FREE ESSAY ON MERGERS AND ACQUISITIONS

MERGERS AND ACQUISITIONS

Mergers and Acquisitions
Since the 1980's, and even more now in the late nineties, it has become a growing trend
for companies, both large and small, domestic and foreign, to form strategic alliances
within their particular industries. There are many specific goals that companies may be
looking to achieve by dong this, but the main underlying reason is to guarantee the
long-term sustained achievement of fast profitable growth for their business. They have
to keep up with a rapidly increasing diversified global market and increased competition.
Nowadays, with the struggle for competitive advantage becoming stronger and stronger, it
is almost essential to form alliances. Diversifying and expanding techniques such as
mergers and acquisitions are very popular methods for forming these alliances. Basically
stated, a merger is a joining of forces and acquisition is a purchase of a company,
whether it is welcome or hostile. The two terms are often used interchangeably. Much
research and planning is required in the early stages of these processes, which starts
with an acquisition strategy used in trying to find a suitable company to merge with.
Advantages and disadvantages of the merger must be thought out, as well as many other
important aspects, such as risk factors and new organizational structures that must be
considered and closely monitored throughout all of the stages of the merger or
acquisition. It is of these competitive strategies, mergers and acquisitions, as well as
a recent case study following the conclusion, that will be the focus of my paper.
Before going further into the merger and acquisition process, a more complete explanation
is necessary. A merger is the combining of two or more companies into a single
corporation. This is achieved when one company or business purchases the property or some
other form of assets from another company. The result of this action is the formation of
one corporate structure. This new corporate structure retains its original identity. An
acquisition is a little different from a merger in that it involves many problems being
dissolved, and an entirely new company being formed.
There are different ways for a merger or acquisition to take place. One obvious method
involves the purchasing business making an absolute payment in cash or in company stock.
Other arrangements may be made such as the exchange of bonds. After the purchase has been
made, the purchaser acquires the assets and liabilities of the other firm.
There are two main types of mergers; horizontal and vertical. A horizontal merger or
acquisition combines firms that competed with one another at the same stage of production
into a single new firm. These mergers usually involve basic commodities. A vertical
merger, which is more common in producer-goods industries, takes the entire production
process, from raw materials to the end finished product, and combines them together under
single ownership. 
Throughout history, certain mergers and acquisitions have influenced modern international
finance. In the late 1800's, merger and acquisition techniques were being abused and
monopolies were starting to emerge. This led to the creation of The Sherman Antitrust
Act, which made monopolies illegal. More recently, large mergers and the birth of new
markets around the globe have affected international finance. When two major corporations
merge they form a company with a very large amount of economical and political power.
This has led to issues that deal with ethics and social responsibility (Hirsch 15). 
Now we contemplate the first important question: Why merge or acquire? As stated earlier,
the overall goal is to ensure future stability and growth in the market. But more
specifically, each company has individual goals that it hopes to achieve. Many times
mergers are completed to save a failing business. Others reasons for mergers include
reduced competition and/or product diversification. These goals are closely related to
the possible advantages of mergers and acquisitions, and of course, in the case of all
risks, there are possible disadvantages as well. 
Many of the advantages have to do with forming unique research and development skills.
One major advantage is that a merger would give a company the opportunity to expand by
establishing their presence in a host country. This invites the company to compete in
other markets. Another possible goal or advantage is being able to adopt technology from
the other business rather than spending the time and money to develop it themselves. In
the long run, this would cut costs and improve productivity. Economies of scale and scope
can be gained with a larger base and with this increased size come many competitive
advantages (Eiteman 482). A successful merger or acquisition may very well allow a
business to reduce its foreign exchange operating exposure by servicing a market with
local manufacturing rather than through imports (Eiteman 483). Some businesses merge to
help alleviate some or all of their debts (debts that will be taken over by the merging
company) in hopes of getting the chance to start over. 
Later in my report I will be discussing a cross-cultural merger, therefore, the
disadvantages I am about to discuss relate to cross-border mergers. One major problem
that may be incurred is cultural differences between the two businesses. This may lead to
tension, conflict, and stresses between the organizations, namely its employees,
lessening the chances of a smooth merger. Many times teams are designed to deal with any
possible conflicts that may arise as a result of the differences in customs, values, and
norms. In a few cases, there are negative political reactions from the unfavorable host
countries. When the possible disadvantages occur, and these outweigh the benefits of the
merger, it is possible that the merger be classified as a failure. Failures could be a
result of bad planning, lack of leadership, unrealistic expectations, and/or inadequate
due diligence. A more recent definition of this describes poor returns to shareholders or
a self-assessment that the company wouldn't repeat the deal (McVinney 11). Failure rates
stagger, ranging between 16% and 80%, depending on the approach used to determine it.
So now that a solid foundation has been laid, the next question that needs to be answered
is: So what steps do businesses actually take when embarking upon a merger? The ten
steps, in order, are:
1) Formation of an acquisition strategy.
2) Defining the Acquisition Criteria
3) Searching for a Target
4) Acquisition Planning
5) Valuing and Evaluating
6) Negotiating
7) Due Diligence
8) Purchase and Sale Contact
9) Financing
10) Implementation
A closer investigation of the steps is important in obtaining a better understanding of
the actual merger and acquisition process. The first step is putting together an
acquisition strategy and the second step is putting together the acquisition criteria.
These two steps are closely related. When thinking about acquisition criteria, management
answers the question, why buy? Possible answers include to increase market share, broaden
their product range, and to diversify by entering into new markets. The third step is
searching for the target. Things that a corporation considers are particular business
areas, products and services desired. The buying corporation does research to find out
all about the target company. This research is done by making telephone contact,
correspondence and by speaking with third parties (notes). If things are looking good, a
meeting between the two corporations will be arranged. Next comes acquisition planning,
the fourth step in the process. In planning, top management must consider location, price
range, profitability, return on capital employee, and image compatibility. A very
important factor taken into consideration at this time is the scope of integration. It is
important to examine this factor because it could lead to failure. Step five is valuing
and evaluation. This involves setting a value and evaluating the potential company. The
value is determined by examining the historical nature of accounts, assets, and by
referring to the Stoy Hayward Quarterly Index. Step 6 is when the negotiating begins.
There are thoughts of sources and methods of funding the business such as internal and
external sources of funds. Step 7, Due Diligence, refers to the management of the
acquisition. At this point there is a space between the two firms while the overall
purchase plan is reviewed. The most important step may very well be step 8, actively
managing the acquisition. This involves the purchase and sale contract, but it also
involves the actions plan. Decisions have to be made about how the company is to be run.
Topics such as authority, responsibilities, and roles must all be defined. This, along
with the implementation of any new ways, will require extensive communication. A major
problem that must be addressed at this point is integrating corporate systems,
structures, and cultures. This is one of the most complex challenges, especially when
dealing with cross-cultural mergers. Problems arise because,
not everyone wants to adopt someone else's way of doing business. And when you start to
form a third culture out of the fabric two equally strong companies, the task is
enormous, especially if your trying to maintain high performance in the marketplace at
the same time (Leonard). 
To deal with any problems, special task-oriented teams are organized who will specialize
in this area. Step 9 deals with financing and finally, the tenth and final step in the
successful acquisition process is the actual implementation of your plan as a company.
When the steps are followed and everything goes as planned, the result is a successful
merger. There will be good operating and market synergy between the buyer and seller, and
the newly merged companies will understand the importance of sharing eachothers capital,
markets, and technology. 
After researching mergers and acquisitions, I have come to understand the importance of
these two growth strategies. Today's business environment is being dominated by mergers
and fast growth. In order be a player in the highly competitive markets, expansion of
firms is necessary. It is almost impossible to achieve high profitability all alone. This
growth is achieved through new product development, acquisition of new plants and more
machinery, and business development activities. Firms are merging due to pressures from
their competitors. Corporations today must understand the financial and technological
difficulties as well as the complex problems associated with the actual interaction of
peoples and plans when participating in mergers, and they must strive to execute all of
their plans to their maximum potential.
CASE STUDY
Renault and Nissan join forces to achieve profitable growth for both companies...
On Saturday, March 27th, it was announced that Renault, a French car manufacturer, would
be teaming up with Nissan Motor Corporation in a $5.4 billion deal that created the
world's fourth largest automaker. This deal gives Renault a 36.8% stake in Nissan, a
company that has been struggling financially for the past few years. The $5.4 billion
deal between Renault and Nissan hands over effective control to the French automaker in
exchange for badly needed cash (Wwodruf). There are other agreements within the contract,
but they will not be discussed in much detail at this time. 
Both of these corporations plan on benefiting from the merger. This alliance will resolve
Nissans very substantial financial problems. Renault will be given the opportunity to
join the automotive big leagues at a time of global expansion in the auto industry
(Marks). Market expansion will be possible because Nissan is strong in Japan, Taiwan,
Thailand and North America- markets where Renault has no presence. On the other hand,
Renault is one of the top marketers in Europe, while Nissan is just a small player.
Nissan is strong in trucks and luxury cars, and Renault is strong in small, mass-market
cars. 
Even though the deal sounds great, it does not come risk-free. Many skeptics believe that
the teaming up of two struggling automakers will not result in profitability or
flourishing. Renault is taking a risk because it has just recently begun being
profitable, and the company may not yet be stable or strong enough to save Nissan from
its great debts. 
Just as any proper merger should have, Renault-Nissan has already disclosed some of their
strategies for achieving a smooth merger. Renault is counting on its expertise in
cost-cutting to turn Nissan around. This expert team is going to be led by Renault
executive VP Carlos Ghosn. The rest of the team consists of 40 Renault managers who will
be responsible for helping Nissan improve efficiency and reduce spending (Marks). The new
joint venture will be led by a global alliance committee of top managers from each
company. Since there will be a clash of cultures, Ghosn's task may not be easy. His
techniques of cost cutting are exactly what Japan is against. Many other teams have been
formed as well. Eleven Cross Company Teams will be assigned the task of promoting all
possible synergies to be implemented by each of the partners (Renault 2). Each team will
be in charge of something different, from product planning and strategy to purchasing and
logistics. 
As a result of the merger between Renault and Nissan, they estimate they will save $3.3
billion in 3 years. Sharing purchasing costs and auto platforms will be used to achieve
this. Renault-Nissan will now operate together in hopes of competing in a globally
diversifed, competitive automotive market.
Works Cited
Eiteman, David K. Multinational Business Finance. Addison-Welsey, Co: Reading, MA, 1998.
Pp. 480-496.
Hirsch, Jared Brett. Mergers and Acquisitions: A Different Perspective. Kimball
Publishing: New City, NY; 1996. Pp. 13-15, 18,19, 31-56.
Leonard, Daniel R. Global Markets.  Mergers and Acquisitions. Shermerhorn Johnson
Company: New York City, NY; 1997. 
Marks, B. Global Automotive Report. Detroit News. 1999.
Http://www.detnews.com/1999/autos.htm. (28 Mar. 1999).
McVinney, Michaels.  A guide to mergers and acquisitions. 1998.
http://www.michelsmcvinney.com (29 Mar. 1999).
Renault. The Agreement. 1999. Http://www.renault.com. (28 Mar 1999).
Woodruf, David. Deals. Nissan, Renault in $5.4 B Deal. CNNFN. 1999.
Http://www.cnnfn.com/hotstories. (28 Mar 1999).