AHAM NZENWATA
1. INTRODUCTION
Corporations reorganize
and restructure for various reasons and in numerous ways. The bottom line
usually is, well, the bottom line. Companies reorganize to increase profits and
improve efficiency. The reorganization of a company typically addresses the
efficiency component in an attempt to increase profits. It's not unusual for a
corporation to reorganize on the heels of changes at the top.
Corporate reorganization
normally occurs following new acquisitions, buyouts, takeovers, other forms of
new ownership or the threat or filing of bankruptcy. Reorganizations involve
major changes in a corporation's equity base, such as converting outstanding
shares to common stock or a reversing a stock split (combining a company's
outstanding shares into fewer shares). Reorganizations often occur when
companies already have attempted new venture financing but failed to increase
company value.
There are several types and reasons adduced for corporate reorganization,
these form the basis for the rest of this paper.
2 REASONS FOR MERGERS AND ACQUISITIONS
There are several possible motives or reasons that firms might engage in
Mergers and Acquisitions, below, explain some these motives.
GROWTH
One of the most fundamental motives for Mergers and Acquisitions is
growth. Companies seeking to expand are faced with a choice between internal or
organic growth and growth through Mergers and Acquisitions. Internal growth may
be a slow and uncertain process. Growth through Mergers and Acquisitions may be
a much more rapid process, although it brings with it its own uncertainties.
Companies may grow within their own industry or they may expand outside their business
category. Expansion outside one’s industry means diversification.
EXPANSION
One of the most common motives is expansion.
Acquiring a company in a line of business or geographic area into which the
company may want to expand can be quicker than internal expansion. An
acquisition of a particular company may provide certain synergistic benefits
for the acquirer, such as when two lines of business complement one another (Bradley
and Kim 2003).
SYNERGY
The term synergy is often
associated with the physical sciences rather than with economics or finance. It
refers to the type of reactions that occur when two substances or factors
combine to produce a greater effect together than that which the sum of the two
operating independently could account for. For example, a synergistic reaction
occurs in chemistry when two chemicals combine to produce a more potent total
reaction than the sum of their separate effects (Bradley and Kim 2003).
According to Asquith (2006), imply stated, synergy refers to the phenomenon
of 2 + 2 = 5. In mergers this translates into the ability of a corporate
combination to be more profitable than the individual parts of the firms that
were combined. The anticipated existence of synergistic benefits allows firms
to incur the expenses of the acquisition process and still be able to afford to
give target shareholders a premium for their shares. Synergy may allow the
combined firm to appear to have a positive net acquisition value (NAV).
DIVERSIFICATION
Diversification means
growing outside a company’s current industry category. This motive played a
major role in the acquisitions and mergers that took place in the late 1960S.
During the late 1960s, firms often sought to expand by buying other companies
rather than through internal expansion. This outward expansion was often
facilitated by some creative financial techniques that temporarily caused the
acquiring firm’s stock price to rise while adding little real value through the
exchange (Jensen and Ruback 2003).
The legacy of the conglomerates
has drawn poor, or at least mixed reviews. Indeed, many of the firms that grew
into conglomerates in the 1960s were disassembled through various spinoffs and
divestitures in the 1970s and 1980s. This process of de-conglomerization raises
serious doubts as to the value of diversification based on expansion (Jensen
and Ruback 2003).
Although many companies
have regretted their attempts at diversification, others can claim to have
gained significantly. One such firm is General Electric (GE). Contrary to what
its name implies, for many years now GE is no longer merely an electronics-oriented
company. Through a pattern of acquisitions and divestitures, the firm has
become a diversified conglomerate with operations in insurance, television
stations, plastics, medical equipment etc (Jensen and Ruback 2003).
3 TYPES OF MERGERS AND ACQUISITIONS
Mergers are often categorized as horizontal, vertical, or conglomerate.
HORIZONTAL INTEGRATION
Combinations that result
in an increase in market share may have a significant impact on the combined
firm’s market power. Whether market power actually increases depends on the
size of the merging firms and the level of competition in the industry. A horizontal merger occurs when two
competitors combine.
If a horizontal merger causes the
combined firm to experience an increase in market power that will have
anti-competitive effects, the merger may be opposed on antitrust grounds. For
example, Etisalat Nigeria sued MTN Nigeria for its (MTN) Acquisition Visafone
as being anti-competitive and giving MTN undue advantage in the GSM market. But
the court upheld the acquisition of Visafone by MTN as being within the purview
of the law.
VERTICAL INTEGRATION
Vertical integration involves the acquisition of firms that are closer to
the source of supply or to the ultimate consumer. Vertical mergers are combinations of companies that have a
buyer–seller relationship. For example, in 1993, Merck, the world’s largest
drug company, acquired Medco Containment Services, Inc., the largest marketer
of discount prescription medicines. The transaction enabled Merck to go from
being the largest pharmaceutical company to also being the largest integrated
producer and distributor of pharmaceuticals (Asquith, 2006)).
CONGLOMERATION
A conglomerate merger occurs
when the companies are not competitors and do not have a buyer–seller
relationship. One example would be Philip Morris, a tobacco company, which
acquired General Foods in 1985.
4. SUMMARY
We have seen that there
are a wide variety of motives and determinants of Mergers and Acquisitions. One
of the most basic motives for Mergers and Acquisitions is growth. Mergers and
acquisitions provide a means whereby a company can grow quickly. Often the only
alternative is to grow more slowly through internal expansion. Competitive
factors, however, may make such internal growth ineffective. Firms may acquire
another firm with hope of experiencing economic gains. These economic gains may
come as a result of economies of scale or economies of scope.
Economies of scale are the reductions in per-unit costs that come as the
size of a company’s operations, in terms of revenues or units production,
increases. Economies of scope occur when a business can offer a broader range
of services to its customer base. Some of these gains are reported as motives
for horizontal and vertical acquisitions. Horizontal deals involve mergers
between competitors, whereas vertical transactions involve companies that have
a buyer–seller relationship.
REFERENCES
Paul Asquith, (2006) “Merger Bids, Uncertainty and Stockholder Returns,”
Journal of Financial Economics 11(1–4), 51–83; and Michael
Bradley, Anand Desai, and E. Han Kim,(2003) “The Rationale Behind
Interfirm Tender Offers: Information or Synergy,” Journal of Financial
Economics 11(1–4), 183–206.
Michael
Jensen and Richard Ruback, (2003) “The Market for Corporate Control: The
Scientific Evidence,” Journal of Financial Economics 11(1–4), April 5–50.
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