M&A

Mergers and Acquisition (Takeover)

Is It an opportunity for a business to make an investment internationally?

Combining of the two businesses entities under common ownership is called merger. Expanding the activities of the firm through acquisition involves significant uncertainties. Very often the acquiring management seriously underestimate the complexion involved in merger and post-merger integration.

The benefits from mergers are often difficult to quantify. The motivation may be to apply superior managerial skills or to obtain unique technical capabilities or to enter a new market.  Acquiring companies often do not know what they are buying. If a firm expands by building a factory here or buying machinery there it knows what it is getting for its money.

By bringing together two firms at different stages of the production chain an acquirer may achieve more efficient co-ordination of the different levels. The focus here is on the costs of communication, the costs of bargaining, the costs of monitoring contracts compliances and the costs of the contract enforcement. In 2011 Google paid $12.5bn to buy Motorola mobility, thus linkage a software company with a hardware manufacturer.

This is a merger that occurs when a larger company buys a competitor and absorbs it into the greater organization. Shareholders have the power to vote to approve or deny such a merger. If the shareholders vote down the acquisition, the corporation cannot legally continue steps to fulfill the merger. To sway shareholders, corporate officers often disseminate information relating to the proposed merger, including how the acquisition will strengthen the corporation and provide a greater share of the profits for investors.

One the biggest mergers in recent years are the mergers of British Airlines and Iberia Airlines (December 2010). The company will have its headquarters in London, with BA shareholders retaining 55% ownership of the company. The merger is seen as a chance for the two airlines to cut costs following two very tough years for the airline industry. Both BA and Iberia are expected to report heavy losses this year, with BA predicted to announce its biggest annual loss since privatisation.

The problem can arise when one company have more than 51% of the shares because they might want to appoint their people on the top jobs. This actually happened in the case of British Airways and Iberia Airlines. Because according to the Spanish they want to cancel this merger. Strike action is being threatened by workers at Iberia in protest against restructuring which will lead to 4,500 job losses. “It’s not fair and it’s not the way things were supposed to be. The merger was supposed to bring growth for both companies and benefits for workers of both airlines,” Sepla head Justo Peral told the Daily Telegraph.

The Spanish carrier’s chief executive Rafael Sánchez-Lozano said: “Iberia is in a fight for survival. It is unprofitable in all markets. Unless we take radical action to introduce permanent structural change, the future for the airline is bleak.”

There are fewer risks; economic risk, political and fear of the recession create a certain type of respond in investing in the company. But in the time of the recession there is a decline in the market confidence, companies focus on their core business and they look at the profitability rather than expanding the business. Because if we compare with the situation of hot kettle as when it is hot it is hard to touch so when the situation is like this than the companies think how to make money and this is the period where good companies will survive and they can create value for the shareholders, and poor companies who do bad purchases they collapses. Recently sports direct bought Republic. It’s a bargain due to low share prices which also supports the M&A (merger and Acquisition).