Mergers and acquisitions are considered as one of the routes by which organisations can expand their presence into new markets across geographies or product segments. Essentially these forms of expansion are external in nature in that they all have an element of foreign presence attached to them. These methods of expansion of business have the advantages of reducing risks as there is a new local knowledge or expertise which is added onto the organisation. There are potential for the acquired organisation to bring in new knowledge and synergies to the total organisation which may be valuable in operating in the new market conditions. But along with the advantages to the organisation there are also associated disadvantages also of falling into debt due to the leveraged nature of the acquisition and higher risk of bankruptcy of the organisation. These factors are analysed below.
Too much Debt and Risk of Bankruptcy
Mergers and acquisitions have been the focus of corporate strategies over the last few decades, with an increasing number of mergers across the globe. A merger or acquisition is a combination of two companies where one corporation is completely absorbed by another corporation. The less important company loses its identity and becomes part of the more important corporation, which retains its identity.
Mergers and acquisitions can occur for number of reasons. One such is to overcome too much debt or to avoid bankruptcy situations. Supplier bankruptcies make up the first wave of restructuring and the rate of bankruptcy fillings will continue to accelerate in the near term. As credit becomes more widely available and companies are able to safe and sound liquidity, there will be a wave of Mergers and acquisitions. If a particular company is undergoing enormous debts and finds it difficult to beat competition or even to survive in the industry, management may make a decision to go for a divestiture. As a result company may sell out to another corporation or may go for a merger.
If a company is suffering from a bankruptcy situation, perhaps it may come to a decision to move for a sell out strategy. Financially viable competitors in the same industry may interested in merging with or acquiring another corporation in the same industry even with huge debts or under a bankruptcy state if there is any potential advantage of merging or acquiring is witnessed. Some times it may be because of the company’s ability to produce goods efficiently if they combined their efforts and facilities. These efficiency gains may come simply by virtue of the size of the combined company; it may be cheaper to produce goods on a large scale. Collaborating or sharing expertise may achieve gains in efficiency, or a company might have under-utilize assets that the other company can better use or else because of the technology or the brand image or any other unique attribute available to the bankrupt company.
The most recent example of such case in the automobile industry is the case of General Motors wherein which it went on a acquisition spree in the heady years of 2000 till the recession struck in 2008. GM acquired stakes or majorities in many European and Asian companies to enter new markets or to simply garner up the market share of these companies. It used the debt model to finance these investments and it should be said that these investments gave the returns in the initial years with GM garnering excellent market share and becoming the world’s largest automaker. But during the recession it became unsustainable and GM could no longer get the financial returns to service its debt. It had to sell off some of the assets and US financial aid was required to help it out of bankruptcy. Taking other examples it may be seen that Honda ditched Rover just in time to avoid the failing company’s sickness spreading to it and taking it also down. While it was BMW which suffered due to the acquisition of Rover after Honda unwounded its relationship. BMW’s German efficiency process could not change the constant poor quality and inefficiencies within rover and they failed to synergise and BMW had to suffer financially due to write off of 3 billion dollars.
Through such merger or an acquisition, the company which suffered from financial difficulties will lessen its burden as it has the ability to overcome its debts as the change in the management may make the company more profitable
Potential Product Synergies
Mergers and acquisitions act as means of increasing market share, improving reach attaining economies of scale and augmenting product ranges. Mergers and acquisitions are turning into a strategic option for companies looking to accelerate growth.
Through mergers or acquisitions companies intended to maximize synergies through their complementary strengths in product line-up, procurement, R&D, marketing and personal training which would result in cost reductions, greater global market penetration and other benefits through corporation. As a result of a merger or an acquisition a corporation would get the access to up to the minute technology, a worldwide network and advanced managerial expertise. In addition substantial cost savings have been achieved through a common purchasing strategy and by setting up a common supplier base. Common platforms will be developed to reduce time for new product introduction. The recent example of acquiring of product synergies is the acquisition of Jaguar and Land Rover by Tata Motors of India. Tata motors through its acquisition of the companies were aiming to enter the UK market as well as to acquire the huge technical and research and development skills available at both the companies.
Achieving of synergies is the ideal sought in corporate mergers and acquisitions. Synergy refers to an increase in the level of performance of a combined enterprise that will exceed the previous individual performance when it was operated separately. For an example managerial economies such as the increased opportunity of managerial specialization, technical economies such as technical know how, purchasing economies due to increased order size and associated bulk buying discounts. In automobile industry there are several synergies that can be achieved through mergers and acquisitions. For an example in 1990 Honda entered in to an agreement with Rover under which Honda acquired minority shareholding in Rover in order to begin European production of Honda Accord and also once Honda rewind its formal relationships had with Rover, BMW acquired Rover Company from its parent company with the expectation of expanding its capacity from 600,000 to 800,000 by 1999 with 150,000 of these vehicles exported.
Access to New Technologies and Emerging Markets
Mergers and acquisitions bring forth several technology and platform sharing agreements, enabling companies to reduce product development time and costs. Further it will be helpful in stepping in to new markets
Through mergers and acquisitions corporations will be able to obtain technology economies. I.e. Mergers and acquisitions will result in enhancing the level of technology sharing and utilization than earlier. As such in automobile industry there can be seen major acquisitions or mergers. For an example in 1979 Honda Motor company signed technical collaboration with British Leyland (Now Rover Group), covering British Leyland production of Triumph Acclaim cars in the United Kingdom. It was a step taken to enter in to the European market and also to obtain the technology of Rover Group.
As mentioned earlier, mergers and acquisitions can be seen as a way of entering into strange, emerging markets. Some countries in the emerging markets such as India, China, and Thailand are growing at a spectacular rate. Thus this amazing growth rates are attracting global automotive majors to these markets in increasing numbers. Companies are resorting to acquisitions or mergers to gain foothold in these markets due to certain cultural reasons or to accommodate differences in two cultures. For example, Honda entered the emerging market of India in 1984 through joint venture with Hero Group. Honda has recently entered into a joint agreement with SIEL Limited to manufacture cars in India. Through these joint ventures Honda was able to enter the emerging market of India and has shown enormous progress in its sales of its motorcycles in the last two decades. Recently Honda acquired the stake of hero group and it has a solid base no in India. The strategy of Honda and other automobile companies in the Asian continent was to form joint ventures with local companies who had the knowledge of the market to push the sales and marketing activities. This was also due to the then government regulations in India and other Asian countries that any foreign company to enter their market they need to have an Indian partner with majority partnership. Recently the governments have relaxed these regulations and many companies were able to acquire the stakes of their partners and consolidate the management, technology input etc into these companies to earn more revenues.