Mergers and acquisitions are basically process of formation of new entities with the objective to create synergy. The purpose behind the process is to combine the strengths of two companies and eliminate the weaknesses of the two to achieve greater efficiencies and increased shareholders’ wealth.
Mergers are wilful strategic decisions taken by two companies of same size to combine in order to enhance sales, improve operations and achieve higher efficiency. Ownership of the resultant company is divided among the ownership of two merging companies in form of stockholding.
Mergers some time lead to survival of only one company like Bank of China, the names of both the companies can survive e.g. Sony Ericsson or it may result into ultimately new company.
Whereas acquisition is the term often confused with mergers. Acquisitions are the purchase of target firm by acquirer either by cash or debt or by exchange of stock. In acquisitions, decision power of target firm le ceases to exist and it’s all decisions are taken by the acquirer as it becomes the part of acquiring company. Acquisitions can be friendly or hostile. Hostile acquisitions involve takeover of the other firm without any agreement with its board whereas friendly acquisitions involve an arrangement with the board of the target firm to purchase that respective firm.
In a friendly takeover public bailout offer is made by the acquiring company to the board of target firm. Such a takeover is a strategic decision by both companies. Example of acquisition of Aetna by CVS is a friendly takeover where CVS a drug store chain made a public announcement of arrangements with the board of health insurer Aetna Inc. to buy it for $69 billion by cash payment and stock.
In a hostile takeover the acquirer either makes a tender offer directly to shareholders if rejected by the management or fight for proxy rights with the objective to replace management in order turn the table in its own favour. wherever there are defence strategies available to the target firm to defend itself from such evil intentions like poison pills etc. Hostile takeovers involve lengths process and cannot be accomplished overnight. For example, Carl Icahn offered three bids rising to $11.7 billion to acquire Clorox, a household goods giant and also fought proxy wars in order to acquire the giant but Clorox giant defended it well and there was no takeover.
After the merger or acquisition, decision about the organizational structure is an important one. The point of concern is whether the current management would retain its position or it would be replaced by the new management. This is the area of concern for management which bothers them to refrain from acquisition as it creates a risk to their position in company also. HR restructuring, cultural management, stress management, job insecurity, talent drainage, low motivation is area of concern for both companies. If these issues are not handled with care they can lead to a failure of merger or acquisitions e.g. AOL & Time Warner
March 22, 2019