Term Paper on "Mergers and Acquisitions"

Term Paper 4 pages (1596 words) Sources: 1+

[EXCERPT] . . . .

Mergers and Acquisitions

The situation in mergers and acquisitions are different. In mergers, two different companies agree to join their forces to develop a bigger company so that they would be able to fight competitive organizations or even to combine their strengths in related and complementary lines. In acquisitions, it is the question of a bigger company taking over a smaller company as it feels the smaller company has some technology or facility which would enable the bigger company develops faster.

There is an unprecedented and high level of merger activity has probably been started by the liberalization of the markets. The trade barriers have been lowered, transportation methods have become cheaper, the norms have become uniform all over the world and the standards and procedures have become common all over the world. In general the geographic expansion that comes from a merger leads to an increase in productivity. The concerned firms can get to the economies of scale and the scope to develop new products and this helps them in getting to new markets. One of the most common methods of getting to new markets is now through cross border markets and this provides access to new markets and later, cost savings. At the same time, the mergers of different companies also lead to the increase in numbers of viable competitors. This may sometimes cause difficulties to existing companies in the market. This is a cause for further mergers as joining forces with a competitor may help both companies to survive in a highly competitive market. Of course there may also be a desire among the merging companies for more power in the market. (Kinne, 1999)

Let us take an example from the last big merger that took place in the country. This was announced on August 12, 2005 and the merger was between Sprint and Nextel Communication Inc. The new company that was formed is named Sprint Nextel Corporation. The common shares of the new company began trading on the New York Stock Exchange on Monday, August 15, 2005. This was the last of the formal steps required for the completion of the new company. The value of the total deal was $35 billion and the companies had totally different strengths and customer bases, which according to some made them a good candidate for a merger. The new organization is the country's third largest wireless provider. The company is expected to have more than 44 million wireless subscribers and serve a balanced mix of consumers, business and government customers and also produce the highest revenue per user in the industry. (Sprint Nextel Completes Merger)

On a "pro forma" basis the new company reported revenues of $40.8 billion for the year 2004. Along with all affiliates and partners the new company has networks that cover 268 million people. It is felt by some that with extensive network, spectrum assets, technology migration path and 80,000 employees, the company may become the next leader in the group. (Sprint Nextel Completes Merger) The change will take quite sometime to register with the customers for the two companies and that will happen only after the new signboards go up at the retail outlets, new brand is exposed to the market, additional service plans are rolled out and similar activities are carried out. The apparent aim is to target the important holiday season. Yet the investors do not like it, and on the day the merger was announced, the shares of Sprint came down by 24 cents and of NXTL by 64 cents. (Sprint, Nextel Complete $35 Billion Merger)

The two companies are known for different operational styles and Sprint is known to be a consumer company with a great emphasis on technology with downloadable games and even live television on handsets. On the other hand, Nextel is popular with businesses and provides push to talk services that makes cell phones operate like walkie-talkies. Since the companies are now merged it is expected that they will provide new services to consumers, and one of these areas is wireless broadband. The technology in this may be pushed further and this technology is able to serve airport terminals and coffee shops better. The possibilities are immense as it makes a coast to coast journey possible with continuous contact to the Internet. According to technological experts, this type of services will be significant for the future of Sprint Nextel as also the two top wireless companies of Cingular Wireless and Verizon Wireless. Thus it is felt that new technology is required for the development of business in the wireless sector. (Sprint, Nextel Complete $35 Billion Merger) This is the point that has been discussed above, and these two companies definitely needed a merger for survival and future growth.

Another important reason for merger of organizations is for consolidation so that there are cost savings. This is often done through acquisition as it enables the bigger organization to get the help from cost savings through economies of scale. Since the total output increases, there is a drop in costs. This however can take place only up to a certain point as beyond that point there is no further savings due to mergers. Thus one of the firms being merged or acquired will be below the minimum efficient size. These operations also expand the scope of the new organization's operations. The important point to be realized is that the average cost of joint operation should be below the cost of operation in the component firms. Cost savings may also come from savings in distribution, advertising and increases in capital. (Kinne, 1999)

Other sources of efficiencies may come from the introduction of new products, development of more efficient processes or improvement of product quality or service. It is however very difficult for the firms to find out in advance whether there will be any savings due to mergers, as these can be only judged after the entire merger process is completed. Another problem in minimizing costs comes from cultural differences between the companies or their styles of management. Even if there is weak competition, the need for cost savings are not realized and thus not achieved. There have been many cases where studies have shown that companies often are not able to estimate the costs of post-merger integration, and the greatest difficulty is in cultural integration. (Kinne, 1999)

One such takeover was by Sun Microsystems and announced on Wednesday August 31 and the total value was $4.1 billion. It has taken over Storage Technology Corporation and the shareholders approved the deal. StorageTek shareholders will receive $37 per share that they have, and the new owners will also take over the liability of employee stock options that have been given. The former chief executive of StorageTek, Pat Martin will not be joining the new company. (Sun Microsystems completes StorageTek purchase) This is clearly a case of acquisition of one company by a bigger company as the functions of the smaller company would help the bigger company to lower its costs. The new culture to be followed is clearly that of the bigger company as can be seen clearly from the removal of the chief executive of the smaller company.

The situations are not so clear as can be seen from the case of Zhone Technologies plans to take over Paradyne Networks Inc. On 8 July, 2005. Paradyne is a supplier of broadband access products and Zhone is an equipment producer, and obviously the products of Paradyne are going to be used. Zhone has agreed to issue 1.0972 of its own shares for each share of Paradyne and that gave an implied value of each Paradyne share as $3.917 when the market price was $1.89. Thus Paradyne is clearly being given a premium. This was also reflected in the market where Paradyne… READ MORE

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