Mergers Acquisition

Today we see many companies asking the government for help so they can keep operating.  We have seen it in the automobile and the banking industry just to name a few and until the economy corrects itself there is no telling how many more industries will join them.  Based on this information, we have also seen more companies in financial trouble than in the past.  Companies continue to merge and acquire other companies even in these dark economic times, so what makes these mergers and acquisitions succeed or fail
    
According to Rosenberg, every week, if not every day, new mergers and acquisitions hit the headlines.  Those were during normal times and as we know the state of the economy today is not normal.  For the past two years, there has been a lack of financing and demand has decreased.  The stronger companies have been using their leverage to buyout other companies thereby reducing the competition, increasing revenues, and broadening product lines.  A merger or acquisition might not be successful if there is any type of instability.  A company that was stable 10 years ago and is struggling now might not be merged into a bigger or another company due to some enormous debt or lack of revenue on either side.  Another company might consider it a good way to increase the products they supply if they do merge with said company.   If a bank is concerned about whether or not they will be around in a month, year, or 5 years, they may be less likely to loan money to a company unless the company is very stable and even then they might make the company provide collateral that they may not be willing to put up.  If a company is taking a risk on an acquisition or merger, the bank might refuse to finance them due to the higher risk.  Although it is known that usually the higher the risk the higher the reward, in these economic times a bank would not be able to afford to take this risk. 
    
Uncertainty is a big factor as to why mergers and acquisitions do not work.  Uncertainty equals risk and in todays economy, the normal risk that was undertaken years ago is not a good risk to undertake today.  There was a time when you would not have thought that certain companies or banks would ever go out of business.  They boasted millions even billions of dollars in assets but yet they carried even more in debt and no one was the wiser until these companies began to fall.  The crisis that occurred in the banking industry is a prime example of why companies are acquired and merged as well as why they sometimes fail and sometimes they succeed.
    
According to an article in Mortgage Servicing News, when Wachovia, Wells Fargo, and Countrywide were purchased they were at the brink of going out of business and then along came bigger banks like JP Morgan and Bank of America to buy them out thereby bailing these banks out.  Why did they need to be bailed out  Mainly because these banks had made loans to customers that were extremely risky and when the time came for those customers to pay these loans back, it became almost impossible.  Wells Fargo, Countrywide, and Wachovia were known for making mortgage loans to customers with questionable credit and they also had a notorious reputation for requiring less documentation than other banks.  Once these loans started to default, the banks were headed for bankruptcy or disseverment.  The bigger banks came to the rescue but at what cost  Once these bigger banks took in those smaller banks that were in trouble then their trouble was now the bigger banks troubles.  Now the larger banks had to think of ways to reduce the problems with these loans.
    
In the banking industry we saw that a prime time to acquire or merge with another bank is when the bank being acquired or merged is in trouble.  When this is done it also can cause some problems for the bank making the acquisition.  But what makes companies go overseas for their acquisitions and mergers  Basically the same thing that motivates them to do so domestically the possibility of increased revenues.  We will continue with the banking sector as we look at cross border acquisitions and mergers.

According to a study done by Ricardo Correa a bank is more likely to get acquired in a cross-border deal if they are large, bad performers, in a small country, and when the banking sector is concentrated. A large bank being acquired makes sense since that means that the bank has large asset balances on its balance sheet.  Large assets could lead to other acquisitions and mergers or it could go towards paying off current debt.  A bad performer in a small country when the banking sector is concentrated says a great deal about the bank.  It states that the bank is not performing well but the country depends on the bank since there are little or no other banks that can suit the needs of the customers.  This is important to note because it means that the bank might not be doing well because of them being more willing to work with their customers and not because of defaults.  A cross border bank might find this to be a more ideal situation than a bank that is not doing well, is faced with many competitors, and in a large country.  We can also see that the size of a country as well as the current state of the industry is important to determine whether or not a merger or acquisition will be successful or not.
    
It is very easy to pick apart the banking industry since we have all witnessed how badly they have done in the past few years but there are other industries that seem to have faced the same fate but have also had help through mergers and acquisitions.  The automotive industry has also faced some troublesome times in the past few years.  In 2005, Swedens Plastal Holding AB acquired Dynamit Nobel Kunststoff GmbH which enabled them to foresee a 1.65 billion dollar a year in sales. Although they purchased a company within their own country the idea behind the success was the same.  Plastal saw an opportunity to add to its revenue by acquiring a competitor which removed a competitor from the industry and allowed them to increase revenue by almost 3 times their current volume.  When a company acquires another company there is usually a possibility of increased revenue and some additions to the products that will be offered.  A Malaysian company, Proton, acquired an 80 stake in British company, Lotus.  Even about 10 years before the economic crisis that is being faced in the United States other countries were acquiring companies to make sure they continued to have a strong presence in the market. Companies use mergers and acquisitions to prepare themselves for the future. 

There could be a company with technology that you may not be able to afford at the time or that you do not have time to acquire therefore the company is merged with another country so that they can share this information together.  Not only does it look better on the books when you bring in a company that has high income potential but also it looks very promising when they have little debt and high assets.
       
One of the many overlooked reasons that a merger or acquisition fails is that the transaction is in an attempt to imitate other companies that have done the same in the past.  In the past, many companies merged and this led to great wealth for the companies and the CEOs of those companies so it is not a stretch to see why other companies might want to follow suit and merger as well.  This strategy however can sometimes backfire because neither company might be ready for this merger nor the stock market does not react according to the way that was originally anticipated.  Also companies have a fear of being acquired therefore they may seek out another company to acquire before they are acquired.  Of course this can lead to problems because as stated above this may not be in the best interest of either company at the time.  Another reason that acquisitions and mergers may not work is that after the merger or acquisition the companies may not use their time wisely to finalize the deal.  This means that once a company is acquired there are still steps to take to make sure that it works out.  In a case of a company acquiring another company from overseas, there may be issues stemming from not addressing cultural issues.  Culture plays a big role in any acquisition or merger of this type and should be addressed immediately thereafter.  If it is not addressed this could lead to using more resources to train employees, acquire new employees, or transferring employees back and forth from country to country.  It can also lead to low morale and low productivity among the employees.

In conclusion, although it is not always known as to why a merger or acquisition did not work it can be speculated based upon the different factors involved in the transaction with the most important factors being uncertainty, imitation, and low performance.  Uncertainty can cause a fear in an industry that may not have existed before.  This fear can be a fear of not being around in the future or a fear of the company that you are taking a risk on not being around.  We have seen company after company fail in these tough economic times and we might see many more before it turns around.  Imitating another company can be productive but only when done for the right reasons.  Acquiring or merging with a company just because others have done it is not a good enough reason by itself there must be some underlying financial reasons to make it feasible.  A company that is performing below standards may be doing so due to some bad business decisions and this can lead to the downfall of the company that is acquiring them.  All of these factors should be considered before companies undergo acquisitions or mergers domestically and globally.

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