Mergers And Acquisitions As Destructive Value

As part of my assignment, I have been asked to discuss the following statement “Mergers and acquisitions can be value destroyers or value creators”. A merger can be defined as when two equal businesses in terms of profit margin and status, combine in order to become one legal entity. Initially, the fundamental reason for this merge is to produce a company that is worth more than the sum of its parts. An acquisition is where one company acquires a controlling interest in another company.

The combination of these unequal companies can produce the same or even more benefits as a merger would. In different cases, these mergers and acquisitions are either considered as the creator of value or the destroyer of value or even possibly both. A company that is considered as a value creator is carrying out their primary value-adding activities in the right manner. In contrast, a company that is seen as a value destroyer does the complete opposite meaning that the company is less appealing to employees, customers and potential investors.

Value Creation Mergers and acquisitions are formed in the hope that they will create value and there is a vast amount of reasoning on why they have been introduced. Businesses will try and create value for the company, shareholders, customers and employees. The present value of all performance enhancements attributable to management change would result in the increase in value from just by managing the assets more efficiently (Damodaran, 2005).

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Horizontal and Vertical Integration of Mergers and Acquisitions Mergers that are of a large scale may have been introduced in order to occupy a large share of the market, whereas acquisitions may have been formed in order to eliminate the competition. The mobile phone group of the recent merge between t mobile UK and orange UK could be potentially the biggest value creating company of all time. There aim is to take advantage of the fact that their products are related so that they can build of each other and therefore create profit and value for the customer (synergy) i. . customers will be able to use either network of t mobile and orange. Tom Alexander, CEO of Everything Everywhere – the company that runs Orange and T-Mobile - said: ‘This is the beginning of an ambitious plan to give our customers instant access to whatever they want, wherever they are – instant access to everything everywhere. This form of merging is regarded as horizontal integration, where growth is achieved through mergers and acquisitions offering similar products and services.

However, the size of the mergers determines the effect it imposes on the market. In the case of the merge between Morrisons and Safeway, the market as a whole was affected, whereas two companies of a smaller size wouldn’t have as big of an impact. Another form of merging is called vertical integration. Vertical integration acquires businesses in the same industry but at different stages of the supply chain. The benefit of vertical integration involves the ability to secure supplies and future orders.

An example of vertical integration is the acquisition of Amstrad from BSkyB, which in turn led to a reduction in costs of its supply chain. Sir Alan Sugar said- "I cannot imagine a better home for the Amstrad business and its talented people. Our companies share the entrepreneurial spirit of bringing innovation to the largest number of customers”. This implies that the merger is creating value towards the employees, because employees who have an in depth understanding of the business can interact there knowledge with their colleagues.

The merge will also add value towards customers due to the business providing improved efficiency and the introduction of innovation. Value creation of Shareholders Managers need to exercise various strategic approaches in order to create shareholder value or to increase it. The prices at which goods and services can be sold, the risks inherent in the business and the level of required investments are used to measure shareholders wealth. “Building profitable businesses creates value.

The board of directors and management’s primary responsibility is to increase company value and shareholder wealth. Shareholders invest in businesses seeking a significant return on their investment. They expect the reward to be appropriate for the business and financial risks of an unsure future. The strategies and approaches employed by the company will help determine if the business has created value for the shareholder.

In the case of Cadbury Schweppes, where the significant aim was to increase shareholder value, their primary aim is to focus on growth markets, improving brands and innovation in order to gain their objectives.  Value Destroyers Even though the fundamental objective for mergers and acquisitions is to create value, there may be factors involved that cause the value to be destroyed. It is believed that the prime component of why acquisitions fail is due to the fact that they paid too much to control it, which in turn leaves them with huge debts.

The buyer may find that the premium they paid for the acquired company's shares (the so-called "winner's curse") wipes out any gains made from the acquisition (Henry 2002). The differences in corporate culture play a substantial role in the M;A destroying value because each company may heavily depend on how they individually strategically run their businesses. Employees from one company may not feel to contribute or share their ideas with the employees with the other merged company therefore causing disruption and eventual failure of the M;A (merger and acquisition).

This could be reflected in the case of Kraft taking over Cadbury’s, as the employees and customers of Cadbury’s felt that their own ownership history of their products and corporate background of brands is exceedingly important to them. When a firm is taking over another firm, there may be dispute amongst the leadership of the M;A. This could lead to destruction between both sides as they both are bemused of their roles in the business.

This may prove a problem in the case of Carlton and Granada: Carlton's chief executive Charles Allen and Granada's chairman Michael Green, who will have joint responsibility for running the merged company, have been likened to "ferrets in a sack". Another issue that was mentioned in the Kraft takeover of Cadbury was that “ a company taking over inevitably dominates and imposes its values and decision making processes”. The stakeholders of Cadbury were not pleased with this takeover as they felt that their ideas and strategies would be unheard of.

When an M;A pursue an investment of a product in their market, they are not too familiar with the information of the product itself. This lack of assurance that the product will succeed i. e. the product will bring in profit over long range of time, will cause potential shareholders or shareholders to not take part in any form of investment of the company. This creation of loss and poor strategic approaches causes eventual value destruction. Another significant issue of a value destroyer is the complexity of a product. M;A fail to manage the complexity of a new product leading to failure in capturing value.

In the case of a merger or a takeover, the effectiveness of complexity management becomes more vital and problematical. Conclusion Mergers and acquisitions will do their utter most best in order to create value. The stepping-stone in which that this can be obtained is primarily down to the relationships between the managers and employees in both sets of companies. There are advantages associated with horizontal and vertical mergers, as they both consist of employees and managers who have a vast amount of knowledge about their own firms.

However, it depends on the way in which they interact with their colleagues to address their understandings. If the M;A are not fully aware of the differences in corporate cultures, it will lead to a dissatisfied workforce therefore destroying value. Leaders who have experienced rapid changes in the value created and destroyed in their initial companies, will have to introduce new and clear visions for the integrated companies to progress. M;A can take full advantage of their integration due to their size and global reach. They can severely challenge their competitors due to the power they can enforce on them i. . combined company strategies could lead to a dominance in market power depending on the size and stature of the companies involved. However, value will be destroyed if the M;A effectiveness of their deals and planning is of a poor quality. If the integration plan of the companies is below par and unclear whilst maintaining the daily running of the business, M;A may fail. Inevitably, there will be instances that arise that are uncontrollable such as dispute over strategic planning between two companies or the irrepressible corporate culture differences.

In most scenarios, it is impossible to determine whether or not M;A create or destroy value, but careful planning and research pre M;A could enhance the situation of it being in more of favor of creating value in the future.

1. Bibliography
2. Damodaran, A. (2005) The value of control: implications for control premia, minority discounts and voting share differentials, Stern School of Business, New York.
3. Hassan, M. , Patro, D. K. , Tuckman, H. and Wang, X. (2007) “ Do mergers and acquisitions create shareholder wealth in the pharmaceutical industry? , International Journal of Pharmaceutical and Healthcare Marketing, Vol. 1, No. 1, pp. 58-78.
4. Cox. D and Fardon M (2007), Management of Finance; a guide to business finance for the non specialist, 1st Edition, Osborne Books Limited References http://newsroom. orange. co. uk/2010/03/01/merger-of-t-mobile-uk-and-orange-uk-cleared-by-eu-commission/

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