Mergers
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A company or business in the normal course of events will have as a basic objective to grow or expand. Shareholders, directors, employees or even customers and suppliers will demand growth. Growth is an objective that is frequently taken for granted. It is a necessity for the business to expand, to sustain the interest of all stakeholders and enable further opportunities for employees to advance and provide greater challenges. A company that is stagnant will find over a period of time that its employees and shareholders will move where the opportunities are best.
One of the typical questions faced will be whether to grow organically or inorganically? Both come with their attendant benefits and challenges. Till now there has been no universal rule to decide the course. Sometimes, the same company has used both these strategies at different points in time or simultaneously.
Many companies choose to grow through acquisition because it is believed to be a quicker. An acquisition will immediately bring access to additional markets, new products or cash flow. To replicate a new market or product is time consuming and it brings a great deal of uncertainty into the companys planning. One strong point in regard to acquisitions vis establishment of a similar business is that the purchase of a business will eliminate a competitor in the market. To establish a new business means taking market share from existing players, it is common for new entrants to underestimate the effect of competitive pressure. One way to avoid the pressure is to acquire a business that does not impact on the existing competitive market position.
Companies come together for many reasons:
To achieve economies of scale, To increase profitability, To storm a new market.
Yet while there may be total clarity of intent in the design of mergers and acquisitions the outcomes are disappointing in many cases. Thats because strategies are ideas: pure with clean lines. Organizations are things: messy and complex. Executives structuring the deals forget that they are uniting two cultures, which is a fancy word for people. People see their lives changing, they become stressed and angry, some leave, some underperform, some behave badly.
The stated problem is just one of the many involving people. This paper explores other issues concerned with Mergers and Acquisitions.
A strategy such as Merger and Acquisition should remember the parameters that define growth? Is it revenue, market value, profits and managerial remuneration, will it be a trade off with profit? And if considered with few desirable parameters together, would it be sustainable? Also it is important to address the important issue – are the stakeholders of the company getting benefited by the strategy? Every stakeholder including the shareholders, employees, suppliers, customers and others have to be taken into consideration if the strategy adopted has to be a sustainable one.
Many people wonder why M&A is so popular and why it spurns an industry of full time professional advisers. The answer is a mixture of both economics and power or ego. Economics will primarily drive the transaction and power or ego will often either finalise or restrict a transaction from occurring.
The philosophy that bigger is better is often questioned in todays society; however it still underpins all M&A activity. Even while economics is seen as the key there are mistakes made while doing the evaluation of acquisition. In evaluating potential acquisitions, companies must look beyond the lure of profits the income statement promises and examine the balance sheet, where the company keeps track of capital. Its ignoring the balance sheet that causes so many acquisitions to destroy shareholders wealth. When a company considers an acquisition, the acquiring CEO is often under tremendous pressure. Investment