Mergers and acquisitions: assessing business risks and benefits

Mergers and Acquisitions: A Risk Assessment

This paper assesses the impact mergers and acquisitions have on business, including sensible and dubious reasons an enterprise may have for engaging in such a relationship, the benefits and costs of mergers and acquisitions and the financial risks associated with merging or acquiring an organization in another country.

Sensible and Dubious Reasons for M&a

Mergers and acquisitions are more commonplace now than ever before, touted by many as a tool for increasing organizational efficiency, diversifying resources, and promoting greater value for shareholders and employees, as well as customers working with an organization (Galpin & Herndon, 2000). When initiated as a tool for improving strategic performance, and engaging two companies offering complementary services, a merger or acquisition is a sensible tool for promoting diversity and offering shareholders real value. However, mergers and acquisitions can also arise for dubious purposes. A takeover or instance where an acquisition occurs without solicitation from the acquiring firm may qualify as a dubious M&a, for purposes of eliminating competition or reducing a perceived threat within one's primary industry (Stevn, 2005).

Other dubious reasons for M&as may include the desire of the bidder or buyer to create a monopoly or empire on a specific market, or when the shareholders believe that the diversification that will undoubtedly arise from an M&a will not lower costs significantly or improve cash flow (Stevn, 2005).

Benefits and Costs of M&a

Mergers and acquisitions can be viewed in terms of their benefits and their costs. Collier (1993) notes that "it is up to a cooperative's management to assess ether customers and owners will benefit through the opportunities associated with mergers when compared to the obvious costs or threats (p. 4). Galpin & Herndon (2000) note that when merges occur between equal entities with complementary resources, benefits including increased access to resources and creation of a strong "global platform" arise, which in turn may lead to substantial growth for all involved (p. 1). Shareholders however, do not always benefit from corporate takeovers or acquisitions. Mckinsey for example, reports that many times M&as do not successfully create value for the enterprise initiating a merger or acquisition (Stevn, 2005).

Costs associated with M&as may include difficulty with the integration process, a merger or acquisition that occurs without due diligence, such that the target company is inaccurately evaluated, pre-existing debt that will increase the burden of expense on the part of the bidder and an inability between the two companies to merger successfully and create a harmonious and adaptable environment (Stevn, 2005).

Cash and Stock Transactions

Shareholders can realize significant opportunities through mergers when they create greater value and improve an organization's ability to grow and produce greater revenues (Galpin & Herndon, p. 1). Ideally an acquisition is initiated to improve cash flow from operating the target firm as the two firms merge together (Stevn, 2005). Cash flow increases when a company buys a target firm or mergers with them when both companies agree the value of the two companies combined will result in higher revenues and shareholder value than if they two companies worked independent of each other (Stevn, 2005; Galpin & Herndon, 2000).

This concept is often referred to as a "synergistic" alliance where greater economies of scale arise as a large firm can reduce per unit costs or spread fixed cost among multiple units (Stevn, 2005).

Conclusions and Analysis

There are many costs and benefits associated with mergers and acquisitions. As M&as have become increasingly commonplace, it is important for owners and strategic partners to fully assess the risks and benefits associated with such transactions. Transfer of ownership to a company can create an environment filled with opportunity and may result in increasing revenues for the merged entity. In some cases however, there is the risk that an M&a will result in a corporate structure that is too large, too diverse and inefficient at operating on a conservative budget (Collier, 1993). This is where the concept of due diligence arises, where companies must assess the risks, benefits, costs and implications of a merger or acquisition before initiating one. Hostile takeovers are most likely to result in unsuccessful ventures where diversification leads to disgruntled employees and poor performance.

Communication and understanding lie at the key to every firm's success. This is true whether a firm operates independently or whether a firm acquires another through mutually agreeable or beneficial assessments. Given modern trends, it is likely that firms will continue to engage in M&as, both domestically and internationally. If executed with attention to detail, people, customers and intent, there is much evidence that such actions can lead to greater value and shareholder benefits.