How Companies Identify and Value Target Companies? - Paper Example

Introduction

International mergers and acquisitions are a way expanding a company's market. It is also a way of restructuring the company's face to represent the world of corporate finance (Ahn, 2011). For the process of mergers and acquisitions to be successful, a company needs three significant steps carefully.

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Several methods exist for identifying a suitable company for merger accusation. The most utilized approach is the creation of the profile of the targeted company (Anyanwu, 2011). The profile includes the features that the targeted company should possess in order be fit for the acquisition. The list of the features consists of the type of activity, the type of market and position, the number of employees, the structure of assets and production range, equity profitability as well as the liquidity of the target company (Arkolakis, Costinot & Rodriguez-Clare, 2012)

Once the profile of a company is completed, it is time to search for that company and formulate a suitable way to approach it. When the right procedure in drafting the profile is used, one usually comes up with the proper list that includes; distributor companies, supplier companies, as well as the names of the competitors to the targeted companies (Apte, 2010). To maximize the efficiency of identifying a target company, a company may mobilize some of its best employees to gather the vital information that is needed and also make a proposal as well as arguments for their choice.

The company may also consider the option of using the counsel of an investment bank. Investment banks may have much more information than any other method of research hence it is the most suitable (Baker, 2011). Once you have identified an appropriate company for the merger, it is now time to formulate a deal with which to approach the managers of the company.

In mergers and acquisitions, valuing the target company is one of the critical issues. The value needs to be determined before the merger takes place (Czinkota Ronkainen & Moffett, 2011). This is done to realize the full benefits of the merger and the synergies that exist. The company intending to carry out the merger may use any of the following methods; market-oriented methods, cash flow based methods or methods based on assets (Free, 2010). Examples of these valuation methods used include the use of the discounted cash flow model and the use of multiples. After valuation of the target market is done, the company now moves to the next stage of settlements and the completion of the merger and acquisition transaction.

The Settlement and Completion of the Merger and Acquisition Transaction

After the company has agreed to the merger and acquisition deal, signing the merger agreement is the next phase. Although there is no specific method that companies use in signing the agreement, mostly they deliberate between themselves on the terms and conditions of the merger (Fidrmuc & Fidrmuc, 2003). One problem that is most likely to arise at this moment is that the relevant stakeholders of the target company may object to the terms. Should this problem occur in the process, then acquiring firm does what is termed as the hostile takeover (Oatley & Winecoff, 2014). However, if the stakeholder approves the merger, the next step is the regulatory approval by the necessary body such as the European Union.

After this is done the two companies now move to the compensation settlement. This comes after the merger has been approved and now the acquiring company needs to pay the company and its shareholders either in cash or shares from the acquiring company (Madura, 2015). A lot of factors determine the mode of compensation ranging from the value of the company, availability of cash, and the friendliness of the acquisition. One of the problems that may arise at this stage is the delay in the regulatory approval. If the regulating body delays before approving the merger, the acquiring company may drop the possibility of cash compensation and prefer the share method (Rousseau & Wachtel, 2011). When this is done and completed, the next element is posted acquisition management.

The Post-Acquisition Management

The post-acquisition management is the stage at which the acquiring company does the modification and introduces new strategies in the new face of the company to realize the full benefits of the merger. Strategies such as effective management are needed as well as the injection of capital to commence operations (Wagner, 2012).

TATA Motors Acquisition of Jaguar Land Rover and How the Three Elements Were Reflected

Indian based automotive company TATA motors recently acquired British based Jaguar Landover Company. To accomplish this process, TATA motors first drafted the target company's profile and came up with a list of tailor-made requirements that the target company should have. They also approached the Barclays bank in Britain, and the bank offered the critical financial information needed.

After a thorough analysis of the information acquired, TATA motors settled on Jaguar Landover Company as their target company. Before approaching the company, TATA motors decided to use the market-oriented method to value the company (International B. P. U, 2008). Perhaps the most critical thing that TATA motors focused on is the size of Jaguar Landrover brands all over the world.

After the valuation process, TATA motors realized that Jaguar Landover is the leading automotive company in British and it's its main competitors are German-based Mercedes Benz and Volkswagen. Tata motors then formulated a deal and approached Jaguar and Landrover managers. At first, this deal was greatly opposed by the stakeholders, and this affected the compensation management. The European Union approved the merger even though a good number of the stakeholders were opposed to it. TATA motors did not want a case of hostile takeover hence they went back to the drawing board and came up with another deal to appease the stakeholders.

Eventually, a good number of the stakeholders accepted the deal, and TATA motors moved to the next stage of compensation settlement. Due to the massive cost incurred in the merger process, TATA motors decided to compensate the stakeholders of the Jaguar and Landrover Company through shares. At the post-acquisition management stage, TATA motors injected a lot of capital for the business to commence operations.

Stakeholder Capitalism and Shareholder Wealth Maximization.

Stakeholder capitalism is a system where the companies treat the major stakeholder's interests equally rather than favoring one of them. It is a trend that is attracting a lot of attention in the business world (Terzi, 2011). The main problem with the stakeholder capitalism model is not the theory part of it but the implementation in the business world because it states that is not enough for a manager to cater for the workers and the community welfare alone. Stakeholder's capitalism is good for international business.

Stakeholder's capitalism creates a competitive advantage for the business since it creates a link between the company and the stakeholders (Ruta & Venables, 2012). This because in stakeholders' capitalism the goal of management is to focus on the interests of all its stakeholders. By doing this, the company retains its brand loyalty and a strong reputation among the stakeholders (World Bank, 2013). Brand loyalty is crucial for any business since it helps retain the customers and also expand the market.

Stakeholders' capitalism approach also helps in value creation through innovation (Wiebe, Bruckner, Giljum & Lutz, 2012). This is because firms that focus on the stakeholders' welfare seem to attract a more powerful workforce. A great workforce is important for the company's innovation process (Yotov, 2012). When a robust workforce is fully satisfied with the job, they are likely to stay in the company for long and engage in the generation of valuable and creative ideas for the business.

Nevertheless, the stakeholder's approach in the market has some limitations to the business. Each stakeholder only cares about his or her benefits, and this may bring divergent interests (Shleifer & Vishny, 2011). Divergent interests in the company are detrimental to the smooth running of the business since it may be hard for the workers to reach a consensus.

Shareholders wealth maximization is the next significant management approach. In this management goal, the company strives to maintain a high value for its shares (Johnson, 2012). In short the company cares more about the shareholders as compared to the customers. The main advantage of this goal is that the company will attract more capital sources since the high the price of the shares, the more potential shareholders it attracts. The management hence finds ways in which to maximize the value of the company in a bid to increase the value of the shares as well as the dividends.

The Distinction Between the two Management Goals

The primary distinction between the two goals is that stakeholder's capitalism is a more powerful approach than shareholder wealth maximization. This is because the former method promotes the overall performance of the business while the latter focuses on the company's shareholders' welfare only. Stakeholder capitalism promotes brand loyalty while the shareholder wealth maximization does not promote brand loyalty. The two management goals have different goals, and sometimes it is challenging for the company to apply both at the same time.

How This Approach is Reflected in TATA MotorsThe TATA motors company has applied the shareholder wealth maximization approach in its management (Fidrmuc & Fidrmuc, 2003). First, the company has lowered its share prices in the European market to attract more potential shareholders. Also in their merger acquisition with Jaguar and Landrover, they used shares as the primary mode of payment to the owners of Jaguar and Landrover as well as its stakeholders (Roy & Sinha, 2016). This shows that the company has mainly applied the shareholder's wealth maximization management approach. This is perhaps the reason why TATA automotive company has accumulated a lot of assets all over Europe and Asia.

Risk Exposure

Different currencies are used in various international businesses. Currencies are vulnerable to depreciation and in some cases appreciation (Eaton, Kortum & Sotelo, 2012). Companies that transact international companies are prone to this risk. The higher the number of currencies involved in a transaction, the greater the chances of this risk to occur (Eaton, Kortum & Sotelo, 2012). Currency exposure can be calculated as the total amount of capital involved in all transactions divided by the total number of currency involved in currency exchange transactions. The larger the answer to this question regarding percentage the higher the risk involved and the more significant the need to apply currency risk management.

Currency exposure is a type of non-controllable currency risk. Companies must impose currency exposure risk management strategies to protect their profit margins and remain relevant in the market (Griffin & Pustay, 2012). This involves the diversification of these risks that the company is facing and also the pursuit of strict control measures. There are four types of currency risks involved in international business. These are transaction risk, economic risk, translation and contingent risk. Transaction risk (Lenzen et al., 2012).

A company experiences transactional risks whenever it has contractual cash flow regarding receivables and payables which are subject to depreciation and appreciation with time. As firms sign contracts with major distributing companies in other countries, they face the...