Corporate Mergers Essay

Introduction

A merger is a combination of two corporations in which only one corporation survives and the merged corporation goes out of existence. There are a large amount of M&A transactions during the last decades. In a merger, the acquiring company assumes the assets and liabilities of the merged company.

The process that a company considers to merge or acquire other corporations is complex. Companies attempt to reduce the cost, increase the ability to be against competition through M&As which provide synergy, diversification and external growth.

Mergers are often categorized as horizontal, vertical, or conglomerate. A horizontal merger occurs when two competitors combine (Gaughan, 2006). For example, in 1998, two petroleum companies, Exxon and Mobil, combined in a $78.9 billion merger. Mergers between large firms in the same industry have long been a public concern. In the United State, the Clayton Antitrust Act (1914) concerns the effects of mergers. In the Section 7 of this Act, "substantially decreases...competition or trend... to create a monopoly. Federal officials would apply rules in the Department of Justice's Merger Guidelines (1984) to evaluate the proposed mergers. They pay close attention to the market concentration of the proposed firms. Merger analysts must compare the market concentration to the proposed firms before and after the merger. Horizontal mergers may monopolise a certain market. Therefore, the government must estimate the market concentration of the proposed merger.

Vertical mergers are combinations of companies that have a buyer-seller relationship (Gaughan, 2006). For example, in 1993, Merck, the world's largest drug company, acquired Medco Containment Services, Inc., the largest marketer of discount prescription medicines, for $6 billion. The transaction enabled Merck to go from being the largest pharmaceutical company to also being the largest integrated producer and distributor of pharmaceuticals. It is obvious that vertical merged firms can lower the input prices through vertical merger and can often lead to a price reduction to final good.

A conglomerate merger occurs when the companies are not competitors and do not have a buyer-seller relationship (Gaughan, 2006). One example would be the tobacco company-----Philip Morris, which acquired General Foods in 1985 for $5.6 billion, Kraft in 1988 for $13.44 billion, and Nabisco in 2000 for $18.9 billion. Altria, whose prior name is Philip Morris, is becoming a successful food company replacing the original tobacco industry. Although the portion of the tobacco industry remains in its running scope, the more important one is the food business of the conglomerate merger. Another major example of a conglomerate is General Electric (GE). This company has done what many other have not been able to do successfully---manage a diverse portfolio of companies in a way that creates shareholders wealth. "The reach of GE's businesses is reflected in our expansive line of products and services that span many industries and customers worldwide. GE businesses all share one important trait: each harnesses the power of imagination to make life better for our customers and consumers all around the world. (http://www.ge.com/products_services/index.html)

Although the advantages of mergers and acquisitions are obvious, most of the cases are not successful in the end. It is common that mergers and acquisitions often occur for sound economic reasons. However, the non-economic reasons also can be the main motives for companies seeking to merge.

This essay attempts to demonstrate although most economic reasons are valid in a short time for mergers, but they will fail in the long run. Some non-economic reasons can be economically beneficial for companies.

Growth and synergy being the sound economic reasons for mergers and acquisitions for companies will be demonstrated in the front of first section. This essay will carry out research to demonstrate that growth and synergy are sound economic reasons for mergers and acquisition for companies. Following the brief introduction of economic reasons, we discuss the known unsuccessful case Daimler-Chrysler, which will show the evidence that most economic reasons are only valid in a short time for mergers. Furthermore, in this case, our concern is that the cultural conflict is the main reason for the failure of merger in the long run, emphasising that sound economic reasons are not always successful. The non-economic reasons for mergers and acquisitions are typically found where the focus is on the technical aspects of integration. Then the aim is to analyse the integration of a bank merger case in Australia. This case here proves that non-economic reasons can be economically beneficial for companies.

Economic Reasons for M&As

Sound economic reason: Growth

There are various possible motives that firms might engage in mergers and acquisitions, growth being one of the most common motives. Companies always confront the dilemma between internal growth and that achieved through mergers and acquisition. It seems that internal growth is a slow process; however, compared with external expansion, it is more stable and certain. Although growth through mergers and acquisitions may be more uncertain, it is really a rapid process. If a company grows slowly through the internal growth, the competitors in the same industry will respond quickly and take the market share. For example, the company invents a new product or process in a short time, this time discrepancies may acquire advantages for the company. But this does not prevent the competitors developing the same product or process. Furthermore, a company may expand its business through different categories, which means conglomerate merger. This occurs when the companies are not competitors and do not have a buyer-seller relationship (Gaughan, 2006). When a company wants to expand to other places or outside one's country through mergers and acquisitions for accelerating growth, some important factors should be taken into account. Perhaps the company is a national company but seeks to extent new markets in other countries, such as a British firm's extension into China. The company desiring to be successful should consider the general situations of the new market, e.g. new staff, government policies, political regulations, language and cultural differences. Therefore, internal growth may be slow and difficult. Mergers and acquisition would be rapid and low-risk options.

Case study: Cultural conflict on Daimler-Chrysler

However, they are not successful in the long time. Some companies merge for really sound economic reasons at the initial purposes. Companies expect to reduce the costs, increase the stock prices for stockholders, take the advantages of synergy, economies of scale and economies of scope and double up the revenues through mergers and acquisitions, which seems to be good expectation at first. Nonetheless, widespread merger failure is at odds with the public and media perception that mergers are grand things that are almost sure to create enormous business synergies that are good for employees, stockholders and consumers (Weber & Camerer, 2003). Cultural conflicts will produce the negative effect in mergers. The example of Daimler-Chrysler will give us a clear perception of the merger failure due to cultural differences. The public hold the perception that there would be a successful corporation between Daimler and Chrysler. At the same time, each company expected to benefit from each other's capability and strength. Stockholders were optimistic about the surge of their stock price. However, the performance was totally different. With regard to the Chrysler's division, the stock price fell a half after the merger. There was a series of layoffs at Chrysler following the merger. The Chrysler division suffered a deficit after merger shortly, and continued to keep losing money for many years (CNN Money, February 29, 2001). Cultural conflict was mainly responsible for the merger failure. Different methods of operation between German and American caused a serious problem. There was formal, structured management at Daimler-Benz, but American preferred relaxed, freewheeling working condition. Chrysler followed its staffs' inclinations, which was the typical American style. What is more, the different divaricating on essential affairs such as pay scale and travel expense emerged after the merger. As a result, the German took the leading position. Along with the dissatisfaction, key engineers and executives left the company at Chrysler's division. The performance was unacceptable at Chrysler division. Consequently, the opposite side in the merger was dissatisfied with Chrysler. Therefore, Daimler attempted to take over the whole organisation and impose the German culture to its partner.

Sound economic reason: Synergy

It is certainly true that cultural conflict would be responsible for the failure in some mergers and acquisition cases. Therefore, it is clear that sound economic reasons are still the main contributors for mergers and acquisitions. While mergers and acquisitions in general have been demonstrated to create economic value (Jensen and Ruback, 1983), very few studies have sought to identify the value related to specific acquisition strategies (the exceptions being Singh 1984; Lubatkin, 1983, 1984). The term 'synergy' refers to the type of reactions that occur when two substances or factors combine to produce a greater effect together than that which the sum of the two operating independently could account for(Gaughan, 2006). Mergers being planned and executed is to achieve synergies. For example, synergy refers to the phenomenon of 1+1=3.The type of synergies can be classified based on types of mergers. The links between merging firms are following;

  • Horizontal mergers = Collusive synergies
  • Related or vertical mergers = Operational synergies
  • Unrelated or conglomerate mergers = Financial synergies

Financial synergy refers to the investment portfolio within unrelated business. A horizontal merger, by definition, is a related acquisition and may involve utilization of economies of scale and economies of scope both in production and distribution (Chatterjee, 1986). Operational synergy may lower the cost of existing business units. The companies would provide unique product and services.

Therefore, there are various possible motives that firms might engage in mergers and acquisitions. Growth and synergy are two of the most common motives. Although some other factors like cultural conflict will affect the final results which may not be successful in the long run of M&As, companies still believe that economic reasons are sound for mergers.

Non-economic reasons for M&As

Information technology

Public concern seems to hold the position that sound economic reasons are the main motives in M&As. But companies also merge for other non-economic reasons. M&As focus on the financial aspects of the merger and acquisition process instead of subsequent process of integration. The essay aims to show the information technology (IT) can be critical to merger success. Strategic context of information technology where IT in mergers is discussed, it is typically to be found in industry and professional journals, where it focuses on technical aspects of integration and usually treats IT in isolation from its organisation context (Violano, 1990; Rubin, 1992; Dayi, 1994). Integration problem in mergers are usually addressed as technical information systems incompatibilities (Rosenberg, 1987; Johnson, 1989; Kubilus, 1991).

Case study: technological reasons on CBA & SBV

In January, 1991, the Commonwealth Bank of Australia (CBA) which was one of Australia's largest national banks, with 1400 branches across Australia, 40 000 staff, and assets of $A67 billion merged an Australian regional bank, the State Bank of Victoria (SBV) which was the largest in the State of Victoria, with 527 branches in that state, 2 million customer records, 12000 staff (including 1000 IT systems staff), and assets of $A24 billion, and was owned by the Victorian State Government. This merger cost the CBA for $A1.6 billion (Johnston & Yetton , 1996). At the beginning of the merger, the State Bank of Victoria was a successful retail bank. However, the bank had to its assets due to the significant financial problems. From its due diligence exercise on the regional bank during 1990, the national bank had identified integrating the computer systems and IT operations of the two banks as a major source of potential value from the merger. The IT functions between the regional and national bank were totally different. There were four distinctive differences between these two banks. Firstly, it refers to the IT strategies, the regional bank paid more attention to the business affairs, rather than the information technology. On the other side, the national bank, whose IT department and business were separated, was more technology-focussed. Secondly, they used incompatible and different technology platforms. The regional one used ICL-based systems while the national bank operated the IBM platform. Moreover, they took quite different testing methodologies systems. Furthermore, the opposite existed in the project management structures and styles of these two banks. The decentralised, team-based management in the regional IT organisation contrasted with the more hierarchical and formal IT management processes in the national bank. Empowering the IT project managers, however, had encouraged the proliferation of systems and costs in the regional bank, and was in such contrast with the national bank's more formalised methods and hierarchical structures that during the merger, according to one national bank manager, "our guys just threw their hands up in horror - 'that is not how you build systems!" (Johnston & Yetton , 1996). Fourthly and finally, the IT staff practices were contrasting with the two banks. The SBV often employed staff through external recruitment of young, educated IT professionals, and recruited many female IT managers. But the CBA took the internal recruitment and training. There were few women in the IT management department. For the rewarding system, the former bank utilised a performance-rewarding system while the latter one had a policy based on bureaucratic, position-based reward system.

At most circumstances, companies who merge for non-economic motives are successful. Comparing to those sound economic reasons, the technical reasons which are considered non-economic reasons also be valid for mergers and acquisition. Companies also consider merging by non-economic reasons can be economically beneficial for the company.

Conclusions

In conclusion, this essay has attempted to demonstrate that different companies put forward different reasons as motives for mergers, some of which are for sound economic reasons, whereas others are non-economic reasons. Growth and synergy are two of the most common motives for mergers and acquisitions. Companies achieve their growth by internal expansion and external expansion through mergers and acquisitions. Synergy, indeed, is considered as a sound reason for M&As, which taking advantages of economies of scale and economies of scope. To some extent, most economic reasons are valid in a short time for mergers, but they will fail in the long run. The factors such as cultural conflict will affect the results in a long period. Technological reason can attribute to the main motive for companies. We mention that two banks ---CBA and SBV in Australia took the information technology into account as their motive for mergers and acquisitions. Some non-economic reasons can be economically beneficial for companies. In recent years, the phenomenon of M&As for companies has consider both the sound economic reasons and non-economic reasons. Mergers and acquisitions continue to play a significant role in the business, whether they will be successful in the long run or in the short time or not to merge through both motives is an issue that is open to question.

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