This essay will examine cross border mergers and acquisitions benefits which is one of the major ways for MNE's to expand globally. There will also be review about the drawbacks of moving from domestic market to global market by cross border M&A. This study will evaluate the past international M&A such as Daimler-Chrysler and Mittelsand and explore the main reasons behind these mergers failures. It also provides several solutions for M&A organizations to be successful in the competitive global market.
The Benefits and the Drawbacks of Cross Border Merger and Acquisitions
A merger is the combination of two firms that creates a new company. An acquisition takes places when one firm buys another and becomes the new owner. Horizontal mergers occur when two companies in the same industry combine. Latest M&A have been of the horizontal type, because evidence has proved that related takeovers and diversifications are more likely to be successful than those in unrelated area. The main reason behind is that they benefit from transfer of good knowledge and expertise; therefore, they have more opportunity to achieve economies of scale and scope. Vertical merger occurs when one company takes over a supplier or another company which is closer to its customers. The key aim of the vertical merger is to control supply or distribution channels. Conglomerate merger takes place when two companies in unconnected business combine in order to diversify the firm by combining unrelated assets and income streams. Conglomerate mergers do not have any large scale influence on the working lives of the majority employees. ( Cary , 1992)
Merger and acquisitions are conducted by firms to implement strategic and financial objectives. Achievement of mergers might be determined by the level of organization and integration. Cross border M&A are more complex than domestic acquisitions because of differences in political and economic climate, culture, tax rules and laws among nations of the acquirer and the target company. Mergers have accepted as an international factor because of the global economic integration and the eroding of barriers to trade and investment. Competition has become global and firms must compete in their local markets and in foreign markets to sustain their competitive edge. As a result, cross border M&A has become more influential than in the past. However, move away from local acquisitions in to foreign acquisitions might be hazardous. (Sudarsanam, 1995)
In a merger, the corporations get together to combine and share their resources to fulfil same objectives. The shareholders of the mixing companies often become stable like joint owners of the combines entity. An acquisition represents an arm's length deal, with one company buying the assets, and with the acquired company's shareholders ceasing to be owners of that company.
The main objective of takeover is growth and expansion of the acquirer's assets, sales and market share. Nevertheless, there are more important objectives for the firms. A more influential objective might be the development of shareholders wealth with acquisitions; the main purpose is to create sustainable competitive edge for the acquirer. Firms generate cross border acquisitions for strategic and tactical factors. According to the growth orientation strategy, firms are likely to move from small domestic market to global market that enables firms to achieve economies of scale. Cross border M&A allow firms to access raw materials to guarantee consistent supply, to access recent innovations and utilise cheap productive labour. Undertaking cross border M&A also enables companies to exploit the firm's brands, reputation, design, and manufacturing and management abilities. (Cary , 1992)
A cross border M&A is a merger where two firms in two different nations engaged in a business. Companies benefit from distinctions in factor cost wages and cost of capital managing different kinds of risks according to the market or policy induced changes in comparative advantages of different nations. National differences in the company because of cross border M&A will provide the company better ability to move operations to the lowest cost nation, develop the company's ability to deal with the risks from market changes or change in state policy, and enhance the ability to learn and adopt due to the various strengths established a link with the culture of different nations.
Economies of scale related to the fact that the combined firm could often lower its fixed costs by taking out duplicate departments or operations, reducing the costs of the firm compare to the revenue stream. As a result, it raises companies profit margins. According to the rose profit or market share, the consumers would be absorbing a big competitor and, therefore, it enhances its market power by obtaining rose market share to set prices. The scale of economies provided by the rise in market volume because the across border acquisitions will lead to better efficiency in each activity of the value chain, the requirement to balance scale and flexibility, and the take advantage of experience, cost reduction and innovation.
The scope economies are made up by the addition of new goods, markets and business because of across border takeovers will lead to sharing investments and costs , reduce risk because of geographic, good , market, business increasing in variety of business, and the capability to share learning across units.
Acquisitions indicate some advantages. First, they are quick to implement. By acquiring a built enterprise, a company could quickly establish its presence in the target foreign market. When the German car maker Daimler-Benz decided it required a larger presence in the US car market, it did not raise that presence by establishing new factories to offer a service to the US, a process which could have taken many years. By contrast, Daimler-Benz preferred to acquire 3rd largest US car manufacturer, Chrysler and merged the two activities to generate Daimler Chrysler. While the Spanish telecommunications service provider Telefonica demanded to establish a service presence in Latin America, it achieved through the number of acquisitions, buying telecommunications firms in Brazil and Argentina. In these circumstances, the companies carried out acquisitions because they are aware of the fact that was the fastest way to build a sizable presence in the target market. (Charles, 2008)
In many situations, companies engage in acquisitions to pre-empt their rivals. The requirement for pre-emption is good in markets that are quickly globalizing like telecommunications where a mixture of deregulation in countries and liberalization of regulations managing international FDI has enabled enterprises to enter foreign markets through acquisitions. In the past two decades, markets have witnessed waves of acquisitions while companies race each other to obtain global scale. For instance, in the telecommunications industry, regulatory alterations make it easier for firms to enter each other's markets by acquisitions to build a global presence. These indicate the $60 billion takeover of Air touch communications in the US by the British firm Vodafone which was the biggest acquisition ever. Same cross border acquisitions happened in the global car industry in the same period, with Daimler taking over Chrysler, Ford acquiring Volvo. (Charles, 2008)
Managers might think that acquisitions will be less risky than Greenfield ventures. When a company engage in an acquisition, it purchases a set of assets that are creating a known revenue and profit stream. By contrast, the profit stream which Greenfield venture may conduct is uncertain because it does not yet exist.
As a company engage in an acquisition in a foreign market, it not only takeovers some tangible assets like factories, logistic systems, customer service systems, but it also takeovers worthy intangible assets indicating a domestic brand name and managers expertise and the knowledge of the business environment in that country. This knowledge enables managers to know the national culture which means that they could reduce the risk of mistakes they will make.
Although there are many advantages about making acquisitions, acquisitions often result in failures. For instance, a study by Mercer Management Consulted examined 150 acquisitions worth over $500 million each that were conducted from January 1990 to July 1995. The study proved that 50% of these takeovers reduced shareholder value, while another 33% provided only marginal returns . 17% was successful. According to the McKenzie &Co study, 70% M&A failed to fulfil expected revenue synergies. (http://www.helium.com/items/1561489-mergers-and-acquisitions)
According to the Ravens craft and Screr's study, many acquisitions have devastating impact on value. This research examined local acquisitions, but, the findings also apply to cross border M&A.
There are several reasons behind acquisitions failures. For instance, the acquiring company often pay too much for the assets of the acquired company. The value of the target company might get bid up if many companies will try to buy. Moreover, administration of the acquiring company is too optimistic because they think the value that might be provided by an acquisition and acquiring firm is likely to pay substantial premium over target companies market capitalization. This is one of the reasons behind acquisition failures which is called hubris hypothesis. According to the Hubris hypothesis assumptions, managers overestimate their capability to obtain value from an acquisition. For instance, Daimler took over Chrysler in 1998 for $40 billion, about 40% more than the market value of Chrysler before the takeover bid. Daimler paid this amount of money because the company believed that it could utilise Chrysler to contribute it's grow market share in US. Daimler's administration notified bold announcements about the synergies that would be provided by combining the operations of the two firms. Executives thought that they could obtain better economies of scale from the global presence, take costs out of the German and US activities, and raise the profitability of the combined entity. Nevertheless, following the year of acquisition, Daimler's German management experienced a crisis at Chrysler due to the poor sales in the US. As a result, the firm lost big amount of money. In the past, Daimler's administration had been too optimistic for the future demand in the United States car market and about the chances for creating value from synergies. Daimler took over Chrysler at the end of the year increase in US car sales and paid a big premium more than Chrysler's market value before demand decreased. ( Charles, 2008)
Acquisitions also experience failures due to clash between the cultures of the acquiring and acquired companies. After a takeover, many acquired firms face high administration turnover because their workers do not want the acquiring firm's way of doing business. This occurred to the Daimler Chrysler, lots of senior managers resigned from their job in Chrysler the following year of the merger. Chrysler administrators do not like the dominance in decision making by Daimler's German directors. Moreover, Chrysler's American managers were paid over 2 times higher than Daimler's German managers and these cultural distinctions lead to tensions. As a result, the loss of managerial ability and expertise might have negative impact on the performance of the acquired unit. Acquisitions experiences failures because attempts to realize synergies by combining operations take longer than expected. Distinctions in administration philosophy and firm culture might slow the integration of operations. Differences in national culture can compound these issues. Bureaucratic haggling among managers also has adverse influence on process. It happened to Daimler Chrysler where plans to combine the activities of two companies process's were delayed by rod less meetings. When the integration plan had been concluded, Chrysler was making loss, and Daimler's German managers faced a crisis. (Charles, 2008)
A large number of acquisitions fail because of insufficient reacquisition screening. Lots of companies decide to acquire other companies without examining the potential advantages and costs. Companies often move with unnecessary haste to apply the acquisition. Nevertheless, a large number of acquiring companies realise that they have bought a troubled organization rather than purchasing a well run business. This could be particular issue in cross border acquisitions because the acquiring company might not totally interpret the target companies national culture and business. (Sydney, 2003)
Companies also diversify among goods and markets to decrease earnings fluctuations and to become less dependent on exports. Moreover, companies do not engage in the home country's economic instability. It also allows firms to compete with foreign rivals in their own nations. Firms are yield home country consumers with service for their foreign subsidiaries. Furthermore, companies exploit temporary benefit from undertaking cross border M&A. For example, favourable exchange rate makes overseas takeovers cheap. Firms such as Coca Cola expanded overseas in order to exploit their specific brands. (Sudarsanam, 1995)
Dowty was a multinational hi-tech engineering firm producing advanced systems and goods for aerospace, defence and information technology markets. From 1976 and 1987 Dowty acquired 4 US firms in aerospace and telecommunications for $108 million.
Dowty utilised its US acquisitions to sell its and subsidiaries goods utilizing their distribution channels in the US and Europe. The acquisitions developed the firm's global competitive edge, added new goods, created special access to Boeing, the aircraft producer , and improved the level and range of technology in the group. Acquisitions provided the firm greater competitive edge in Europe due to the access to US collaborative agreements and high tech goods.
Acquisitions experience different obstacles in many nations. There are some major barriers. In Europe , family control of firms are challenging obstacle to takeover. For instance, in Italy the biggest firms are family owned. Germany's industrial most important organization is the Mittelstand, that is established by family firms. The approach to acquisition is one of the reluctance and hostility. British and American buyers have obtained notoriety for their short term's. According to the managers of Mittelstand firms, price is not the most important thing. The company managers cherish their firms. (Sudarsanam, 1995)
In many nations such as Spain and Greece, accounts might not be publicly valid. They may not deal with internationally accepted accounting rules. Furthermore, in nations such as Germany and Japan, accounts are developed to satisfy the tax rules and might underestimate profits. When utilising the accounting information in those nations, the bidder should adjust the revenues, assets to reasonable levels.
Cultural and political barriers to cross border acquisitions create great profile and might lead to adverse publicity to the acquirer. Some difficulties even exist when host and home nations have same cultural profiles and speak the same language. For instance, National Australia Bank took over the Bank of New Zealand about $787 million in 1992. The acquisition was protested by politician and shareholders. (Sudarsanam, 1995)
Conclusion:
A company could deal with issues if it considers its acquisition strategy carefully. Monitoring of the foreign enterprise to be acquired ,indicating detailed auditing of activities , financial position may contribute to make sure the company : does not pay more than enough money for the acquired unit, it prevents horrible surprises after the acquisition and takeover company whose organization culture does not have antagonistic attitude to the acquiring enterprise. The objective ought to be decrease unnecessary management attrition after the acquisition. Moreover, managers should move quickly after a takeover to put a combination plan in place and to execute this plan. Some people in the acquiring and acquired units will attempt to slow or prevent any integration efforts due to the losses of employment and new management power engaged in. Managers ought to have a plan to handle impediments before they occur.
