ASSIGNMENT (MACR)

DATE OF SUBMISSION: 23MARCH 2019

Q. After exhausting all opportunities of internal optimization potentials the only way for
many companies to grow or to ensure survival is to merge with other companies. The CEOs
of the companies try to manage the growing requirements by extending the business
portfolios or even acquiring whole companies. But are M&A the panpharmacon to handle the
changing global markets and to ensure the prospective success of the companies?

A corporate merger or acquisition can have a profound effect on a company’s growth

prospects and long-term outlook. But while an acquisition can transform the acquiring
company literally overnight, there is a significant degree of risk involved, as mergers and
acquisitions (M&A) transactions overall are estimated to only have a 50% chance of success.
In the sections below, we discuss why companies undertake M&A transactions, the reasons
for their failures, and present some examples of well-known M&A transactions.

Some of the most common reasons for companies to engage in mergers and acquisitions
include:

To become bigger. Many companies use M&A to grow in size and leapfrog their rivals, in
contrast, it can take years or decades to double the size of a company through organic growth.

To pre-empt competition. This powerful motivation is the primary reason why M&A activity
occurs in distinct cycles. The urge to snap up a company with an
attractive portfolio of assets before a rival does so generally results in a feeding frenzy in hot
markets. Some examples of frenetic M&A activity in specific sectors include dot-coms and
telecoms in the late 1990s, commodity and energy producers in 2006-07, and biotechnology
companies in 2012-14.

To create synergies and economies of scale. Companies also merge to take advantage
of synergies and economies of scale. Synergies occur when two companies with similar
businesses combine, as they can then consolidate (or eliminate) duplicate resources like
branch and regional offices, manufacturing facilities, research projects, etc. Every million
dollars or fraction thereof thus saved goes straight to the bottom line, boosting earnings per
share and making the M&A transaction an “accretive” one.
To achieve domination. Companies also engage in M&A to dominate their sector. However, a
combination of two behemoths would result in a potential monopoly, and such a transaction
would have to run the gauntlet of intense scrutiny from anti-competition watchdogs and
regulatory authorities.

For tax purposes. Companies also use M&A for tax reasons, although this may be an implicit
rather than an explicit motive. For instance, since until recently the U.S. has the
highest corporate tax rate in the world, some of the best-known American companies have
resorted to corporate “inversions.” This technique involves a U.S. company buying a smaller
foreign competitor and moving the merged entity’s tax home overseas to a lower-tax
jurisdiction, in order to substantially reduce its tax bill.

Why do mergers and acquisitions fail?

Some of the main risks that may precipitate the failure of an M&A transaction are:

Integration risk. In many cases, integrating the operations of two companies proves to be a
much more difficult task in practice than it seemed in theory. This may result in the combined
company being unable to reach the desired targets in terms of cost savings from synergies
and economies of scale. A potentially accretive transaction could therefore well turn out to
be dilutive.

Overpayment. If company A is unduly bullish about company B’s prospects – and wants to
forestall a possible bid for B from a rival – it may offer a very substantial premium for B.
Once it has acquired company B, the best-case scenario that A had anticipated may fail to
materialize. For instance, a key drug being developed by B may turn out to have
unexpectedly severe side-effects, significantly curtailing its market potential. Company A’s
management (and shareholders) may then be left to rue the fact that it paid much more for B
than what it was worth. Such overpayment can be a major drag on future financial
performance.

Culture Clash. M&A transactions sometimes fail because the corporate culturesof the
potential partners are so dissimilar. Think of a staid technology stalwartacquiring a hot social
media start-up and you may get the picture.