Corporate Development: Mergers & Acquisitions
This article focuses on the corporate development practice of mergers and acquisitions. It provides a description and analysis of the main types of mergers and acquisitions including vertical mergers, horizontal mergers, and conglomerate mergers. Antitrust regulations, corporate procedures, and government guidelines overseeing mergers and acquisitions will be addressed. In addition, this article summarizes the human resource issues that result from corporate mergers and acquisitions.
Keywords Acquisitions; Antitrust Regulations; Conglomerate Mergers; Corporate Development; Growth; Horizontal Mergers; Mergers; Vertical Mergers
Management: Corporate Development: Mergers
Corporations create growth through organic or inorganic business activities. Growth refers to economic expansion as measured by any number of indicators such as increased revenue, staffing, and market share. Investors and economists debate the relative strengths and weaknesses of organic and inorganic business growth. Inorganic and organic business growth each move in and out of favor depending on the strength of the economy, political environment, and government regulations. Organic growth is created by expanding existing business resources rather than through mergers and acquisitions. Inorganic growth is created by corporate development practices. Corporate development refers to the activities that companies undertake to grow through inorganic means such as mergers and acquisitions, strategic alliances, and joint ventures.
Mergers and acquisitions are business methods that legally unify ownership of corporate assets that were formerly subject to separate controls. Mergers and acquisitions are considered to be one of the most important business tools for achieving competitive advantage and growth. In the merger and acquisition process, one corporation is completely absorbed by and into another corporation. The acquiring company usually maintains its identity and name. Mergers and acquisitions vary from corporate consolidation, the process through which two corporations join and form a wholly new corporation. Mergers and acquisitions were one of the main engines of business growth in the 1990s. For example, during the 1990s, the telecommunications industry grew from the merger and acquisitions activity of large companies such as AT & T and British Telecom. In the twenty-first century, business trends are moving more toward organic business growth and away from mergers and acquisitions as an engine of growth (Shin, 2005).
In the United States, mergers and acquisitions are regulated by the federal government to control anti-competitive practices. Mergers and acquisitions can potentially limit competition in the marketplace, reduce output, and raise prices for consumers. As a result of anti-competitive practices, the federal government has developed formal merger and acquisition regulations, procedures, and guidelines commonly referred to as antitrust regulation or law. Antitrust regulations operate to prohibit mergers and acquisitions that have more negative than positive consequences for society. Despite the problems associated with anti-competitive practices, mergers and acquisitions, when successful, have the potential to produce numerous benefits for business, government, and society. Common benefits of successful mergers and acquisitions include more effective management within a business organization; optimization of underused assets; reduced costs for corporations and consumers; improved product quality; and increased output.
The following section provides a description and analysis of the main elements of the merger and acquisition process: Choosing growth through mergers and acquisitions; types of mergers and acquisitions; managing mergers and acquisitions; and merger and acquisition regulations, procedures, and guidelines. This section will serve as a foundation for later discussion of human resource management of the problems that result from mergers and acquisitions.
The merger and acquisition process, across businesses and industries, shares similar trajectories, timelines, management concerns, regulations, procedures, and guidelines. The following sections discuss these elements and variables of the merger and acquisition process.
Choosing Growth through Mergers
The decision to create growth by merging with or acquiring another company is a form of corporate development and strategic planning. All successful business organizations engage in corporate development and strategic planning. Strategic planning, indistinguishable from corporate development in most instances, refers to the way an organization defines its future direction and makes decisions on allocating its human and capital resources in a way that will achieve these established goals. Corporate development and strategic planning require companies to accurately predict future needs and potential opportunities so to choose the appropriate course of action and time frame for growth. Once a corporation chooses its growth objective as a development strategy, corporations must choose the most effective course of action to achieve this goal. Corporations that choose merger and acquisition as their path or engine for growth must make decisions regarding what mode of merger or acquisition to choose based on their resources, industry, and goals (Lu, 2006).
Types of Mergers
There are three main types of mergers and acquisitions: Horizontal merger, vertical merger, and conglomerate merger. Horizontal merger refers to the business act in which a firm acquires another firm in the same industrial and geographical area that sells a similar product. Horizontal mergers are a way companies eliminate competition. Vertical merger refers to the business act in which one firm acquires one of their customers or suppliers. Conglomerate mergers refer to all non-vertical and non-horizontal mergers and acquisitions. Examples of common conglomerate mergers and acquisitions include pure conglomerate transactions, geographic extension mergers, and product-extension mergers.
The nature of the competition between parties involved in the potential merger is the main factor influencing the choice of merger type. The federal government has different concerns about each type of merger and acquisition. Areas of concern surrounding horizontal mergers and acquisitions include the possibility that the merger will eliminate competition, raise prices, and reduce product output and availability. Areas of concern surrounding vertical mergers and acquisitions include the possibility that mergers will limit the competitions' access to sources of supply or to customers and impede new businesses from entering the market. Areas of concern surrounding conglomerate mergers and acquisitions include the possibility that mergers will transition a large firm into a dominant firm with a decisive competitive advantage and keep other companies from successfully entering the market.
Corporations decide what type of merger or acquisition to pursue based on their resources and objectives. Corporations with significant capital resources may choose to pursue the purchase of assets. In the purchase of assets scenario, the buyer purchases another company's assets and, in some instances, its debts. Corporations may choose to pursue the purchase of stock. In the purchase of stock scenario, the buyer buys some amount of the seller’s stockholdings and inherits the seller’s responsibilities and rights, including debt, relative to the amount bought. Corporations may choose to pursue a statutory merger. In the statutory merger scenario, the merger allows the merging companies to continue existing as one legal entity. Ultimately, there are numerous different types of mergers and acquisitions that correspond to varying business needs and business models (Lu, 2006).
Common problems and issues experienced during and after mergers and acquisitions include strategic, moral, organizational, legal, financial and human resource issues. Mergers and acquisitions, throughout their lifecycle from the first proposed idea to post-merger, require careful oversight and management. Corporations are increasingly implementing ongoing merger and acquisition policies to guide merger and acquisition activities. From 1994 to 1995, the number of corporations in the United States with merger and acquisition policies in place grew from 35 to 65 percent. Corporate merger and acquisition policy ranges from very simple to very complex. Simple corporate merger and acquisition policy generally includes the...
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