The merger of mercantile companies is the integration of two or more companies through the block transfer of the assets and attributing to the partners of the companies that merge shares, participations or quotas of the company that is created or in one of those that are merging. The mergers can be of two types: a) merger in a new company, all the previous companies disappear, and a new company is, created and different from the previous ones; b) merger by acquisition, one or more companies integrate their assets in another already existing, increasing the latter its capital stock in the amount that comes (Baag & Dutta 2009). The acquisition of a company occurs when the acquirer purchases all the stock or when the acquirer buys the company's assets. Acquisition can also be done through cash or security offerings.
The reasons for carrying out the mergers and acquisitions can be varied, depending on the sector, the companies, the interests of the managers, or the shareholders, etc. However, the main reasons to carry out these operations are the creation of value for the shareholder through the generation of positive synergies; opportunities to improve management, obtain greater market power; search for economies of scale; diversification of product and markets; and internationalization (Fuller, Netter & Stegemoller 2002). The main reasons for approaching these operations are a) to pursue the leadership of the sector; b) to create value for the shareholder; c) to increase market share; d) to obtain productive synergies; e) to increase profitability.
Reasons for Merging
Among the reasons for merging and acquisition, the following are highlighted:
The main objective of strategic alliances is to grow through synergies, whether operational or financial. This is achieved since the merger of two companies usually leads to a competitive advantage by also involving a reduction in costs, due to the economy of scale. It is a good way to penetrate a new market. It allows rapid diversification of the firm and, in turn, combines complementary resources among participating companies (Hariharan 2005). Besides, when mergers and acquisitions are horizontally integrated - companies of the same sector- market share increases and competition decreases.
Financial Point of View
A merger does not mean having to withdraw money; it is a "change of cards." Even though there are different ways to agree to a merger, the most common method involves valuation of the merging companies and then exchanging shares. The shares are exchanged proportionally to the value they represent instead of cash or monetary transfers between the merging companies (Hviid & Prendergast 2013). Therefore, it is a matter more of reaching an agreement of valuations of companies than of disbursement of money. Even, anecdotally, in some cases in which the new company has centralized all the equipment in a single site releasing premises, these have been sold generating the own additional liquidity merger.
Results Point of View
The synergies generated by the mergers can be very broad and, in various aspects, the one generated is one of the points that, by itself, recommends such merger operation. A well-conducted merger, in most cases, allows the results to meet the formula 2 + 2 = 5: the results of the resulting company are higher than the sum of the results of the initial companies. The scale effect is very important in all areas (Mead 2009). In the productive can appear savings by volume of production; by optimization of productive lines; by concentration of production centres and by logistic savings. In the commercial area, to cover the same area with less commercial equipment or to reach new ones with the same equipment but with a greater portfolio of products and with a greater concentration of clients (Achampong & Zemedkun 2015). In the areas of support (administration, human resources, IT) the volume effect is clear: twice the volume of business never requires twice the support area, this can always be lower.
Performance of the Organization
While it is expected that, in the early stages, the new organization may have a somewhat chaotic or low performance, the change that involves the merger and the special circumstances it generates can be taken into account to design a new organization more efficient, high performance, that is, break with the past and propose a new optimal way of functioning (Arnold 2012).
Economies of Scale
Several executives and businesspeople consider that higher production volumes offer them the opportunity to distribute fixed costs in a higher volume of production and expand their markets, therefore considers mergers as the most suitable strategy for this purpose. Thus, the natural objective of horizontal and conglomerate mergers are economies of scale. However, studies conducted by Andrade, Mitchell and Stafford (2001) show that mergers with such purpose have not achieved such synergies and on the contrary have led the new company to failure.
Economies of Vertical Integration
Many mergers take place because they are considered as a good strategy for business to control and coordinate the production processes, expanding backward, to incorporate the production of the raw killers, and forward, to reach the final consumer. However, recent research on this type of mergers indicates that a higher degree of integration does not necessarily represent an advantage for companies that carry out merger processes for that purpose. The integration in some cases is absurd and inefficient (Adolph, Elrod & Neely 2006). Many companies have shown to be more efficient with the strategy of outsourcing (outsourcing) of some of their activities and partnerships in the complementation of the different phases of the production process. Some of the examples of successful mergers and acquisitions are listed below.
Reasons Against Merging
Choke Between the Different Cultures of Companies
When talking about large companies with experience in a market, probably over the years, each one has implemented a particular company culture, its philosophy, a way of working and a leadership model. The cultures of the two companies should be aligned as much as possible. It is essential to harmonize and make clear the type of leadership that is going to be carried out. The success of a company is based on good leadership.
Loss of Employees
Layoffs can be one of the main problems of a merger or acquisition. The Human Resources department plays, therefore, a significant role. It is essential to identify the areas that can generate complications before carrying out the operation. The problem of labour disputes has to be solved pending resolution and carry out a harmonization of conditions of collective agreements (Bharadwaj & Shivdasani 2013). No less important is to calculate how many employees will be lost during this transition and, in particular, what impact it will have on the company.
On the side of costs, the largest that mergers have is regarding elimination of jobs. The increases in productivity and the reduction of costs that are achieved come at a very high rate of payroll reduction and dismissal of workers who performed similar functions in different companies, and who become redundant due to integration. In this sense, the objective of mergers, which is the creation of shareholder value for the generation of higher profits, is largely equivalent to the destruction of value for workers who lose their jobs and incomes. It is a typical case of growth without employment (Andrade, Mitchell & Stafford 2001). The most worrisome is that in many cases the goal of creating value is not even achieved. According to a report from The Economist magazine some years ago, about 55 % of the mergers carried out destroyed shareholder value of the companies involved, for reasons as diverse as excessive indebtedness, the clashes of diverse business cultures, or the loss of brands of recognized commercial value.
The Use of 'Cash Offer' and 'Share Exchange' As a Form of Consideration for Mergers and Acquisitions
A public offering for the acquisition of shares (OPA) is a financial transaction that aims to obtain a significant share in the capital of a Company, normally listed, which is usually called "the affected company", while the person who launches the OPA, which can be a natural or legal person (or several), is called "offering entity". A merger or acquisition bid can be made on a listed company or an unlisted company (Chistofferson, McNish & Sias 2004). In the first case, there are legally binding rules of obligation, while in the case of a non-listed company, the OPA will normally have the status of a voluntary OPA.
When a takeover bid is launched on the shares of a listed company, the legislation requires that the offer is extended to all securities susceptible to be converted into capital, except warrants and call options. Therefore, if the affected company has issued convertible bonds or there is a capital increase in progress, there are subscription rights in the market, or it has issued non-voting shares and, for not paying the minimum dividend, voting rights have been granted (Adolph, Elrod & Neely 2006). The bidder entity will have to extend its offer to all these securities, establishing the financial equivalents necessary to give a purchase value to all of them, which is homogeneous with the one offered for the shares.
If there are several bidding companies interested in the acquisition of a certain affected company, there will be several competing takeovers, and a procedure will be established by the CNMV so that interested shareholders can evaluate said bids and choose the one they consider most appropriate for them. The consideration of an OPA can be in cash, in securities or part in cash and part in securities. The CNMV will require a bank guarantee from the offering entity to guarantee that the shareholders who decide to attend the offer will receive the consideration offered.
Acquisition in Cash
The ability to pay cash is determined as the sum of cash investments and the indebtedness capacity (after the acquisition or merger) of the two companies together. It is typical that companies with high cash investments frequently become targets of acquisition of other companies (Hariharan 2005). The ability to issue more shares and thus increase capital is not a viable alternative because of the usual pressure of time and competition that accompanies mergers and acquisitions decisions. Only, if after a merger, a company becomes too indebted, and this cannot be resolved by selling non-key businesses, the issuance of new shares is resorted to.
Leveraged Acquisition (LBO's)
LBO's are a special case of acquisitions. Very popular in the 1980s, with them emerged the emissions of "junk bonds" (junk bonds). These bonds were used to finance some high-risk acquisitions and typically paid high-interest rates. The risk associated with them was the cause of their name "junk bonds." With the growing wave of mergers and acquisitions, LBO's are once again being mentioned as a way to acquire companies (Achampong & Zemedkun 2015). LBO's can be defined as "an acquisition of a business through a transaction where the risk capital contribution of the buyer is small in relation to the amount of the transaction, and where most of the financing derives from loans from external sources and/or the seller in the form of a deferral of payment of the purchase price. The assets of the company to be sold form the collateral for the loans taken by the...
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