Mergers & Acquisitions in Engineering: Stadium Electronics Case

Introduction to Mergers and Acquisitions

Mergers and acquisitions (M&A) over the past 25 years have encompassed a great deal of activity and have drastically shaped the business environment for engineering firms. There is an important distinction between a merger and an acquisition. According to Healthcare Financial Management (2011), "A determination must be made at the outset as to whether a transaction is a merger, an acquisition, or something else. The sole criterion for identifying a merger is that the combining entities cede control to a new entity. Conversely, in an acquisition, one entity cedes control to another entity" (Healthcare Financial Management, 2011).

The effects of mergers and acquisitions involve empirical economic theory and a positive return on the equity price of the acquired stock (Pautler, 2003). However, the motives to engage in M&A activity have ostensibly not changed over time.

According to Pautler (2003), "The most general motive is simply that the purchasing firm considers the acquisition to be a profitable investment. The most common theme found in the work of economists who have written about merger activity is that mergers are often thought of as an alternative form of investment. Firms will undertake acquisitions when it is the most profitable means of enhancing capacity, obtaining new knowledge or skills, entering new product or geographic areas, or reallocating assets into the control of the most effective managers/owners" (Pautler, 2003).

Historical Waves of M&A Activity

The commencement of the last 25 years of M&A activity aligns with the start of the Fourth Wave (Rudolph, 2001) of merger and acquisition activity. The Fourth Wave is characterized by Rudolph as the decade of the "raiders" — an adjective describing a type of aggressive acquisition style. The mid-1980s saw a precipitous rise in the number of M&A transactions to more than 22,000 (Rudolph, 2001), "driven by the new tides of strategic purchasing, privatization, and foreign investment. Another trend, although not new, reemerged during this decade — the hostile takeover" (Rudolph, 2001).

The next, or Fifth Wave (Rudolph, 2001), occurred in the 1990s. This decade involved "consolidation and diversification" (Rudolph, 2001). However, the forces of governmental regulation were more prominent than in the past. According to Rudolph, "The underlying forces of regulation, technology, financial markets, leadership, and the balance between scale and focus drove organizations to seek strategic alliance" (Rudolph, 2001). Additionally, the 1990s saw an increase in the number of syndicates and strategic alliances forged to increase the number of mergers and acquisitions throughout industry.

Mergers in the 1990s were characterized by abnormal returns and the desire to consolidate. Market positioning was the strategic wild card in deciding whether a company pursued a merger or acquisition involving a competing or non-competing firm. According to Farinella (1996), "Mergers continue to play an important role for companies positioning themselves in their markets. Companies that merge create greater financial strength, a wider selection of products, and greater efficiency than either company has alone. Typical candidates include companies that provide similar books of business and can gain economies of scale through a merger. Future revenues and earnings for the surviving company are expected to result in continued surplus growth" (Farinella, 1996).

According to Rudolph (2001), "The nature of the deal value changed from the 1980s to the 1990s. Not only were there more deals, the magnitude of the deals became larger, individually and in the aggregate. The average size for the top 10 deals in the 1980s was $12.3 billion, $300 million less than the tenth-place finisher for the 1990s" (Rudolph, 2001). Certainly, the financing behind these deals increased significantly over the course of the decade. The increase in the value of firms in growing markets made M&A in engineering ever more attractive.

The underlying rationale (Rudolph, 2001) has also shifted over the past four decades. It has transitioned from "a belief in growth through extension of core activities to an expansion of core operations to the current belief that innovation and creation of synergy is preferred over building from the ground up. The unsettling feature of this evolution may be that eventually organizations will remove all excess expenses from their operations through traditional strategies but the bottom line will remain unacceptable to investors" (Rudolph, 2001).

Strategic Rationale and Integration Challenges

Contemporary merger and acquisition activity is more complex and integrative than at any prior time in history. However, the activity is highly specific and carefully crafted to guarantee a profitable integration between two organizations. According to Huang and Kleiner (2004), "Several studies have shown that cultural incompatibility is consistently rated as the greatest barrier to successful integration. For instance, a 1992 Coopers and Lybrand study reported that in one hundred failed or troubled mergers, 85 per cent of executives surveyed said that the major problem was differences in management style and practices" (Huang & Kleiner, 2004).

The literature also supports the notion that current M&A activity can be a costly mistake when undertaken inappropriately. According to Huang and Kleiner (2004), "Shortly after a merger and acquisition, many organizations experience lower sales, as well as increased complaints about customer service. When sales and service suffer, people in these groups tend to blame the merger or acquisition. Therefore, managers must ensure they maintain the standards of sales and service that their customers expect. Actions to boost sales and service must be overtly planned and quickly executed" (Galpin and Herndon, 2000, as cited in Huang & Kleiner, 2004).

According to Sikora (1995), "The lesson from that feast-to-famine experience is that the M&A foundation of 30 years ago was slender as a reed — once the conglomerates dropped from the buy side, no replacements filled the gap. Most businesses had yet to be convinced that M&A was more than a gamble for impatient corporate cowboys. That attitude changed in the 1980s in line with the new realities of the late 20th century that have challenged businesses across the globe. Acquisitions came in from the cold as well-crafted strategic ploys to quickly infuse companies with the size, skills, technology, and other prized assets needed to vigorously compete and survive. The emergence of well-heeled financial buyers added to the momentum. History also teaches us that M&A is highly dynamic, and that the future may generate deals as unthinkable by contemporary standards as today's deals would have been unthinkable 30 years ago" (Sikora, 1995).

The acquisition of Stadium Electronics should be well grounded in academic justification prior to financing a deal. Business takeover strategies are now ever more complex and require changes in tactics and strategy (Smith, 1985). Acquisitions may be encouraged by financiers looking to capture a quick profit in a risk arbitrage situation.