What is Wrong with M&A?

This time my discussion will be about the merger and acquisition activities which can be performed by the company in some cases. As you can find on my earlier blog, FDI approaches are including merger and acquisition, therefore the objectives of these doings are similarly set according to the benefit of that particular investment. Let's say if FDI is aimed to increase company’s cash flow in the long run because it will multiply the asset generation of the business, merger and acquisition won’t offer differently.
 
In reality, a merger is an activity of firm to combine their organizations with another into one new company, while acquisition is when one company is bought by another company, yet no new corporation is established throughout this undertaking. Looking at these definitions, do you think that it sounds really good if company perform them and in fact quite a lot of successful and famous firms, for example Microsoft and Skype; Polycom and HP Visual Collaboration; Google and Motorola Mobility; and even Kellogg’s and Pringles done this in the previous years? 

Investment plan over another company I assume will enable company to expand and increase capability for achieving additional value, and indeed according to Flught (2009); Kaplan (2010) performers are trying to maximise the shareholders’ wealth through this.  In Kellogg’s and Pringles case, I could see that they were determined that acquiring Pringles will nearly triple Kellogg’s business dimensions and additive constituent of earnings will be occurred as well, hence companies are likely to be ready in spending lots of money for the deals according to the figure shown in below. (Thomson Reuters Mergers and Acquisitions Review, 2012)- Calculated until first 9 months, in billion US$.

10 Largest M&A Deals 2012

However, what is wrong with merger and acquisition if they can do so? Actually I also concerned about the statement which clarifies that this approach will likely to reduce financial risks besides the advantages mentioned; furthermore it appears that M&A trends were declined from the year 2011-2012. The real argument in this slanting moment is that various sources point out that performance of M&A turns out to be worst very often. So tragic, yet it is so true that such great strategy can end up with the reduction or even destruction of neither shareholder value nor wealth. We, as the acquirer in all probability will suffer this. This can be seen from the fact on which the clash available to one of the international companies called HP in recent year. Disaster came as share price dramatically dropped by 12.4% after the bidding transaction, the lowermost since 2002, plus there was huge loss of $8.9 billion (the most senseless in 73-year history). It seems that it opposed the fact since financial risk was not diminished, but arouse. Shareholder value was cut due to the bad strategic move dedicated for Autonomy Corporation.

I believe additional market power that may lead to ‘prosperity’ assumed by the acquirers is included as one of the main forces for the overconfidence of doing the M&A. The management did not provide adequate planning and study, resulting in puzzling, greasy path that won’t allow the acquirer to step into further operational synergy; in fact, acquirer is additionally prompted to truly comprehend its market circumstances to be able to make corporate power as well as to challenge the control of target firm. Culture difference and certain transformation by some means made inconsistency to realize target and here the outcome was performance can’t be as good as before. HP in that case finally experienced that there was certain accounting scandal to be blamed; nonetheless I think that it is primarily because of the doubt as regard to the boldness to turn their business to software company from hardware.  

In spite of the strong financial position obtained by the company, management especially HP’s need a critical success factor of M&A to contribute its shareholder value generation. Some economists perhaps prevent these actions, but once admitted, I suggest that they should be integrated within robust scopes such as agency principle (clarified at first blog) to avoid the over optimism and provide more anticipation; fair number of deals to make the company focus on necessary challenges; good tactical deed for instance make a use of the low P/E ratio so as to grab higher average return; real correct planning and judgement over the targeted firm; and all resources and organization culture to be assessed as I found this statement on which HP need to truly consider:  “To succeed as a software-touting hardware player requires a “fundamental shift in corporate culture,” he added, and is not something that can be easily bought”.

Year 2013 is estimated as a good year for M&A. The survey says that there will be optimism headed in financial transaction because of consumer market, besides growths in geography, customers and others are existed and economy are continue to stabilize since the financial crisis. As the bidder, we should focus on some industries which may be potentially giving great return from the activities. These industries include software/ telecommunications/ technology, health/ pharmaceuticals, energy and even financial services. (KPMG, 2013) As the result, M&A approaches will not simply be a coin that is thrown to give either a queen face or value of the coin that is too risky to be chosen.

I had provided this following video to support this outlook. Enjoy!

http://www.youtube.com/watch?v=waSSpmOYVng&list=WL-CnPOF3WrCzqq8ePg4IP5tnVYukrsS2p