Merger, Acquisition, and International Strategies

Institution

Merger, Acquisition, and International Strategies

Abstract

Merger refers to the combining of two companies, often characterized by one company offering securities to stockholders of another for the surrender of equivalent stock ownership. Synergy, in simple terms refers to the comprehensive integration of business activities with the hope that such will result in increase in performance and a corresponding reduction in operation costs. Usually, two companies opt to merge when they realize that the combined effect of their complementary strengths and/or weaknesses could result in better performance. Reasons for mergers vary, and can be internal, within the industry, or external, involving different industries. The latter case often results from the need for diversification or sharpening business focus. In such a case, the goal is to reduce or regulate the impact of one industry on the performance of the other. Thusly, when a company’s objective involves sharpening of focus, it would consider forming a merger with another provided the latter has control over a specific market share that is of greater interest.

Regarding the growth perspective, merger allows a company, usually the acquiring one, to expand its market share without being hands-on on the task. Simply purchasing the company the controls the market of interest implies the acquiring company will have an indirect control of the said market, a case termed horizontal merger. For instance, when a larger beer company overtakes a smaller, yet highly competitive one, thereby allowing the smaller company to make more sales to its brand-loyal customers (Weber & Tarba, 2011), the acquiring company benefits from the increased proceeds.

Another objective for merging is to increase supply-chain pricing power. When a company opts to buy out one of its suppliers or distributors, the acquiring company manages to level the costs incurred in the supply chain. By buying out a supplier, the acquiring company eliminates the marginal costs added onto its trading by the intermediary-like supplier. Similarly, if a company opts to buy a distributor inn its supply chain, there is immense potential of conducting the shipment at lower costs, thereby saving the accrued marginal costs. Elimination of competition is another potent reason why a larger company may opt to merge with a relatively smaller one. The result is that the acquiring company is able to remove competition at an early stage, thereby controlling a larger market share. However, to achieve such a goal, a comparatively large amount of premium is needed to convince the shareholders of the target company to relinquish their shareholding.

A company may also front for a merger if upon critical evaluation it realizes that the move would be a good investment with potential positive returns. This is consistent with the capitalist business society whose objective is to maximize shareholder returns. Consequently, acquisition of another company that offers a chance of conferring such results inherently becomes a good fixation. The move tends to favor significantly large companies with the capability of accessing the necessary finances to secure the deal compared to smaller ones. Furthermore, since such mergers come with additional capacity of loan access and equity financing, growth of the resulting company becomes imminent.

A merger between two companies operating the same line of business results in improved operation economies. Replication of functions within every firm may be removed to the advantage of the merged company. Such functions as accounting, purchases as well as marketing efforts instantly come to mind. The chances of realization of such benefits increase significantly when the firms involved are relatively small. Business functions are exclusive to small business firms. Mature company with a low share price but a mass of cash flow would be a smart target, or an incompetent, or mismanaged firm that has important brands, assets and distribution channels could also be a target. If a company has a large free cash flow and does not have plans to use it then a company may buy it out load it up with debt to pay themselves and use that free cash flow to pay interest. A company may also be a good target to merge with if it wishes to reduce overhead and redundancies often by reducing headcount.

According to Paul Burmeister, the chief operating officer (COO) and chief financial officer (CFO) of multiple companies, prior to making a decision on merger prospects, one should consider a number of issues. First, there is need to evaluate the liquidity and financial strength before entering any transaction. Determine the financial capability of the company by conducting a financial health check. Thereafter, determining the company’s liquidity i.e. ability to create and uphold an investment, and at the same time assess the company’s assets structure capability of bearing the potential extra strain. Alternatively, evaluate a range of arrears and equity financial support strategies that will avail the required financial health for a successful merger. Imperative also is definition of goals and success factors. In combining your merge and acquire plan, you should evaluate your competitive position and your future goals. In doing this, knowledge on the need to acquire the new product, a process or an intellectual capital is important. Most important though is that the acquisition should bridge the gap between the present and the desired future state if the company.

Another factor worth considering relates to planning and execution of due diligence. In evaluating a probable deal, you will need a varied array of calculations. Correct follow-up of due diligence ought to confer a strategically fit acquisition plan. Meditate over the company’s objectives and assess the key drivers towards the acquisition. By simply having in mind the aspects that you need to preserve, the aspect to test in due diligence will automatically fall into place. Your main goal is verifying that the expected value is integrated. It encompasses monetary, legal, operational, technology and people. For effective implementation, create a transition team with a strong management since as noted by Burmeister, “it sets the tone for efficiencies and savings." Additionally, planning and execution of the integration must be done carefully. The final merging stage should take into consideration respective cultures and processes of the individual companies, majorly by focusing on revalidating all of the procedures developed since the inception of the merging process. Finally, be aware of its iterative nature, one that requires consistent evaluation of working and non-working aspects, as well as the driving values, making adjustments where necessary. Remember speed is important at this point; delay drives breakdown and may be costly.

Other methods for ensuring a soft transition include creation of incentives, usually tied to successful completion of establishing milestones. Inculcate integration into the company, holding managers accountable for execution of each course. Remember simply signing the deal that not translate to benefits; it is made in combination. Many deals fail due to poor integration compared to any other aspect, thus necessitating for immediate inception of planning upon target identification. Build up your plans according to accountability, function and focus more on aspects that may derail the course of due diligence thereby curtailing the company’s ability to realize the prospective benefits. A final tip relates to the infamous C's: Compensation, Cull, Communication and Care. A well-compensated team shows more commitment to delivery of objectives. Decision-making has to be fast and effective. Constant and effective communication to have stakeholder always informed on current issues and situations is equally important. Always react to situations in a manner that shows concern and care for the wellbeing of the people just as much as the entire organization and its objectives.

The universal economy has become more bloodthirsty as organizations of all sizes try to expand beyond regional borders. Internet and information technology are among the factors that have made it possible for smaller companies to venture into international markets. Before moving international, though, it is useful to understand common reasons organizations to join the international business field (Grünig, & Morschett, 2011). The main reasons why businesses go international are: Saturated local industries give fewer opportunities for companies to grab customers. This drives them to look overseas for new markets and clients. For example, developing nations can provide sufficient opportunity for new income sources. Discovering resources or building partnership opportunities can also contribute to your capacity to tap into international consumer markets. Companies develop internationally to build up synergies in resources and powers that multiply the value of growth. Some U.S. companies have stretched into Asian markets to influence the technological expertise of local populations, boosting their capabilities while expanding their client bases (Weber & Tarba, 2011). Distribution effectiveness can also be enhanced by establishing valuable global systems. This is mainly true for companies that source supplies on a worldwide basis. Operating in various countries give superior insulation from economic downturns in one or two areas. A company doing business in the U.S., Africa, and Asia may not suffer as much from a U.S. economic fall if it is offset by better circumstances in its other locations. In this example, the company can use returns gained in other markets to uphold and develop its U.S. business. This is an easy but real purpose for many companies that go international. If your competitors go into foreign markets, it seems reasonable that your business should do so as well, conditions permitting. If you have a competitive opponent in the U.S., your opponent could gain increased recognition and exposure by joining markets where you do not have a presence.

Business level strategies feature actions taken to give value to customers and get a competitive advantage. Cost Leadership – companies compete for a wide customer based on cost. Cost is based on internal efficiency to have a margin that is sustaining above average returns and price to the customer so that customers will buy your product/service (Collis, 2014).. Works well when product/service is standardized can have generic goods that are acceptable to many customers, and can offer the lowest price. Continuous efforts to lower costs about competitors are necessary to be successfully a cost leader. Maintain tight control over production and overhead costs. Minimize cost of sales, research and development (R&D), and service. Worth noting is that corporate level strategy has a close association with the strategic decisions made within the organization. Financial performance, acquisitions and mergers, human resource management as well as resource allocation are key elements of corporate level strategy. The corporate-level strategies address the entire strategic scope of the enterprise, this is the big picture view of the company and may include deciding in which service or product markets to compete and the geographic boundaries of the company’s operations (Goold, Campbell, & Alexander, 1994).

References

Collis, D. (2014). International Strategy: Context, Concepts and Implications. United States, U.S: Wiley.

Goold, M., Campbell,. & Alexander, M. (1994). Corporate-level strategy: creating value in the multibusiness company. New York, N.Y: J. Wiley.

Grünig, R., & Morschett, D. (2011). Developing International Strategies:Going and Being International for Medium-sized Companies. Germany, Berlin: Dirk Springer Science & Business Media.

Weber, Y. C., & Tarba, S. Y. (2011). Mergers, Acquisitions and Strategic Alliances: Understanding the Process. United Kingdom, U.K: Palgrave Macmillan.