Corporate Mergers and Acquisitions

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Abstract

This research paper will focus on exploring how corporate mergers and acquisitions affect a companys financial well-being and the effectiveness of the employees performance. Particularly, it will examine the above-mentioned issues from the perspective of financial and HRM effects on the employees whose management was changed due to the mergers and acquisitions introduction and those not employed in the basic organizational bodies.

The research variables include the process of information transmission between the members of the existing and new teams, concerns of the staff workers regarding the preservation of their jobs, job satisfaction of the assimilating team members. Moreover, this paper will examine the extent to which the above-mentioned factors affect employee performance& the financial position of the organization (Mitchell, Andrade & Stafford, 108).

Introduction

To begin with, it is necessary to provide the basic definitions of the terms used in the paper. Thus, a merger is defined as the activity of a company directed at joining its financial opportunities and technological equipment with those of another company to form a new enterprise under the new title, or under the name of one of the founding companies, i. e. mergers. An acquisition, which may also be referred to as a takeover, might be defined as a strategy of the corporate management consisting in buying another company to facilitate the growth of the former by creating a new business entity and enlarging it with the assets and powers of the newly bought enterprise.

The smaller company among the two participating in an acquisition becomes the subsidiary fro the larger one. At the same time, the employees of the bought company are not fired. Their working agreements are incorporated into the organizational structure of the buying enterprise which provides them with jobs according to the contracts they had with their original company before its buying (Ghoshal and Bartlett, 86).

The purchase of the major share of a companys stocks can also be referred to as an acquisition process as it allows the buying company to control the performance of the target company. After this, the official transition of the ownership rights from one company to another can also take place, provided both companies agree on the conditions of such a transition. The shareholders of the acquired company can obtain an option of buying their shares out as a way of compensation for the possible losses they might suffer from the ownership change. Another option presupposing the transmission of their shares of the companys stocks to the new owners is also possible under the mutual consent of the parties.

An acquisition, as well as a merger, may be categorized as hostile, friendly or a reverse takeover depending on the circumstances leading to it. Drawing from this classification, and from the definitions provided above, the essence of the two processes is similar in the sense that they both presuppose the change of ownership of a company or creating a new business entity (Marks, 65). Accordingly, the following passages will refer to both mergers and acquisitions similarly.

Thus, a friendly merger is possible under the conditions when the management of both companies sees it as the best way to improve the companies performance and facilitate their further developments. A friendly merger is usually a result of the negotiation process between the companies (Ginsburg & Stephen, 25). After the merger agreement is reached, both companies register the target shares that are supposed to be used in this process by means of compiling a joint listing statement. When the latter is approved by the management of both companies, the combined registration statement is sent to the stakeholders of the merging companies.

A hostile takeover occurs mostly in cases of the failing performance of a company which is further acquired. The company planning to acquire the latter does not carry out negotiations with its management but simply puts the acquired company in front of the fact that it cannot afford further development as an independent company and is to become a branch of the more successful enterprise. The takeover intention is however advertised to allow the company to for its defense in court with the help of the best lawyers and suitors they can afford hiring. This fact allows the companys stakeholders either to prepare for the court defense of their interests as well, or make the decision about the willful merger of the companies without the juridical procedures in court (Marks, 65).

A takeover may also be regarded as hostile when the board rejects an offer but the bidder continues to follow up, as well as when the bidding firm makes an offer before to board being aware of the bid (Bruner & Asquith, 134). A hostile takeover can be executed by means of a tender offer which sets the price for the enterprise in question over the highest mark fixed in the market. On the other hand, the takeover can be carried out through a peaceful persuasion of the stakeholders of the company bid for to replace the management of their company s that the merger could be carried out successfully. Finally, a peaceful takeover can be carried out through the above mentioned purchase of the major share of the companys stocks in the market.

A reverse takeover is the process resulting in a small company acquiring management control of a bigger one. It may also be defined as the process by which a private enterprise takes over a public company. This usually happens when a small (private) company is developed and funded enough to afford the management capacity to buy a publicly listed company. However, private companies, although usually having the opportunities to take over the public ones, prefer to stay out of such deals involving the public scrutiny and possible losses of profit involved by the latter (Marks, 66).

Acquisitions and mergers can also be categorized according to other factors that allow speaking of the vertical merger, horizontal and conglomerate merger types, depending on the competitive link between the two firms participating in it. Vertical mergers are associated with one firm taking control of the customers based of both enterprises, while another one supervises the suppliers of both companies. Horizontal mergers involve the acquisition of a firm that provides the same products or services and operates in the same region in order to do away with competition.

On the other hand, conglomerate mergers deal with all the other types of acquisitions characterized as both vertical and horizontal mergers. The three following types of the latter can be distinguished. First of them is the merger the enterprises whose products or services have no clear relationship, such as that of a canned food producer and a cloth manufacturer. The second one is the merger directed at the extension of geographical boundaries of a firm acquiring another firm which produces the same products or services but operates in a different market. The example of such a merger can be an insurance company in New York buying an insurance company in London to develop its customer base internationally.

The third type of mergers is the product extension type which involves a company merging with another one that produces a different product or service but requires the same production techniques or marketing.

As a result, there are various competitive advantages that come with these three types of mergers. Thus, horizontal mergers pose the following three advantages resulting from their specificity. First, it is the ability to cope with competition between the merging firms which could have a big impact on performance depending on the size of the companies participating in the merger. Secondly, the amalgamation of the firms might create a substantive market force that would, in the long run, increases the competitiveness of the prices for the goods of both firms and provides for these firms joint development. Thirdly, the merger creates a concentrated relevant market which might make its other players become more coordinated to set a price level to push the merger out of the market.

During the recent years, the rate of mergers between business companies has been on a significant decrease in the USA, as well as all over the whole world. Globalization, changing regulatory frameworks, and market liberalization leading to an increase in the intensity of competition have added importance to enterprises volumes. In this situation, it has become more profitable to create large-scale enterprises. Big retail stores have also increased in numbers as a result of fierce competition. This has been accompanied by the stiff competition that super and hypermarkets had with traditional department stores and specialized stores (Nickels, Hugh et al, 32).

At the same time, urban commercial centers, or malls, have also substantially developed in the competition with inner-city and rural businesses. The major point of this competition has been the influence in certain segments of the market and prime trading bases, while the main purpose of this competition has become the introduction of stable and competitive prices for goods and services that should have allowed standing the competition with the urban enterprises (Boone, 24).

As Mitchell, Andrade & Stafford (2001) argue, such a price-oriented strategy requires larger scales of business, new markets and customer bases. Accordingly, mergers and acquisitions are one of the responses to this need for expansion, which is a primary concern for the developed countries with fully functioning financial markets. However, the above discussed economic changes and transformations of the market are not unique for the developed countries only. The so-called Third World countries, i. e. the developing states of Asia, Africa and Eastern Europe, are also affected by these changes (Mitchell, Andrade & Stafford, 118).

Thus, the small and medium size business enterprises are obviously the companies employing over a half of the whole amount of labor force in the market. The process of acquisitions and mergers, however, brings change to this situation creating more large scale, local or international wholesalers and retailers, enterprises that dominate the market and set their own rules in it. As a result, the consolidation of the market forces can be observed in the market, which causes the concentration of great numbers of employees in only few largest companies.

Effects of Mergers and Acquisitions

Financial effects of Corporate Mergers and Acquisitions

The acquisition of another business can be one of the easiest ventures for the management of a company. What is necessary to do this is to develop the proper takeover strategy and evaluate the venture planned for the acquisition properly in order to make the respective bid for it. The offer might at first be rejected by those being taken over in order to increase the price. However, the takeover bid might be accepted at once after all the takeover conditions are considered by the company bid for.

Other possible expenses that takeover procedure might involve include the judicial procedures and court hearings of the cases if the company taken over decides to file a lawsuit in its defense. Finally, the expenses might result from the companys attention being distracted from its basic business activities by the takeover process. The financial losses suffered by the company might also affect its state substantially.

Another important aspect of the issue of mergers and acquisitions is the ability of the companies to predict the ways in which their competitors might want to carry out the takeover. These predicting attempts may be misleading and result in the companys being not prepared for the takeover and in the financial losses the latter might cause.

The process of buying the new business may not really require the special activities from the companys management; however, the basic decisions to make in the deal are the functions of the management of the company. The initial integration phase of both mergers and acquisitions demands innovative leadership styles from the management to ensure the proper conduct of either of the takeover types. Also, the strategy of the further development and the investment initiatives in the company taken over should be develop by the management.

The very procedure of the merger of the acquisition should be carried out in accordance with the negotiated conditions. They should be stipulated in the merger agreement signed between the two companies, and should reflect the interests of both parties to the deal. The strategic plan according to which the takeover is carried out might be innovative or traditional aiming at simple expansion of a company to the new markets using the business ties and customer base of the acquired enterprise.

In this respect, the forces standing behind the merging companies are of almost no importance, as the management of each of the companies should clearly understand that the success of the merger depends greatly upon their HRM skills and corporate management achievements. The importance of this aspect is understood by management but, despite huge costs that its ignoring involves, is paid not enough attention to.

The issue here is that the scholarly research has been conducted not enough on the topic of post-merger development of companies and the role of the senior management in it. For example, it is necessary to consider the issues of post-merger HRM policies and the special techniques that are to be implemented by the management to achieve the highest results. However, it is also evident that mergers and acquisitions have also positive effects upon the performance of the companies participating in them. Their employees might also benefit from merging of their companies with the larger one. This might result in an improvement of their career prospects, increase of opportunities and financial wellbeing.

Positive Effects of Mergers

The acquisition of another business has some financial advantages that come with it. One of these advantages may be to the increase of the companys customer base and the subsequent increase in its sales. Among the other advantages such ones can be mentioned as saving money on buying new equipment, new products, offices, plants, shops and employing larger numbers of the labor force which the planned development of the company might involve. The speed of the process of acquisition is also rather substantial for its success. The faster the process of acquisition is carried out, the better it impacts the further performance of the companies merging.

The quickly and properly conducted acquisition save not only money, but also the time which the companies can use for the proper assessment of the possible perspectives and profits the acquisition might bring to them both. In case if the merger does not prove to be as effective as it was planned to be within the initial period of time, the companies might decide to change the ownership form and either merge with other partners or gain independence in business matters.

The example of a successful management in the post-merger situation is presented in the case study of the Williams Company. This enterprise, at the time when the case study was conducted, had two kinds of the financial liquidities. First of all, Williams Company possessed the internal liquidity, consisting of available cash investments of the enterprise. Secondly, the external liquidity was also at the companys disposal; it consisted in the opportunity to borrow money from available bank-credit facilities for their further utilization without any limitations exercised by the loan covenants. On December 31, 1995, Williams Companys assets amounted to $726 million in cash, which was only the part of the actual capital of the company which equaled $800 million in the form of bank accounts and the investments into the enterprise. This sum was increased by $200 million in 1995 when the bank-credit facilities provided the company with the access to larger loans.

In January 1996, Williams Corporation, also known as Delaware Incorporation, a wholly owned subsidiary of Williams Company, issued a $400-million shelf registration statement for the Securities and Exchange Commission, after which $250 million of debt securities were issued by the company. Compared to 1993, when Williams Company issued a $300 million shelf registration statement for the Securities and Exchange Commission, the total increase in the amount of money available to the company grew for $100 million.

As a result of this case study, it can be concluded that the registration statement might have been used to secure Williams Companys common or preferred stock, preferred stock purchase rights, debt securities, warrants to purchase Williams Company common stock or warrants to purchase debt securities. Williams Company has not experienced any need for additional financing arrangements of its organizational structure; however, the company admits the possibility of such arrangements in case if the market conditions or the companys strategic interests are concerned.

One more advantage for any company participating in a merger might be the decrease of the competition. Although it is a short-term advantage, it might allow the firms to launch their products to the new markets due to the newly acquired facilities and the expansion of the newly formed companys interests. This, together with the expanded brand portfolio and increased market share, will allow the firm to enjoy the benefits of dominating the market and spending insufficient amounts of money on such necessary policies as advertising and promotion aimed at attracting more customers.

Negative Financial Effects of Merger and Acquisitions

However, mergers and acquisitions also have certain negative effects upon the financial and juridical performance. One of the most dangerous points in this respect is the possibility of the existence of the hidden liabilities of target entity. The company bid for might have failed, or been reluctant to, disclose its financial data to the full extent. For example, the information about the companys debts, age of their assets, the number of creditors, and the annual costs incurred might be covered so that the bidder should not cancel the merger agreement. This lack of transparency might lead to the acquiring company making the wrong estimations about the financial side of the merger and of the potential risks such a transaction might bring. As a result there may be some unplanned expenditures which making the acquisition or the merger a no-profitable venture.

The Financial Cost to the Organization

An organization which acquires another organization usually remits a specific amount of money in order to have ownership of the latter. There are several ways in which the acquiring company might gather the necessary amount of money. The first one is the usage of the companys savings and assets combined with certain sums retrieved from the companys bank account, which is a rather problematic and time-consuming task. The second, and a rather popular, way of collecting money for the bidding price of the acquired company is borrowing money from banks under the liability to issue the respective amount of securities and bonds.

Most acquisitions that have been financed through borrowings can also be referred to as leverage buyouts. The funding of the acquisition will be reflected on the balance sheet of the company that has been acquired. In case if the company fails to pay the debt, the lender is entitled to sell the acquired companys assets to receive the compensation. Otherwise, the acquired company pays the debt.

Mergers, especially those involving companies producing the same type of products or services, lead to reduced competition in the market they operate in. Such a situation can result in the emergence of a monopolized market where sellers are few and any decision made by any of them can significantly affect the markets commodity prices and have a remarkable impact onto their competitors (Dean, 648). This type of market can be good for the short-term business, while it is rather disadvantageous for consumers. The long-term effect of the monopolization of the market can be the lack of growth due to inadequate innovation policies carried out by the monopolists. At the same time, the emergence of a new competitor might break the monopoly and take the monopolist-firms down (Ackerman, 34).

Effects of Mergers on Employees Effectiveness at Work

The success of the mergers is determined by the proper development of their organizational cultures. In case of merging, the leadership and decision-making styles are supervised while the possible differences in the organizational cultures are often ignored. For example, the counseling practices, financial aids, and even such small details as dress code are stable in every particular company, and their intolerant change might undermine the performance of the whole newly emerged company. It should also be noted that usually mergers affect the organizational cultures of companies negatively. Lack of attention to such established rules and regulations as the Inside Revenue Code can result in the failure of a merger, especially if the companies from different countries are involved in it.

To understand the above mentioned rules and avoid the aforesaid negative consequences of their ignoring, it is necessary to clear out the basic definitions of the phenomena involved. Thus, the Internal Revenue Code regulates the rights of the employees from the acquired companies and categorizes them as follows:

Employees form a previous employer who become employed by the employer as a product of a merger or an acquisition between the employer and the previous employer of a stock or asset acquisition, merger or other similar transaction involving a change in the employer of the employees of a trade or business, plus employees hired by or transferred into the acquired trade or business on or before a date selected by the employer that is within the transition period defined in Section 410(b)(6)(C)(ii).

In other terms, these are the people that the company hires with the only difference is that they were hired by another company, and the new hiring took place without resignation from the previous place of work. The process of the new hiring lasts from the starts of the merger process till the end of the fiscal year when the two companies form a single juridical and business entity. The workers of this new organization are labeled acquired collection of workers (Susskind, 40).

The rights of these workers are assured by the so-called Rights and Features policy. The latter is established by the two companies while negotiating the merger conditions, and is included into merger agreement and into the further strategic plan of the newly formed enterprise. The traditional Rights and Features policy includes:

Plan loan guides and assuring the employees benefits in the new company;
The right to direct investments;
Granting the employees with the right for the aforesaid investment and for the employer securities (including conversion, dividend, voting, liquidation preference, or other rights conferred under the security);

It should be kept in mind that the acquired group of employees is also inclusive into the number of the current employees who are transferred into the new business entity. There dont seem to be any formal rules regarding this. This situation might involve the so-called problem testing of the workers carried out through transferring them to one of the companys branches to check the workers for loyalty to the company. Such a practice is rather widespread but its effects are controversial, and every enterprise should think twice before implementing it (Susskind, 40).

As far as the skilled and motivated workers ensure the success of any company, and the ambitious company is the guarantee of the motivated and fruitful performance of these workers, there can be observed the mutual connection between the enterprise and employees. A successful business company is the one able to make people want to work for its development by giving them benefits and advantages in career development, recreation, etc. As mergers and acquisitions are rather stressful for their participants, both parties of the mergers should ensure the high levels of job satisfaction, minimize work-related stress, and thereby protect enterprise productivity by any means necessary.

In the ambitious companies, the HRM departments are charged with these tasks. Accordingly, the HRM departments of the merging companies have to be especially careful about the policies they implement in the staff, including automation and standardization, as the latter might be perceived hostilely by the employees that would decrease the companys performance. Proper training and preparation of the workers and management for the challenges that come with the merger can enable the employees to adjust to the new requirements, and increase their performance efficiency so that the new employers will be sure to keep them employed in their company.

An adequate degree of security of the job is a very important factor which gives the workers the feeling of the proper organizational culture. On the other hand, it makes the workers committed to the firms goals to the extent that they are focused at work. Such job security could be supported by training for employability and multi-skilled job experience so as to make it possible for the workers to adapt to higher work place demands, and have wider career prospects in the modern world of business competition.

The reconstruction process after the merger sometimes requires the workers to relocate. This results in the increase of the time workers need to get to work. Developing the strategy to solve this issue, the company should first of all take into account the interests of the workers having families. Needless to say, other employees interests and needs should also be addressed by the management while developing such a strategy. The most popular ways to solve the commutation problems include housing and transport opportunities presented to the employees.

Drawing from the above said, employee performance can be greatly affected by mergers and acquisitions. First and foremost, employees will experience communicative dilemmas when interacting with team members from the other party of the merger agreement. It is quite evident that when several teams of workers are put together, they will always tend to show different rates of loyalty to their respective parent management, practices and norms. The situation is worsened when the HRM managers of one company take control over the staff of another one. This puts the worker teams into unequal conditions and undermines the organizational culture of the newly merged business entity.

Moreover, if the staff cuttings come into question, the workers of the acquired company also face disadvantages. The greater experience of the acquiring companys employees and their proved commitment to the company will ensure their working places, while the other workers would be under the greater risk of losing their jobs. This can be a major weak point for the new employees joining the new system (Bavelis, 132). The point here is that the leaders of the organization are likely to take make choices in favor of their long-term workers rather that the new ones. This will mean that the new employees will have no rights for mistakes, will have to steer away from the managers supervision, and to quickly learn how to cope with the new system in order to have a chance of surviving the future downsizing.

Conclusion

There are many researches and studies done on the effects of mergers and acquisitions on the companies and their employees. Some of the major topical issues which are studied include communication mechanisms of the downsizing organizations, the conflicting perception of the workers who have been part of major organizational downsizing and effects of the later on the retained workers (Susskind, 30-65). One of the most important problems of mergers and acquisitions is the proved impossibility for the new employees to completely adjust to the new requirements and organizational culture standards. The likelihood of having new managers to report to can make new workers exposed to the disjunctive dilemma of attitudes and working ethics (Susskind, 30-65).

The major focus of the current research paper was the examination of the effects that mergers and acquisitions can have of companies and their workers. This paper has managed to find out that to avoid any negative consequences of mergers and acquisitions, the companies have to negotiate the merger agreement conditions and stipulate all potentially controversial points in it. This will allow clear understanding of the roles both companies play in the newly created enterprise. Finally, this will provide the workers with the guarantee of preserving their jobs and ability to feed their families (Mitchell, Andrade & Stafford, 104).

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Dean, Showalter. Financial Management: Oligopoly. USA Economic Association Journal, 85 (3): 647-653, 1995.

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Ginsburg, M. & Stephen, J. Leveraged Buy-outs, Mergers and Acquisitions. USA: Commerce Clearing House, 1989.

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Mitchell, M., Andrade, G. & Stafford, E. New perspectives and evidence on mergers. Economic Perspectives Journal, 15 (2):103-120, 2001.

Nickels, W. Hugh, J. et al. Commerce: Understanding Business. Boston: McGraw- Hill, 1999.

Susskind, A. and Miller, V. Firms: Structural Holes and Downsizing. Communication Research Journal, (25): 30-65, 2002.

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