Inter-firm relationships-Mergers and Acquisitions (Research Paper Sample)

Inter-firm relationships-Mergers and Acquisitions  1.0 Literature Review of Mergers & Acquisitions as an Inter-Firm Relationship (Corporate Strategy) General Concept of Corporate Strategy Mergers and Acquisitions (M&A) is a form of corporate strategy in which two or more firms come together under one management to achieve a specific shared goal (Carney, 2011). In corporate strategy, firms devise single or a series of plans aimed at enabling them to achieve certain specific goals. Even in the event that the intended goal(s) might be simple one(s), the manner in which the strategies are reached remains complex due to the fact that corporations, governments, or groups have with them a diverse collection of resources, skills, products, people, and assets (Carney, 2011). There are three broad ways in which corporate strategies can be defined and implemented; The Seven S Model, the ITIL V3 model, and the Big Question Approach (Carney, 2011). The Seven S Model provides a framework through which improving effectiveness can be enhanced in an organisation by assessing the following; Structure-relating to organisation hierarchy, Systems of operation and gathering information, Staff-relating to Human Resource, Skills, Style-organisation’s culture, and Super ordinate goal (shared values) (Bruner, 2011). ITIL V3 model on the other hand considers integration of IT in the formulation of strategy that involves defining market, development of service offerings, and organisation of strategic assets to provide value for customers, and preparation for execution (Bruner, 2004). With regard to Big Question Approach, it involves a strategy in which answers to basic and big question needs to be given by the firms forming the alliance (Bruner, 2011). This may be on issues like; what is our uniqueness and why should people opt for us and not our competitors? These corporate strategies are driven by the following four Ps; Perspective-defining vision and mission for the firm, Position- defining distinctiveness and policies of the firm, Plans-defining means and methods to be used in execution, and Patterns-defining daily actions that may allow for new strategies to emerge (Bruner, 2011). Mergers and Acquisition as a corporate strategy also assumes this concepts when strategising a way forward. Definition of Mergers and Acquisitions (M&A) As discussed above, Mergers and Acquisitions (M&A) is a form of corporate strategy, corporate finance, and management restricted to selling, buying, combining or dividing of different organisations and entities (Herndon & Galpin, 2013). The move is motivated by the need to create a synergy that would enable the alliance make the new firm rapidly grow without a subsidiary created or a scenario of a joint venture. For this reason, the activities related to M&A involve restructuring in which the ultimate entity focuses in providing positive value or growth. It is worth noting that Mergers and Acquisitions are more often used interchangeably particularly when considering the eventual economic outcome (Herndon & Galpin, 2013). Whereas this is not something serious, the actual meaning is well articulated in legal context. Legally, a merger is defined as a consolidation of two companies into a single entity while an acquisition is a situation in which one company take full control of another and establishes itself as the owner. Normally in an acquisition the target company ceases to exist. Whilst in a merger the target company can still remain as an independent entity although under the control of the acquirer (Herndon & Galpin, 2013). Despite the difference, the two structures can always lead to financial and economic consolidation of two or more entities (Herndon & Galpin, 2013). An example of the latest M&A that hit the international headlines in pharmaceutical industry was the generic drug unit of Piramal Health care being taken over by the US based drug maker Abbot Laboratories (ABT). The deal was worth US$ 3720 million (Loftus & Ahmed, 2010) Reasons why firms opts for M&A Businesses operating in a capitalist society tend to concentrate in maximising the shareholders wealth and returns (Risberg, 2013). The reason for mergers and acquisitions should thus be looked into in the same way as to why a company would opt to buy equipment or any other asset. It is because they expect a good return from the move and regard it as an investment. Companies opting for Mergers and Acquisitions are thus investing their resources; they foresee the move ultimately beneficial and worth investing in. This explanation provides the broader meaning detailing why mergers and acquisitions are inclined to financial aspect. Other than these, there are legion other reasons why firms would merge. It should also be noted that not all mergers are productive and that a reasonable number fail to achieve intended objectives. Another financial motive for mergers and acquisitions is diversification. Some large conglomerate firms considers M&A as the best way of risk reduction; diversification is an investment decision that significantly reduces risks for business by engaging in different industries that might not be exposed to similar risks at the same time (Halibozek & Kovacich, 2005). Other reasons for M&A include; tax advantage, economies of scales, improving finances, and access to debts and equity finances- large businesses have access to debts that were formerly above their limits (Hoskisson, 2008). Types of Mergers and Acquisitions There are different forms of Mergers and Acquisitions considering corporate philosophies and the strategic alliances. With regard to the perspective of business structure, the difference types of M&A are discussed below; Horizontal Merger This is a kind of merger that takes place between companies that are competing in the same industry. The reason for the merger may be occasioned by the need for increased capital, profit, and performance. This kind of merger reduces the number of competitors hence stiffening competition within the business segment (Sherman & Sherman, 2011). Vertical Mergers This involves companies of the same industry but different fields coming together to do business. In this case, the companies are combining their operations and production a single shelter. This allows them to focus more on all the requirements of a single industry (Sherman & Sherman, 2011). Co-Generic Merger This kind of merger involves companies dealing in production, essential technologies, and business market. It involves extension of product line or making acquisition of the component that are required in daily operations. It opens more opportunity as the business is able to diversify using common set of resources as well as the strategic needs (Sherman & Sherman, 2011). Conglomerate Merger This is a situation in which companies that are not related come together to form a single unit of operation and management. The product lines for the businesses are different and are not in any way related; only operations overlap (Sherman & Sherman, 2011). It is simply a unification of different firms into a single management. 2.0 How to Succeed In Making Inter-Firm Collaboration (Mergers & Acquisitions) Work Hunges and Weiss (2007), report that Mergers and Acquisitions increases by 25 % every year and that such alliances constitutes at least a third of many of these companies’ value and revenue. Interestingly, the same report informs that out of these new alliances, between 60% and 70% fail to work despite a plethora of advises available on making such alliances work. With this information, Hunges and Weiss (2007) explains that making Mergers and Acquisitions work requires that focus be skewed on how to work together and not defining the business plan as has been the tradition. In order to make M&A work, emphasis should not only be on the formalisation of business plan and contract but should be coupled with critical examination that thoroughly explores and clarifies the nature of the relationship between the partners (Hunges and Weiss, 2007). The major motive behind Mergers and Acquisitions is achieving an ability of accomplishing what either side cannot achieve when they opt not to form an alliance. This is the reason why Exxon and Mobil, Wells Fargo and Wachovia, and Delta Airline and Northwest Airline merged. This collaboration thus needs other elements beyond just agreement to come together in order to work successfully. For this reason, to effectively manage an alliance (Merger and Acquisition), selecting the right partner will play an important role enabling a working relationship (Ireland, Hitt, & Vaidayanath, 2002). Before making a decision to join an alliance, complementary strengths need to be established. For example, if firm A excels at sales and firm B excels at service, then the collaboration will probably be able to work. When firms that are not complementary to one another come together, they always take much time arguing over who has the best way of doing things at the expense of integrating aspects of the best approaches (Bower, 2001). Collaborating firms should be able to excel in different areas of business to enable enhanced efficiency in executing the desired goals (Draulans, deMan, & Volberda, 2003). Considering the fact that firms that have been differently managed are now coming together under one management and control, there is need for constant communication for the partners in the alliance. In cases where Mergers and Acquisitions have failed to work, miscommunication or lack of structured mode of communication has always been the primary culprit (Jemison & Sitkin, 1986). For successful continuity in Mergers and Acquisition, signalling of cooperative intentions is important in conceiving perception of the other partner (Jemison & Sitkin, 1986). This level of relationship helps in avoiding hostile assumptions that may be detrimental in steering the cooperation between the two partner...