Mergers and Acquisitions

The term "merger" refers to the combination of two companies resulting in appearance of one new company which continues to exist. Mergers may be categorized as horizontal, vertical and conglomerate. In horizontal merger two competing firms are united across similar products or services, used as a way to increase the market share. In vertical merger two firms, for example manufacturer and supplier, are united along the value-chain, used as a way to gain a competitive advantage on the market. Conglomerate merger occurs when two companies in completely different industries unite in order to smooth out wide fluctuations in earnings and provide more consistency in long-term growth. (Evans 2000.)

The term "acquisition" refers to the purchase of assets of one company by another company. The acquiring company will remain in business and the acquired company will be integrated into it, in other words the acquired company still continues to exist as a part of acquiring company. (Evans 2000.)

The main idea behind mergers and acquisition is one plus one makes three. The most common reason for firms to enter into merger and acquisition is to merge their power and control over the markets. The mergers and acquisitions of the two companies create additional value which is called "synergy" value. Synergy value includes higher revenues, lower expenses and lower cost of capital. (Evans 2000.)

Mergers and acquisitions often provide the fastest and the largest initial international expansion among any other foreign market entry strategies. At the same time, it is the most expensive entry mode and thus, decision requires strongest due diligence. (Hitt 2009, pp. 234-235.)

This entry mode will immediately provide the acquirer with the status of being a local company and the benefits of local market knowledge, an established customers and suppliers base and an opportunity to be treated by the government as a local firm. Sometimes, due to government regulations this is the only option for a company to enter the foreign market. (Tradestart 2015.) http://www.tradestart.ca/market-entry-strategies

Needless to emphasise, that the most favorable advantage of mergers and acquisitions, compared to all previously discussed entry strategies, is the highest extent of control. Moreover, mergers and acquisitions result in tax benefits. There is also a great advantage of decrease of financial risk and again, combination of operational powers, such as technological know-how and in-depth knowledge of local market specifications.

“In some cases, a profitable company can reduce its tax liability by acquiring a less profitable company in the same industry. However, acquisitions accomplished through stock purchases can also result in potential liability for the company making the acquisition.” (Blank 2015).

M&A strategy has many advantages and may appear to be highly beneficial for the companies involved. However, both parties have to understand and accept the fact, that mergers and acquisitions are not risk-free. There exist another side of any advantage, and problems do occur in any kind of acquisition. Figure 3 presents both sides of M&A strategy, which should be definitely taken into consideration by initiators before actual implementation of this foreign market entry mode.

Figure 3. Reasons for Acquisitions and Problems in Achieving Success. (Hitt 2009, p. 199.)

Acquisitions differ from mergers, even though those two processes are usually united into single entry strategy. “Negotiations during a merger process involve the relative ownership interest each company will hold in the merged entity. In an acquisition, on the other hand, negotiations focus on the relative value of each company in negotiating a purchase price.” (Blank 2015.)

Date: 2015-12-17; view: 950