This report discusses what mergers and acquisitions entail and how they form part of the organizational strategic planning. Usually, organizations acquire weaker organizations. The essence of these mergers and acquisitions is primarily to share strengths and overcome their weaknesses with the objective of increasing profitability and market shares. Therefore, this report further explores some of the rationales for mergers and acquisitions (M&A) along with different types of M&A such as horizontal integration, vertical integration, and conglomeration. The report provides a case study of companies which have strategically gone through mergers and acquisitions to offer an excellent understanding of the concept. The report is divided into two parts. Part one discusses the concept of mergers and acquisitions and details how it is applied in strategic management. This part also discusses types of mergers and acquisitions, competitive advantage as the motive of M&A, the history and evolution of mergers and acquisitions, pro and anti-M & A arguments, fives waves theory of M&A and their attributes, and the adaptation of mergers and acquisitions. In part two, the report presents a case study for M & A: ICICI Bank Ltd, its history, and the analysis and discussion on its M&A.
Part 1IntroductionMergers and acquisitions commonly known as M&A, are significant components of the corporate restructuring in strategic management. The fundamental principle behind mergers and acquisitions is the fact the two or more companies running together have a higher competitive edge than when running as separate entities. Therefore, mergers and acquisitions ideally entail consolidation or amalgamation of at least two companies. Thus, it implies that the understanding of M&A remains one of the critical relevance aspects in the contemporary corporate world, particularly with increasing news and updates on mergers and acquisitions around the globe.
Definition of Merger and Acquisition
Agarwal and Mittal (2014, 236) describe a merger as a union of two companies or consolidation of two or more firms into a single entity. In this case, the identities of the previous companies are lost so that the resulting alliance also leads to the accumulation of assets and liabilities of those companies for collective benefits. The merger, also known as an amalgamation, can also be described as procedures undertaken by a business to facilitate company's growth and increase its access to new markets. It involves a strategic unification or fusion of two companies or companies to form a single business or companies re-registered under a new name. Similarly, all shareholders of merging firms become a shareholder of the larger firm. Theoretically, a merger occurs between two companies considered to be equal in stature and size. However, not all companies that enter into a merger deal are identical in all aspects. Sometimes, a merger may involve a marriage between companies with significant differences. The merger can be classified into four types as follows:Horizontal Merger: The horizontal merger occurs when two or more companies that were initially competing within the same industry unify. These companies are considered to be in the same stage of industrial revolution and same sector. The merger involves direct competing firms so that the resulting single company expands as it continues to operate in the same industry. Horizontal mergers are intended to produce considerate economies of scale and to reduce the number of competing firms in the industry. It is also undertaken to generate as a full monopoly in the market and drive out competitors. A good example is an automobile company that is overtaking counterpart (Agarwal and Mittal 2014, 237).
Vertical Merger: A vertical merger occurs where two companies operating in the same industry but different distribution systems or production stages combine into one big company. When a company takes over its producers or suppliers or raw materials, then its activity may cause backward integration. Conversely, forward integration is said to occur when a company takes over customers or retailers of another company. Vertical integration may lead to financial and operating economies. The resulting firm from merger becomes more competitive in the market that it rivals due to the combination of its production and distribution chain. Therefore, a vertical merger enables those firms struggling in sustaining their production schedule and marketing network to integrate fully. The vertical merger also reduces the associated overhead costs resulting in self-sufficiency, greater independence, and reduced transaction costs. A good example can be seen in the case where a healthcare industry purchases providers of the ambulance services (Agarwal and Mittal 2014, 237)
Congeneric Merger: In this type of merger, both the target and acquired firm are interrelated through marketing processes, production processes, and underlying technology. Companies in this type of merger operate in the same industry and are interrelated. However, these companies have no customer-supplier relationship. The target firm represents an extension of technologies, market participants, and the product line of the acquirer. The merger here symbolizes an outward movement where a company is acquired from its business to another business. In this case, the acquirer obtains its benefits from entry into the related market with higher return and exploitation of strategic resources. These transactions provide both firms opportunities to diversify using common strategic resources. A company uses the congeneric merger to reach out to customers of another company with corresponding distribution and sales channels (Agarwal and Mittal 2014, 237).
Conglomerate Merger: In this kind of merger, firm that is engaged in unrelated business activities combined and operate as a single entity. These firms have no horizontal or vertical relationships. Such companies belong to different industries. Their main reason for the merger is to diversify at minimal setup costs so that they can utilize available financial resources and increase the value of outstanding shares. In case of a pure conglomerate, there is no unifying factor in their technology, production, research and development, and marketing. However, in practice, one or more of these factors overlap.
The acquisition is a phenomenon where one giant firm acquires or takes-over the struggling firm so that the existence of the latter ceases. Ideally, the acquisition may be described as the process where one company or organization buys another that is usually smaller in size and less competitive. The company or organization that seeks to acquire another company or organization is referred to as the acquiring firm while the latter is known as the targeted firm.
M & A and the Strategic Management
For the past decades, mergers and acquisitions were regarded as just financial transactions which aimed at controlling less valued assets. The strategy targeted a business or the entire industry contrary rather than the acquirer's business with the primary goal being to ensure sufficient cash flows for the repayment of the debt. However, significant changes have occurred over the time so that in the modern business world, the typical M&A seems quite operational and strategic. Today, managers of this business are not aiming at purchasing undervalued assets but instead new talents, organizational competencies, extensive geographical territories, improved channels of distributions, and installed customer bases. All these acquired elements in returns provide new strategic opportunities for the organizations to gain a competitive edge over its rivals. These organizations succeed by consolidating units of business for them to maximize their share prices and revenues. As a tool of strategic planning, mergers and acquisitions have been emphasized for the business success (Tamosiuniene and Duksaite, 2009, 11).
Most of the past studies on mergers and acquisition found that most of the managers did not have a clear strategic rationale for mergers and acquisition as well as the effect the strategy could have on their companies. Today, average companies have moved their focus from cost saving to the perception that mergers and acquisition could be a driving tool for corporation growth. M&A have a broad rationale for its justification. However, it is also worth noting that the organization which undertakes such M&A can either gain or lose from the deal. It is therefore relevant for managers to align M&A plans with their organizational strategic plans. Management can achieve this alignment using useful screening tools to assess targets for M&A through the due diligence process.
There are two primary methods of growing a business: inorganic and organic growth. Inorganic growth refers to the situation where a company grows so that it can skip numerous steps in its growth path. The organic growth of a company is characterized by an incremental increase of company's infrastructural resources, people, and customers. Mergers and acquisitions are classified under an inorganic growth strategy. Mergers and acquisitions enable companies to acquire competitive advantage where a single large firm offers consumers products of high value through improved services and affordable prices. While sometimes a firm may charge relatively higher prices, such prices are justified by the quality of services rendered or goods provided.
A firm is said to gain a competitive edge or advantage by offering its consumers products of high value, better services and justifies prices of theirs. Five forces give a company a competitive niche in the industry: competitive rivalry, purchasing power, product development and technology, the power of supplier, and the level of monopoly power of a firm. Usually, rival firms in the same market increase their competition level through strategies such as advertising, offering more attractive goods and services, giving warranties, products differentiation, or through price competition.
Products Substitute Naturally Influence the Level of Competition by Limiting Profitability in the Industry
History and Evolution of M&AAccording to Jorgensen and Jorgensen (2010, 16), significant mergers and acquisition activity occurred for the last century have been motivated tremendous changes in macroeconomic forces. Such microeconomic factors have been associated with the five historical waves. Historical account traces that the first wave of merger and acquisition was observed in the 1890s that are considered to have been created by the development of the trade for t...
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