Mergers and Acquisitions

Introduction In today’s competitive world, when globalization has taken the front seat in almost all parts of the world, the companies have to face enormous amount of competition. It helps organizations to avoid investing considerable amount of money in combating the competition. For avoiding unnecessary blockage of money into things, which do not lay any output for the firms, the companies these days resort to corporate restructuring processes.Advertising We will write a custom essay sample on Mergers and Acquisitions specifically for you for only $16.05 $11/page Learn More Corporate restructuring involve mergers and acquisitions. On the bigger picture, the mergers and acquisition leave lasting effects on the performance and fate of the company. A merger is the coming together of two companies to form one larger company. Such actions in the business world are normally voluntary and they will involve cash payment to the company that is targeted or even stock swap. There may be a stock swap, which is mostly used by many companies since it always has the provision of allowing the shareholders from both companies to share all the involved risks in the business deal. The merger often has effect on the earnings of the company as well as on their market goodwill. Hence, the price of the share is also affected. Whenever any company goes through phases of restructuring, the expected output could be either negative or positive. In a way, a merger may be similar to acquisition but in merging companies, the resulting company will always have a new name, which may be a combination of the companies’ names. Branding of the resulting company will purely depend on the marketing and political reasons. Thus as time continues to pass and competition tightens between companies competing for the same markets, the drive to merge will continue taking precedence. It should be remembered that the management of the companies plays a key role i n the discussion of choosing a merger as a right strategy. It has been noted that a key element in mergers is to increase the competitiveness of the new organization and bring about better fortunes. Major force driving this acquisition of merger between Merck’s and Medco Mergers increase shareholder value and attract accrual of gains to the target company. Among the benefits, include the benefits of economies of scale, attempts by companies to form oligopolies and monopolies thereby creating market power, and need for diversification. In essence, formation of mergers is attributed to waves in an industry, prompting different companies to react by uniting and clustering to enhance their survival. The failure of the efficient market hypothesis gives rise to acquisitional takeovers, in which companies strive to increase their market power by accumulating material, financial, and human resources.Advertising Looking for essay on business economics? Let's see if we can help y ou! Get your first paper with 15% OFF Learn More Mergers are largely associated with increased shareholder value and company profitability, usually through expansions, diversifications, and cost savings (Gugler, Mueller, Yurtoglu and Zulehner, 2003). By using share values for the merged companies before and after the mergers, the researchers report that most of such mergers result in increased share value, implying that the wealth of the shareholder and the value of the company in the eyes of investors have increased. However, the value of shares of the acquiring firm and those of the target firm differ in relation to market conditions and public perceptions regarding the merger (Hunt, 2009 pp. 5). Returns on the mergers differ from company to company, with value firms reporting higher returns on average compared to growth firms (Frankel, 2005, pp. 153). The variations in returns on the mergers result from varying degrees of risks, and investor forecasts in relation to prev ious company performance. Similarly, the researchers attribute differences in company profitability following the mergers to different accounting and reporting practices, and the variation in industrial shock waves necessitating the mergers. Identifying the actual benefits resulting from mergers is challenging, since it is difficult to identify underlying sources of gains from mergers, and studies suggest that all benefits associated with the mergers accrue to the target firm shareholders (Andrade, Mark and Erik, 2001 pp. 106). As such, it would be difficult to establish the actual benefits resulting from mergers. Companies form mergers to increase their competitiveness by accessing a wider market, new skills, and technologies. With globalization, it is extremely difficult for a pharmaceutical company to succeed on its own. By forming mergers, companies can access new markets, new products, and extra finances. However, mergers are not always successful unless both parties are benefi tting. An effective merger must ensure that both parties derive benefits from it. Once a company enters into a merger, it may loose its sovereignty. This means that the company cannot get out of the merger in the future even if it has resolved its financial difficulties. It is therefore important to maintain independence so that if the merger fails to succeed, the companies can part ways and continue their operations as independent companies. Negotiators must always act in the best interest of the shareholders because it is their responsibility to ensure that they maximize the profits of the shareholders. If only one party is benefitting, the losing party should then not sign the deal. The parties should instead go back to the negotiating table and create a deal that increases the net value of both parties.Advertising We will write a custom essay sample on Mergers and Acquisitions specifically for you for only $16.05 $11/page Learn More The most general reason for the success of merger and acquisition is that many firms try to overcome concentration risk. Firms, which are excessively dependent on a single product, are exposed to the risk of the market for that product. Diversification by way of merger and acquisition reduces such risk. In addition, firms often use merger and acquisition as a strategy to enter into new market or a new territory. This gives them ready platform on which they can further build their operations. Tax shield is one another aspect of consideration. Tax shields play an important role. Firms in distress have accumulating past losses and unclaimed depreciation benefits on their books. A profit making taxpaying firm can derive benefit from these tax shields. They can reduce or eliminate their tax liability by benefiting from a merger of these firms. In some countries, tax laws do not permit passing of such tax shields to the acquiring firm except under specific circumstances (DePamphilis, 2009). From the case , the merger was meant to provide market for their products. The Executive Vice President, Sales Marketing believed that a merger was going to open up new markets that are in the managed health care market. Medco’s had kept marketing database which was going to be used to l create market expansion opportunities. However, the Chief Operating Officer did not consider benefits but thought of effects of cultural and operational differences. The merger was the right strategy because it would solve the problems that the two companies were facing. Merging the two companies would create a company that transcended national borders thus increasing sales. A merger is the most efficient way to enter a new market or increase distribution line. The company can respond to competitive cost pressures through economies of scale. For Merck Company, the merger would reduce marketing cost by $1billion and expand sales while Medco would be able to penetrate the American market and gain financial support. However, the merger failed to materialize because the two companies could not agree on the terms of control. Merger is an important business approach that is directed towards expanding the business (Gugler, Mueller, Yurtoglu and Zulehner, 2003). Merger may help an organization to increase its monopoly power on one hand, through increasing its economies of scale and scope and on the other, it may complicate its operational procedure and destroy inter and intra departmental harmony through increasing its size beyond manageable level.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Actually, merger is not a mathematical cloth that will always yield two by the summation of two one. Success of merger depends upon extreme managerial proficiency, nature of the product and market as well as the customer’s psychology immediately after the merger. It has been observed that in financial sector, when two banks merge, the credit deposit ratio incurs a set back. It might affect the rate of profit negatively. Therefore, it may be concluded that the outcome of merger is always uncertain and if it fails to generate substantial positive outcome, the stockholders of the respective organization might suffer a loss. Synergies of the merger The merger agreement was expected to provide an opportunity to Merck Company to increase market share in the industry as a leader and the highest revenue earner and with the highest market capitalization. Market growth was a major ground behind this acquisition the company wanted to ensure an increasing share in the managed care. This will ensure the growth of company earnings. There may be elimination of overlapping management and consolidation of business support functions. The benefits of the merger are witnessed through the company’s ability to adjust to market demands and the large market share attained through the merger. In the long term, the merger is likely to be beneficial to the companies due to the increment in revenues and overall cost saving. Merging makes it cheaper for companies to access materials from suppliers, and can get such materials at a discount due to the economies of scale. This is beneficial in the long-term performance of the company since it leads to more savings, hence more investment and overall increased profitability. The benefits of mergers are usually traced to shareholders and company performance, and these are derived from the value of shares. The merger turned company into one of the largest employers and is expected to increase the company’s revenue both in t he short term and in the long term. Following the positive changes in the company’s share value, the merger supports the existing literature on the claim that mergers increase shareholder value and company profitability. Additionally, the merger follows the observation that investors use a company’s previous performance record to predict a merger’s future performance (DePamphilis, 2009). The ratio of exchange When a firm trades its stock for the shares of another firm, the number of shares of the acquiring firm must be determined. The first requirement, of course, is that of the acquiring company have sufficient authorized and unissued and/or treasury stock ordered to complete the transaction. Often the repurchase of shares, is necessary in order to obtain sufficient shares for the transaction. Since the acquiring firm is generally larger and has a market for its shares, the acquiring firm offers a certain amount for each share of the acquired firm. This amount is generally greater than the current market price of publicly traded shares. The actual ratio of exchange is merely the ratio of the amount paid per share of the acquired firm to the market price of the acquiring firm pays the acquired firm in stock, which has a value equal to its market price. However, price has been stated of $ 6.6billion for acquisition of Medco Containment Services Incorporated. Benefits of merger The two companies will experience exponential growth in market share, since they end up dealing with a bigger organization than they did before. They also gain from an expanded network, which literally means dealing with more people and thus gaining more contacts with Medco’s database. This is a good prospect for business expansion. The benefit in the long run to the shareholders is that they can gain when the merged company does grow as profit margins increase. This happens when the new firm finally settles into business and gains new ground by benefiting from the cost cutting measures. Among the gains of the employees are that those who survive usually end up working for higher wages once the merger picks up and the gains begin to be seen. Higher pay packages are offered them, they experience, and exciting career growth provided that the merger is successful. This offers them greater opportunities and personal development prospects than they had before. There is a better prognosis for career advancement. Promotion means handling more people over a larger scope. This increases the gains that go with career advancement (DePamphilis, 2009). Even then, loyal consumers, especially the corporate ones are always considered when major decisions are being made. They are the ones who keep the companies going in the lean times, and with time, the companies learn that rubbing such customers the wrong way is economic suicide. Therefore, they do not emerge as losers even in a merger. The main advantage to consumers is the improvement in quality that results from the outstanding features of each individual company’s products being consolidated into one better whole. Apart from that, the consumer benefits from wide ranging products over and above what they had in the individual company before, especially in areas where only one of the partner companies was represented. Competitive reactions to Merck’s acquisition of Medco After Merck announced intention to merge with Medco competitors reacted quickly by merging with companies, which were vertically in their supply chain. British drug maker SmithKline Beecham planned to merge with Diversified Pharmaceutical Services Incorporated, at $2.3 billion while Roche Holdings Limited announced plans acquire Syntax Corporation. One year later Eli Lilly and Company intended to acquire PCS Health Systems from McKesson Corporation for $4 billion. Conclusion Mergers may have some economies of sale and scope, it is not materialized in every case, and hence there may be failures. Aga in, the benefits or synergies may take some time to reflect and it is usually reflected first in the value of the combine firm as against the sum of values of independent firms. In case of acquisitions, it is important for the bidding firm, which is the combined firm after the deal is complete, to perform well and show an improvement in valuation. References Andrade, G., Mark M. and Erik S. (2001). â€Å"New Evidence and Perspectives on Mergers.† Journal of Economic Perspectives 15, no. 2 (2001): 103–120. DePamphilis, D., (2009). Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. London: Academic Press. Frankel, M. (2005). Mergers and acquisitions basics: the key steps of acquisitions, divestitures, and investments. San Francisco: John Wiley and Sons. Gugler, K., Mueller, D., Yurtoglu, B. Zulehner, C. (2003). â€Å"The effects of mergers: an international comparison.† International Journal of Industrial Organization 21, no. 2003 (2003): 625-653. Hunt, P. (2009). Structuring Mergers Acquisitions: A Guide to Creating Shareholder Value. New York: Aspen Publishers Online. This essay on Mergers and Acquisitions was written and submitted by user Rylie A. to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here. Mergers and Acquisitions Introduction Mergers and acquisitions (MA) help a firm to grow by venturing into new markets. Mergers are a combination of two or more companies who join together to achieve some strategic or financial objective (Sherman A. et al 2006).Advertising We will write a custom essay sample on Mergers and Acquisitions specifically for you for only $16.05 $11/page Learn More Acquisitions involve the purchasing of assets or shares of a company in order to have control of that company (Sherman A. et al 2006). M A can take place peacefully or can sometimes be a difficult process for the companies involved. Having given the definition of MA, this report focuses on how they develop and the reasons why companies pursue MA. Then focus will be made on the types of MA along with the threats and opportunities. This report will further examine the factors that affect MA with the support of real cases. Finally a conclusion will be drawn from the research. Trends of mergers a nd acquisitions In the 1970s, there was increased formation of MA. This trend was persistent and resulted in increased, globalisation. Firms are incorporating the concept of internationalisation in their operation. The current boom with regards to MA in the 21st century has similarities with older conglomerations of the 1990s. However, the trend has affected firms in economic sectors (Hijzen et al 2008, p. 852). The financial markets are no longer the major factors in determining formation of mergers or acquisitions. Furthermore, there is a cause to believe that the current surge is progressed by strategic choices of businesses in light of opportunities offers by the economic prowess.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Most cross-border MA are mostly experienced in the same industry with few variations where new investors are involved. Reasons for acquisitions/mergers The prima ry motivation for coming together or purchasing another business has been to ensure creation of corporate profits hence maximising the shareholder’s value (Bà ¶secke, 2009, p. 46; Campa Hernando, 2004, p. 56). In addition, firms also enter into strategic alliances (business relationship between 2 or more parties with the objective of attaining a critical business objective such as acquire the skilled employees, products and intellectual property). Companies such as Googles, Cisco and Yahoo have all formed acquisitions over the years. MA may also take place because of a rapid change in technology, fierce competition, changing consumer preferences, control costs and a reduction in demand (Sherman A. et al 2006). This means that a company cannot keep up with the changing situation and thus, it resorts to this measure. In addition, firm’s share all the risks involved. However, the individual firm’s remain independent. When venturing in to new markets companies enc ounter problems. Cultural Factors Affecting M A When firms from different national origin interact through MA, they are bound to experience very different and incompatible cultural characteristics (Alvesson, 2002 p. 74). Cultural differences are major components to be considered because cultural clash is considered to be a major obstacle that often causes failed MA (Hà ¤kkinen et al 2004, p. 28).Advertising We will write a custom essay sample on Mergers and Acquisitions specifically for you for only $16.05 $11/page Learn More Various studies have revealed that the existence of cultural differences in different companies greatly contributes to failure of MA (Alvesson 2002, p. 76). In the process of implementing MA, managers assess the key cultural differences that exist in the merging/aquiring firm (Marmenout 2008, p. 75). To reduce the cultural differences interference with synchronization, managers are encouraged to have mergers with firms operating in the same industry. Analysing cultural differences will aid in increasing the probability of the merger succeeding (Mercer 2006, p. 134).This arises from the fact that the necessary harmony in the merger is established (Sudarsanam 2010, p. 135). Culture conflict translates into misunderstanding in the firm (Gitelson et al 2004, p. 1). , Hence, the merging firms experience inefficiencies and time wastage (Frensch 2007, p. 112). A number of aspects such as valuable resources, employee benefits, decision-making process, communication and measures are affected (Gertsen et al 2004, p. 123). Therefore, there is a need to establish harmony among a new firm since cultural differences can affect the synchronization process and hence reduce the intended synergy. The degree of complexity in M A is high if two countries are involved due to cross-cultural disparity. Despite MA involving firms in the same industry being easy, the workforce could respond to comparable situations in a completely different way (Mercer 2006, p. 134). Therefore, consideration of cultural differences prior to the merger is necessary (Gitelson et al 2004, p. 123). Firms should also conduct harmonisation of the MA which entails ensuring that their operation strategies are similar. Strategies of harmonization are very critical for managing cultural differences. To achieve this, an efficient communication within the organisation should be adopted to minimise chances of resistance (Gitelson et al 2004, p. 123).Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Other disadvantages of MA Apart from cultural differences, other disadvantages relate to attainment of a bad reputation. This mainly occurs if one firm acquires a firm which has a negative publicity. This may have a significant effect in the success of the new entity established. Thus, the management team should conduct a comprehensive analysis of the potential partner so as to determine the reputation it has established. In addition, the firm may experience diseconomies of scale. This arises from the fact that the firm may grow in its size leading into an increment in unit costs. MA may also result into a decline in the employees’ level of motivation because some employees especially those in the management level may be rendered redundant. MA may also result into conflict of objectives between the two firms. The resultant effect is inefficiency in the firm’s operation. Cross-Border MA MA involve are formed with a common goal of sharing resources in order to achieve a particular goal. Sharing resources means that each firm benefits from the resources of the other firm and the new firm established is able to attain synergy (Sudarsanam 2010, p. 138).. For example, one party may have a skilled human capital while the other may have adequate financial resources. A cross border M A entails two firms that operate in two different national economies or two companies that operate in the same economy but they belong to different host nations (Andrade et al, 2001, p. 106). Global Trend According to Hijzen et al (2008, p. 852), the high rate of globalisation is forcing firms to incorporate the concept of internationalisation. Other factors include increased deregulation, corporate restructuring and privatisation (Marmenout 2008, p. 75). Understanding the threats and opportunities of cross-border is essential in M A activities and the nature of global strategy. Formation of cross-border MA is costly (Bruner, 2004, p. 89). The price being offered is a criti cal determinant of the success of the acquisition, there is no intrinsic reason why that can cause failure for the properly-conceived strategic mergers. Evidence gives quite contradictory outcomes. For instance, the BP and Mobil merger was aimed at gaining market power by competing with other larger oil corporations in the market and to cut down significant expenses through elimination of duplicate facilities, reducing work force and other overheads (Carleton et al 2004, p. 103). Some mergers may not have significant integration problems, it seems that it had a strong strategic logic and it’s regarded as a blueprint for other similar ventures among rival firms like Amoco and Shell. It is also quite unusual strategy because, the merger only consolidated market resource in Europe but the firms remained rivals in other places. Theories for International Expansion There are three theories that offer probable reasons why firms expand their businesses to the global market (Madura, 2006, p. 56). They include comparative advantage, product cycle and imperfect markets theories. The internalisation theory has also been highlighted by several researchers. Comparative advantage theory purports that a company/ country has a totally different comparative advantage of producing when it is able to run a cheaper production with minimal opportunity cost compared to other firms or countries (Finkelstein, 2009, p. 109). Thus, western nations invest in China due to its large population, China a source of cheap labour and market; however, it has had a totally different cultural background making integration very challenging (Finkelstein, 2009, p. 109). This theory further explains that the two firms engaged in MA could draw great benefits from each other because of these cheap production process and free trade. For example, Fresenius Kabi acquired APP pharmaceutical company to enter into the American market and supply generic drugs to US and Canada. Through the acquisition, Fresenius Kabi expanded its operation hence becoming a global leader of IV generics status (Mullin, 2008, p. 9). Other important examples of comparative advantages include the emerging economies that have great advantage in certain fields (Frensch, 2007, p. 212). Brazil has an advantage of investing in bio-fuels, Russia in energy, while Indians have captured the information technology industry and taking it to a very competitive level (Hoskisson et al, 2000, p. 454). China as a new strength in the economy enjoys comparative advantage of manufacturing, where most of products are made in china because of availability of cheap labour (Hoskisson et al, 2000, p. 455). Imperfect market theory asserts that countries are usually differing with the amount of resources that are accessible for production. These resources are not transferable to another country in a cheaper way or freely (Hoskisson et al, 2000, p. 458). This means that there could be a lot of obstacles and expenses that are att ached to the transferring factors for production. In essence, if there were no such barriers or if the factor were transferable without restrictions, then there won’t be comparative cost advantages hence there will be no reason for the international or cross-border MA (Chari et al, 2004, p. 126). Market imperfections help cross-border MA to grow and exploit international transactions which would be purely for domestic industries (Rossi Volpin, 2004, p. 278). Product cycle theory purports that whereas a company will initially produce products and services that are able to satisfy the demand in the domestic country, with time, the market becomes mature and saturate. This may force the firm to expand its market in the foreign market (Rossi Volpin, 2004, p. 278). This explains why firms are very innovative. It’s through such dynamics that Big Pharma was motivated to acquire Biotech in order to venture into new drugs and equipment after its patent expired. Basell acquisit ion of Lyondell chemicals led to growth in the size of the firm (Salmon, 2010, p. 27). The firm was able to improve its market position by diversifying its operation and also to attain economies of scale. Internalisation theory explains that when MA enables a company to exploit the benefits of intangible assets like branding, management skills, marketing strategies, patents, superior expertise and goodwill (Chari et al, 2004, p. 129). These assets are influenced by the size of the business. They also have immobility and limited information and basically founded on proprietor information (Rossi Volpin, 2004, p. 279). Such obstacles can be bypassed by engaging in cross-border deals hence gaining access to these intangible assets and consequently increasing shareholder value (Campa Hernando, 2004, p. 56). Studies have found that many takeovers in this perspective are mainly those in the research and development business (Guillà ©n, Tschoegl, 2008, p. 123). Target valuation The valu e of MA from the value creation impact of the target firm capital and profitability are implicit in value and there is goal difference between the goals of net assets value. From the financial results, MA following a merger value creation entail the increase in the net current cash flow value. From a corporate MA viewpoint, analysis of MA value creation from the merging firms’ net asset value, via an analysis and evaluation of the target firm’s intrinsic value, the MA value synergies developed to determine the acquisition value creation can be attained. The target firm in the value of the M A process of value creation can be addressed at three levels of synergy. Net asset value: together with profits from ongoing operations to changing the enterprises capital increase, the formation of accumulating capital, this accumulated capital is invested business on the basis of long-term business formation in the past. Target firm MA price is evaluated from the current enterpri se, future profitability and growth as determined by the inherent value, value added acquisition synergy and firm growth option value. Target Company’s Value: the acquisition seeks to pursue the objectives of the undervalued firms. It’s important to determine the target firm’s inherent value and then make comparison with the market. Growth option value: M A returns when the target firm has indicated rising trend, meaning that the value has a call option and future growth of M A income can be brought. The value of synergy Target firm: MA to create value via collaboration and bring together resources, knowledge for enhancing combined value of the MA on both sides. Many cross-borders mergers face serious difficulties in the process of integration after the merger or acquisition (Hà ¤kkinen et al, 2004, p. 32). The new firm has to undertake a number of activities so as to attain synergy (Carleton et al 2004, p. 103). Through effective integration, M A can succeed in the long term (Olie 1990, p. 206). Cross-Border Merger/Acquisition obstacles A number of legal requirements have to be met in cross-border mergers. As a result, the acquiring firm can be disadvantaged or hampered by lack of crucial information and the legal incompatibility (Olie 1990, p. 208).Sometimes, the legal structures frustrate organisations’ M A. These restrictions are not restricted to cross-border mergers but they explain the failure of M A (Vasconcellos et al 1990, p. 174). An example of legal barriers is evident in China where the government introduced a regulation on monopolies limiting the probability of entering into the market by foreign firms. Tax barriers are another obstacle which governments impose to cross-border mergers. Despite efforts by managers to ensure smooth transition process, taxation matters are usually problematic (Arnold 2002, p. 145). This is because these issues are usually dealt with domestically and they are sometimes not clear exhau stive to determine the effect of tax of the international M A (Vasconcellos et al, 1990, p. 178). Such impediments require seeking expert consultation services or special agreements with tax agencies on these grounds. Cross-border mergers could expose gaps or weaknesses in the regulatory framework thus making the regulatory bodies inadequate or uncertain on how to carry out the process of merger thus causing delays (Vasconcellos et al 1990, p. 179). Economic barriers, such as fragmentation of equity markets can impose extra transactions expenses on cross-border M A (Arnold 2002, p. 145). For example, the share mechanism can be intricate and costly when the merging firms are listed differently on the stock markets. The extra costs could influence the bidder on the kind of deal to get into (Sudarsanam 2010, p. 138). In addition to these barriers, there would also be differences of member state that would demand differentiated approach adoption. The differentiated approach has very l ittle information available on value-based process. With regard to the attitudinal barriers, some of the member states support ‘National Industrial Policy’ openly or surreptitiously, targeting to become domestic national champions. Among possible justification, some could argue that these types of policies could ensure more finances for the national economy. Political issues could also affect privatised firms that have in the past received public money hence cross-border mergers can be blocked (Cartwright Cooper 2000, p. 112). In the European banking sector, companies are seeking to consolidate their market position in the domestic arena before they make the strategic move in response to formation of single market and also introduction of single currency. Merging in this view is often differentiated because of specific development is individual nations (Vasconcellos et al 1990, p. 174). The following example is about a cross border acquisition of two banks from differe nt countries: Cross border Acquisition of the Royal Bank of Scotland with ABN AMRO In 2007 the Royal Bank of Scotland was involved in the Europe’s biggest cross border banking deal (F.T, 2011). ABN AMRO, a Dutch bank was acquired by the Scottish bank after having competing against Barclays. This was supposed to be an effective deal which was intended to cause rapid growth and global domination (Wilson H at el, 2011). They intended to make savings on the stationery bill and shared computer software (Hosking P, 2008). However, this was not the case. This type of cross border acquisition has been used to explain the consequences of a deal which produces negative results within a year. As stated not all acquisitions are successful. This deal had a liquidity impact on RBS in particular to its capital ratios. This was a costly deal for them. Also the ABN’s staff were concerned of the RBS management attitude, this reflects cultural differences in workers/managers. Finally in 2009, the ex boss of the Royal bank of Scotland, Sir Tom McKillop pointed out that the takeover of ABN Amro was a â€Å"bad mistake† (Duncan H., 2009). Conclusion From the analysis, it is evident that there are a number of factors which motivates firms to consider forming MA. Factors relate to the high rate of globalisation, increased privatisation and economic liberalisation. In addition there are a few theories which explain why firms expand into the international markets. These include the comparative advantage, product cycle, imperfect markets and the internalisation theory. However, MA are faced with numerous challenges, cultural differences etc which limit the probability of success such as RBS faced. MA may result into diseconomies of scale as a result of increment in the size of the firm. The employees’ level of motivation may adversely be affected limiting the firm’s operational efficiency. In addition, legal, political, and economic barriers are associ ated with MA. All these restrictions cause uncertainty of future trade and cash flow and this in turn affects asset value and therefore poor performance. However, various economies are considering forming trading blocs so as to harmonize these issues and allow free trade. In most cases, the target value of MA relate to increasing the net assets value, attain a high growth and to attain synergy. Reference List Alvesson, M., 2002, Understanding Organizational Culture. New York: Sage, pp. 74-76. Andrade, G., Mitchell, M., Stafford, E., 2000. ‘New Evidence and Perspectives on Mergers,’ Journal of Economic Perspectives 15, pp. 103–120. Arnold, G., 2002, Corporate Financial Management. 2nd Ed. Harlow: Prentice Hall. Bà ¶secke, K., 2009, Value Creation in Mergers, Acquisitions, and Alliances. Wiesbaden: Gabler Verlag. Bruner, R. F., 2004, Applied Mergers and Acquisition, Stockholm: Rutledge Publishers. Campa, J. M. Hernando, I. 2004, ‘Shareholder Value Creation in European MAs,’ European Financial Management, Vol. 10 (1), pp. 47-81. Carleton, R. J., Berry, C. S., 2004, Achieving Post-Merger Success: A Stakeholder’s Guide to Cultural due Diligence, Assessment and Integration. New York: John Wiley Sons. Cartwright, S., Cooper, C., 2000, HR Know-How in Mergers and Acquisitions. London: Institute Of Personnel and Development. Chari, A. Ouimet, P. Tesar, L. 2004, Cross Border Mergers and Acquisitions in Emerging Markets: The Stock Market Valuation of Corporate Control, EFA 2004 Maastricht Meetings Paper. No. 3479. Duncan H., 2009, Ex-RBS boss holds up hands to ABN takeover – admitting it was a ‘bad mistake’, Mail online. Web. Finkelstein, S., 2009, Advances in Mergers and Acquisitions. New York: Emerald Group Publishing. Frensch, F., 2007, The Social Side of Mergers and Acquisitions: Cooperation Relationships after Mergers and Acquisitions. Sydney: DUV FT 2011, ABN Amro takeover battle, Financial Times. We b. Gertsen, M. C., Torp, J. E., Soderberg, A. M., 2004, Cultural Dimensions of International Mergers and Acquisitions. Sydney: Prentice Hall. Gitelson G., Bing, J. W., Laroche, L., 2004, The Impact of Culture on Mergers and Acquisitions. New York: ITAP International Incorporation. Guillà ©n, M. Tschoegl, F. (2008). Building A Global Bank: The Transformation Of Banco Santander, Princeton, NJ: Princeton University Press. Hà ¤kkinen, L., Norrman, A., Hilmola, O., Ojala, L., 2004. Logistics Integration in Horizontal Mergers and Acquisitions. International Journal of Logistics Management, Vol. 15 Issue 1, pp. 27 – 42 Hijzen, A., Gorg, H., Manchin, M., 2008. Cross-Border Mergers and Acquisitions and the Role Of Trade Costs. European Economics Review, Vol. 52, Issue 5, pp. 849 – 866 Hosking P. 2008, RBS remains upbeat after ABN Amro deal, The Times. Web. Hoskisson, R. E., Eden, L., Lau, C. M., Wright, M. 2000. ‘Strategy In Emerging Economies,’ Academy Of Management Journal, 43: 249-267. Madura, J., 2006. International Financial Management, 8th ed., Thomson South-Western, Mason, Ohio. Marmenout, K., 2008. Getting Beyond Culture Clashes: A Process Model of Post-Merger Order Negotiation. Montreal: McGill University. Mullin, R. (2008). Generic Drugs Germany’s Fresenius Will Acquire Heparin Leader APP Pharmaceuticals, Chem. Eng. News, 86 (28), p. 9. Olie, R., 1990. Culture and Integration Problems in International Mergers and Acquisitions. European Management Journal, Vol. 8, Issue 2, pp. 206-215. Rossi, S. Volpin, P. 2004, Cross-country Determinants of Mergers and Acquisitions, Journal of Financial Economics, 74: 277-304. Salmon, J. (2010). 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Mergers and Acquisitions A merger refers to a situation where two or more companies unite to form a single company and this kind of bonding is found among medium sized and small companies. Acquisition occurs when one company is bought by another one. These two aspects are meant to promote growth of the companies involved. This paper addresses the various mergers that took place in United States and their effects.Advertising We will write a custom research paper sample on Mergers and Acquisitions specifically for you for only $16.05 $11/page Learn More Let us take a look at the merger that took place in the banking industry in the year 2004 between the Bank of America corp. and FleetBoston Financial corp. In this merger the bank of America corp. acquired the ownership of FleetBoston financial corp. This means that the company that was bought existed under new ownership and as a result its identity was changed to resemble that of the bank of America corp. (Straub, 2007) A cross ch eck on the history of FleetBoston suggests that the bank had successfully merged with another financial institution known as BankBoston and its previous identity was fleet financial group. The history of FleetBoston indicates that this is not the last merger that’s happening involving FleetBoston. This shows that the management of this organization is determined and will do anything just to make sure they remain operational with a wider customer base. The bank of America had also entered into a merger which had seen it grow tremendously and since it was ranked third in US it had the required base to buy the FleetBoston bank. The bank of America also had a failed merger with a stock brokerage institution known as Merrill Lynch in 2008.The merger seemed attractive on paper but on the ground it was very tough. According to Depamphilis (2008), the bank of America lost many customers after acquiring the ownership of the stocks brokerage firm because the existing customers had pers onal relationships with the employees of the outgoing owners; people can not trust people who are not known to them. This loss of clients happened because the bank of America could not retain the organization culture of the outgoing Merrill. Before an acquisition takes place there are a few things that the new owner to be should consider and they are namely (1) asset assessment, (2) historical earnings, (3) future maintainable earnings assessment, (4) comparable company and comparable transactions and (5) discounted cash flow assessment.Advertising Looking for research paper on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More These factors are used to determine the cost of acquisition (Depamphilis, 2008). In this case the cost of buying FleetBoston was 47 billion. The above stated factors were important and remain like so because by acquiring the ownership of FleetBoston the bank of America was going to bear all the losses that were being incurred by the bought company and besides it had to take the unknown risks. In the final end the FleetBoston was no more because its shares were now owned by the bank of America. Straub (2007) argues that there are various reasons for mergers and acquisitions. First, merging companies reduces the cost of operations as opposed to when the companies are being run as independent entities. This results in rise in company proceeds because there are several sellers of goods and services hence the union causes the group of companies to have an upper hand in business. When a smaller company buys a bigger company it stands to raise its proceeds and also improve its market share. This is because the acquired company could have managed to gather many customers and hence the new owners do not need to look for new customers. Acquisition promotes cross trading because the incoming company can sell its products and services to the existing customers of the outgoing owners. For in stance if a company that deals with insurance brokerage was bought by a company that sells automobiles the customers of the insurance company can buy automobiles from the new owner of the company. An example in Information Technology industry involves the case of Google when it purchased Like.com in August 2010 for almost $100 million with an aim of improving the IT infrastructure of Boutiques.com. Google integrates managers, websites, employees, network, and data in driving its IS strategy. With its newly implemented e-commerce site, Boutiques.com, Google seeks to widen its market base by offering customers new ways of searching and purchasing clothes and accessories (Efrati Morrison, 2010). According to Harwood (2006) companies that make huge proceeds can buy companies that make less or no profits in order to capitalize on their taxation which is normally subsidized. This trend was very common in the US until recently when the government implemented a policy that prohibited large companies from buying companies that are operating at a loss. Company mergers and acquisitions usually have negative impacts on the management. This is because when a company acquires ownership it lays of some of the employees of the previous owner.Advertising We will write a custom research paper sample on Mergers and Acquisitions specifically for you for only $16.05 $11/page Learn More This could affect the performance of the company and thus reduce its productivity because the new management team may not follow the legacy of the previous management team. Since the remaining employees were used to the leadership strategies of the previous managers they would take much time to get used to the new leadership strategies. When a deal involving a merger and acquisition is being closed the parties have to agree about which brand name should be used. There are several suggested options. First, the weaker brand name can be done away with and it can be replac ed by the popular brand. Secondly the parties can do away with their respective brand names and develop a new brand. In some mergers the parties may opt to retain their identities and thus use them simultaneously. Therefore, instead of relying on creating mergers, companies should find new strategies of penetrating into upcoming markets because success in business comes after a business have held on to its position after others have left. In business world the ups and downs are part of life. References Depamphilis, D. (2008). Mergers, Acquisitions, and other Restructuring Activities. New York: Elsevier, Academic Press. Efrati, A. Morrison, S. (2010). â€Å"Google Jumps Into Fashion E-Commerce.† The Wall Street Journal. 18 November 2010. Retrieved from https://www.wsj.com/articles/SB10001424052748703688704575620840174153292 Harwood, I.A. (2006). â€Å"Confidentiality constraints within mergers and acquisitions: gaining insights through a ‘bubble’ metaphor† . British Journal of Management 17(4):347-359. Straub, T. (2007). Reasons for frequent failure in mergers acquisitions: A comprehensive analysis. Wiesbaden: Deutscher Universitasverlag.Advertising Looking for research paper on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More This research paper on Mergers and Acquisitions was written and submitted by user Dirty Parrot to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.