Mergering

MERGERING

Director's Enquiry

A merger is the combination of two or more entities into one through a purchase or a pooling of interest. The process by which a corporation obtains control over a complete strategic business unit (SBU) or competence may be described as being by acquisition, merger or take-over. A merger is the coming together of 2 organisations, often of a broadly similar size. An acquisition is the purchase of one company by another, with the acquirer usually considerably larger than the company acquired. A take-over on the other hand is a hostile acquisition this takeover process where the directors of the target company do not wish their firm to be acquired. In the past two decades, merges and acquisitions have been the examples of the most dramatic corporate growth and expansion. In recent years, there has been an expansion in the number of mergers between large corporations these have been caused by a number of reasons, which include globalisation, deregulation, and increased competition in the markets. Through a merger, two organisations come together to share resources and achieve a common goal for the future. Through the process of the merger, two economic units are combined to form a much larger and stronger entity.

The increased competition, which results from globalisation, is one reason for the increased globalisation and consolidation. Given the increasingly international environment in which organizations compete, a multinational merger instantly opens a company up to a worldwide market, cross border knowledge transfer channels, international skill, and a wider consumer market. Firms feel to keep up with the industry and remain a key competitor they have to follow the trend. The increased competition is one reason, which has led to an increase in the merger activity (Fine, 2002). Through mergers, a company can increase its investment in skills and expertise by channelling in the resources of two companies. Mergers lead to increased operational efficiencies and organisations can increase their capabilities by combining their research facilities. Also through creating a merger a company can increase shareholder wealth, when a firm enters into a merger it increases its assets, knowledge, expertise and skills. A company can increase its profitability by increasing its industry concentration and generate oligopolistic profits. (Lundan et al, 2001) some organisations increase their shareholder wealth through merges by increasing the scope of their activities and geographical presence.

There are two types of growth for a firm these include vertical diversification and horizontal diversification. Vertical diversification is enlarging the organisation's capabilities by undertaking operations in a different competitive arena in the same value chain the company is operating. Horizontal diversification is one where operations in a different competitive arena in the same value chain but not in the same industry the company are operating. Horizontal diversification, when a firm moves into providing offers that complement its current offers. Through such an activity, the revenues of a company can be increased through consolidation of two firm's assets. Through vertical integration, a company can improve its operations by controlling elements in its value chain (Grants, 2003).

1.0 Introduction.

This project will focus on GlaxoSmithKline plc one of the worlds largest pharmaceutical companies. The report analyses the reasons behind multinational mergers with particular reference to GSK plc. This research examines the theoretical reasons for the pharmaceutical merger can be realised in practical situations such as that of GSK plc. This report then goes one step further to assess the effect that such a merger has on a cross section of stakeholders such as the shareholders, governments (tax wise), community and on the business itself, by looking at and comparing the position of GSK immediately after the merger and one year later recording any changes.

Mergers especially multinational mergers cost a lot of money to implement. An interest in why despite the high transaction and integration costs associated with mergers and more importantly the risk of merger collapse or failure, an increasing number of companies still engage in the process as a means of inducing growth. The logic must be that the benefits outweigh the costs and this report shows what benefits were hoped to have been realised in form of financial and business reasons and whether they were realised in the form of effects of multinational mergers.

1.1 Multinational Merger

An increasing trend for globalisation is one of the many reasons for creating a multinational merger company. Given the increasingly international environment in which organizations compete, a multinational merger instantly opens a company up to a worldwide market, cross border knowledge transfer channels, international skill, and a wider consumer market to name a few benefits. Firms feel to keep up with the industry and remain a key competitor they have to follow the trend. According to Fine 2002, pressure in industry led to the merger trend. He also states that six of the ten major drug companies have been involved in mergers over the past four years. Prior to the $76 billion December 2000 GSK merger we had Pfizer the world leader in prescription drugs sale merge with Warner Lambert Company and after the GSK merger we had mergers between Johnson and Johnson and Alza Corporation at $11billion and BMS and Du ponts prescription pharmaceutical business for $7.8 billion. Finally, Fine 2002 puts the merger trend down to the perception that mergers improve the businesses ability to generate sustainable long-term growth and enhance shareholder value in an increasingly competitive environment.

Fine (2002) states that there are primarily two reasons why pharmaceutical companies have been motivated to pursue mergers. Firstly, to maintain investment in skills, technology and expertise and secondly to discover, develop and deliver new and improved drugs to patients more quickly and efficiently. In the case of GSK it can be seen that they invested Ð'Ј2.6 billion in 2001 in a research organisation dedicated to delivering medicines to meet the needs of individuals throughout the world. In addition, the merger led to an increase in scientists to about 15000. This goes to show how the multinationality of the newly merged firm benefits a global market. It can also be seen that in combining the skill, technology and expertise of Glaxo Wellcome and SmithKline Beecham,