Cross Border Mergers & Acquisitions
SEMINAR REPORT CROSS BORDER MERGERS & ACQUISITIONS INTRODUCTON Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can aid, finance, or help an enterprise grow rapidly in its sector or location of origin or a new field or new location without creating a subsidiary, other child entity or using a joint venture.
The distinction between a “merger” and an “acquisition” has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender for the stock is generally termed as the acquisition of companies.
Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. [1] The acquisition process is very complex, with many dimensions influencing its outcome. Increase in acquisitions in our global business environment has pushed us to evaluate the key stake holders of acquisition very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage.
Retention is only possible when resources are exchanged and managed without affecting their independence. MERGERS & ACQUISITIONS An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into “private” and “public” acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not isted on public stock markets. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. Whether a purchase is perceived as being a “friendly” one or a “hostile” depends significantly on how the proposed acquisition is communicated to and perceived by the target company’s board of directors, employees and shareholders. It is normal for M;A deal communications to take place in a so-called ‘confidentiality bubble’ wherein the flow of information is restricted pursuant to confidentiality agreements. 3] In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target’s board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become “friendly”, as the acquiror secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation. “Acquisition” usually refers to a purchase of a smaller firm by a larger one.
Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets. Motives behind M&A
The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance: •Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. •Economy of scope: This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. •Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker’s customers, while the broker can sign up the bank’s customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products. •Synergy: For example, managerial economies such as the increased opportunity of managerial specialization.
Another example are purchasing economies due to increased order size and associated bulk-buying discounts. •Taxation: A profitable company can buy a loss maker to use the target’s loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to “shop” for loss making companies, limiting the tax motive of an acquiring company. Tax minimization strategies include purchasing assets of a non-performing company and reducing current tax liability under the Tanner-White PLLC Troubled Asset Recovery Plan. Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below). •Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. Vertical integration: Vertical integration occurs when an upstream and downstream firm merges (or one acquires the other). There are several reasons for this to occur. One reason is to internalize an externality problem. A common example is of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power, each firm reduces output from the competitive level to the monopoly level, creating two deadweight losses. By merging the vertically integrated firm can collect one deadweight loss by setting the downstream firm’s output to the competitive level.
This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable. Cross-border M&A In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large M&A deals cause the domestic currency of the target corporation to appreciate by 1% relative to the acquirers. The rise of globalization has exponentially increased the necessity for MAIC Trust accounts and securities clearing services for Like-Kind Exchanges for cross-border M&A.
In 1997 alone, there were over 2333 cross-border transactions, worth a total of approximately $298 billion. Due to the complicated nature of cross-border M&A, the vast majority of cross-border actions have unsuccessful anies seek to expand their global footprint and become more agile at creating high-performing businesses and cultures across national boundaries. [17] Even mergers of companies with headquarters in the same country are very much of this type and require MAIC custodial services (cross-border Mergers).
After all, when Boeing acquires McDonnell Douglas, the two American companies must integrate operations in dozens of countries around the world. This is just as true for other supposedly “single country” mergers, such as the $29 billion dollar merger of Swiss drug makers Sandoz and Ciba-Geigy . WHY FIRMS GO CROSS BORDER Jack Behrman (1972), distinguished four major types of foreign investors based on the underlying motives, which later adapted and extended by Dunning4. They are 1) Resource seekers, 2) Market seekers, 3) Efficiency seekers and 4) Strategic assets or Capability seekers.
