Mergers And Acquisitions Organizational Characteristics

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Mergers and Acquisitions (Organizational Characteristics)

The practice of merging and acquiring new firms from different countries has greatly increased over the past fifteen years (Moeller and Schlingemann, 2005 as cited in Martynova and Renneboog, 2008). By this way of expansion, that is through acquisitions and mergers, they are able to take advantage of the difference in tax rates and are able to make a profit from the inconsistencies of the markets, for instance, the government control on resource markets and labor force (Scholes and Wolfson,1990 as cited in Martynova and Renneboog, 2008; Servaes and Zenner' 1994 as cited in Martynova and Renneboog, 2008). In addition, increased benefits from mergers and acquisitions of companies of the neighboring countries are also an outcome of improved governance of the target companies and the bidding firms and due to the spillovers of standards related to corporate governance among the two companies.

In case of a merger of two companies or acquisition of a new company in the domestic U.S. markets, as stated by Xie and Wang (in press), there is an advantage from the combined corporate governance of both i.e. target company and the bidder firm. The investor's rights index highlighted in the study conducted by Gompers et al. (2003 as cited in Martynova and Renneboog, 2008) is exploited and this confirms that there is an augment due to merger and acquisition, through the target firm and the bidder index differences. By this we can derive that the extent of potential growth in management control is increased in merger and acquisitions across the border due to the improvement of financial management. Hence our major concern is to find out the effect of corporate controls on value of acquisition and mergers across the country.

According to the international law, a complete acquisition of a company by a company from a different country results in complete transfer of ownership of that company and empowers the acquirer to have complete control on the newly formed company and apply its rules and regulations on it, and as such the control of corporate sector is replaced. By doing so the applicable corporate governance of the acquired company will be of the country where the acquiring company exists (Bris and Cabolis, 2008 as cited in Martynova and Renneboog, 2008).

When the new rules and regulations applied on the bidding company are also applied on the acquired company, there will be a progress in achieving the goals by corporate governance which will result in an added value to the stakeholder's interest. With the increase in share value due to corporate governance, value of target firm and the bidder company will also record an increase. This theory is known as "the positive spillover by law" hypothesis (Bris and Cabolis, 2008 as cited in Martynova and Renneboog, 2008).

Here the word "Positive" means the improvement underwent by the target firm because of the complete acquisition of the company by the bidding firm or this can also be interpreted to be the increase in returns of the bidder as well as the target company resulting from improved controls of the bidder in the acquisition. Similarly the unconstructive spillover by law theory can be defined as the low standards of controls of the bidding firm that are associated with low share value of the company (Bris and Cabolis, 2008 as cited in Martynova and Renneboog, 2008).

"The negative spillover by law effect" is likely to occur between the bidder of a country that has a low investor security as well as a target firm with strong controls of rules and regulations. As the bidder acquires the target company, the applicable rules and regulations will be more relaxed and lenient than those earlier applied on the target company. This will result in the reduction of quality of the corporate governance, particularly of the acquired company. This can decrease the net worth of the target firm when it's acquired by the bidder company. One possible way out of this dilemma can be that the bidder company also adopts the stricter regulations of the acquired company. This is known as the bootstrapping theory: where the bidders adopt the rules and regulations of a level which is higher (Bris and Cabolis, 2008 as cited in Martynova and Renneboog, 2008).

Companies can contract on their own for the best possible interest of the shareholders. By following the bootstrap strategy of employing controls in the business, the bidder will facilitate in increase in the value of shares at the time of merger owing to better corporate governance. In the case of either a complete merger or acquisition of a company or in part bootstrapping can take place, but increase in value will be greater in partial acquisitions where the bidder possess less than hundred percent of the right to vote and the target firms stay a member of the stock exchange (Starks and Wei, 2005 as cited in Martynova and Renneboog, 2008).

The value thus enhanced by the bootstrap hypothesis is useful in acquisitions with complete equity or partial bidding where some of stakeholders are still in connection with the new company and they might interrupt the new administrative policies which can result in decreased interest of the stakeholders (Starks and Wei, 2005 as cited in Martynova and Renneboog, 2008).

In case of a complete take over, the international law recommends the positive spillover according to the law, which will also result in accepting the change in nationality by the target firm. However, partially acquiring a firm will also result in the same spillover effect that can be termed as the spillover according to the control theory. Even though the target company is not completely taken over by the bidding company in partially acquiring scenario, the bidding firm may try to enforce their own rules and regulations of governance on the target firm on the condition that the rules of the bidding firm are more binding than the target firm. On the contrary, if the rules and regulations of bidder firm are less effective than the rules of the target firm than the bidding company has to follow the law of the target firm (Martynova and Renneboog, 2008).

Thus we can conclude with our study that the positive spill over by law supersedes the negative spill over by law. The value of shares of the bidder firm and the target company are increased when the rule and regulations for corporate governance are stricter on the bidder than the target firm. This shows that if strong rules are enforced on the target company, it will result in an increase of the share value and will also decrease the personal benefits of the controlling managers. On the other hand, if the rules and regulations of the bidding firm are less effective than the rules followed by the target firm, the returns of bidder and target firm might turn out to be low. But this hypothesis acts in contrast to the negative spillover by law hypothesis as it does not negate the bootstrapping theory (Martynova and Renneboog, 2008).

In fact it is revealed that the bidders having poor controls on their organizations have to bootstrap to the target firms rules of good governance which will result in the increase in the value of shares. It is important to note that this hypothesis only applies to partial acquisitions and not complete mergers or is applied in deals which still have shareholders of the target firm and the target firm is still listed on the countries stock exchange (Martynova and Renneboog, 2008).

This theory of spillover by control applies when there is a difference between the governing policies of the bidder and the target firm which impose a positive effect on the expected returns in case of partial acquisitions. In this case the spillover effect where the state protects the rights of the shareholders of the bidder, firm increase in value of share is figured. Here, shareholders of both target firms and the bidding company enjoy the benefits of good governance; the asset value of both the organizations go up (Martynova and Renneboog, 2008).

Therefore we can easily conclude that government control on rules and regulation has a great influence on the course of companies taken over by the bidder companies not necessarily present in the same country. Particularly, it is explained that weak control of firms by corporate governance is the reason they are so easily taken over by the bidder companies in the neighboring countries instead of firms of their own country as confirmed by the studies conducted by Doidge et al. (2007 as cited in Martynova and Renneboog, 2008) as well as an earlier research conducted by Benos and Weisbach (2004 as cited in Martynova and Renneboog, 2008). If the interests of the investors of the target firms are defended they are more likely to yield value by the bidder firm.

An idea presented by Goergen et al. In the year 2005 (as cited in Martynova and Renneboog, 2008) is offered here where the takeovers are termed as the valuables of the countries where rights of stakeholders are protected and as such compel firms to opt for a productive merger and acquisitions from their neighboring countries of low governing standards with respect to the protection of stakeholders rights. International mergers and takeover processes are positively influenced by efficient control by the parent country which may lead to the formation of a direct link between protection of investors and a companies' access to debt financing (La Porta et al., 1998 as cited in Martynova and Renneboog, 2008). Martynova and Renneboog in the year 2007 explained that debt financing is directly related to merger and acquisitions across the border (Martynova and Renneboog, 2008).

Lastly, a major chunk of the findings identified that the impact of the comparative size of transactions, ways of paying, free cash flow, strategies of diversifying, hostility, variations in economic development, proximity, stock price run up and the association with language are some of the factors that need to be considered by both the target and the bidder company (Martynova and Renneboog, 2008).

The respective analysis brings value to the overall text in mainly two ways. Firstly, the question is addressed about the way or the choice of channels that the companies use in generating value for the mergers and acquisitions of cross border companies. It is not just the economic features related to the bidder, target or the bid itself but also the transfer of the excess of corporate governance standards from either of the companies to justify partially the premiums of the takeover or the expected value that sometimes result in abnormal increase in returns (Martynova and Renneboog, 2008).

The effect of country wide corporate governance codes on the wealth of the investors impact the merger and acquisitions that occur cross border and have been earlier discussed by Bris and Cabolis (2008 as cited in Martynova and Renneboog, 2008) and Bris et al. (2008 as cited in Martynova and Renneboog, 2008), Starks and Wei (2005 as cited in Martynova and Renneboog, 2008), Kuipers et al. (2003 as cited in Martynova and Renneboog, 2008), and Rossi and Volpin (2004 as cited in Martynova and Renneboog, 2008). The afore-cited five research studies assess and evaluate the impact of valuation via the spillover of corporate governance standards taken from various standpoints and then look at the varying outcomes.

This analysis considers the research made by Bris and Cabolist (2008) and Bris et al. 2008. The researchers depict that the premiums of takeover that arise from cross border arrangements go up with the variations in the investor protection and the level of accounting standards among the target and the bidder....
...It was recorded that this impact is considerable only in the case of mergers and acquisition when the bidding company fully acquires the target one (as cited in Martynova and Renneboog, 2008).

In comparison, the findings of this particular analysis show that the enhancements in the investor protection of the target company have a direct connection on the synergy resulting from takeover regardless of the nature of the takeover. The findings therefore depict that the takeover synergies related to governance do not necessarily have to come about from a "spillover by law effect" but can also materialize from bootstrapping and spillover by control (Martynova and Renneboog, 2008).

Secondly, this respective research premises on the indices of the new corporate governance. The indices created by La Porta, Lopez-de-Silanes, Shleifer and Vishny (henceforth LLSV) are superseded by the country level indices that are more descriptive. Also they have been used in the researches talked about in the earlier paragraphs. Employing the assistance of over a hundred business lawyers coming from over thirty countries in Europe, the authors of the paper have developed a database of corporate governance that revolves around the primary alterations in the regulation of corporate governances in all the countries present in Europe over a period of past fifteen years. For every country, the corporate law and practice, stock exchange regulation and their effectiveness is quantified so that the conflicts of interest can be minimized, particularly the ones between creditors, management, minority and the majority shareholders (as cited in Martynova and Renneboog, 2008).

The indices that have been considered here depict that the regulation of corporate governance has considerably altered or has been modified in almost all the countries present in Europe since the year 1990. Thus, it is important to mention that with relation to earlier researches, the legal indices made use of in the respective analysis vary with time and depict the alterations that took place in the legal setting (as cited in Martynova and Renneboog, 2008).

Countries' rules and regulations are of more importance than those of firms and as such more emphasis is laid on them. Firstly, it is not really possible to provide a code to the material of the corporate charters to gather the changes and to collect all the important decisions made by the shareholders in the annual general meeting. These firms exist in different countries having different types of legal, corporate governance and regulatory systems (as cited in Martynova and Renneboog, 2008).

Secondly, observation report proves that there is a strong connection between corporate management of companies at both the country and firm level. The differences in a cross section analysis of corporate governance present at the firm level was evaluated by Doidge et al. (2007 as cited in Martynova and Renneboog, 2008) who found that the majority of the differences can be justified by the features of the country. They presented the view that countries are very important as they affect the cost incurred by a firm to manage corporate governance. Companies with efficient control are least concerned about ways to govern as the management of company is controlled by major shareholders (Martynova and Renneboog, 2008). In the following pages, we will compare three companies and their it departments and how the mergers and acquisitions affected their overall performances.

A new section of information technology and computer, known as CIT department was formed to supervise the resources of information technology following the acquisition by WorldPharma and merging with PharmaTech and CB Medicine (the names of the companies have been altered to protect privacy). Initially, the department worked for the major job of facilitating the acquisition and coming up with the integration plan for the different it systems in place, such as MetaFrame which existed in the new entity.

The primary objectives of the international MetaFrame system concerned with the migration project are two. Firstly the goal is to integrate every system (MetaFrame) from the earlier distinct pharmaceutical companies into one that is managed globally and is unified. Secondly the objective is to come up with an international group of people working together for backing the new and centrally controlled MetaFrame. Mr. XYZ became the new manager charged with responsibility of managing the system. As this project was embroiled with the intricacies of the system and organizational concerns, Mr. XYZ had to address a number of issues after the acquisition.

The performance of a MetaFrame system can be enhanced classifying them into zones that enable the geographic areas to function on their domestic it networks and reduce to a minimum network communication related to the IMA data-store. The logic behind the establishment of zones was the establishment of one zone for each operation having a greater number of MetaFrame servers or one that has a weak network connection to the closest IMA data-store. Information about configuration of non-system, for example active or disconnected sessions and load on servers, is maintained and controlled at every zone by ZDC. Within the zone, communication is also controlled by ZDC and as such the MetaFrame unit cannot communicate directly with other MetaFrame servers.

The MetaFrame product was released in many versions by the Citrix Corporation and its first version was named "WinFrame" after which "MetaFrame 1.8" and "MetaFrame XP" was released. Then a new version called "Presentation Server" was released by Citrix Corporation and then validity of MetaFrame version was marked up till 30th June, 2007.

As MetaFrame XP had a significant role to play in the acquisition made by World Pharma, many experts were available for it. Even though the latest version of MetaFrame (i.e Presentation server) was introduced in the markets, it was decided to implement MetaFrame XP in the migration project. Therefore only MetaFrame XP version is selected to be discussed in this case study.

In addition to it, Citrix Corporation on 11 february 2008, named its product as "XenApp" instead of "Presentation Server" (Complete details of the MetaFrame product can be obtained from www.citrix.com ). 1.2 MetaFrame system in use nowadays: Pre-M&a. A combination of three firms started to amalgamate. Firstly there was a structural difference in MetaFrame system adopted by the three companies therefore a centralized" Metaframe system of operation was selected by CB Medicine and PharmaTech.

The centralized framework would entail all the users having access to one huge MetaFrame that would be managed by IMA Data-store. Be it an engineer in Japan or a scientist in Sweden, the same environment of the MetaFrame system would be used. The environment of the MetaFrame system can be identified as a listing of servers along with their applications present on each of the servers.

In the practical framework, however, each unit of business (e.g., a unit of manufacturing in Midwest U.S., a unit of marketing in East coast U.S.) will have to make and manage its own MetaFrame system environment. Therefore, a marketing and manufacturing concern both will have their separate MetaFrame system environment in WorldPharma.

To enable WorldPharma in competing in its relevant industry and to facilitate the operation challenges faced by the company, the best possible version of MetaFrame will have to be selected by Mr. XYA and the computer information and technology department, in this respect.

References

Benos, E., Weisbach, M., 2004. Private bene-ts and cross-listings in the United States. Emerging Markets Review 5 (2), 217 -- 240. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Blume, M., 1979. Betas and their regression tendencies: some further evidence. Journal of Finance 34, 265 -- 267. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Bris, a., Cabolis, C., 2008. The value of investor protection: rm evidence from cross-border mergers. Review of Financial Studies 21 (2), 605 -- 648. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Doidge, C., Karolyi, a., Stulz, R., 2007. Why do countries matter so much for corporate governance? Journal of Financial Economics 86 (1), 1 -- 39. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Goergen, M., Martynova, M., Renneboog, L., 2005. Corporate governance convergence: evidence from takeover regulation reforms. Oxford Review of Economic Policy, 21 (2), 243 -- 268. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Gompers, P., Ishii, J., Metrick, a., 2003. Corporate governance and equity prices. Quarterly Journal of Economics 118 (1), 107 -- 155. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Kuipers, D., Miller, D., Patel, a., 2003. The legal environment and corporate valuation: evidence from cross-border takeovers. Texas Tech University Working Paper. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

La Porta, R., Lopez-de-Silanes, F., Shleifer, a., Vishny, R., 1998. Law and ?nance. Journal of Political Economy 106, 1113 -- 1155. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Martynova, M., Renneboog, L., 2007a. What determines sources of transaction ?nancing in corporate takeovers: costs of capital, agency costs, or means of payment? Mimeo. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Moeller, S., Schlingemann, F., 2005. Global diversi-cation and bidder gains: a comparison between cross-border and domestic acquisitions. Journal of Banking and Finance 29, 533 -- 564. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Rossi, S., Volpin, P., 2004. Cross-country determinants of mergers and acquisitions. Journal of Financial Economics 74 (2), 277 -- 304. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Scholes, M., Wolfson, M., 1990. The effects of changes in tax laws on corporate reorganization activity. Journal of Business 141 -- 164. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Servaes, H., Zenner, M., 1994. Taxes and the returns to foreign acquisitions in the United States. Financial Management 42 -- 56. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Starks, Wei, 2005. Cross-border mergers and differences in corporate governance. Working paper University of Texas. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Wang, C., Xie, F., in press. Corporate governance transfer and synergistic gains from mergers and acquisitions. Review of Financial Studies, forthcoming. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Sources Used in Documents:

References

Benos, E., Weisbach, M., 2004. Private bene-ts and cross-listings in the United States. Emerging Markets Review 5 (2), 217 -- 240. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Blume, M., 1979. Betas and their regression tendencies: some further evidence. Journal of Finance 34, 265 -- 267. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Bris, a., Cabolis, C., 2008. The value of investor protection: rm evidence from cross-border mergers. Review of Financial Studies 21 (2), 605 -- 648. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

Doidge, C., Karolyi, a., Stulz, R., 2007. Why do countries matter so much for corporate governance? Journal of Financial Economics 86 (1), 1 -- 39. Taken from: Martynova, M. And Renneboog, L. (2008). Spillover of corporate governance standards in cross-border mergers and acquisitions. Journal of Corporate Finance 14, 200 -- 223

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