Mergers and Acquisitions: the Good, the Bad, and the Ugly

Introduction

Corporations come in a variety of shapes and sizes, but the majority have one thing in common, and that is generating value. Looking into the various industries, we have the automotive industry, which creates value by delivering a useful product to the customers. The technical industry, which pursues enhancing productivity and efficiency to all users, whether for business or pleasure. The retail industry, among the others. Corporations rise from the various industries out there to form a basis of value creation (Ross, 2017).

The value of a corporation is reflected upon various factors. We have the value of assets, which consist of current and fixed assets. We also have the total value of a firm to investors, which is comprised of the current liabilities, long term debt, and the equity of shareholders. Between these factors we have networking capital which is produced. Many financial analysts refer to these as the simple balance framework. Through this model is how many corporations accomplish their goal of maximizing profits.

Corporations are comprised of corporate officers, directors, and shareholders. The proprietorship of a corporation is represented by stock. Therefore, the management of a corporation is accomplished principally by the stockholder’s point of view. When a corporation has insufficient management, the results may be exhibited through loss of value in stocks. Shareholders intend to control the cash flow of a corporation by pursuing mergers and acquisition in the effort to get rid of bad management. After all, the whole focus of a corporation is to maximize value, not minimize it.

Mergers and Acquisitions

           Mergers occur when one organization is completely absorbed by another organization. This process involves the absorbed firm’s assets being liquidized and even to the point where the name of the firm ceases to exist as a separate business entity. An example of a successful merger that comes to mind is when Washington Mutual decided to merge with JP Morgan Chase years ago. The merge of Washington Mutual with Chase resolved the largest bank failure in the history of the country (Palmeri, 2008). I used to work for Washington Mutual during the time and witnessed how so many jobs were saved as a result.

           Some may argue that mergers are destined for failure, but that is not always the case. Mergers become the solution for restructure of the corporation and enable the business entity for a way forward to financial recovery. The concepts of mergers and acquisition may seem the same, but they have their unique differences. Acquisitions occur when one entity obtains control of the net assets and operations in exchange for a transfer of assets, employment and the issuing of shares (Chiriac, 2011).

           The main cause of a merger and acquisition failure is simply the lack of due diligence analysis. It is essential for a corporation procuring to acquire another business entity to analyze their financial statements, exposure to liabilities and seek legal as well as tax expert advice. Failure in the process can be proactively avoided when applying these best practices. Nobody with good experience looks to buy a used automobile without first checking under the hood. Hence, good experience is essential to determine a successful merger or acquisition.

A Merge and Acquisition Disaster

           One excellent example of an epic failure from a large merger and acquisition occurred in 2005, when Sprint acquired Nextel Communications. The two business entities combined to become the third-largest communications provider. The expectation was to enable company growth by cross selling their products and services. What the company selectively ignored was major cultural differences between each business entity, which soon resulted in the resignation of multitudes of executives from Nextel (Dumont, 2019). Eventually, the company did not deliver the success expected and suffered a major loss of market share.

           The lesson’s learned from this large merger and acquisition disaster is to always make exploring cultural differences a major part of the due diligence analysis. Each corporation has its distinct battle rhythm, and when firms merge to become one business entity, it immediately can cause a giant culture shock. Many people do not like change and react differently regarding culture shock. This usually drives a lot of employees and key role players away from the firm, making it a challenge to move higher in valuation. Cultural aspects of a firm must never be ignored before such a decision is done with mergers and acquisitions.

Advantages and Disadvantages

           Although there is uncertainty involved in the process of mergers and acquisitions, fear must never be a driving factor towards decision making. There are many advantages as well as disadvantages which the process can bring. Many of the benefits to mergers and acquisitions are: -increasing business capacity, -creating a larger market share, and -reducing financial risk (Dumont, 2019). Synergy is created when mergers and acquisitions occur, resulting in cost savings and increased revenue for the business entity. When carefully analyzed and applied correctly, the merger and acquisition can result in benefiting both firms as well as the economy.  

            One major disadvantage towards mergers and acquisitions is that the market can be easily “fooled” by the business entity wanting to merge, making it appear their earnings per share have solid growth (Ross, 2017). If investors are fooled that the firm is in a better market posture than it really is, there can be negative side effects after the merger occurs. Another disadvantage that appears beneficial is diversification. Depending on what is being diversified, many times this may not really create value. Although we can benefit from diversifying certain products and services, we must take precaution that these new products do not tend to hurt marketing instead of enhancing it.

Conclusion

           Learning from other business entity failures can enable us as business leaders to avoid having similar negative results regarding mergers and acquisitions. Knowledge is half the battle, applying leads to accomplishment. During the paper, the concepts of mergers and acquisitions were addressed. The advantages as well as disadvantages were emphasized, and examples of successful and unsuccessful mergers and acquisitions were provided. Overall, a higher level of certainty and a lower level of fear can be attained for the decision-making process.

                                              References

Chiriac, I. S. (2011). Mergers - Success or Failure? Central for European Studies (CES) Working Papers, 135.

Dumont, M. (2019, June 25). 4 Biggest Merger and Acquisition Disasters. Retrieved from Investopedia: https://www.investopedia.com/articles/financial-theory/08/merger-acquisition-disasters.asp

Palmeri, C. (2008). JPMorgan Chase to Buy Washington Mutual. Business Week Online, 19-19.

Ross, S. (2017). Corporate Finance: Core Principles & Applications 5 Ed. New York City: McGraw-Hill, Inc.