by engaging in cross-border deals hence gaining access to these intangible assets and consequently increasing shareholder value (Campa & Hernando, 2004, p. 56).
Studies have found that many takeovers in this perspective are mainly those in the research and development business (Guillén, & Tschoegl, 2008, p. 123).
Target valuation
The value of M&A from the value creation impact of the target firm capital and profitability are implicit in value and there is goal difference between the goals of net assets value. From the financial results, M&A following a merger value creation entail the increase in the net current cash flow value.
From a corporate M&A viewpoint, analysis of M&A value creation from the merging firms’ net asset value, via an analysis and evaluation of the target firm’s intrinsic value, the M&A value synergies developed to determine the acquisition value creation can be attained.
The target firm in the value of the M & A process of value creation can be addressed at three levels of synergy.
Net asset value: together with profits from ongoing operations to changing the enterprises capital increase, the formation of accumulating capital, this accumulated capital is invested business on the basis of long-term business formation in the past.
Target firm M&A price is evaluated from the current enterprise, future profitability and growth as determined by the inherent value, value added acquisition synergy and firm growth option value.
Target Company’s Value: the acquisition seeks to pursue the objectives of the undervalued firms. It’s important to determine the target firm’s inherent value and then make comparison with the market.
Growth option value: M &A returns when the target firm has indicated rising trend, meaning that the value has a call option and future growth of M & A income can be brought.
The value of synergy Target firm: M&A to create value via collaboration and bring together resources, knowledge for enhancing combined value of the M&A on both sides. Many cross-borders mergers face serious difficulties in the process of integration after the merger or acquisition (Häkkinen et al, 2004, p. 32).
The new firm has to undertake a number of activities so as to attain synergy (Carleton et al 2004, p. 103). Through effective integration, M & A can succeed in the long term (Olie 1990, p. 206).
Cross-Border Merger/Acquisition obstacles
A number of legal requirements have to be met in cross-border mergers. As a result, the acquiring firm can be disadvantaged or hampered by lack of crucial information and the legal incompatibility (Olie 1990, p. 208).Sometimes, the legal structures frustrate organisations’ M & A.
These restrictions are not restricted to cross-border mergers but they explain the failure of M & A (Vasconcellos et al 1990, p. 174). An example of legal barriers is evident in China where the government introduced a regulation on monopolies limiting the probability of entering into the market by foreign firms.
Tax barriers are another obstacle which governments impose to cross-border mergers. Despite efforts by managers to ensure smooth transition process, taxation matters are usually problematic (Arnold 2002, p. 145).
This is because these issues are usually dealt with domestically and they are sometimes not clear exhaustive to determine the effect of tax of the international M & A (Vasconcellos et al, 1990, p. 178).
Such impediments require seeking expert consultation services or special agreements with tax agencies on these grounds.
Cross-border mergers could expose gaps or weaknesses in the regulatory framework thus making the regulatory bodies inadequate or uncertain on how to carry out the process of merger thus causing delays (Vasconcellos et al 1990, p. 179).
Economic barriers, such as fragmentation of equity markets can impose extra transactions expenses on cross-border M & A (Arnold 2002, p. 145). For example, the share mechanism can be intricate and costly when the merging firms are listed differently on the stock markets.
The extra costs could influence the bidder on the kind of deal to get into (Sudarsanam 2010, p. 138). In addition to these barriers, there would also be differences of member state that would demand differentiated approach adoption. The differentiated approach has very little information available on value-based process.
With regard to the attitudinal barriers, some of the member states support ‘National Industrial Policy’ openly or surreptitiously, targeting to become domestic national champions. Among possible justification, some could argue that these types of policies could ensure more finances for the national economy.
Political issues could also affect privatised firms that have in the past received public money hence cross-border mergers can be blocked (Cartwright & Cooper 2000, p. 112).
In the European banking sector, companies are seeking to consolidate their market position in the domestic arena before they make the strategic move in response to formation of single market and also introduction of single currency.
Merging in this view is often differentiated because of specific development is individual nations (Vasconcellos et al 1990, p. 174).
The following example is about a cross border acquisition of two banks from different countries:
Cross border Acquisition of the Royal Bank of Scotland with ABN AMRO
In 2007 the Royal Bank of Scotland was involved in the Europe’s biggest cross border banking deal (F.T, 2011). ABN AMRO, a Dutch bank was acquired by the Scottish bank after having competing against Barclays. This was supposed to be an effective deal which was intended to cause rapid growth and global domination (Wilson H at el, 2011).
They intended to make savings on the stationery bill and shared computer software (Hosking P, 2008). However, this was not the case. This type of cross border acquisition has been used to explain the consequences of a deal which produces negative results within a year.
As stated not all acquisitions are successful. This deal had a liquidity impact on RBS in particular to its capital ratios. This was a costly deal for them.
Also the ABN’s staff were concerned of the RBS management attitude, this reflects cultural differences in workers/managers. Finally in 2009, the ex boss of the Royal bank of Scotland, Sir Tom McKillop pointed out that the takeover of ABN Amro was a “bad mistake” (Duncan H., 2009).
Conclusion
From the analysis, it is evident that there are a number of factors which motivates firms to consider forming M&A. Factors relate to the high rate of globalisation, increased privatisation and economic liberalisation. In addition there are a few theories which explain why firms expand into the international markets.
These include the comparative advantage, product cycle, imperfect markets and the internalisation theory. However, M&A are faced with numerous challenges, cultural differences etc which limit the probability of success such as RBS faced.
M&A may result into diseconomies of scale as a result of increment in the size of the firm. The employees’ level of motivation may adversely be affected limiting the firm’s operational efficiency.
In addition, legal, political, and economic barriers are associated with M&A. All these restrictions cause uncertainty of future trade and cash flow and this in turn affects asset value and therefore poor performance.
However, various economies are considering forming trading blocs so as to harmonize these issues and allow free trade. In most cases, the target value of M&A relate to increasing the net assets value, attain a high growth and to attain synergy.
Reference List
Alvesson, M., 2002, Understanding Organizational Culture. New York: Sage, pp. 74-76.
Andrade, G., Mitchell, M., & Stafford, E., 2000. ‘New Evidence and Perspectives on Mergers,’ Journal of Economic Perspectives 15, pp. 103–120.
Bösecke, K., 2009, Value Creation in Mergers, Acquisitions, and Alliances. Wiesbaden: Gabler Verlag.
Bruner, R. F., 2004, Applied Mergers and Acquisition, Stockholm: Rutledge Publishers.
Campa, J. M. & Hernando, I. 2004, ‘Shareholder Value Creation in European M&As,’ European Financial Management, Vol. 10 (1), pp. 47-81.
Carleton, R. J., & Berry, C. S., 2004, Achieving Post-Merger Success: A Stakeholder’s Guide to Cultural due Diligence, Assessment and Integration. New York: John Wiley & Sons.
Cartwright, S., & Cooper, C., 2000, HR Know-How in Mergers and Acquisitions. London: Institute Of Personnel and Development.
Chari, A. Ouimet, P. & Tesar, L. 2004, Cross Border Mergers and Acquisitions in Emerging Markets: The Stock Market Valuation of Corporate Control, EFA 2004 Maastricht Meetings Paper. No. 3479.
Finkelstein, S., 2009, Advances in Mergers and Acquisitions. New York: Emerald Group Publishing.
Frensch, F., 2007, The Social Side of Mergers and Acquisitions: Cooperation Relationships after Mergers and Acquisitions. Sydney: DUV FT 2011, ABN Amro takeover battle, Financial Times. Web.
Gertsen, M. C., Torp, J. E., & Soderberg, A. M., 2004, Cultural Dimensions of International Mergers and Acquisitions. Sydney: Prentice Hall.
Gitelson G., Bing, J. W., & Laroche, L., 2004, The Impact of Culture on Mergers and Acquisitions. New York: ITAP International Incorporation.
Guillén, M. & Tschoegl, F. (2008). Building A Global Bank: The Transformation Of Banco Santander, Princeton, NJ: Princeton University Press.
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Hijzen, A., Gorg, H., & Manchin, M., 2008. Cross-Border Mergers and Acquisitions and the Role Of Trade Costs. European Economics Review, Vol. 52, Issue 5, pp. 849 – 866
Hosking P. 2008, RBS remains upbeat after ABN Amro deal, The Times. Web.
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Marmenout, K., 2008. Getting Beyond Culture Clashes: A Process Model of Post-Merger Order Negotiation. Montreal: McGill University.
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Olie, R., 1990. Culture and Integration Problems in International Mergers and Acquisitions. European Management Journal, Vol. 8, Issue 2, pp. 206-215.
Rossi, S. & Volpin, P. 2004, Cross-country Determinants of Mergers and Acquisitions, Journal of Financial Economics, 74: 277-304.
Salmon, J. (2010). The Rise and fall of Corporate America, Victoria: Trafford Publishing.
Sherman A. & Hart M., 2006, Mergers & acquisitions from A to Z, American Management Association, second edition, printed in the United States of America. Web.
Sudarsanam, P. S., 2010. Creating Value from Mergers and Acquisitions. Harlow, UK: FT Prentice Hall.
Vasconcellos, G. M., Madura, J., & Kish, R. J., 1990. An Empirical Investigation of Factors Affecting Cross-Border Acquisition: The United States vs. United Kingdom Experience. Global Finance Journal, Vol. 1, Issue 3, Pp. 173-189
Acquisition strategy refers to a high-level business and technical organization system designed to achieve planned goals within a particular resource limits and time. Acquisition strategy as management program can be viewed as a procurement method for the business components or services.
Before an acquisition plan is initiated, the target company market performance and market situation should be analyzed to determine the best target company, and its best acquisition price.
Tyco international ltd has been able to use acquisition strategy to promote its growth to very high levels of excellence, through its highly diversified world company incorporation of its three major business divisions of; security solutions, fire protection and flow control. In the early 1960s it acquired Armin plastics and the Ludlow Corporation to start packaging services.
After this acquisition, the company recorded booming business and consequently high profits due to diversity of products in the market. Due to this, the company met the business threshold to be listed in the New York stock exchange in the year 1974.
Soon after Tyco international joined the stock exchange, it gained competitive advantage against its competitors, as this acted as an advertisement to those who did not know it and its products. It continued to expand both in its products and services, and through acquiring other companies to a point, where it has gained an international recognition, further widening of its market share through export of its products.
Through this strategy, speed of growth in terms of resources and competency of the company is higher than that of competitors, with ability to provide a wide range of new products of high quality.
By the way of acquiring an already established firm with ready products for sale such as polythene and plastic pipes, after acquisition the company was able to minimize the risks and cost of developing these new products, hence making its production cost low. This is translated into low prices of its products in the market compared to those of competitors.
The acquiring company has been able to increase its market power through enhanced market presence with a wide range of products and services. Many companies feel that they have inside ability to do business, but they are unable to exhaust their available capital and capability due to insufficient size.
During acquisition, a company gets a good opportunity to increase its size that is necessary to exploit its overall competences by developing and growing in terms of sizes. The major concern of increase of size is the market share of the company.
For instance, Tyco has a history of expanding its market shares through acquiring various companies from both within and without the industry. Whenever a company expands its market share, the market power as well increases, hence placing it at a more competitive edge in the market.
For a company to enjoy a powerful market share, it may be forced to acquire the relied supplier in the market, the most competing company, or the major distributor. To some extent, some companies like Tyco international have tried to expand their market shares through acquiring companies from a different industry, and the process has proved to be successful.
Starting a new company is usually associated with many hindrances, the company enjoyed easy acquisition of Armin plastics and the Ludlow Corporation and with minimal competition effect. Through acquisition, there is a very high likelihood of the company to overcome the main entry barriers.
The big companies with expanded market shares find it easier to venture even to the most competitive areas. This is facilitated by the strong financial base of that company, as most of the companies that are new and upcoming find it hard and expensive to enter the market.
When it becomes challenging for small companies to venture into the market, those opportunities are left to be exploited by the big companies. When Tyco international acquired the second company it was soon listed in the New York stock exchange, this increased confidence among shareholders and other stakeholders, due to anticipated growth which was then realized.
When it acquired Armin plastics and the Ludlow Corporation, the later management and workforce was also absorbed to the new program, they brought new ideas and management strength that has made the company prosper to greater heights.
In addition, the company may use acquisition as a way of eradicating the behavior of depending on a single or few products in its operating market. For instance, at the beginning, the company was majoring in three types of products only within its operating market.
Within a duration of less than five years Tyco international had acquired various companies dealing with different products such as fire control, security services, electronics, packaging etc. one of its target was to acquire such companies to gather the basic guidelines of venturing into such fields.
In conclusion, although it has benefitted widely from acquisition strategy, there are some weaknesses that are associated with that strategy. There are some of the companies that have tried acquisition to no success due to such challenges. Most of the researches done on acquisition strategy prove that the benefits of this strategy outweigh the challenges making the process acceptable.
References
Birkler, J. (2004). An acquisition strategy, process, and organization for innovative systems. New York: Rand Corporation.
Gamble, J., & Thompson, A. (2006). Essentils of Strategic Management:The Quest for competitive Advantage. Michigan: Routledge.
For every corporate to conduct its core business and forge forward strategically in future, there is need to have a more vibrant corporate portfolio that is designated to propel it in the operating environment. Usually, the environment is characterized with stiff competition.
Nonetheless, a concern for most organizations especially those that are in multi business like Wesfarmers, is how to strategically align plans of its different units so that its conglomeration can work harmoniously as one whole unit. For this reason, Wesfarmers’s corporate portfolio follows specific guidelines in respect to strategic management.
These principles include; Ansoff Matrix which according to Mordem (2007) involves a classic analysis of the market based on a matrix comprising of four major variables of existing markets, new markets, existing products and new products.
In addition, Ansoff Matrix also considers five market–product development alternatives in its strategic alignment which are consolidation, penetration, market development, product development and diversification. Moreover, Wesfarmers Corporate portfolio is also tailored based corporate parenting, portfolio matrix and diversification.
Nonetheless, from the case study analysis of the Wesfarmers, it is evident that the corporate also follows portfolio matrix in its corporate portfolio. According to Johnson, Whittington and Scholes (2011), portfolio matrix ensures that there is linkage between business growth rate and the competitive position of the organization which is usually determined by its market share.
For instance, its investment strategies are determined by the ‘Net Profit Value’ which is usually based on the discounted cash flow. This was therefore the main principle applied in acquisition of Coles as it was also in line with other units hence being the best fit Wesfarmers operations.
In addition, another portfolio matrix that Wesfarmers follows in its corporate portfolio is the familiarity of the industry in terms of its risk level, geographical location and the business that the industry is operating.
For this reason, according to Johnson, Whittington and Scholes (2011), the basic objective of using portfolio matrix in shaping corporate portfolio is to ensure that the organization is only investing in markets which are highly promising and attractive both in the current times and in the future.
For that matter, Wesfarmers considered this principle before it acquired Coles. Additionally, portfolio matrix also ensures that investments which are done on mature markets becomes self reliant by being self financing in addition of producing cash flow which can also be invested in other productive business areas (Mordem, 2007).
This also formed the basis for acquisition of Coles since it was already a productive niche and it could offer the best fit for Wesfarmers.
Nevertheless, from the case study, it is relative to acknowledge that Wesfarmers also employ corporate parenting strategies in its corporate portfolio.
For that matter, according to Koontz and Heinz (2008), corporate parenting usually views an organization in terms of its capabilities and available resources that can help it build a vibrant business division value that can be able to generate synergies from other business divisions.
Nonetheless, this is accomplished through focusing on competencies of the parent organization and the core values that are usually derived from the interrelationship between business divisions and the parent organization.
According to the Wesfarmers business operation, its operations are diversified into several business entities that drew their guidelines from the parent’s origination. For that matter, it was prudent for Wesfarmers to acquire Coles since it could easily fit in its parental structure.
Furthermore, Wesfarmers also appreciates and use diversification strategies of strategic planning and management in its corporate portfolio.
Corporate units are at liberty to venture into new business entities provided their new ventures comply with the stipulated threshold given by the parent organization.
Nonetheless, this is taken to ensure that shareholders interests are taken into account by ensuring that the value of corporate share on the stock market is competitively maintained in order to guarantee these shareholders value in terms of dividends.
Conclusion
To wind up, it can be asserted that Wesfarmers was more concerned with corporate structure and its financial control mechanism. This formed the reason as to why it was motivated to pursue acquisition of Coles. However, in doing so, Wesfarmers considered several theories and principles to ensure that the new acquisition fits well in its corporate portfolio.
References
Johnson, G., Whittington, R., & Scholes, K. (2011) Exploring Strategy: Text& Cases. 9th ed. Sydney: Prentice Hall.
Koontz, H & Heinz, W. (2008) Essentials of Management: An International Perspective. 7th ed. New Delhi: Tata McGraw-Hill.
Mordem, T. (2007) Principles of Strategic Management, England: Ashgate.
The Royal Numico case study can be used as a process of learning because the company makes mistakes that it failed to predict. A more in depth analysis of the environment might have led them to better information and prevented them from buying the other companies in the first place. In both the acquisitions their top goal was to become the market leader by acquiring someone else’s goods. In my opinion, they become too one sighted and failed to understand that acquiring companies with huge sums of money will not lead to a higher market share. There has to be a strategy for every SBU and every department and every product line. It takes more than a give and take relationship to be successful in the business world. You just can’t buy your market share you have to go out and grab it.
The Environmental Analysis of the Royal Numico
The environmental analysis of company can be conducted through many methods. To use this analysis is a tool to make decisions it is more that both internal and external components are looked at. Porter’s five forces can be analyzed to understand the internal and external environment of Royal Numico. They relied heavily on research and development and marketing ad had to think about internationalizing and growing as a company to recover these costs. They decided to buy Rexall Sundown Inc. Porter’s Model looks at rivalry with the competition but the acquisition by Numico had to do more with expanding and recovering costs. Another reason was to acquire a higher market share and obtain more products. “The acquisition reinforces Numico’s leading position in the growing nutritional supplements market… The acquisition of Rexall Sundown, major supplier to the mass market, will provide Numico with leading nutritional supplements brands and the largest distribution network in the U.S.The acquisition will allow Rexall Sundown to enhance its string market position in the U.S. mass market and provides access to the European market.” (Eppink 729)
Royal Numico had clearly analyzed each of the aspects of the acquisition and what the environment was like at the moment. They knew that their distribution network was commendable and would a lot of value to the Numico Company as a whole and help with making more sales. They also analyzed their current market share to understand the environment and sought to expand it with the acquisition. They also analyzed the buyer and supplier power. “WE bought the US companies and their distribution channels to be in a position to sell our clinical and diet foods on a large scale. We did not buy them just for selling vitamins…More than half of the turnover in the USA was diet and sport nutrition.” (Eppinks 729) They knew that they had to get their hand on all the suppliers so they can distribute their product effectively and they knew that the product was being sold because of the high turnover.
An entry and exit barrier analysis is a must according to Porter’s model. In their annual report they did not overlook the risks attached with the acquisition. “First of all, Numico focused on the production of specialized nutritional products. This policy involves certain risks regarding the vulnerability of these products and the target groups which there are aimed at, including babies, patients and people with specific nutritional needs. (Eppinks 730) They evaluated their target markets and realized that there was some vulnerability to sell to the target markets. “The second risk was the increasing foreign exchange risk from the growth of the activities in the USA. Numico drew up its balance sheet in euros; a change in the rate of the dollar relative to the euro has a positive or negative impact on the sales reported. The same change would have the opposite effect on the value of debt if it was incurred in US dollar.” (Eppinks, 730) They knew that the environment consisted of incessant fluctuations in the currency rates and that sales would get affected.
An environment analysis helped them understand that if the economy went up they result would be great but any threats to the economy would have a fatal consequence. “Finally, the board recognized that sales of nutritional supplements were more sensitive to economic fluctuations rather then their traditional products. However this effect was somewhat reduced because consumers were becoming increasingly conscious of their health and the importance of balanced nutrition.” (Eppink 730) They understood that although there were economic barriers their target market had become more health conscious and as long as there was a need for the product they would be successful. Royal Numico carried out a good environmental analysis although it might be questioned if it was good enough. Both the acquisitions were sold eventually either because they were failures or just not in line with Numico’s new strategies.
Analyzing the Suitability of an Acquisition
There are eight steps to checking the suitability of an acquisition (Steps to a successful acquisition 2005):
Choose Target Spaces
After analyzing the company environment the company can understand where its strengths lie and where the weaknesses lie. A SWOT analysis can tell the company where they stand currently and where they should go form there. A gap analysis should be conducted to see the difference between where they are where they want to be. In Royal Numico’s case they were successful in their country but they wanted to expand to the United States. Henceforth, they settled in the idea of an acquisition that would give them a strong distribution channel and a larger product line.
Develop Target Profiling Criteria
Once they company realized that they wanted to acquire another company they had to choose which one would be the best. The acquisition must be in line with the original goals, the mission and the vision of the company as a whole. The location of the company, it’s position in the market, and its supply and demand functions have to be analyzed to paint a clear picture of where the company is right now and where will it go after the acquisition.
Collect Information and Rank Targets
Research and development is a big part of making decisions because it ends up being one of the most important tools. This aspect was already inscribed in Royal Numico, henceforth they could easily analyze their targets and calculate the risks. One aspect of collecting information should be consulting critics and taking outside advice. Rooji made three criticisms to the acquisition of the Rexall Sundown which were most likely ignored because later these factors come back and haunt Numico and result in the sale of Rexall Sundown.
Approach Targets
Approaching targets is a difficult task because people react to things differently in different countries. Since Royal Numico’s acquisition was in the United States it would have to thoroughly analyze the American publics buying methods. As stated earlier the company knew that there were risks involved and reaching out to the target market would be quite vulnerable. Since they knew that reaching out to targets was quite venerable they should have created a strategy to eradicate that vulnerability or come up with a plan to handle it. The suitability of an acquisition also depends on its feasibility. Although a lot of the things sounds attractive and Numico had enough money to buy the both the companies they should have researched how this would affect the target markets.
Investigate Targets
In order to minimize these risks they company had to analyze the target markets and they found that the American consumer had a health conscious mindset and they would nutritional supplements and related products. Once again paying attention to Rooji’s analysis would have been beneficial here because they failed to realize that dietary supplements were based on fads that would come and go and depended heavily on the economy. It is not wise to simply launch and idea or a strategy only because a few aspects seem positive. Each negative or incomplete area of information has to be completed and analyzed thoroughly.
Determine Valuation, Negotiate and Set Deal Terms
They acquired the company for 2 billion pounds in the form of shares, bonds, and other payment methods. (Eppink 729) The GNC merger was one of the largest one in the history of nutritional foods and banks like JP Morgan backed up Numico’s payment in cash. The sale of a company is just important as the acquisition because if the acquisition does not work out well a sale is inevitable. In my opinion the future value of the acquired company should be calculated if the strategy doe not go as planned. This would give a rough estimate of how much the company might loose. The company could use this information to evaluate and set aside funds from the profits to cover future losses so that if the unfortunate event of selling an acquisition does happen the company does not end up being in a huge loss like Royal Numico eventually did.
Perform Confirmatory Due Diligence and Close the Transaction
To successfully close a deal there must be a written set of responsibilities established so that there are no conflicts after the acquisition. Each person in the company should know their role and be aware of what they have to do in order to meet the long term goals of the company. All the documentation should be taken care of and should be double checked for accuracy.
Integrate the Companies
Acquisition will allow the companies to work together as one in a mutual relationship of benefiting each other. Integration has to begin right away to the acquired company can achieve all the goals of the parent company.
Evaluate the acquisition of the nutritional business “The acquisition of General Nutrition Companies (GNCI) by Royal Numico, N.V. this month could be the start of a far-reaching consolidation in the troubled nutritional and natural products industry… Midsized firms with revenues of $100 million to $750 million, such as Rexall Sundown, Twinlab, Nutraceutical International, NBTY/Nature’s Bounty and Weider Nutrition, are possible acquisition candidates, given the generally low valuations accorded to nutrition and natural products companies…a product glut at retail has led to disappointing sales and earnings for a number of industry leaders, with nutrition stocks badly lagging the overall market.” (Product glut 1999) These are some of the headlines that were circulating in 1999 preceding Royal Numico’s acquisition of Rexall Sundown. Clearly the lagging market was in indicator of expanding internationally and to earn a higher market share.
“Major baby-food supplier Royal Numico said it will pay $1.75 billion in cash for Pittsburgh’s General Nutrition Companies (GNC). Executives of the Dutch group said the merger would result in the world’s largest company devoted exclusively to nutrition. GNC, which operates 4,000 stores in the US and other countries, announced last month it was buying an 8 percent stake in drugstore.com, an online prescription retailer.” (Business & Finance 1999) The large summed acquisition clearly highlighted that Royal Numico saw many benefits especially when “General Nutrition’s board of directors has unanimously approved the merger agreement in which Royal Numico will pay $25 per share for all outstanding shares of the company in a transaction valued at about $2.5 billion.” (Matta 1999) For Numico this acquisition meant two things: a higher market share that would a leading position in the market and expanding the product line with GNC using research and development. (Eppinks 728)
Numico followed the eight successful steps of acquisition when it went after GNC. It set certain goals, evaluated target markets, analyzed results and in the end ended up accomplishing what it was after: “As a result of intensive active component research development, Numico has developed a range of specialized nutritional supplement products. The acquisition of GNC provides Numico with the world’s leading brand and the largest distribution network in the US to sell these products without significant additional marketing expenses.” (Eppink 729)
“ROYAL NUMICO NV, a Dutch specialty foods company, will acquire Rexall Sundown Inc., a major US manufacturer and marketer of nutritional supplements and consumer health products. The transaction is valued at roughly $1.8 billion, or $24 per share, including the assumption of about $114 million of Rexall Sundown’s net debt and the value of its outstanding stock options.” (Mirasol 2000) According the Numico the acquisition would help the company penetrate the US market through dietary supplements and “strengthen its position as the global leader in specialized nutrition products.” (Mirasol 2000) This acquisition was the third one on Numico’s list and gave it the title of “the world’s largest nutritional supplements company.” (Mirasol 2000) The acquisition was finally made for “2.7 times sales, or $1.77 billion.” (Cohen 2002)
One thing to watch out for in the Rexall Sundown aqusition was that it was related to dietary products. According to Theo van Rooji this would pose a lot of non traditional challenges. “First of all, this new market was one with much more influence from fashionable developments. More over, he considered these products to be much more income elastic and therefore more dependant on economic cycles. Finally the competititors were often smaller companies with sometimes unpredictable and ‘wild’ behavior.” (Eppink 729) This acquisition was not as risk proof as the earlier one and posed many challenges. Anything in the dietary product category is close to a fad. Although people are becoming more and more health conscious they still look for quick ways to reduce weight and when one product gets old they jump to the next one. This is apparent in the American market because it is easy to see that Jane Fonda got pushed aside by the Tae-Bo guy, then he got pushed aside by home appliances, which then got pushed aside by diets that wouldn’t require exercise. Within these diet plans we first had the South Beach and tomorrow we might have the South Shore. Rooji’s observation is completely succinct in that these products are like fads and highly dependant on some sort of phantom following that might die down immediately and without notice.
Evaluate the disposal of the businesses – was the disposal a mistake?
“Dutch conglomerate and specialty foods company Royal Numico announced that it will sell Rexall Sundown, the largest supplier of vitamins and supplements to Wal-Mart stores. Numico blamed Rexall Sundown, which it acquired in 2000 for $1.8 billion, and GNC, the supplement retail operation it acquired in 1999, for the conglomerate’s $1.45 billion third-quarter loss.” (Slumping Supplement 2002) Although the analysis of the strategy presented that although there were risks the acquisition would be suceeful. This shows that even a environment analysis cannot show what the future might hold but it can be a good predictor. According to Rooji’s observations the dietary supplement posed all the challenges he predicted.
The acquisition did not accomplish any of the company’s goals and instead they ended up in a loss.According to the case study “During the presentation of the financial results for 2002 in March 2003, Numico announced that the sale of Rexall Sundown was well under way. Rexall Sundown was characterized as a low-growth/low-margin business. Given the new strategy which focused on high-growth-high-margin business, Rexall Sundown no longer fitter both the criteria. GNC was put on probation; it was a high-margin, but a low-growth business.” (Eppink 731) Along with Rexall Sundown, GNC also became stagnant. Either that or none of their current acquisitions were in line with their new strategy of high growth and high margin.
This was understandable in the case of Rexall Sundown because it posed many risky challenges to begin with. The dietary supplements were highly dependant on fads and stability was very hard. Surprisingly, “In July 2000 FTC charged Rexall Sundown with making false and unsubstantiated claims for its Cellasene product as a purported cellulite treatment. In March 2002 a Camden County jury returned a verdict in favor of New Jersey consumers in a class-action that alleged Rexall Sundown had marketed and labeled its Calcium ‘900’ and Calcium 1200 products in violation of the New Jersey Consumer Fraud Act.” (Slumping Supplement 2002) This unfortunately might have been one of the reasons Rexall Sundown was not doing well and Numico found out. Even if Numico was not aware of the infringement of the law it was best that they got rid of Rexall Sundown before they got into further debt: “The Dutch baby food maker Royal Numico sold Rexall Sundown, a vitamin supplements company in Boca Raton, Fla., for $250 million in cash yesterday. The buyer NBTY Inc., a manufacturer and marketer of nutritional supplements based in Bohemia, N.Y. Royal Numico, which owns the GNC vitamin stores, is heavily in debt after a series of poor investments and needs to raise 650 million euros ($746 million) by the end of 2004 to meet some of its obligations.” (Crouch 2003)
“On 17 October 2003 the sale of GNC was made public. It was stated that there was no strategic fit Numico. It was a retail brand, with little product overlap and synergies limited to research.” (Eppink 731) Reasearch and development was one of the main goals of the acquisition and that both the companies would benefit each other. The entry strategies into GNC were fool proof and there were barely any risk factors but for the most expensive merger in the nutritional foods sector to fail something must have been over looked. “Moreover, Numico’s management could now focus their time and financial resources on its high-growth/high-margin business of baby food and clinical nutrition. GNC was sold to Apollo Manaagement for US$750m in a deal completed in 5 December 2003.
The estimated impairment was 450 million Pounds. A press statement issued by GNC said that “Apollo…sees tremendous value in the power of the GNC brand.” (Eppink 731) The sale of GNC was somewhat surprising because earlier there were no risks associated with the strategy and the board of directors had said yes to the sale immediately and unanimously. Everything was pointing in the right direction and unlike Rexall Sundown no negative information was found pertaining to the risks of the strategy either. It is best to conclude that GNC brand was not a failure but just not in line with the new strategy of Numico where as Rexall Sundown could have easily been a complete failure.
The Royal Numico case study can be used as a process of learning because they company makes mistakes that it failed to predict. A more in depth analysis of the environment might have led them to better information and prevented them from buying the other companies in the first place. In both the acquisitions their top goal was to become the market leader by acquiring someone else’s goods. In my opinion, they become too one sighted and failed to understand that acquiring companies with huge sums of money will not lead to a higher market share. There has to be a strategy for every SBU and every department and every product line. It takes more than a give and take relationship to be successful in the business world. You just can’t buy your market share you have to go out and grab it.
Matta, L. Matthew. “Duo To Feed Market With Royal Numico Deal.” Bank Loan Report 14.30 (1999): 2. Business Source Complete. EBSCO.
Mirasol, Feliza. “Numico Acquires Rexall Sundown To Form Leading Nutrition Supplier.” Chemical Market Reporter 257.19 (2000): 23. Business Source Complete. EBSCO.
“Product glut may spell trouble for supplement hucksters. (Cover story).” NCRHI Newsletter 22.5 (1999): 1. Academic Search Complete. EBSCO.
Acquisition is the buying of one company by another company. This corporate action occurs in public and private sectors. As a strategy, acquisition is considered because it helps companies to grow rapidly without having to open another company. The acquisition process is difficult with because it has many considerations, and many expected outcomes, which involves a variety of structures used in taking control over the possessions of a company with different tax and regulatory deductions.
Usually, a bigger company acquires the ownership of a smaller company as part of its growth strategy. However, DePampilis (2008) argues that at times the smaller company might acquire control over management of the bigger company, which is usually called reverse take over.
An acquisition may be perceived as friendly or hostile depending on if it is taken in and communicated to by the other company’s board of directors and shareholders. In a friendly transaction, both companies cooperate in transactions. If an unfriendly transaction occurs, the smaller company might be unwilling to accept the offer, or its board has no earlier knowledge of the offer.
Google is an example of a company which acquires new companies to strengthen its market position. For example, when Google acquired YouTube and DoubleClick, it made use of their extensive search technology because it knows what is best for its target customers.
To determine whether to acquire a company, Google considers the following factors: the audience size, the rate of growth of the company been acquired, the company’s, potential in the market, the investors, the competitors, and interrelated technologies. Google’s acquisition of DoubleClick enabled it to have access to the DoubleClick’s advertising software, its customers, and network, hence becoming more competitive, and acquiring more resources because it was able to reach many customers.
Likewise, in 2005, Sun Microsystems, which develops software such as Java, Solaris, and SPARC, acquired StorageTek. The acquisition was essential to the company because it created a big storage of their data and software businesses. StorageTek gave Sun the industry leading product line in automation of tape because it was a customer focused company. Thus, Sun’s strength in storage increased sales and services.
Their expertise was to the advantage of Sun, and capabilities of both companies combined brought about the proper management of products and growth of Sun Microsystems. In essence, customers are served well and they feel more stable working with a bigger, more established company.
According to Harwood (2006), for the acquisition of a new business to take place, several steps should be considered. First, gaining access to the market worth of the target company – this involves its financial performance and its estimated future market worth, its products, the group structure and the business history as well; this is called business assessment.
The second step is proposal, which is given after the analysis of the target company. The third step is the exit plan, which comes in when the target company agrees that it may be in full sale or part sale. The target company then tries to get the highest selling price, and when the buying deal is made, the purchase agreement is written down. The final stage is integration, where the two companies are incorporated.
Additionally, Straub (2007) outlines that there are several factors to consider before the acquisition of a new company. First, the growth rate of the company: it is important to take time and know the type of business being purchased. For most of the times, existing business relationships can make a negotiation easier, just like the case of Google and Sun Microsystems.
In addition, buying an investment banker will increase the chances of success. The dealer of the company being sold should be a person who is able to give a clear legal and financial detail. The buyer should also understand how to structure the deal because few deals are done in cash and most buy outs require a mix of cash, seller financing, and earn out.
Cartwright and Schoenberg (2006) conform that the most important asset, which is the workforce, should be taken care of; for example, bonus arrangements and other benefits.
Business transaction plan should begin early; this involves the incorporation of products, operations, and technology. Processes which have been integrated should be taken care of because they will determine whether the cost savings of the transactions are realized. In company acquisition and merger, it is also good to consider the benefits that it will bring to customers.
This is what Google and Sun are doing to expand their market share. Furthermore, there are also some poor reasons for acquiring a company, such as revenge, where a big company buys another company which it was competing with, and which was not successful. Also, it is inappropriate to acquire a new company using excess cash. A company which is on sale should not be considered, or just to impress shareholders.
In conclusion, business acquisition is an excellent way for businesses to form one firm and work as one. With acquisition, products and marketing are improved; there is better market profitability, increased profits and sales, and acquiring valuable information about certain products.
Employees from both companies give different thoughts of making and improving business processes. If a company with stronger market existence buys out the weaker company, then a more competitive and cost competent company is generated. Customers feel secure when they are associated with big companies like Google and Sun Microsystems.
References
Cartwright, R. & Schoenberg, R. (2006). Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities. British Journal of Management, 17 (S1), S1-S5.
DePamphilis, D. (2008). Mergers, Acquisitions, and other Restructuring Activities. New York: Elsevier, Academic Press.
Harwood, I. A. (2006). Confidentiality Constraints within Mergers and Acquisitions, Achieving Insights through a ‘Bubble’ Metaphor. British Journal of Management, 17 (4), 137-359.
Straub, T. (2007). Reasons for Frequent Failure in Mergers and Acquisitions: A Comprehensive Analysis. Wiesbaden: Deutsche Universitats-Verlag.