To evaluate and discuss the concepts of the M&A among corporations, their types and the reasons underlying behind these mergers.
To find out whether M&A help in obtaining appropriate results.
To evaluate the M&A process and the integration which took place between Orange and T mobile companies in the United Kingdom.
To carry out an analysis on both of the companies performances before & after M&A considering the accounts of these companies and to identify whether the M&A activity was success or failure.
M&A activities play a major role in helping the companies achieve healthier economies by increasing the returns of stakeholders of the company. Most of the companies try to increase their wealth within a short time and in order to carry out this one of the most possible and efficient ways is the company to opt for selling their business to a company which is much larger and well established in the market than them.
Weston and Weaver (2004) describes that the fundamental role of M&A is to help companies which are participating in the activity in facing the challenges that lie ahead of them. M&A mainly comprises of expansion in terms of activities carried out by the companies. These activities include “joint ventures, stock tracking, reformation, licensing and other interactions within the corporate which helps create proper network relationships.”
The graph below indicates the number of mergers which have been undertaken with the time period of 2 years from the 1st quarter of the year 2007 to the last quarter of year 2009. From this graph we can understand the rise in the transaction numbers and the amount which has been invested on them.
The graph analysis indicates that transaction numbers have been reducing on completion of the final quarter of the year 2007 until the third quarter of year 2009. There has been a increment in the M&A transaction after the third quarter of 2009.
The research carried out by the researcher is about the merger which took place between orange and T mobile recently in the year 2010. M&A is considered to be the popular topics within the corporate market and is used as a major strategy in restructuring the company within the market in which the company survives. Till recently the companies have been arguing stating that the M&A activity might not help them in achieving success. This research is mainly carried out by the researcher to find whether this is really true and whether M&A activities can become successful by considering the case of Orange and T mobile, who merged in the year 2010. I will be trying to critically evaluate the effectiveness of Orange and T mobile merging together to form a better company or not. While carrying out this research I will be able to determine whether the integration of the companies took place as planned and what will be the future plans of the combined entities.
Since the year 1992 there have been several mergers and acquisitions of companies. A business usually as two options either it has to grow in the market or die. The companies which grow in the market usually drive away the competition from their competitors, create enormous profits and provide higher dividends to their share holders. The companies facing problems and who are about to die in the market usually lose customers, their share value decreases and the dividends provided to the shareholders also reduce. These weaker companies instead of getting excluded from the market can merge themselves with stronger companies who have been well established in the market. The positive assets and attributes of the acquired company can be used by the buyer company to increase its competitive advantage in the growing market.
Jayasinghe (2010) describes the merger waves to start between the years 1899 and 1904 with the introduction of horizontal mergers in USA. This merger wave was called as the greatest movement in the M&A activity. These horizontal mergers were followed by second waves of merger called as the vertical mergers which took place between 1916 – 1929. The next wave started with the introduction of conglomerate mergers during the end of world war two within the time period of 1965 to 1989. This third generation of merger activity was followed by Hostile takeovers and congeneric mergers which marked the starting of the fourth merger wave between the time periods 1992-1998. The present generation describes the mergers taking place across the borders of the countries and nations called as cross border mergers which marked its beginning by the end of year 2000 and are still going on until now. This is brief history of merger and acquisition activities which started in the 18th century and as been carried on since then by the companies to establish themselves well within the market within a short period of time. Let us discuss briefly the horizontal, conglomerate, vertical and congeneric mergers.
Horizontal mergers: Farrell and Shapiro (1988) define horizontal mergers as “mergers which take place between the companies who perform same business in the market”.
Vertical Mergers: Green (1990) defines vertical mergers as “the mergers between the companies and their suppliers in order to control the allies of the company’s product lines.”
Conglomerate Mergers: Benston (1980) defines conglomerate mergers as “mergers involving firms which carry out activities which are completely unrelated to each other’s businesses.”
Congeneric Mergers: Brown (1995) defines Congeneric mergers as “the mergers which take place between two companies which are present in the same market but produce different products.”
Let us discuss some of the major benefits of carrying out mergers between two companies:
Cash is not required for carrying out the activity.
Tax is not incorporated on the transaction carried between the companies participating in the merger.
The potential possessed by the acquired company is appreciated by the acquirer.
The returns which are obtained from the investments done by the investors of both the companies’ increases.
Direct and indirect costs involved in asset purchase and leases are reduced also the merger activity is much faster to be carried out.
France Telecom which serves as a mobile network operator and an ISP in France uses its brand named Orange to operate its business within the United Kingdom. This telecom company is considered to be the 7th biggest operator providing telecom services all around the world having more than 189 million clients according to the stats provided by the company in the year 2009. The brand creation was carried out in the year 1994 for Hutchison Telecom’s United Kingdom telephone network. The Hutchison telecom network was acquired by France Telecom in the august of year 2000. In the year 2006 the Internet service providing operations of the company which was previously called as Wanadoo was rebranded as Orange. The headquarters of the company lies in Arcueil in France and has become the commercial brand of France Telecom worldwide.
T-Mobile is a German company providing mobile network services and Internet services. The owner of the company is Deutsche Telekom. The company provides services in the form of several GSM networks throughout the world and most of its stakes lies in the central and eastern parts of Europe. T mobile has more than 150 Million clients worldwide which stands just below Orange in ranking and is considered to be the 8th biggest mobile network service providers. It is also the 3rd largest MNC after Vodafone and Telefonica of UK and Spain respectively. Recently T mobile merged with France telecom’s Orange in the year 2010 to obtain their position as the top most competitors in the telecom industry and the combined entity is called as Everything Everywhere.
According to Gole and Morris (2007) M&A has always been considered as a tool during the modern times to increase the growth of the company through expansion and consolidation of the company base all over the world. They both adds statements to this by describing that the M&A activity usually involves big transactions where two giant companies combining themselves are the only transactions which are visible within the M&A market. According to Sherman and Hart (2006) M&A usually serves as a major factor which helps the companies in growing into stronger and better companies and increases their competitive advantage in the market in which the companies are operating.
Definition of Key terms:
Sudarsanam (2003) describes mergers as “the corporations which come together to combine and share their resources to achieve common objectives. The shareholders of the combining firms often remain as joint owners of the combined entity.”
Reed, Lajoux & Nesvold (2007) agrees with the definition provided by Sudarsanam (2003) and says that the mergers can be both forward and reverse biased based on the acquired company merging into the acquiring company or the acquired company absorbing the acquiring company respectively.
According to Weston and Weaver (2004), forward merger can be described as a merger wherein the targeted company merges into the acquirer and the stakeholders of the target company exchange the company’s stocks with substantial wealth offered by the acquirer as agreed before the process of merging is started. This transaction will be treated by the income tax department before consolidating as a transaction of target company stocks being sold at suitable price to the acquirer and this wealth is equally distributed among the company’s stakeholders.
Weston and Weaver (2004) describe reverse merger as a merger wherein the target company absorbs the bidding company. The shareholders of the acquired company become the owners of the stock which has been absorbed from the acquirer. The transaction between the companies opting for merger is considered as a common stock deal by the income tax department.
Carney (2009) agrees with wordings given by Weston and Weaver (2004) & states that, along with forward and reverse mergers there are others as well. These mergers are described as follows:
Triangular mergers: “The buyer engages a completely owned subsidiary with the target company.”
Reverse triangular mergers: “The target is corporation which is surviving and in this an approval from board of directors of both the companies is required in order to treat the basic changes in the shareholders’ contract.”
Short form mergers: “The merger in which the votes from the shareholders are not considered since the buyer company owns more than 90 percent of the target company’s voting stock.”
According to Miller (2008) subsidiary mergers are the mergers where in the company which is targeted for merging by the bidding company maintains the target company as a separate subsidiary and doesn’t change its operations. The major motive behind this is the liabilities of the target company which are not disclosed by the target company to the acquiring company.
Example: “merger between General Motors & Electronic Data Systems.”
Major benefit of subsidiary merger is the reduction in time that is consumed for merging processs to be carried out between the target company and the acquirer. According to Reed, Lajoux and Nesvold (2007) mergers taking place between the subsidiary and the parent doesn’t require the approval of the stakeholders of both the companies even though there is a requirement for the approval of stakeholders when it comes to any of the merger processes. Approval from the board of directors of the target company is the only prerequisite which is required by the laws of the government when it comes to a merger between the subsidiary and the target company. The board of directors opinion is enough to carry out the merger process between the subsidiary and the parent.
“Subsidiary mergers can be either forward or reverse. In Forward subsidiary merger the target company is merged into the acquisition subsidiary whereas in Reverse subsidiary merger the acquisition subsidiary is merged into the target company.” (Reed, Lajoux & Nesvold, 2007)
Statutory merger are the mergers in which the acquirer acquires the liabilities as well as the assets of the target company based on the statutes which the target company implements. This can be explained clearly with an example. Let us assume that X is the acquirer and the Y is the target company and lets us also assume that X has acquired Y and the M&A activity which took place between them be the subsidiary merger. Once the merger as taken place between these two companies company Y carries out its daily operation as before but under the name of Y whereas company Y carries out its dailty operation as usual but under its own name.
According to Sherman and Hart (2006), the definition of acquisition generally can be defined as “The purchase of an asset such as a plant, a division, or even an entire company.”
Acquisition in general is nothing but the control or taking charge of a property. When it comes to the acquisition in the world of corporate, the acquiring company becomes the owner of the acquired company. This happens only when the acquirer purchases around 50% and above stocks within the company which is targeted for the acquisition activity to take place.
Example: “Procter & Gamble acquired the company Gillette for $57bn in the year 2005 in order to expand by creating world’s largest collection of consumer brands.” (BBC News, 2005)
Sudarsanam (2003) defines buyout as a group including private firms and managers belonging to a particular business trying to acquire a company or a part of the company’s business within the company which is targeted for acquisition.
Sudarsanam (2003) describes that takeovers and acquisitions share several similarities between each other. The major prerequisite in this type of acquisition is that the acquiring company has to be large when compared to the target company in both assets and resources.
Distinctions between mergers and acquisitions:
According to Sherman and Hart (2006), here are some of the differences between M&A and are as follows:
Acquisition and merger differs from each other in the basis of acquiring a target company. In merger two or more companies combine together into a better company whereas in acquisition one purchases the other to form a bigger company.
In acquisitions the new entities do not share the equity among both the participating companies whereas in mergers both the companies participating in merger activity shares the equity among the stakeholders of both the companies.
Here are some of the other differences between M&A and are explained as follows:
Top 9 Mergers and Acquisitions worldwide between 2000 and 2009:
Rank Year Acquirer Target Transaction amt.
Reasons behind Mergers and Acquisitions:
According to Pautler (2001) one of the basic ideas or motives behind companies opting for the merger and acquisition is the belief the companies have according to which they think that profits of the companies can be increased within a shorter time period just by merging themselves with the another company working in the same market or in a different market.the companies believe that the capacity of the company can be enhanced. They think that they can have access to knowledge, skills as well as entry into new markets into which the company has never set its foot into. The companies also think that by moving their resources into the hands of better management they can achieve a better performance. According to Neary (2007), the literature which can be reviewed within the industrial organization is vast and the two major motives or the reasons behind M&A activities is the efficiency and the strategic motives. Seeing the transaction numbers which have been going on till now we can understand that the companies have serious reasons for opting for the merger and acquisition activity.
Systematic and scientific approaches have to be utilized to collect information on a topic and to perform a research on it. This collection of data from different sources has to be systematic and can be obtained in any possible way. Usually there are many numbers of methods which a researcher can utilize to obtain answers for the research question on which he is working on. He just has to select appropriate means of data collection and analysis for his kind of research. For example when a researcher is doing a research on a scientific question he has to answer it in a scientific manner with observations, experiments and field works rather than in facts and figures. Kumar (2005) defines research to be “a way to find answers to your questions.”
The process which is used to carry out the research and to obtain the necessary information to find out the solution for the research question must be designed in such a way that it includes:
“processes being undertaken within a framework of a set of philosophies;”
“uses procedures, methods and techniques that have been tested for their validity and reliability;”
“And is designed to be unbiased and objective.”
Research methodology mainly deals with the process which is being involved in carrying out the research to find an appropriate answer to the research question which is at hand. Prominence is highly provided to the data analysis and usually consists of data in the form of methods, models, facts and figures which help in answering the question which the researcher has in mind.
The above diagram describes the various steps that are to be carried out while performing a research on a particular topic. In the research which is carried out by the researcher the approach which is utilized to carry out the research is the Inductive Approach where in the theory involved behind the merger and acquisition activity between Orange and T mobile isn’t tested but is built step by step by utilizing different patterns of presentations. The type of sampling used for this research is the Non probability sampling in which the interviewees are selected not on the basis of probability but through the recommendations of other interviewees. Once the data collection is completed it will be analyzed to find out whether the planned synergies were obtained as planned between Orange and T mobile.
Sampling Design: Snowball Sampling is designed as described in the diagram below:
Process of collecting data that is required for answering the research question which is acquired from different sources (either secondary or primary) is called as data collection process. According to McBurney and White (2009), this can be carried out in several possible ways and the sources for the information collection can be divided into two major types and are as follows:
Example: “Data from books, journals, internet, articles, and magazines.”
Example: “Data obtained through interviews, face to face conversations, telephonic interviews, questionnaires and case studies.”
Data collection Sources:
This kind of source usually provides information from the works which have been already published or written by other researchers while carrying out their research in the same field. This can be used by anyone and doesn’t have any restrictions on using this information unless the data is copyrighted or patented. Data which is acquired from these possible sources are most accurate and is experienced by the researchers who have carried out this research. According to Kumar (2005), Sources of secondary data can be “books, journals, articles from the magazines, newspapers, annual reports, government statistics, industry handbooks and findings of other research papers.”
Secondary sources types which will be used while carrying out the research are as follows:
“Books”: Books provide information which can be accessed easily and the cost which is involved in gathering this information from the books is much cheaper since there are several authors publishing the required information which can be really helpful for the research which is being undertaken. This data which is obtained from the books can serve as an alternate means of research since it is the workings of the previous authors who have done a research on the topic which is being undertaken now. Books will be mainly used in supporting the theory content of this research and to understand the concepts which lies behind this theory.
“Articles”: Articles from magazines, journals and newspapers can also be used to collect the secondary information which is being required for answering the research question. This information which is obtained from the articles will be up to date and can be obtained easily and the cost of acquiring is cheap too. In articles information regarding the current happenings of the participating companies will be looked into by the researcher. I will also study the progress which is obtained after the merger as taken place between the two companies.
“Internet”: Internet sources provide a best possible means to obtain the secondary data which is required for carrying out the research. Information from internet will be used to survey the literature involved behind the M&A activity, profiles of the companies and their present dealings.
Secondary research Advantages:
Here are some of the advantages for carrying out secondary research to find a solution for the research question:
“Data can be accessed easily.
Cost of acquiring the secondary data is cheap.
We can also find out the problems that have to be faced while carrying out the primary research.”
Secondary research Disadvantages:
Here are some of the disadvantages for carrying out secondary research to find a solution for the research question:
“The quality of the information obtained from secondary sources must be critically evaluated since the origin of the data has to be validated.
Information obtained might be incomplete due to the expensiveness of the entire report.
Information obtained through secondary sources might be out of date.”
Primary data is unlike secondary data which is readily available. It has to be obtained by the researcher by observing the surroundings in which the researcher is doing a research on and obtain necessary information from this observation to answer the research question on which he is working on. Once the necessary information is obtained the researcher has to interpret the information which he has gathered. This data which the researcher has gathered can be shared with others or might not be shared. Primary sources of data according to Kumar (2005) include “experiment in labs, field works, case studies, questionnaire and interviews to find out the relevant information required for the research.”
Primary sources types which will be used while carrying out the research are as follows:
“Lab Experiments and Field works”: This type of data collection will not be considered in the research which is being carried out by me, since this research doesn’t involve any scientific studies and experiments to be undertaken to obtain the answers for the research question. Making this method of data collection to be neglected.
“Case studies”: Case studies serve a best possible means to study and understand the happenings and issues which are under progress in the corporate world. It helps examine processes when they are in extreme conditions. In the primary research which is being undertaken by me I will be using the case studies to acquire information about the motives and ideas, problems faced and the process involved behind the M&A activity which took place between Orange and T mobile companies this year.
“Interviews”: Kumar (2005) says that “Data obtained from the interviews are the most reliable primary information available. Interviews can be carried out in different forms such as: face to face interview, telephonic interview and Interview through mails.” I will be interviewing my uncle who is currently working as a manager within the T mobile company. Since he has been assigned works related to the integration between Orange and T mobile, I will try to gather the information related to the process involved in integrating two companies, the degree of integration between Orange and T mobile.
Primary research Advantages:
Here are some of the advantages for carrying out primary research to find a solution for the research question:
“Primary research helps in collecting information that is only necessary for the research and can avoid unnecessary information unlike in the secondary research.
It provides greater control while gathering the information required for the research.
Information gathered by using primary research is the authors own work and need not be shared with others.”
Primary research Disadvantages:
Here are some of the disadvantages for carrying out primary research to find a solution for the research question:
“The primary research can be more costly than carrying out secondary research.
The primary research consumes more amount of time to gather primary research since its time consuming to execute the research plan successfully.
Primary research cannot be feasible sometimes. If the organization is too large then gathering information from all the means is not possible and generalization would be a problem.”
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