Mergers And Acquisitions Current Industry Scenario Management Essay

The previous chapter had given us an insight of the research that would be conducted providing an introduction to it. A brief discussion was done by the researcher regarding the research and the possible outcomes of the research.

In this chapter we would be discussing the relevant literature that would be used by the researcher to conduct this study. It would also give us few insights about the ‘real’ world scenarios with regard to Mergers and Acquisitions. The key factors that would give success in case of a Merger/Acquisition are discussed. Finally, this chapter concludes with a summary of the key points made throughout the chapter.

To reiterate the research title is; What are the repercussions of mergers and acquisitions: do they offer competitive advantage; is the advantage sustainable? A review on GE from 2005 to 2010.

The Aim of this research is to critically evaluate the consequences of mergers and acquisitions on the extent to which it can prove to be beneficial for an organization and how well can an organization get accustomed to the competitive advantages from mergers and acquisitions? based on a review of General Electronics from 2005-2010. In meeting this aim, the following Objectives were set:

To critically observe the methods and procedures followed by organizations for mergers or acquisition to happen

To critically examine if the motivating methods employed by General Electric Company help to yield more output in a merger and acquisition, 2005 to 2010

To assess the scope, these mergers and acquisitions contributed towards increasing both the top line and bottom line growth in General Electric Company, 2005 to 2010

To critically observe the methods and strategies that General Electric Company followed to sustain their growth and development obtained from the merger or acquisition, 2005 to 2010

To identify the areas of integration in an organization that most need improvement and to resolve the problems

Mergers & Acquisitions – Current Industry Scenario:

The current industry scenario as far as Mergers & Acquisitions (M&A) are concerned is more of an act of showing power by the company pushing for the merger or takeover. No one is happy as far as a merger or an acquisition is concerned other than the company which is taking over. A M&A normally leads to various staff issues, the culture of an organization goes through a complete change and this change becomes hard to be accepted by the existing staff members of the company which is being taken over. We have seen many scenarios wherein the staffs of the company being taken over have had to either undergo a huge change or leave the organization itself. But, the scenario is always not the same; there have been instances wherein the company taking over have come forward to help the existing staff members in the old organization to blend in the new system which they are not used to. Many companies have made it to the top of their respective industry because of such M&A’s.

In the instance of the most recent takeover of Cadbury by Kraft Foods, both the companies have been known for their bitter rivalry in the industry. But at the end of all this rivalry the board of Cadbury’s agreed to bow down for 11.5 billion pounds in January 2011. The Chairman of Cadbury Mr.Roger Carr in an interview with BBC was quoted to say that the reason for which Cadbury agreed for the takeover was more in the financial interest of the company. This clearly shows that any kind of merger would just be done on the basis of the financial ability of the company to handle the pressure. Cadbury a company known for its best HR practices had to give away its culture and its practices to a company like Kraft foods which the moment they took over Cadburys, just started replacing the existing staffs with their own staff. This is the kind of attitude that saw many lose their jobs. There were many who were made to leave their jobs by showing the culture of an American company to the British workers. Cadbury was known to take care of its workers and when the takeover was completed it was just cleaned over by Kraft Foods just in the way they wanted.

This is not only for Cadbury, this is normally what happens in any takeover and Kraft-Cadbury is just an example of what has been happening around. But, there have been few takeovers which might also result in the growth of the bond. The example for this can be the General Electric Company (GE) takeover of Lineage Power Holdings, Inc., from the Gores Group, LLC. This takeover which happened in March 2011 resulted in the growth of Lineage Power Holdings Inc., in the field of telecommunications and data communication. Though the company was taken over by GE the company still stuck to its culture and none of its staff have been asked to leave by GE. This showed GE’s attitude towards its employees even if it meant that it was a company that they had taken over. This attitude of GE shows how a company should handle such acquisitions in a smooth manner without affecting the employees.

Though the current scenario gives us a different picture about Mergers & Acquisitions it is very important that companies do not take decisions based on the current scenario alone. That is where it becomes important for an organization to do ample research before proceeding for an Acquisition or a Merger. There are number of theories that suggest different kinds of approaches to be taken with regard to a M&A. The reviews of the literature on these theories are discussed by the researcher further in this chapter.

Mergers & Acquisitions – Classification:

The classifications based on the transactions can be done as Horizontal, Vertical or Conglomerate (Gaughan, 2002, Chunlai Chen and Findlay, 2003). As stated by Chunlai Chen and Findlay (2003), horizontal M&A is where the target and the acquiring company are in the same industry. The example for such a merger was discussed earlier when the researcher spoke about Kraft Foods takeover of Cadbury. This is largely due to the fact that there has been substantial change in the technology and liberalization of industries. M&A are said to be classified as vertical when there is a combination of firms which were already in a client & supplier or a buyer & seller relationship. The organizations that are involved in such transactions normally look at downsizing the costs in the value chain and eventually benefit the economics of scope (Chunlai Chen and Findlay, 2003). As stated by Gaughan (2002), a transaction that involves two companies which operate completely unrelated business is called Conglomerate.

In addition to the above M&A can also be classified as either ‘ Friendly’ or ‘Hostile’ (Chunlai Chen and Findlay, 2003). A transaction is considered as ‘Friendly’ if the target company’s board agrees to the takeover amount and the M&A is carried out. If the takeover happens with the target company’s board just needing to surrender to the acquiring company just for the money, it is considered as ‘Hostile’.

Chunlai Chen and Findlay (2003) also stated that the M&A could be Domestic or Cross-Border for the companies that are involved. This is normally done in order to create a presence or to look at having better opportunities for success in the Industry.

The classification of M&A could then be summarized in the table below:

Classification of merger & acquisition transactions

M&A classification in terms of

Value chain

Relationship

Economic area

Horizontal M&A

Vertical M&A

Conglomerate M&A

Friendly M&A

Hostile M&A

Domestic M&A

Motives and the Theories behind Mergers & Acquisitions:

Exploring the motives of firms engaging in M&A transactions has been placed with a significant amount of efforts by different authors. Earlier Trautwein (1990) and more recently Cox (2006) provided us with a more brief description of the motives by underlaying different theories (Please refer to Table 2.2: M&A Motives). Trautwein(1990) noted that M&A makers were more interested in the valuation (the deal yielding a higher Net Present Value) and synergy to justify the merger or acquisition. As expected it is quite clear that managers do not refer monopoly power in any of the benefits that the acquiring organization might be deriving out of the deal. Trautwein (1990) also states that the process and the raider theories have very little evidence on the motives implied by them both in the form of research or in practice. The disturbance theory is also discussed by him as being considered at the macro-economic level than the micro-economic level which is more related to the present research and hence the researcher has not considered the same. Interestingly, Gaughan (2002) gives a more realistic way of viewing the M&A motives with numerous empirical case studies which has reference to the theories with more details. There are four main motives for a firm to execute M&A according to him, they are:

(1) Quick growth comes through M&A;

(2) Economics of scope or scale may be gained through M&A;

(3) Having a larger firm due to a M&A means more access to capital market, which would in the future lead to a lesser cost of capital, i.e., benefits of more financial options; and

(4) A firm with superior management skill might also look at M&A with an anticipation of higher gains through the target organization’s business.

One the whole, the researcher quite clearly shows how all the three authors noted above have concurred on the fact that any M&A is driven by not one but many complex motives. And all these are not at all similar in any form and would always vary from deal to deal which can never be justified with a single theory/approach.

Merger & acquisition motives (adapted from Trautwein, 1990 and Cox, 2006)

Motives

Theory

Description

Rational Choice – M&A

M&A – Benefitting Acquirer’s Shareholders

Gaining

Based on synergy

Efficiency

Theory

The three major synergies – Financial, Managerial and Operational are achieved when M&A is executed.

Transfer of Wealth from customers

Monopoly theory

Market power is seized by planning and executing M&A. Horizontal & Conglomerate M&A types wherein the acquiring firm takes control of the industry on the whole.

Transfer of Wealth from

target’s

shareholders

Raider theory

A person who oversees and initiates wealth transfers from the stockholders of the companies he bids for exchange of excessive compensation after a successful takeover is called a Raider.

Gaining based on private

information

Valuation Theory/ Investment Theory

This kind of M&A is normally planned and executed by managers who have in-depth knowledge about the market of the target company.

M&A – Benefitting Managers

Empire- building theory/

Agency theory

Instead of increasing the shareholder’s value, M&A is planned and executed to maximize the Manager’s own utility.

Process Outcome – M&A

Process theory

M&A’s are executed as an outcome of another process as per this theory. These processes can be internal or external to the organization.

Macro-Economic Phenomenon – M&A

Disturbance theory

The M&A which is triggered by virtue of an economic disturbance forms the Disturbance theory. These are normally those M&A’s which are not that successful when it comes to long term as they are a result of an economic imbalance.

The successful Acquisition-Integration strategy of General Electric Company – A Preview:

The case study that has been taken for this research is that of General Electric Company, a name which has been very successful in Mergers & Acquisitions mostly due to its strategy techniques. The most successful strategy as far as GE is concerned is the Wheel of Fortune: The Pathfinder model of GE capital. The whole cycle of the integration of both companies as a single entity involves a lot of involvement from both the sides.

The most discussed acquisition-integration process is that of the GE Capital Service’s Wheel of Fortune model coded as the Pathfinder Model. This model is now well established and has been successfully implemented by GE in all its acquisitions.

This model consists of four main stages called “Action Stages” viz. Pre-Acquisition, Foundation Building, Rapid Integration and Assimilation. It starts from when the deal is initiated to the stage where the integration is completed. The four stages are further divided into two or three more processes within each stage. The Pre-Acquisition stage has processes like Due Diligence, Negotiation and Announcement, Closing and Signing off of Deal. The Foundation Building stage consists of the launch of the integration, the acquisition -integration workout and the strategy formulation. The Rapid Integration consists of two processes – Implementation of strategy and Course Assessment and Adjustment. The last and final stage is Assimilation wherein you have the long-term evaluation and Adjustment and then the Capitalization of the success of the integration of both organizations. Also in each action stage several best practises which are more specific and practical to help the managers to support the integration process.

WOF-GE.jpg

The Wheel of Fortune: The Pathfinder Model

This model clearly shows that the acquisition integration is in itself an art which can be also a science when it comes to principles followed by this model. A particular sequence of actions which are leveraged according to the requirement of the acquisition-integration process is clearly defined in the Pathfinder model, most of which are more unique in nature. The model is shown with such representation that it does not eliminate the need for managers to improvise for the integration process but it however prevents this improvisation to become a centre point in the integration process.

This is the model that has been successfully implemented by GE time and again and has always paid them rich dividends when it comes to both organization and staff integration, which is very important for the integrated organization to thrive in the current market situation.

Conclusion:

In the above chapter the researcher has given the insights on the current scenario with regard to the Mergers & Acquisitions. The researcher also ventures into the different theories with regard to Mergers and Acquisitions and explains with the help of necessary literature the concepts surrounding these theories. Also the researcher identifies the various scenarios in which these theories are to be used in a merger or acquisition. The researcher further gives information about the reason why GE has been chosen for this research as a case study by emphasising the fact that most of the acquisitions that have been executed by GE have been successful. The Pathfinder model being followed by GE is explained by the researcher, giving a summary of the acquisition-integration process which has helped GE in smoothening of all acquisitions handled by GE. On the whole this chapter deals with various literatures that detailing the M&A processes and gives the researcher a strong idea about the Research Methodology to be followed for conducting this research successfully.

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