Business Tips: Merger and Acquisition Activities Explained

Merger and acquisition or M&A activities have been conducted throughout the world with the intention of creating synergy among the merging firms. Merger and acquisition between large firms usually totaled up to billion of dollars spent in the effort. M&A promises benefits such as further promoting the business growth or investment strategy to the merging firms.

Numerous example of large merging activity could be drawn by looking at the history of M&A activities in the United States as it has been categorized in their history as the five waves of merging activities.

The first wave of merger activity was predominantly horizontal mergers. The first wave was deemed as the "merger for monopoly" by George Stigler, a Nobel Prize winning economist. The large monopoly mergers has further implication to the industry in the United States as it has dramatically affected small firms in certain industrial area to wither. This was the case where the steel industry has been badly affected where only one firm survived in the onslaught of the historical corporate world.

The second wave, however, was focused on merging with firms to form oligopoly. During this period, many firms consolidated and has been given ample opportunity to further expand their business due to the economic boom as the result of the after effect of World War 1.

During the third wave of merger in the history of the United States, most of the merger comprise of conglomerate type of merger. These firms were determined to set out to further diversify their line of products. Their efforts were further supported by the booming economy where revenues continued to flow into the company.

The fourth wave of merger on the other hand mostly comprise of hostile takeovers where corporate raiders have played a significant role. Corporate raiders would take over a firm where it would be a norm for that particular firm to have been underperforming and plague with huge amount of debt. The corporate raiders would then reform the firm and finally resell it at a higher price.

Finally the fifth wave of mergers has been taking place in the 90's where most of the firms opt for strategic mergers. These strategic mergers were formed primarily to increase the company competitiveness to further stay ahead of competition and to ensure that it would have the leading edge over their competitor.

Some of these strategic mergers could be even related to Malaysia by taking the recent merger and acquisition effort in the banking sector as an example. The merger and acquisition in the local banking sector was conducted primarily to increase the competitiveness level in the respective industry to prepare it to face further challenges such as the opening of the local banking sector to foreign banks under the WTO rules.

Summary - Discussion

Drivers to Merger and Acquisition activities

Countless firms from various industries have opted to perform merger and acquisition with an assortment of reasons. One of the key drivers for a merger and acquisition to take place is to further enhance the technology that the firm possesses. This would be particularly true for mergers between companies that have high reliance on the usage of technology in their business. An example could be drawn by looking at the merger between Boeing and McDonell Douglas. The merger between both of these airline manufacturer giant has further increase competitiveness to the merged firm. By merging with McDonell Douglas, Boeing now has further capability to produce high performance aircraft which is fitted with the latest technology. The merger has significantly boost Boeing's standing by possessing more than 60% of the commercial airline market share.

The next driver for merger and acquisition would be attributed to the need to stay competitive to face globalization or even AFTA. The implementation of ASEAN Free Trade Area (AFTA) among the ASEAN countries this will have some form of impact to the local firm or company in the participated country. AFTA, which would see reduced or zero tariff on products imported and exported within the ASEAN region, is expected to be fully implemented in 2005. By considering both of these factors, the local banking industry would be more competitive in the near future as it would be opened up for foreign banks to set up their branches locally under the ruling of WTO. Local banks would need to be better equipped to face the onslaught of globalization. Some of the smaller banks might be less competitive and might be consumed by the larger foreign banks if they were to be left alone to compete. Many merger and acquisition activities has already commence in the local banking industry to strengthen the respective industry.

Acquisition of talent could also be a driver for merger and acquisition activities. Companies that have been plagued by the problem of the disability to further expand might consider merging with another firm to gain expertise of talent that would be incorporated into their own firm. An example could be drawn by looking at Microsoft Corporation in their effort to acquire companies that have talented workforce to further aid them in their own operations. Microsoft Corporation has taken many radical moves where they would acquire firms by paying large payouts in the move to acquire the firm.

Another driver for merger and acquisition activity to take place encompasses the need to increase customer relationship. The firms would merge together to further facilitate efforts to increase customer relationship. Customer relationship might be one of the value propositions that the company could add by merging thus indirectly increasing the competitiveness level in the firm.

The final key drivers that could be identified for merger and acquisition activities comprise the need to enhance brand value of the firm. In a related situation between the merger of Hewlett-Packard and Compaq, both firms have gain significant brand value over the course of the merger. This has increase competitive level between both of the firms and thus providing them with some leading edge over their competitors. The merger has provided the company with a richer portfolio of products and solutions and a deeper service team. Their area of services has been greatly enhanced thus has some form of implication of enhancing their brand value.

Barriers to Successful Merger and Acquisition activity

Merger and acquisition that has commenced between large firms has significant barriers to overcome in order to achieve a successful merger. One of the key attribute that has barred firms from a successful merger activity includes the lack of executive champions and focus. The lack of executive champions could be further narrated as the lack of inspirational leaders that are reliable and capable of overcoming a barrage of assault originated from the merger activity. Lack of focus might be the result of poorly stated company vision and mission coupled with poor management that are weak in enforcing it which might have eventually causes the company to loose their focus over a period of time. Poor administration in these key areas might provide some barrier to a successful merger and acquisition activity.

Another barrier that has been identified would have originated in integrating highly complicated Information Technology systems between the merging firms. Complex systems might pose a barrier as the complexity might make merging effort a hideous task to perform. The failure to integrate key IT systems might render the merger ineffective causing it to fail.

The culture of a company might also pose a significant barrier to the merger activity. The difference of culture practiced in the company might create a problem in the integrating effort in the merging activity. Informal groups might be formed to create menace in the firm thus rendering the firms operations inefficient and ineffective.

The lack of dedication from key stakeholders might also generate problems which might serve as a barrier to the merging activity. The lack of dedication from key stakeholders might delay efforts to complete the merging activity. One of the attribute that contribute to this menace might be because the key stakeholders does not perceive the significance of the merger.

Finally, unrealistic expectations from the merger activity might also serve as a barrier to a successful merger. Unrealistic expectations might have originated from inexperience leaders that have overlooked into the potential of the merger thus setting goals which might not be realistically attainable.

Conclusion

Over the past decade, numerous merger and acquisition has taken place all over the world. The United States served an excellent example to show these merger activities over the time frame of the late year of 1800 to the present year.

Many firms have seen the idealized benefits of merger and acquisition and many has taken courageous step to commence this activity. Drivers to mergers and acquisition served as the main reasons behind the merger activities. Successful merger would further enhance the competitive edge of the firm thus giving them the advantage of staying ahead of competition. This is particularly true in the case of the implementation of free trade zone in the Asian countries as well as globalization.

However, successful merger and acquisitions have been plagued by multitude of barriers. These barriers pose as a threat that would likely affect the outcome of the merger. Lack of dedication and expertise might eventually render the merger and acquisition activity ineffective or even cause it to fail.