Provide the theoretical and practical analysis of international mergers and acquisitions
This report aims to provide the theoretical and practical analysis of international mergers and acquisitions. The case chosen in this report is the acquisition of BP Amoco and Atlantic Richfield Company (ARCO). Only secondary research was used in this report. The collected data about this acquisition primarily came from the Internet and the Financial Times CDROM. Rationale of International Mergers and Acquisitions
‘Mergers and acquisitions have become the most dramatic demonstration of vision and strategy in the corporate world. With one single move you can change the course of your company, the careers of your managers and create value for your shareholders.’ (Puranam, 2000) Mergers and acquisitions have been classified into three categories: (Arnold, 2002)
Horizontal In a horizontal merger or acquisition two companies that are engaged in similar business are combined. Vertical Vertical mergers or acquisitions take place when firms from different stages of the production chain combine. Conglomerate A conglomerate merger or acquisition means the combination of two firms that operate in unrelated business areas. Firms decide to merger or acquire with other companies for variety reasons. A merger or acquisition is rational if synergy is created. This means the combined entity will have a greater value than the sum of its parts. Synergy is often express in the form 2 + 2 = 5. (Arnold, 2002)
One of the important forces to drive mergers or acquisitions is to increase market power. This is the ability that controls the price of the product. It can be achieved through a monopoly, oligopoly, dominant producer positions or collusion. Another important synergy is the ability that exploits economies of scale. Large size often leads to lower cost per unit of output. Economies in marketing can be achieved through the use of common distribution channels or joint advertising. There are also economies in administration, research and development, purchasing and finance.
By vertical merger or acquisition an acquirer may achieve more efficient co-ordination on the different levels. The costs of communication and the costs of bargaining are the focuses. If a firm wants to enter a particular market without the right knowledge, the quickest way maybe acquire an existing player in that product or geographical market. In conglomerate mergers one of the primary reasons is that the overall income stream of an acquirer will be steady if the cash flows come from a broad variety of products and markets. Risks will be reduced without decrease of return.
More efficient management is dominant after a successful merger or acquisition. This type of merger or acquisition can raise the welfare of society and the firms. The trend of mergers and acquisitions is going to be more international. In the UK and US institutional shareholders are willing to sell their shares if a satisfied offer is made. Furthermore SSAP 22 allows goodwill to be offset against reserves directly. Therefore in the UK acquisitions are likely to be encouraged. In Germany or Japan mergers and acquisitions are much more difficult than in the UK or US. The reason primarily is banks control the financial systems of these two countries, and have long-term relationships with companies. They are not easy to sell their stakes.
The Efficiency of Stock and Foreign Exchange Market “An ‘efficient’ market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.” (Fama, 1995)