Distinction between mergers and acquisitions

Although often used synonymously, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (that is, when the target company does not want to be purchased) it is always regarded as an acquisition.

And what are the essential preparatory steps in a successful acquisition? Of, course, the first thing to establish is what strategic goals you are trying to achieve through that acquisition and they might be various I terms of market share. or. may be some economic benefits with vertical integration or international presence. After establishing goals you need to establish your target. Who you’re gonna try and buy, who is that acquisition company you’re gonna for? Having put together the strategy and identified the target and the valuation of that target, you need to make sure the funders of acquisition are on board. be they institution or private funders or banks.

But acquisition has happened, what needs to be done to ensure the successful integration of the new business? An acquisitions and the success of the integration of that acquisition is all about planning in reality. First of all, need pay more attention to financial side of things. On the soft side of things, it about communication.

Of course, there are so many pitfalls in takeovers and mergers that you really have to plan carefully. First, you’ve got to recognize the constrains that your organization is under with regards to communication.

You need to be absolutely honest with everybody about what you’re doing and about the process you’re going through and be clear with them where you can non communicate with them and why. You’ve got to create that trust as the basis of managing the change moving forward. The second thing for me is about being beware of the sycophants in your organization – remember with merger or takeover, you’re bringing two organizations together. two management teams – all of their roles probably duplicated- and in that process, you’re going to get a whole lot of people vying for the same job.

One of the most important phenomenon in organization is -Corporate egos. Corporate egoa cause problems but they seem to be inevitable in a business culture that prizes drive, determination and leadership above all. Having the strength of personality and the ability to suppress the others is a fundamental prerequisite to climb to the top of the corporate ladder. So with a power-hungry alpha male at the top of each company, it is not surprising that every time a mega-merger is announced, there is a high probability of a boardroom bust-up (fight, disagreement).

Europe’s most spectacular and public bust-up was between Volvo and Renault. Volvo in that case would have had a minority of 35 % stake (turning into a Renault takeover without paying the acquisition premium). That divorce coasted Volvo several hundred million dollars because of its chairman’s dictatorial management style.

Egos play such a large role when two giant corporations come together that it is hard to make them work unless one personality is prepared to take a back seat or step down. Compromise is essential if mergers between two powerful corporations are to work to the advantage of both parties and their shareholders. Otherwise friendly discussions break down and can easily turn into all-out war.

Mergers and acquisitions continue apace in spite of an alarming failure rate. A lot of studies have reached the same conclusion – the majority of takeovers damage the interests of the shareholders of the acquiring company. They do reward the shareholders of the acquired company, who receive more for their shares than they were worth before the takeover was announced.

Why do so many mergers and acquisitions fail to benefit shareholders? The majorities of failed mergers suffer from poor implementation. Senior management fails, for example, to take account of the different cultures of the companies involved. Melding corporate cultures takes time, which senior management does not have after a merger. Most mergers are based on the idea of “let’s get revenues”, but it is vitally important to have a functioning management team to manage that process.

Mergers are about compatibility, which means agreeing whose values will prevail and who will be the dominant partner. The measure of success is when the combined entities deliver better returns to the shareholders than they would separately. Managers need to remember that competitors are not going to hang around waiting for them to improve the performance of their new acquisition. Announcing a takeover will have alerted competitors.

Transnational mergers and acquisition ( common in the expansion of Chinese TNCs)

· Resources exploitation - China National Offshore Oil Corporation became the biggest offshore oil producer in Indonesia by buying off the stakes of local companies

· Acquisition of technologies - buying off the companies that possess technologies.

There are other kinds of alliance: Joint ventures and strategic alliances

Joint venture – two or more companies agree to collaborate and jointly invest in a separate business project. This type of deal allows the partners to combine their strengths in one specific area.

· relevant in expansion to high-risk markets, sometimes the only possible - governmental regulations of the host country (India - local business operations require 51% control by Indian nationals)

· the local owner becomes an integral part of the stakeholder group - increases cultural sensitivity and operational controls

· increase market coverage (an enterprise can expand into other market segments in which the partner has established itself better) in exchange to access to reliable suppliers

Example: expansion of Chinese TNCs (TCL – French Thompson) - helped to improve the international image of Chinese brands and make the entrance to European markets easier + broadened the financing sources

S/a are more complicated than mergers and acquisitions. The common goals of the alliance may serve different strategic objectives of partners. Its aim is to take advantage of each other.