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This chapter aims to provide a basic idea of the research and it is organized as background, objectives, methodology and the framework of the thesis.
For a firm to survive or die in the corporate environment, the mergers and acquisitions are one of the oldest phenomena. The wave of the mergers started in the start of the twentieth century and after that there were more diversifications and this led to the creation of conglomerates. But the wave of mergers and acquisitions was cut abruptly by the great depression that occurred in the year 1929. But the mergers and the acquisitions regained their strength in the 1960s as the economy of the world was recovered. In the present times, the wave of globalization as well as liberalization that started in the 1990s has led to a substantial increase in the acquisitions happening over cross borders. Hence this has led to the existence of a market separately for mergers and acquisitions and also for corporate control. The overall estimate of the mergers and acquisitions in the year 2007 amounted to 4 trillion US dollars and the contribution of the United States alone was 40 percent of the total estimate provided above. It is predicted by means of the experts that there would be a substantial acceleration in the growth of the mergers all over the world.
Characteristics of mergers
A highly competitive and a dynamic world of business has been created by means of the rapidly evolving changes in the technological advances and the globalization and in such a circumstance, the mergers and acquisitions are used in an increasing manner for the seeking of a competitive advantage and also for the maximization of the value of the shareholders The terms mergers and acquisitions would not be perceived well by common man as they would mean one and the same to him. But these terms have different meanings and also the implications of the same are different as well. There could be a lot of classifications and sorting of the terms. The mergers and acquisitions are also called as M&A and they deal with the combining or the aggregation of two or more companies or the buying or the selling of the companies. The target as well as the acquiring companies is of the opinion that by combining with each other they would be able to help each other in technical aspects or financial aspects in their industry. This happens in case of between industries also. Because of the mergers, there could be the saving of the expense, the time and the effort needed for the creation of a new unit of business. Acquisition of a company by another company against the wishes of the target is called as hostile takeover and this would result in the acquiring firm buying out majority of the outstanding shares of the company that has been targeted. After merging the newly formed firm would take up the name possessed by means of the company that has acquired or a new name would also be formed. In some cases there would be mergers taking place at the level of the corporate and in other purposes, the business would be continued as if the two companies are functioning as separate entities. All such decisions are influenced by means of the decisions and opinions of the managers in the particular industry (Yahoo finance, n.d.).
Reasons for mergers and acquisitionsGrowth
The major and one of the major and most common reasons behind the happening of the mergers is the growth. A firm or a company could be grown in two ways. The first is by means of internal growth. This kind of growth could be gradual and also turn out to be less effective in situations where the firm aims at exploiting the opportunities where the firm would enjoy advantages at only a short term over its competitors. Hence a fast and easy way is to merge and obtain the resources necessary for the achievement of the goals. Although the companies that bid would have to pay a premium for the acquisition of the resources by means of mergers the overall cost would not be much costlier than that of the growth happening internally. In the situation of internal growth, the firm would have to cover by itself all the expenses cost by a usual process of trial and error. In most of the cases the mergers and acquisitions are the fastest way to grow than that of the internal growth though there exist exceptions to this notion (Gaughan, 2001).
Other than growth of the firm, the most cited objective behind the happening of mergers and acquisitions is the attaining of the benefits synergistically. This means that on combining two firms, a more valuable firm than the individual value of either of the firms would be obtained. Though the idea of synergy is well appreciated by means of the merging partners, realization of such gains is very hard. Basically, there are two ways in which synergy could be attained. One way is by the attainment of a degree of economy in costs and the other way is by means of the enhancements in the generation of revenue where the former is comparatively easy to achieve as it only involves the abolishing of the factors that are duplicated in the two merging firms like the overhead as well as the personnel. On realization of this synergy there would be an automatic decrease in the costs per unit (Gaughan, 2001).
Hence the mergers and the acquisitions constitute an integral part of the strategy of expansion. The deals could be horizontal where there is a combination of the competitors and there could also be transactions at the vertical level where there is an aggregation of the buyers with that of the distributors.
Mergers in the United States
In case of the United States there are strict regulations imposed for the mergers and the acquisitions to take place and the organizations like the Federal Trade commission as well as the Department of Justice play a prominent role in the approval of the mergers. Such regulatory bodies are present and they impose strict regulations because there is a necessity to avoid the formation of the monopolies and such monopolies are controlled by the government by means of acts like the Sherman Act of 1890.
As the completion of the mergers and acquisitions are difficult, it is difficult to be sure on the number of mergers that are attempted in a given period of time. Also there is a tendency for the acquiring firms to keep the mergers and acquisitions secret and such secrets are kept away even from that of the employees of the participating firms (Federal Trade Commission, n.d.).
In case of the successful mergers and acquisitions, there is an announcement made about them to the general public and there are also potential benefits for the shareholders. By means of the combined efforts, the combined company would be able to reduce the costs of maintenance of two companies and also increase the revenue and hence would generate more amount of profit. In case of the companies that join with that of the competitors, the combined strength of the two companies would also impart more of market power and also a substantial amount of share in the market (Ross, 2008).
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Trends in the US
America as well as Canada show a decrease in the percentage of privately held businesses and also the plans for acquisitions and this has decreased from that of 44 percent in the year 2009 to that of 32 percent in the year 2010. Yet the decline has not fallen below that of the global average. There has been an increase in the focus on mergers and acquisitions as shown in a survey which projects that 26 percent of the respondents in the US and over 17 percent of the respondents in Canada still focus on the mergers and acquisitions as and when they are readying themselves for an upturn in the economic status of the world. This proportion also constitute above the 14 percent average of the world. In the region of North America, the key determinants and drivers of the mergers and acquisitions are spread in a more even manner. They opt for mergers and acquisitions mainly for the purpose of acquisition of the technological benefits and also for the gaining of access towards operations of business at a low cost. Hence the acquisitions are tools that cater to multiple purposes like the designing of a business strategy, achievement of operational benefits and also for the pursuit of business growth. There are also a lot of privately held businesses in Canada as well as America that are ready to put themselves on sale. The percentage of businesses in Canada that are willing to sell themselves have gone up to over 12 percent in the year 2009 and in case of North America, it amounts to over 7 to 10 percent. The people investing financially were cited as the ones who are more likely to acquire as against the rest of the world where trade buyers would be preferred (International business report, 2010).
Aims and objectives of the studyFollowing are the objectives of the study.
- To investigate the performance of the mergers and the acquisitions in US between the period 2000-2005.
- To assess the impact of the merger and acquisitions on the bidder and target firms
- To find the Abnormal Return (AR) as well as cumulative abnormal return (CAR) of the acquiring companies 5 days before and 5 days after the announcement date as well as the effective date
- To look at the methods of payment of the mergers and acquisitions.
The dissertation would follow a method that would combine the qualitative as well as the quantitative methods for the presentation of the results. Also more focus would be laid on quantitative methods and the statistical tools like the One Sample T-Test, Independent Samples T-Test, Mann-Whitney Test, Spearman’s Rank Correlation Test and regression analysis would be used for data analysis. The market model would be used and the abnormal returns, average abnormal returns and cumulative abnormal returns would be estimated. Through these methods, the objectives and the hypothesis stated in the above mentioned sections would be tested rigorously and the interpretations of the results done.
Framework of the dissertationThere are five chapters into which the dissertation is organised.
The first chapter deals with the introductory section where there is a presentation of the initial round of the research. This chapter is organised with the stating of the background of the research, objectives of the research, the aims and the objectives, a brief account of the methodology to be adopted and the frame work of the thesis. The next chapter would be the review of the literature available on the research topic in hand. The types, trends, motives, the causes and the factors underlying the mergers and the acquisitions would be dealt in detail in this chapter. Also there would be a mention on the previous empirical studies existing on the subject.
The third chapter would deal with the methodology which would describe the data collection methods and the other statistical tools that would be employed for the testing of the hypothesis. The tools like the parametric and the non-parametric tests undertaken to test the statistical significance in the data would also be mentioned in detail in this chapter. The fourth chapter is the analysis of the data and the provision of the results for the same using the methods outlined in the methods chapter. In the fifth chapter, the conclusion for the thesis would be provided and the results would be interpreted and discussed. Also further recommendations for the problem taken into consideration would be provided. This chapter would also make a mention on the limitations existing in the study that is undertaken.
Data And Research Methodology
Data has been collected from Professor. Huainan Zhao's personal dataset that contains a list of a large successful U.S. takeovers by public that acquires both domestic and foreign as well as public and private targets. The takeovers occurred with a minimum deal value of $500 million, with initial bids announced between January 1, 2000 and December 31, 2005. to be included in the sample, the following conditions are used in selecting the final sample:
- The target firm has a disclosed dollar value and the bidder is acquiring 100 percent of the target firm.
- The deal value of the transaction is with a minimum of $1,300 million. Deal ( or transaction) value can be defined as the total amount paid by the bidder, excluding expenses and fees. The dollar value involves the amount paid for all common stock, cash or a combinations between them (Fuller, 2002).
- The target is a public firm, or a private firm
- Acquirers are U.S. firms traded publicly on AMEX, Nasdaq, or NYSE and have five says of return data around the takeover announcement listed on the Center for Research in Security Prices.
- The status of the takeover is completed one, taking into the account only the friendly takeovers.
The final sample size consists of 148 acquisitions, which eventually divided into three groups based on the types of payment method: (1) pure cash (2) pure stock (3) combination of cash, stock and method classified as “other” by Prof. Zhao's , similar to Antoniou, Petmezas and Zhao (2005).
Review Of Literature
Due to globalisation and also due to the barriers for growth internally, because of the economic constraints and other strategic constraints, one of the important ways by which fast growth can be achieved is Mergers and Acquisitions (M & As). The only focus of the mergers and acquisitions in the past involved the attaining of control on the assets that are not valued and after merging or acquiring them, they can be broken down or traded and this process is called as asset stripping. Another strategy is that they could be developed into units that are autonomous. This was the situation of the past and in the present scenario, the mergers and acquisitions have evolved as incorporating more of strategies and purpose and aims at the achievement of a level of consolidation in the industry. Intent of the mergers and acquisitions could be that it helps in gaining access to new markets. Also M&A helps in gaining access towards cash inflows that includes channels of distribution that are new or novel geographic markets and also in accessing a customer base that is more developed. Another advantage of mergers and acquisitions is that new technologies as well as new organisational abilities can be accessed which in turn could be leveraged for the extension of strategic goals. Also the units of business could be consolidated which would lead to the increase in the prices of shares and revenues (Gaughan, 2002) .
Definition and conceptualisation of Mergers & Acquisitions (M & A)
One of the commonly occurring phenomenons seen in many of the industries is Merger and acquisition activities. There are many M&A deals that are happening in the everyday life which are reported continuously in press releases. The activities involved in M&A alter the structures of the market, shares of the market and also the magnitude of competition that exists in the market. The money that is at risk and the amount of deals getting closed as well as the wide spread existence of mergers and acquisitions all over the world provides the concept with a very important role in the theory of business administration. There exists two types of mergers and acquisitions, and also the two words acquisitions and mergers are often confused and in technical regards they possess different meanings and are also confused at times as one and the same words. “A merger is a combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm.” In a definition provided by Gaughan (2002) we can define a merger as “a combination of two companies in which only one company survives and the merged company ceases to exist”, whereby the acquiring company assumes the acquiring company assumes the assets and liabilities of the merged company”. Otherwise known as “take over” acquisition is nothing but “buying of a company the “target” by another or the purchase of an asset such as a plant or a division of a company”. The major advantage of M&A is that it is suggested and proposed as the universal remedy for the rapid growth of the market. Hence the companies feel that they can generate revenue by the simple addition of the yearly revenues of the companies that are targeted to be acquired. This method is easier when compared to the efforts put in the improvement of the profits of an enterprise from the scratch (Jagersma, 2005).
Horizontal vertical and lateral mergers
Depending on the stage involved in the chain of value generation the mergers could be segregated in to horizontal, lateral and vertical
A merger is said to be horizontal, when it occurs between two firms that are competition to each other in the same field. Hence as a result, the horizontal merger results in a great improvement in the market power of the new firm.
A merger is said to be vertical, if it occurs between two companies that are in varied stages over the chain of value of generation. It may involve the merging of a firm with that of its distributor or supplier A merger is called as a vertical merger, if merging takes place between two firms that are in the process of doing business in totally different fields.
A statutory merger is nothing but the process of merging, where the firm that acquires takes over the assets as well as the liabilities of the company that is merged.
In case of the subsidiary merger, the company that is targeted turns into a portion of the subsidiary of the company involved in acquiring the target. There is also the concept of reverse subsidiary merger in which there is no expense involved; time for the process of initial public offering and regulations are also not involved. In this case, an ancillary of the company involved in acquisition is merged into the target firm which is listed prior in the stock exchange and hence the price of the stock is boosted.horizontal, vertical and lateral acquisitions
There are three types of acquisitions- horizontal, vertical and lateral depending on the stage which it occupies in the chain of value generation. The advisory industry of M&A has become so invasive and persistent that it has penetrated with terms like carve out, bolt on and roll up. A horizontal acquisition is otherwise called as bolt-on whereas roll-up is nothing but an intention to enlarge the firm’s size. There can also be structured acquisitions like an deal or an asset or even an stock deal otherwise called as an share deal.
An acquisition called as carve out or an asset deal is one where there is a purchase of the plant or a division or a subsidiary of a company that is present. Contradictory to an asset deal, when the acquiring firm is involved in the purchase of a whole firm, it is called as an share deal. The acquisitions could also be segregated on the basis of whether they are done in a friendly or hostile manner on the basis of whether there exists an understanding between the managing department of the acquirer as well as the target. If there is a resistance exhibited by the target firm’s management, then the acquisition is called as a hostile acquisition. When there is an embracement of the target company then the acquisition is called as a friendly acquisition (Neven et al, 2005).
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