Last week I have discussed regarding the foreign direct investment, how a company (International Business) can invest abroad. This week, I am going to share about the other opportunity for International Business to make an investment abroad in order to expand or growth their business; an activity of mergers and acquisitions by another company. It is an essential role of the mergers and acquisition of a company in corporate finance because it is also regard as the external growth for most companies while other companies feel that it is a constant threat of their independent existence. The term acquisition as define by Arnold (2008;865) "a purchase of one firm by another with the associated implication of financial and managerial domination" which also known as takeover where a company acquire for another company's ordinary share capital, financed by cash payment, issue of securities or a combination of both.
In reality, acquisition's process is quite hard rather than simply purchasing the machinery or build a factory. It must target the company and considering the potential benefits of acquired that particular company, also need to bid the target company that might involves a big amount of the price. While mergers' definition by Arnold (2008;865) is " combining of two business entities under common ownership" which also regard as a friendly reorganisation of assets into a new organisation. This activity is still focusing on a certain economic sectors where there will be based on the sector concentration which based on the same industries. For instance, the financial services industry i.e. bank wants to acquire another bank, healthcare sector with the healthcare firm and etc.
Why there are mergers activity in business world? It is perhaps because of these reasons:
1) synergy: when the assets and /or operations of two companies are complement to each other, so that may
be able to reduce cost. But however, it is difficult to quantify before companies combine and difficult to realise once combination has occurred.
2) bargain buying: where the target company's price is low than its present value
3) managerial motives: this activity occurs because of the managerial interest where the managers might want to pursue base on their interest rather than to increase the shareholders' wealth.
4)third party motives: it is about receiving a high dividend paid that advisers may want to achieve behind this activity.
Other than that, there are also some causes behind the current merger and acquisition activity's trend in the some particular period; firstly, the mergers & acquisition occurred in 1999-2000 due to they want to increase in mega deals and global corporations, secondly, due to UK peak periods in the late 1980's and 1990's, the Merger & acquisition activity is reasonable to level of the economic risk and due to the economic uncertainty, the uncertainty of political also affected thus, link to this activity in order to levels of political risk. However, effect from several issues such as the US and world recession fears that have been reduced the corporate activity, the reduction in bank lines of credit, the market's confidence is declined and some business tend to focus on their own core business made the mergers & acquisitions activity became slow in 2000-2002.
As a result of the slowdown in M&A activity during that period, Mergers and acquisition activity is possibly useful only if it can increase the acquiring company shareholder's wealth. So, probably by merging and acquiring other company in the slowdown period of M&A during the bargaining of low share price, deregulation of market and turnaround situations and restructuring are the best time to do this M&A activity and also may give a potential benefit to the acquiring company shareholder's wealth. Nevertheless, during 2004 onward, the M&A activity become active because of the major economic factors; the increase of the GDP due to the strong and vibrant economies are suitable to make the FDI which has strong linkage between FDI and GDP growth, the weakening in Dollars make the investment more attractive in US as the US companies become cheaper and easy to acquire and due to the increasing in oil /resource prices which then increase the viability of previously unprofitable locations.
In contrast, M&A's process also tend to fail to generate value for the acquiring shareholders while Jensen and Meckling (1976) stressed that any activity in the financial management, there should be include the aim to increase the value of shareholder ; that is the basic principle of it . Why is this happen? It is because of there is misguided of strategies (strategic plans are being value destroyed instead of creating the value), over optimism (underestimate the investment required in merger activity) and failure of integration of management in the firm which intend to do the merger activity. In spite of this, there are also other group who might influenced by this activity especially the various stakeholders such as the employees itself, management and directors, government, society (job losses), local community (loose major employment) and suppliers (cutting cost happen which is not good for them) and customers (get benefit from the combination of business).
In current activity of M&A, regarding the Business Times (2013), in which the Japanese lender (Bank of Tokyo-Mitsubishi UFJ) probably wish to improve their finance by purchasing another Indonesian Bank as the Tokyo-based lender is maintaining focused in Asia when it comes to expansion, said the deputy president in Bank of Tokyo. They are also intended to buy Philippines ' banks, however there is no discussion or deal yet with the local lenders. Therefore, they are trying to improve their network and commercial banking business to run this activity quickly if there is the best target and timing for them to do so. From this activity, it is reports that Mitsubishi's move could create the acquire shareholder wealth where they could help the Indonesian central bank's plan to consolidate its banking system. If this is really happening, they probably successful in this activity as they are be able to create value for the acquire shareholder.
In my opinion, the most serious situation where there will be job loses in this activity. Therefore, perhaps, by comply with the Arnold's (2008) ten golden rules for eliminate the 'acquire' employees might satisfied all parties and the managers could set a proper strategies in this activity to meet the interest of all stakeholders within or around the company..
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