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Reasons and Types of Merger and Acquisition

University: University of Chester

  • Unit No: 3
  • Level: Undergraduate/College
  • Pages 6 / Words 1500
  • Paper Type: Assignment
  • Course Code: MBAX9141
  • Downloads: 0

INTRODUCTION

Mergers, as well as acquisitions, have been a very important source of expanding business for ages, companies around the world have taken this route to gain profitability as well as to venture into another field of business. Through M&A Companies around the world will be able to do business in a more effective as well as efficient way. A merger is defined as the mix of at least two organizations and an altogether new organization is framed, shares are traded for those in a new organization (Dutordoir, Roosenboom and Vasconcelos, 2014). Typically a concurred exchange. On the other hand, An acquisition is a mix of two organizations where one organization loses its corporate presence and all advantages and liabilities are assumed to control by the procuring organization.

MAIN BODY

Reasons for Merger and Acquisition

There are various reasons for which an organisation may decide to amalgamate with another firm, this may include growth as well as development of business, up gradation on the front of research and development of company etc.

Increase in Capacity Quickly: An organisation can increase the level of its current capacity quickly by Merging or acquiring with other organisation. This will raise their overall capacity level and hence higher business growth can be seen in the longer run.

Economies of Scale: If a company decides to perform M&A, it will allow organisation to do business on a larger scale, and thus it can achieve economies of scale, this means that when goods and services are provided on a larger scale, the organisation is able to save on the front of cost and thus results in higher level of profitability.

Market Entry: Access to new geographic or item advertises e.g. passage to key worldwide markets or a 'foothold' in a developing business sector. When an organisation wants to enter into a new market, it usually decides to either perform a joint venture with other firm or will merge and acquire with other firms (Gupta, 2012).

Business Growth: The level of business growth can be achieved. The organisation can achieve market dominance through right kind of mergers and can have a larger overall market share within the business. It is thus quite important to have a proper strategy of M&A for achieving growth and development with a quicker pace.

Technological Up gradation: This is also yet another reason for making Mergers and acquisition by the organisations. Usually it does happen that a particular organisation does not carry sufficient technological capabilities, then it decides to acquire or merge with another company having those capabilities, so that business growth can take place and greater customer base can be created effectively (Brueller, Carmeli and Drori, 2014).

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Types of Merger and Acquisition

A company may decide to acquire or merge with different companies operating within the business environment of the organisation. These companies may be supplier, Buyers, competitors of the organisation. Based on this relationship, the types of Mergers and Acquisitions are defined. The various types of merger and acquisitions are defined as follows:

Based on Integration

Forward Integration: This means Purchase of retailers, consumers or the distributors of the organisation (Rottig, 2013).

Backward Integration: Under this, the company would purchase one of the supplier of the organisation. For Example, Toyota decides to purchase its one of the supplier in order to effectively help its production department.

Horizontal Communication: This is the most common way of acquiring or merging with another company. Under this an organisation would go on to purchase or merge with one of its competitors to gain added advantage as well as business growth over longer period of time (Gill, 2012).

Based on Stages

Under this the company would make creeping acquisition in the other company slowly after making an initial purchase within the business organisation. This type of acquisition usually takes place when the acquisition is quite big enough and an organisation does not have enough resources to carry out the M&A immediately. For Example, Foreign companies like craft foods invested in UK based Cadbury before and then finally made a purchase of the same (Baker and Niederman, 2014).

Why companies Prefers Merger and Acquisition

The credit crumple and financial emergency of 2008– 09 may have diminished the quantity of merger and obtaining bargains in the short run, however it has expanded the importance of M&A capacities going ahead. Ventures are merging and rebuilding with expanding speed now and then by decision, and at times by force of government. Organizations with accessible money are seeking after an expanding exhibit of obtaining openings introduced to them as the emergency unfolds markets or a 'foothold' in a developing business sector (Krishnakumar and Sethi, 2012). Most of the companies finds it suitable to conduct business by acquiring other companies and hence leading to rapid growth and development in the current business and managers of the businesses around the world finds it suitable to grow business through inorganic growth instead of organic growth. Organic basically means achieving business growth through selling of goods as well as services in an effective manner, it does not include growth through purchasing business of others and then the resources of the acquired company will be claimed as ow resources and hence a higher business growth can be seen through this and investors can be made satisfied through this by showing them a bigger picture.

The organizations that ace the capacities of fruitful M&A and assemble their groups in like manner are the most liable to prevail in the unverifiable, hyperactive M&A condition of the coming years. At the point when a M&A group is gifted and able, a specific force grabs hold. The frameworks and procedures, administration, and lines of business begin acting in arrangement. Physical areas close down as arranged; a few people are reassigned, others are advanced; business accomplices are picked; IT systems are connected or eliminated; impetus structures are consolidated; and societies are fit. At last, the two organizations wind up one. The procedure of the procurement is finished, and the new organization turns its consideration, indeed, to the prospects of developments (Goddard, Molyneux and Zhou, 2012).

There seem, by all accounts, to be three for the most part acknowledged classifications of merger thought processes. To begin with, mergers may be embraced to upgrade the monetary execution of the firm. Economic thought processes incorporate expanding professional fits, accomplishing economies of scale, hazard spreading, cost decreases, getting a 'deal' because of market valuation differentials, taking a guarded position, or reacting to showcase disappointments. Second, mergers may happen in light of the fact that chiefs see an individual advantage. These individual thought processes incorporate expanded esteem through expanded deals and firm development, or expanded compensation through expanded deals or productivity. Furthermore, the administrative test exhibited by coordinating another firm and administering the tasks of a bigger firm may likewise add to the individual thought processes of merger exercises. Third, key thought processes for example, cooperative energy, worldwide extension, seeking after market control, obtaining of new assets (counting managerial aptitudes and crude materials), enhancing the competitive condition by (1) procuring a contender or (2) making hindrances to section, or product offering extensions may propel merger exercises (Phan, 2014).

For example Kraft Foods decided to acquire Cadbury of UK for growing its business within the European market in an effective way.

Reasons for Failure of M&A

There are varied types of reasons that has lead to decline in the overall growth of M&A. It usually becomes difficult for a company acquiring other company to manage its business and understand its culture properly, therefore the scope of inefficiency being evolved in the company purchased is quite obvious, some other factors for failure of M&A can be reliance of companies on inorganic Growth, lack of proper and efficient management (Nolan, 2012). Thus it is important to take M&A as a strategic tool for increasing the overall reach of companies in different business regions. It is equally important to consider its effects on the health of the firm in the longer run and then only necessary decisions regarding the same shall be made.

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CONCLUSION

Thus from the above discussion it is quite clear that the overall growth as well as development of M&A has taken place in the recent past. This is due to growing needs as well as demand of consumers around the world, which is asking companies to develop and grow their business and this can happen only if companies will acquire other business or companies through following the policy of inorganic growth. This will allow them to enter into global markets and tap consumers from different regions and with different tastes as well as preferences. Organisations are taking businesses to growth path through effectively managing its overall resources and also loading up to more resources through various integration strategies.

REFERENCES

Books and Journals

Dutordoir, M., Roosenboom, P. and Vasconcelos, M., 2014. Synergy disclosures in mergers and acquisitions. International Review of Financial Analysis. 31. pp.88-100.

Gupta, P.K., 2012. MERGERS AND ACQUISITIONS (M&A): THE STRATEGIC CONCEPTS FOR THE NUPTIALS OF CORPORATE SECTOR. Innovative Journal of Business and Management. 1(04).

Brueller, N.N., Carmeli, A. and Drori, I., 2014. How do different types of mergers and acquisitions facilitate strategic agility?. California Management Review. 56(3). pp.39-57.

Gill, C., 2012. The role of leadership in successful international mergers and acquisitions: Why Renault‐Nissan succeeded and DaimlerChrysler‐Mitsubishi failed. Human Resource Management. 51(3). pp.433-456.

Krishnakumar, D. and Sethi, M., 2012. METHODOLOGIES USED TO DETERMINE MERGERS AND ACQUISITIONS'PERFORMANCE. Academy of Accounting and Financial Studies Journal. 16(3). p.75. 

Goddard, J., Molyneux, P. and Zhou, T., 2012. Bank mergers and acquisitions in emerging markets: evidence from Asia and Latin America. The European Journal of Finance.18(5). pp.419-438.

Phan, H.V., 2014. Inside debt and mergers and acquisitions. Journal of Financial and Quantitative Analysis. 49(5-6). pp.1365-1401.

Nolan, P., 2012. China and the global economy. In Charting China's Future (pp. 55-64). Routledge.

Baker, E.W. and Niederman, F., 2014. Integrating the IS functions after mergers and acquisitions: Analyzing business-IT alignment. The Journal of Strategic Information Systems. 23(2). pp.112-127.

Rottig, D., 2013. A marriage metaphor model for sociocultural integration in international mergers and acquisitions. Thunderbird international business review. 55(4). pp.439-451.

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