Mergers and Acquisitions

Introduction

Mergers and acquisition (M&A) varies from country to country. Some countries have laws regulating M&A while others don't. M&A basically is a combination of two or more businesses into one new business. What defines the merger or acquisition is how the combination is brought about. Mergers are usually negotiated between parties before the combination occurs while acquisition does not necessarily have to go through negotiations between parties.

Mergers and Acquisition can succeed or fail base on a number of factors. This paper will examine the concept of mergers and acquisition, why M&A fail and possible recommendations

Input

Businesses sometimes merge or acquire to improve on their competitiveness and to meet their strategic objectives. Mergers and acquisition can come about because of stiff competition in the market or to create economies of scale or to enter new markets, or to diversify or a combination of many factors as mentioned in this sentence. Sometimes the only reason an acquire may purchase a business is for speculative profits, in that the sole purpose is to purchase with the intention to split them into smaller pieces and selling them or parts thereof for a price which is much higher than the acquiring price.

Mergers and acquisition can also come about because of management failures. This situation can come about because management was unable to move the company in a positive direction which would have maximize shareholders wealth. Some of the issues which can lead to management failures include creating strategies which may be assembled with errors in alignment or market conditions may change during implementation.

Mergers and acquisition can be forced on businesses or events can drive companies towards mergers or acquisition. There are many drivers which can lead to mergers and acquisition, some of the more common ones include

* A requirement for specific skill - companies merge to acquire skills that they do not have.

* Globalization - a phenomenon that causes business to be in one open space forcing serious competition among firms.

* Geographic consolidation -

* Diversification - growing outside a company's current industry category

* Increased management inefficiency - The inability of management to move the business from one point of growth to another.

* Desire to enter new markets or customer base

* The need to buy into a growth sector or market

Business can decide to merge in varying ways which includes:

* Vertical integration - which is characterized by forward or backward integration into the supply chain. In vertical integration two firms participate in different stages of production or value chain.

* Horizontal Integration - which is characterized by the practice of on a company acquiring another company that is in the same general area or sector

* Conglomeration - which is characterized by the acquisition of unrelated companies that continue to produce in unrelated sectors

All business has a lifecycle. Mergers and acquisition are no different. In the context of business, mergers and acquisition lifecycle is basically the changes that take place during the life of the entity created as a result of M&A. The lifecycle stage includes:

1. Inception stage - this is where senior management initiates the process. Discussions are held with regards to the business environment and the future of the business with regards to its strategic objectives. The business will examine its growth prospects both in terms of size ad finances. Having discussed the objectives they will move to the next stage which is the feasibility stage of their strategic objectives.

2. Feasibility stage - at this stage management begins to explore which way is best to go by conducting research that would provide the best decisions whether to merge or acquire. At the completion of the feasibility stage the decision is taken as to the direction to proceed in, that is merging or acquiring.

3. Negotiating stage - in this stage parties meet to discuss the possible merger or acquisition.

4. Implementation stage - once the negotiations are complete, contracts are signed which sets the terms under which the merger will exist.

Mergers generally fail because of poor implementation. There are several varying reasons why mergers fail, they include:

a. An inability to agree on terms. During the negotiating or implementation stage if parties to the negotiations have varying different viewpoints that wish to see in the merge institution they may hold fast to their position and cause the merger to end or never take place.

b. Overestimating the true value of the target.

c. The target being too large relative to the acquirer

d. A failure to identify potential synergies

e. An inability to implement change

f. Shortcomings in the implementation and integration process

g. A failure to achieve technological fit

h. Conflicting cultures

There are individuals who attempt to profit from mergers; they do so through a process called merger arbitrage. These individuals are called Arbitrageurs ("abs"). Merger arbitrage refers to an investment strategy that attempts to profit from the spread. The difference between the targets's trading price and the offer price is called the discount or spread.

These arbitrageurs buy the stock and make a profit on the difference between the bid price and the current stock price if the deal is consummated. If the merger is successful then the arbitrageur captures the spread, however if the merger fails the arbitrageur incurs a loss. The loss incurred is usually greater than the profits obtained if the deal succeeded.

Data Analysis

From the case we know that AOL and Time Warner entered into negotiations to create a merged enterprise. AOL is an internet service provider and Time Warner was a cable company delivering broadband