Enhanced strategic competitiveness and augmented competitive advantage has resulted in more firms opting for mergers and joint ventures. In recent times we have seen industries move towards consolidation as witnessed in acquisitions like Tata-Corus and Pfizer-Wyeth.
Mergers occur when two firms agree to integrate their operations on a stipulated basis to create a competitive advantage from their combined resources and capabilities. Acquisitions hold one firm in dominance as it merges the other firm's competencies more effectively as a part of its original portfolio.
Let us now look at what might be the chief motives behind acquisition. The motives differ significantly for the buyer and the seller.
One of the primary reasons for acquisition is to enhance market power. This motive was at play when Coca-Cola acquired Thumbs Up in India. Thumbs Up was (and still is) the largest selling carbonated soft drink in the country and the acquisition helped Coke to boost sales as well as diversify its product line while gaining bargaining power over suppliers and consumers. Noteworthy in this case is that, Thumbs Up continues to sell as a different brand from Coca-Cola, the acquirer brand.
Another motive behind such strategic alliances is to reach new markets. Wal-Mart, the world's largest retailer entered the indian market through a JV with Bharti for wholesale cash and carry format as India at that time did not allow 100% FDI in retail. Now, that the rules are set to be relaxed, it can use its experience of the Indian market to its advantage.
Enjoying the benefits of cost optimisation over economies of scale and scope is another reason companies like to go for mergers and acquisitions as it spreads their fixed costs of promotion and other overheads.
Pepsi acquired brand like Tropicana, Lay's etc. to extend its product portfolio to snacks and other beverages and thus in this case the motive was diversification.
Other advantages accruing to the acquirer could be of fiscal advantages, financial gains and top managerial characteristics or impulses.
Why do the seller's sell?Primarily because of the following reasons:
1. To increase the value of the owner's stcok
2. To increase growth rate
3. To acquire resources to stabilize operations
4. To benefit from tax legislation
5. To deal with top management succession problems
Acquisitions can be Horizontal (in the same industry eg. Arcelor-Mittal), Vertical (same industry but different stages of the value chain) or Related acquisitions (Merck-Medco).
The approach, which a company should take towards integration, should be understood by considering two (additional) criteria:
1. The need for strategic interdependence.
2. The need for organizational autonomy.
FOUR TYPES OF VALUE CREATION IN MERGERS AND ACQUISITIONS
Obviously, the goal and central task in any acquisition is to create the value that is enabled when the two organizations are combined.
There are four types of value creation:
1. Resource sharing. Value is created by combining the companies at the operating level.
2. Functional skills transfer. Value is created by moving certain people or sharing information, knowledge and know-how.
3. Transfer of general management skills. Value is created through improved insight, coordination or control.
4. Combination benefits. Value is created by leveraging cash resources, by borrowing capacity, by increased purchasing power or by greater market power.
ORGANIZATIONAL AUTONOMY
Managers must not lose sight of the fact that the strategic task of an acquisition is to create value. Furthermore they must not grant autonomy too quickly, although obviously people are important and should be treated fairly and with dignity.
THE PREFERRED MERGERS AND ACQUISITIONS MODEL
Depending on the score on the above two factors, the preferred Acquisition Integration Approaches are:
§ Absorption: Management should be courageous to ensure that this vision for the acquisition is carried out.
§ Preservation: Management focus is: to keep the source of the acquired benefits intact, “nurturing”.
§ Symbiosis: Management must ensure simultaneous boundary preservation and boundary permeability, gradual process.
§ Holding: No intention of integrating and value is created only by financial transfers, risk-sharing or general management capability.
Now let us look at the pros and cons of mergers:
PROS:
operate effectively. The following are few of the steps which can be taken to ensure that cultural issues do not become a roadblock to integration in acquisitions:
1. Make culture a major component of change component work stream
2. Identify who owns the corporate culture and have them report to the senior management
3. Ensure that the cultural work focuses on the measurable business results
4. Consider the strengths and weaknesses of both cultures
5. The decision-making process should be independent of cultural differences
6. People with culture change knowledge should be put on teams that define the organizational interfaces in the new model.
Its imperative to understand that efforts to address culture should be based on the recognition that culture is both powerful and implicit, that employees are unlikely to change their
cultural beliefs in response to exhortations to adopt new cultural values, and that culture can be rigorously linked to behaviors that affect business value.
Mergers occur when two firms agree to integrate their operations on a stipulated basis to create a competitive advantage from their combined resources and capabilities. Acquisitions hold one firm in dominance as it merges the other firm's competencies more effectively as a part of its original portfolio.
Let us now look at what might be the chief motives behind acquisition. The motives differ significantly for the buyer and the seller.
One of the primary reasons for acquisition is to enhance market power. This motive was at play when Coca-Cola acquired Thumbs Up in India. Thumbs Up was (and still is) the largest selling carbonated soft drink in the country and the acquisition helped Coke to boost sales as well as diversify its product line while gaining bargaining power over suppliers and consumers. Noteworthy in this case is that, Thumbs Up continues to sell as a different brand from Coca-Cola, the acquirer brand.
Another motive behind such strategic alliances is to reach new markets. Wal-Mart, the world's largest retailer entered the indian market through a JV with Bharti for wholesale cash and carry format as India at that time did not allow 100% FDI in retail. Now, that the rules are set to be relaxed, it can use its experience of the Indian market to its advantage.
Enjoying the benefits of cost optimisation over economies of scale and scope is another reason companies like to go for mergers and acquisitions as it spreads their fixed costs of promotion and other overheads.
Pepsi acquired brand like Tropicana, Lay's etc. to extend its product portfolio to snacks and other beverages and thus in this case the motive was diversification.
Other advantages accruing to the acquirer could be of fiscal advantages, financial gains and top managerial characteristics or impulses.
Why do the seller's sell?Primarily because of the following reasons:
1. To increase the value of the owner's stcok
2. To increase growth rate
3. To acquire resources to stabilize operations
4. To benefit from tax legislation
5. To deal with top management succession problems
Acquisitions can be Horizontal (in the same industry eg. Arcelor-Mittal), Vertical (same industry but different stages of the value chain) or Related acquisitions (Merck-Medco).
The approach, which a company should take towards integration, should be understood by considering two (additional) criteria:
1. The need for strategic interdependence.
2. The need for organizational autonomy.
FOUR TYPES OF VALUE CREATION IN MERGERS AND ACQUISITIONS
Obviously, the goal and central task in any acquisition is to create the value that is enabled when the two organizations are combined.
There are four types of value creation:
1. Resource sharing. Value is created by combining the companies at the operating level.
2. Functional skills transfer. Value is created by moving certain people or sharing information, knowledge and know-how.
3. Transfer of general management skills. Value is created through improved insight, coordination or control.
4. Combination benefits. Value is created by leveraging cash resources, by borrowing capacity, by increased purchasing power or by greater market power.
ORGANIZATIONAL AUTONOMY
Managers must not lose sight of the fact that the strategic task of an acquisition is to create value. Furthermore they must not grant autonomy too quickly, although obviously people are important and should be treated fairly and with dignity.
THE PREFERRED MERGERS AND ACQUISITIONS MODEL
Depending on the score on the above two factors, the preferred Acquisition Integration Approaches are:
§ Absorption: Management should be courageous to ensure that this vision for the acquisition is carried out.
§ Preservation: Management focus is: to keep the source of the acquired benefits intact, “nurturing”.
§ Symbiosis: Management must ensure simultaneous boundary preservation and boundary permeability, gradual process.
§ Holding: No intention of integrating and value is created only by financial transfers, risk-sharing or general management capability.
PROS:
•To ensure management responsibility
•They create easy & quick growth opportunity
•They create mobility of resources
•Offer a chance to a rick unit to survive
•Avoid gestation period & hurdles in setting up new projects
CONS:
•Professionalism gets replaces by money powers
•No new assets are created
•The interests of minority shareholders are not protected
•They create avoidable stress & strains to workers & managers
Culture has emerged as one of the dominant barriers to effective integrations. In one study, culture was found to be the cause of 30 percent of failed integrations. Companies with different cultures find it difficult, if not often impossible, to make decisions quickly and correctly or tooperate effectively. The following are few of the steps which can be taken to ensure that cultural issues do not become a roadblock to integration in acquisitions:
1. Make culture a major component of change component work stream
2. Identify who owns the corporate culture and have them report to the senior management
3. Ensure that the cultural work focuses on the measurable business results
4. Consider the strengths and weaknesses of both cultures
5. The decision-making process should be independent of cultural differences
6. People with culture change knowledge should be put on teams that define the organizational interfaces in the new model.
Its imperative to understand that efforts to address culture should be based on the recognition that culture is both powerful and implicit, that employees are unlikely to change their
cultural beliefs in response to exhortations to adopt new cultural values, and that culture can be rigorously linked to behaviors that affect business value.
Well, that's all for the day. Until next time.
Cheers!!!
Signing off
Shauvik.
M&A appears for Mergers and Acquisitions and is the place of business technique, fund and control of purchasing, promoting and splitting organizations. There are some essential differences between mergers and acquisitions. Put basically, an purchase is when one organization buys another while a merging is where two or more organizations merge.
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