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Advantages And Cons Of Mergers And Acquisitions

Keywords: concept of mergers and acquisitions

Submitted By: Yatendra Kumar

"Discuss the tactical rationales and motives for American companies desperate to execute mergers outside the American borders. Do you think it is accurate for the European Union to restrict mergers between American companies that do business in European countries? (For instance, the European Percentage vetoed the proposed merger between WorldCom and Sprint, both U. S. companies and it carefully analyzed the merger between AOL and TimeWarner, again both U. S. companies). Make suggestions on whether such mergers in europe are a worthwhile investment for American organizations. "


Today's business world is of growing overall economy and globalization, so the majority of the companies are struggling to achieve the optimal market talk about possible on both market level i. e. Local and International market. Day by day business person works to attain a most well-known goal i. e. "being the best with what you perform as well as getting there as fast as possible". So businesses work faultlessly to beat their competitors they assume various ways to do thus. Some of their ways might embody competitive within the marketplace of their main competency. Therefore, it insuring that they want the best knowledge and skills to have got a fighting possibility against their competitors in that business.

In 21st century businesses are the game of growth. Every business want the ideal market show (expansion) over their opponents, so companies want to get optimum expansion by using the most typical shortcut i. e. Merger and Acquisition (M&A). The progress main motive is financial stableness of your business as well as the shareholders riches maximization and main coalition's personal motivations. Mergers and acquisitions (M&A) offers a business with a probably bigger market share and it starts the business up to a more varied market. Nowadays it is the mostly use options for the expansion of companies. Merger and Acquisition (M&A) fundamentally makes a business bigger, increase its production and gives it more financial power to become more powerful against their rival on a single market. Mergers and acquisitions have developed quality across the world within the existing economic conditions due to globalization, progress of new technology and augmented competitive business world (Leepsa and Mishra, 2012). In the last decade, M&A will be the dominant means of organization's globalization (Weber, Shenkar and Raveh 1996). Merger especially is actually a growing development that has become a location of the recent business conditions and it's apparent to have got affected each country and trade (Balmer and Dinnie 1999).

Concept of Mergers and Acquisition

The main idea behind mergers and acquisition is one plus one makes three. The two companies together tend to be well worth full than two labeled companies at least that is the concluding behind mergers. Merger is the combination of two or more businesses, generally by offering the shareholders of 1 firm's securities in the acquiring company in exchange for the acquiescence of the shares. Merger is the union of several firms to make of a new body or creation of a positioning company (Western european Central Bank, 2000, Gaughan, 2002, Jagersma, 2005). Quite simply when two firms combine to create a new organization with distributed resources and commercial objectives, it is recognized as merger (Ghobodian, liu and Viney 1999).

It includes the mutual image resolution of two firms to merge and be one entity and it might be regarded as a choice created by two "equals". The mutual business through structural and functional benefits secured by the merger will reduce cost and increase the profits, increasing stockholder values for each and every band of shareholders. Quite simply, it involves two or more comparatively equal companies, which merge to be one public entity with the goal of making that's value over the total of its components. Through the merger of two businesses, the stockholders sometimes have their shares within the previous company improved for the same amount of stocks within the built in entity. The fundamental process behind getting an organization is to create shareholders wealth over and higher than that of two firm's riches. The best exemplory case of merger is merger between AOL and Time Warner in the entire year 2000. In 2000 the merger between AOL and Time Warner is one of the primary deal that later fails.

The advantage and negatives of merger and acquisition are depending of the new companies short-term and permanent strategies and efforts. That is as a result of factors enjoys' market environment, Versions in business culture, acquirement costs and changes to financial ability surrounding the business captured. So pursuing are the some advantages and disadvantages of merger and acquisition (M&A) are:

Advantages: Following will be the some advantages

  • The most typical reason for companies to enter merger and acquisition is to combine their power and control over the markets.
  • Another edge is Synergy this is the magic power that allow for increased value efficiencies of the new entity and it requires the condition of results enrichment and cost benefits.
  • Economies of range is produced by sharing the resources and services (Richard et al, 2007). Union of 2 firm's leads in overall cost decrease supplying a competitive benefit, that is possible consequently of lifted buying ability and longer development runs.
  • Decrease of risk using innovative techniques of controlling financial risk.
  • To become competitive, firms need to be compelled to be peak of technical innovations and their interacting applications. By M&A of a little business with original technologies, a huge company will preserve or expand a competitive edge.
  • The biggest gain is taxes benefits. Financial advantages might instigate mergers and organizations will completely build use of duty- shields, increase monetary leverage and utilize substitute duty benefits (Hayn, 1989).

Disadvantages: Following will be the some difficulties came across with a merger-

  • Loss of experienced workers aside from staff in command positions. This sort of loss inevitably will involve lack of business understand and on the other palm that will be worrying to exchange or will only get replaced at nice value.
  • As a result of M&A, employees of the tiny merging firm may necessitate exhaustive re-skilling.
  • Company will face major difficulties because of frictions and interior competition that might occur among the staff of the united companies. There is certainly conjointly risk of getting surplus employees in some departments.
  • Merging two businesses that are doing similar activities may imply duplication and over capacity within the company that might need retrenchments.
  • Increase in costs might result if the right management of modification as well as the execution of the merger and acquisition interacting are delayed.
  • The uncertainty with respect to the agreement of the merger by proper assurances.
  • In many events, the return of the talk about of the company that triggered buyouts of other company was less than the return of the sector all together.

The merger and acquisition (M&A) reduces overall flexibility. If a competitor makes revolution and could currently market vital resources those are of superior quality, change is rough. The change price is the major differentiation between your particular merger value as well as the merchandising value of the company that may be of larger difference.

Literature Review:

This paper handles the merger and Acquisition of the companies. The mixture of two companies is measure additional value than two companies at least that's the concluding behind mergers. This also contains the main strategic rationales and motives for American companies wishing to execute mergers outside the American borders and is europe restriction on the American companies M&A with Western european companies is accurate by the help of case study of merger between AOL Time Warner.

Strategic rationales and motives for American companies:

The main rationales and motives of American companies to merger outside the America are to extend their market, get new way to obtain raw materials and faucet in large capital market. The cross-border M&A is a widely used and popular strategic means for international companies seeking to develop their business reach, widen new development facilities, enlarge new sources of raw resources, and utilize capital market segments (Weston, Chung, & Hoag, 1990). Deals from the borders' have been many and large during the 1990s (Subramanian et al. , 1992), and the deals like that are probable to attain new heights anticipated to globalization styles, drop in unwieldy business restrictions and red tape, and by the development of standardized accounting standards by various capital-starved countries (Zuckerman, 1993). Moreover, the main purpose is to expend their business or market and develop new options for raw materials.

Restriction for Mergers in EU:

In the sooner times, the enforcement guidelines in European Zone against mergers were totally different. In the starting, the Western european Community wasn't numerous included concerning mergers. The founders of Western Economic Community thought that division of markets resulted into unskillfully as well as for them largeness was never issues or a haul (Bermann et al, 1993). They'd even thought of regulation as a remedy for large mergers instead of de-concentration. Actually, Mergers were generally accepted and cross-border mergers were most welcome which might help mix the European Union. To the scope that the Western european Community started taking interpersonal control for mergers very seriously, it majorly focused upon a pull that mergers would produce abuse of market power (Eleanor, M n. d). Finally, European Commission (EC) legislation considered merger as a main growing matter. The EC government bodies make sure, once companies combine, the market balance is retained and avoid distortion of competition and development of dominating position that might be abused. Massive companies ought to take endorsement from europe and deliver them with necessary one.

Case study

The merger between AOL and Time Warner was declared on 10 January 2000 and it was worth $183 billion. That was the largest merger in the history of American business world. AOL had about 40% share of online service in the United States and the Time Warner have significantly more than 18% of US media and wire homeowners. The merger is taken into account to be a vertical merger between one between the most crucial web service suppliers and this one amongst the biggest advertising and entertainment firm. The new company was created and named as AOL Time Warner and was the fourth biggest company in america, as examined by stock market valuation. After the merger deal, AOL become a subsidiary enough time Warner Company at level and has functions in Europe, North American countries and Asia. As the web service company, AOL on look greatly rival from Microsoft, Yahoo and different low price net access suppliers. Thus, the organization tries to induce advertising and e-commerce development, thereby separate it by rival (BBC, 2000).

Impact of package on the performance

After the state announcement of deal merger between AOL and Time Warner progress rate in income has dramatically dropped. The profitability suffered a good plunge when the alliance. The strength of the new united company was terribly poor as established from the advantage turnover ratio. Even the liquidity of the organization suffered after the merger as visible from this percentage. There are many reasons for failure however the foremost essential reason was the unequal size of the firms, wherever AOL was overvalued because of this of web bubble. Regarding to New York share exchange prior to the deal the share price of AOL is 73 and Time Warne is 90 but after announcement of the merger package the shareholders dissatisfaction shown on talk about market of AOL and Time Warner and the shares drop right down to 47 and 71 respectively. AOL and Time Warner fail to keep up shareholders satisfaction levels this conjointly one among the rationale to loosing stableness of show holders in line with the Times newspaper (Kane and Margaret, 2003).

The market valuation of both the companies AOL and Time Warner were decrease from the starting of the merger to end of the offer. AOL has drop down approximately 60 percent and Time Warner around thirty percent of market value once the offer has been sealed. The market valuation of both companies from 2000 to 2011 was fallen down dramatically. The AOL market value has decreased from 167$ billion to 107$ billion and the Time Warner 124$ billion to 99$ billion and is also the biggest fallen down of any company in American record.

Reasons for merger Failures

1+1 = 3 looks great but in practice or fact every time it isn't work properly and be fallible. Historical movements show that around 2 thirds of huge mergers can disappointed on their own terms, which means they're going to lose value on the stock exchange. The motivations that mainly drive mergers are frequently blemished and efficiencies from economies of range might establish elusive (Investopedia, 2010).

Adoption of the new technology does take time for the standard company. In late twentieth century dramatic changes has occur in web. Migration of recent function of web service is linked with high barricade and a number of other sociable and legal problems was encircled around and recently established firms like yahoo, msn etc was offering high edge competition. Cost-effective rate of inflation is high, to build economy more powerful American federal has modified the coverage and taxation rules have throwing a dispute for AOL to conquer this things merger as time passes Warner became a berry to the AOL. General public and private regulations are one of the reasons for the merger failure. The reason why of merger failing has ended valuation of AOL stocks shows a dramatic effect on the deal, while stake holders are not satisfied and improper communication with consumers damages the trust of customer. The merger's fail was a result not only as a result of replete of the dot-com bubble but it addittionally the failings by AOL Time Warner management to ever really integrate both firms.


One size does not match all. Several companies think that the most effective way to get ahead is to increase business restrictions through mergers and acquisitions (M&A). Mergers produce synergies and economies of size, increasing procedures and cutting prices. Investors will take comfort within the theory that a merger can deliver increased market power. The same thing happens with the America's biggest merger deal between AOL and Time Warner. They feel that merger is helpful for both companies but it not matched up for both of these. Both AOL and Time Warner synergies shows diversification is the fact the key goal of the firms to extend the revenue and to attain the value gain as a result of amendment in mode of technology and increase in the competition for the well established firms. Throughout the phase of merger web bubbles also the key cause for over valuation of shares. In differentiation Time Warner was the victim of net bubble. This type merger failure conditions shows support the European Commission to restrict the American companies to merge with the Western european companies. European fee has the right to govern the European market and make stable the Euro Zone market. The European percentage (EC) is thought of defending home companies from foreign rival plus they encourage their zone mergers. Therefore the European percentage doesn't want any problems like dis-economies of range, clashes of cultures and reduced amount of flexibilities by the merger of American companies. So the merger is highly controlled by European Union to avoid major focus of economic vitality in euro area. The merger bargains situations like AOL and Time Warner helps the European Commission rate (EC) to make demanding rules to restrict the merger and acquisition (M&A) of American companies with the Euro Zone companies.

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