Monday 25 April 2011

MERGER & ACQUISITIONS- FINANCIAL ANALYSIS

Objectives:
To identify and evaluate the benefits of mergers and acquisitions;
To evaluate whether mergers/acquisitions provide an increase in synergistic value and/or other benefits for the new merger/acquired company.
To identify and evaluate the key post acquisition factors which provide the basis for a successful merger/acquisition.
Summary:
Benefits of M&A:
The merged companies tend to have more resources at their disposal than the individual one. This way the companies avail economies of large scale by increased scale of operations. Due to intensive utilization of production facilities, distribution network, etc., these economies will occur (Jain et al, 2004:129). In horizontal mergers where range of utilization of intensive resources is higher, these economies will be available. The economies will occur up to a point where average cost is minimum which is called optimum point and will be significant in case of large companies (Kristen, 2004:43).
According to Berk and DeMarzo (2007:877) it is a large company which will enjoy economies of scale, savings from large scale production of goods and economies of scope- achieve savings by combining the marketing and distribution of different types of related products.
With the merger of the companies, a large number of operating economies are at the command. These economies result in horizontal as well as vertical mergers (Rock et al, :65). The operating inefficiencies of small concerns will be controlled by the superior management, emerging from the merger.
Synergy refers to the greater combined value of the merged firms then the sum of the values of the individual units. It is something like two plus two more than four (Arnold, 2005:1044). It results from benefits other than those related to economies of scale. Operating economies are one of the various synergy benefits of merger and acquisitions. However, synergy doesn’t always occur in M&A (Coyle, :47).                     
M&As help a company to grow rapidly as it is not always possible for a company to grow significantly by internal expansion (Verma, 2007:186). The growth through M&A is also far cheaper. Acquisitions of a going concern prevent the companies from risks and new product lines taking. The growth in turn leads to an increase in market share.
Two or more companies can diversify their activities through M&A provided that the firms do not operate in the same markets or in the same industry (Frensch, :47). Since different companies are already dealing in their respective lines there will be less risk in diversification. When a company tries to enter new lines of activities then it may face a number of problems in production, marketing, etc. When more concerns are occurring in different lines, they must have crossed many hurdles (Jain et al, 2004:134).
According to Seth (1990:431) “In unrelated acquisitions, where such efficiencies (internal synergy effects) are not expected to be present, value creation occurs nevertheless, and is associated with the coinsurance effect.”
When a loss-making company merges with a company making huge profits, it is able to benefit from the tax shields. A company making losses will not be able to set off losses against future profits or vice versa (Pandey, 1978:34).
Merged companies are capable of planning their resources very well in order to become financially sound (Sharma, 2007:18). Merger leads to an increase in the values of the merged companies (Weston & Weaver :134). It also ends the competition between the companies involved so that they don’t spend much on advertising, etc now (Berk and DeMarzo, 2007:878).
Evaluation if M&A Provide an Increase in the Synergistic Value or other Benefits for the Acquired Company:
Mergers are due to a company’s urge to expand the business. A financially sound company may takeover smaller companies in order to grow its business. But because of the lack of capital smaller companies are unable to take over the large companies. For the purpose of huge investments, smaller companies want to merge with financially sound companies. But M&A process itself is controlled by stock market. Whenever the stock market booms, the mergers become more pronounced. It is because the takeover becomes relatively cheap as the shares increase in value. Conversely if the value of the shares tends to decrease, the company becomes prone to be acquired.
Mergers can fail when the merged companies cannot agree on existing or new terms. Mergers can also run into regulatory problems. Governments may be concerned that the merger might create a monopoly and can either block it or require the merged companies to sell some of the firms which are part of their business.
Mergers can sometimes not deliver the strategic objectives set, such as cost savings failing to materialise.
There have been varied studies that suggest that whatever the instant benefit to shareholders, mergers rarely give much added value to the economy as a whole.
According to  Schniederjans & Fowler (1996)  The desire for synergy in mergers and acquisition has been widely acknowledge in the management and its presence has become a requisite in most acquisition analysis, synergistic effect enhance the joint profitability of the newly structured organization, and at the same time it reduces the risk which each firm would face as an individual entity. In general the main objective of combining two firms is to produce a relationship where 1+1>2.
Once a company has been merged or acquisitioned, the value of the firm depends on the cash flows generated from the business operations and the firm’s cost of capital. Moreover depending on the success of the firm’s strategies and decisions, the value of the firm will either increase or shrink (value creator or value destroyers).
Post-Acquisition Factors for a Successful M&A:
For a successful M&A, the post-acquisition factors are of great concern. The post-acquisition is the most important part of the takeovers. According to Child et al :
“...much of the disappointment with acquisition performance stems from post-acquisition factors.”
The key for the success of the takeovers is the integration of the combined firm. According to Pablo (1994), the merged firm will choose various types of integration based on factors such as task, cultural and political properties.  According to Neale and Pike 2007 integration exhibits a different order of complexity in different types of takeovers. Integration should include selling of the assets which are not likely going to add any value to the company. This is called asset stripping (World Bank report China). Integration also involves the changes in the new environment after the M&A. Management has an important role to play. According to (The Manager.org) major success factor for any merger or acquisition is the properly managed integration of both the companies. Neale and Pike (2006:564) state that Jones (1986) five key steps explain that the integration is a complex mix and acquiring company should follow an ‘integration sequence’ based on them. The five key steps are:
°         The combined firm should establish clear reporting relationships so that the uncertainty is avoided.
°         There should be the resource audit to examine the physical and human assets in order to access the management quality.
°         Key factors can be controlled by keeping a control over the information channels that export messages and import data.
°         Corporate objectives should not only be in agreement with the parent objectives but should also reflect differences due to rates of return and margins in profits.
°         The organisational structure should be also revised.
Efforts should be made to improve the operating efficiency, set up a better management system and streamline the operations of the newly acquired firm to ensure that the potential synergies are reaped (Stahl & Medenhall, 2005:379).
The merged firms should also take initiatives to establish a right kind of corporate culture and provide the right management and leadership (Gollakota et al, 2007:204). The capabilities acquired by takeover should be put to use and it depends on the management. According to Child et al, 
“...capabilities acquired represent a potential but, once transferred, they still must be applied before they can lead to a competitive advantage......challenge is not just to acquire capabilities, but also to preserve, to transfer and to apply them in order to enhance competitive advantage.

2 comments:

  1. To make effective mergers and acquisitions, there are quite a few actions in the procedure. Discovering a advisor with years of experience with mergers acquisitions is the best way to begin. When two organizations can provide mutually valuable benefits, then a merging is likely limited for achievements. One should identify the many factors that mergers and acquisitions are necessary and progress if the organization is truly dedicated to the procedure.

    Mergers and Acquisitions

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  2. The numbers put many things into perspective. I wonder how many software companies targeting small businesses have reached the 100k customers mark. That would imply reaching 0,05% of all businesses globally. It may seem like not much, but it is harder than it sounds
    Valuation partners

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