Failures Of International Mergers And Acquisitions

Table of contents

Introduction 3

Types of Mergers 3

Types of Acquisitions 4

Motives behind M&A 5

Problems faced in Mergers and Acquisitions 6

Problems faced in Cross Border Mergers and Acquisitions 7

Sony's Acquisition of Columbia Pictures 8

Sony 8

Columbia Pictures 9

Analysis: Star Framework 9

Fig: Choice of Entry Mode 15

Failure of the Acquisition 15

Reasons for the Failure 16

Merger between Daimler-Benz and Chrysler Corporation 18

Daimler-Benz 18

Chrysler Corporation 18

Analysis: Star Framework 19

Reasons for the Merger 22

Failure of the Merger 23

Reasons for failure 23

Culture Clash 23

Mismanagement 25

Literature Review 27

Conclusion 29

Introduction

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and merging of different companies.

A purchase deal will be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

Types of Mergers

* Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.

* Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

* Market-extension merger - Two companies that sell the same products in different markets.

* Product-extension merger - Two companies selling different but related products in the same market.

* Conglomeration - Two companies that have no common business areas. There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

* Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.

* Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

Types of Acquisitions

An acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile.

In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.

Motives behind M&A

These motives are considered to add shareholder value:

* Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.

* Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices.

* Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the