Page 114 - DMGT545_INTERNATIONAL_BUSINESS

Unit 6: Modes of Entering International Business

6.5 mergers and acquisitions notes

Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and
management dealing with the buying, selling and combining of different companies that can aid,
finance, or help a growing company in a given industry grow rapidly without having to create
another business entity.
Merger is a tool used by companies for the purpose of expanding their operations often aiming at
an increase of their long term profitability. There are 15 different types of actions that a company
can take when deciding to move forward using M&A. Usually mergers occur in a consensual
(occurring by mutual consent) setting where executives from the target company help those from
the purchaser in a due diligence process to ensure that the deal is beneficial to both parties.
Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding
shares of a company in the open market against the wishes of the target’s board. In the United
States, business laws vary from state to state whereby some companies have limited protection
against hostile takeovers. One form of protection against a hostile takeover is the shareholder
rights plan, otherwise known as the “poison pill”.
Historically, mergers have often failed to add significantly to the value of the acquiring firm’s
shares. Corporate mergers may be aimed at reducing market competition, cutting costs
(for example, laying off employees, operating at a more technologically efficient scale, etc.),
reducing taxes, removing management, “empire building” by the acquiring managers, or other
purposes which may or may not be consistent with public policy or public welfare.
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Caution Mergers and Acquisitions do not have a very successful history in providing
corporate growth platform for many businesses.

Distinction between Mergers and Acquisitions

When one company takes over another and clearly establishes itself as the new owner, the
purchase is called an acquisition. From a legal point of view, the target company ceases to exist,
the buyer “swallows” the business and the buyer’s stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size,
agree to go forward as a single new company rather than remain separately owned and operated.
This kind of action is more precisely referred to as a “merger of equals”. Both companies’ stocks
are surrendered and new company stock is issued in its place.

Example: In the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms
ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

International Mergers and Acquisitions

International mergers and acquisitions are growing day-by-day. These mergers and acquisitions
refer to those mergers and acquisitions that are taking place beyond the boundaries of a
particular country. International mergers and acquisitions are also termed as global mergers and
acquisitions or cross-border mergers and acquisitions.
Globalization and worldwide financial reforms have collectively contributed towards the
development of international mergers and acquisitions to a substantial extent. International
mergers and acquisitions are taking place in different forms, for example horizontal mergers,
vertical mergers, conglomerate mergers, congeneric mergers, reverse mergers, dilutive mergers,
accretive mergers and others.

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