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59_mergers Isuues and Concerns

59_mergers Isuues and Concerns

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Published by: dkamble17 on Sep 09, 2010
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 Mergers and Acquisitions: Issues and ConcernsBy
 Abhijit ChakiSmita Waghmare
 Jamnalal Bajaj Institute of Management Studies
 
Mergers and Acquisitions: Issues and Concerns
Mergers and acquisitions fail if they are not in conformance with the strategic objectives.A study carried out by McKinsey & Co. concluded that some companies focus too muchon cost cutting while neglecting day-to-day business, and thereby profits suffer. A mergermay also have been done for just glory than conforming the strategic objectives. Anexecutive’s ego gets satisfied when he buys the competition, especially when he gets abig bonus for the deal. Bankers, lawyers and other assorted advisers who can earn bigfees from clients engaged in mergers are biggest motivators for these deals.Economies of scale thought of at the time of deciding the merger can become elusive.The organization may become too fuzzy and unmanageable. Mergers may also be drivenby the fear of Globalization. The step may be defensive when the management thinks thatit is better to acquire before getting acquired.Some mergers and acquisitions have also failed because of differences in the topmanagement. It is a result of lack of clarity, at the time of decision of merger oracquisition, of the future strategic steps to be taken. It is most important that mergers andacquisitions are backed with strategic objectives and not driven by the hype or selfishmotives of the management. It needs proper corporate governance on the part of management. Talent retention becomes very important in the wake of merger oracquisition. The company needs to ensure that the best talent remains in the company.For that it needs to have proper plan at the time making decision of merger or acquisition.It also needs to ensure that the culture does not change drastically or if it needs to bechanged there is proper change management in place. Also, the top management needs toform a clear common vision at the time of making the decision for merger or acquisition.
 
 
Introduction:
Mergers and acquisitions
have gained importance in recent times. Businessconsolidation by large industrial houses, consolidation of business by multinationalsoperating in India, increasing competition amongst domestic companies and competitionagainst imports have all combined to spur
mergers and acquisitions activities in India.
 Mergers and acquisitions take the form of 
 
Open offers
 
 
Substantial sale of equity
 
 
Sale of distressed assets by financial intermediaries
 
 
Schemes of arrangement by companies, etc.
 
The last 2 years have seen a spur in the number of merger deals and also the average sizeof the deal has been increasing year after year. To give a perspective, the month of August saw 41 deals worth $ 2.17 billion.The historical data shows that roughly two-third of the big mergers and acquisitions failas the value of stock declines in the stock market. The value may increase immediatelyafter the announcement of merger; it starts declining soon after the market comes torealize that the assumptions behind the merger were flawed.We will have a look at few of the live examples from the industry and look at the reasonsas to why do the mergers fail.
Importance of Valuation
A valuation of a target company or business in needed to decide the maximum price thata purchaser should be willing to pay for control. The seller responds to the offer that abidder makes, based on the bidder’s valuation. However, a seller also could make his

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