Cross Border Merger and Acquisitions
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The corporate world has been expanding tremendously. This has resulted in huge competition among firms. This is because each firm seeks to attain its set goals and objectives. Particularly, each of the firms seeks to attain the goal of profit maximization. This has created the need for firms to come with strategies that ensure that they are more preferred than their competitors. In recent years, instances of cross border mergers and acquisitions have become more apparent. This has been all in a bid to reach the target market while minimizing costs and maximizing profits. The underlying question is whether it is really a worthy venture.
The issues surrounding cross border mergers and acquisitions were largely dealt with in Simon’s London’s article “Business Life Management” in the Financial Times newspaper. The financial analyst begins by noting that there have been many cases of companies that ventured into cross border mergers or acquisitions returning to their domestic markets extremely frustrated. The reasons as to why companies prefer cross border mergers acquisitions are diverse. The ease of entry while acquiring the goodwill and reputation of the previous company is an advantage that most businesses target. There is also the already existing pool of customers familiar with the particular brand. This places the acquiring company in a better position that a company that starts from scratch.
There is also the stabilization factor due to existing cash flows in the foreign market. This implies that the company strategy is cost effective and, therefore, attractive. There also economies of scale that are accrued to the process. For instance, there company has a bigger scope of intangible assets such as business processes and expertise. Jo Danbolt, a lecturer at Glasgow University, supports the strategies of cross border merger and acquisitions. This is because the share holders in the company are bound to gain from the decision. This is because the overseas bidders are likely to offer attractive prices, and they are most likely to pay in cash. This is especially the case for companies in the UK.
A study of 4430 USA acquisitions by Sara Moeller (Cox School of Business, Southern Methodist University) and Fredrik Schlingemann (University of Pittsburgh) indicated that companies that had acquired overseas faced lower stock in the foreign market in the long-term. The study was based on acquisitions that were made between 1985 and 1995. It was apparent that the initial market reaction did not last a long time. This implies that the companies are seen to suffer a great deal in the end.
Studies have also indicated that cross border mergers and acquisitions are destruction to the value initially created. Ervin Black, Thomas Carnes and Tomas Jandik confirm the findings of these studies. They confirm that the share performance of the acquiring companies deteriorates with time. In the long-term, the acquisitions may be deemed unproductive. This implies that acquisitions may appear to be productive in theory but are actually unproductive in practice.
The main reasons for the differences in the results from the expectations could be attributed to several factors. For instance, the difference in accounting standards applied by the companies in question is a great contributory factor. This is because this could lead to differing prospects in regards to the expected results. Unavailability of accurate financial statements could results in wrong prospects. As a result, this could lead to wrongful speculations by any financial analyst.
The legal framework persistent in the foreign country could also lead to a difference in opinion. This could result in the prevalent actions of the management. For instance, it is easier for firms to operate in UK than in Germany. It is, therefore, important to be able to establish the ease with the management of the company is going to adapt to the culture of the foreign country.
However, despite all the information regarding the reasons why countries should not operate abroad, there are many companies implementing these strategies. This is largely attributed to agency conflicts within organizations. This may lead the executives to indulging themselves in foreign markets since the interest of the shareholders are the least of their concerns. This is mainly because the managers in these companies are hoping to attain glamour from the implementation of such strategies.
From the above analysis, it is extremely crucial to note that companies hoping to acquire or enact cross border mergers have a lot of considerations to make. This is because the venture could be a liability to the company. This implies that a company willing to engage itself in such a venture should carry out extensive research so as to be able to determine the risks and benefits that the company is bound to face.
The parties involved (management) should also have pure intentions rather than revenge motives. Management should be competent so as to be able to establish the short-term and long-term gains attributed to the venture at hand. The surrounding factors such as laws and regulations in the foreign market should be clearly defined before any major steps are enacted. The compatibility of such regulations should be determined. Also, the accounting standards applied by the foreign company should be determined to ensure that there are no wrong decisions made in regards to the merger and acquisition decisions. This will avert any future wrongful speculations.
In conclusion, management is largely based on past experiences. It is extremely crucial for firms to take the past experiences of other firms in their future prospects. This will ensure that they avert the risks that they are bound to face.
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