Tyson Foods is the second largest company dealing with marketing and processing of chicken, pork and beef. The company is interested in having a merger with Sanderson Farm. Sanderson Farm is the third largest producer of poultry in the United States. The company produces over nine million chicken in a week, hence controlling the United States poultry farming industry. In 1947, D. R. Sanderson started a farm business with the help of his two sons Dewey and Joe Frank (Watrous & Monica, 2018). The company dealt with selling fertilizers and seeds to their neighbors. After a few years, one of Sanderson's sons acquired knowledge on hatchery and selling chicks. In 1955, their business switched to selling chicken. Sanderson Farm was later formed in1961 when Sanderson Brothers Company merged with Miss Goldy Corporation (Tyson Foods Inc, 2015). Today, Sanderson Farms are one of the largest poultry producers. The ethical business practices and commitment to family values are some of the reasons contributing to the great success of the Sanderson Farm.
Mergers and acquisition is an essential aspect of the growth and success of a business. Large corporations have come into existence through merging and acquiring other companies. The main rationale for doing a merger and acquisition is the creation of more value to a company when compared to the company operating independently (Pristine, 2015). There are various reasons for conducting a merger and acquisitions in the business world today. The following are some of the reasons Tyson foods is holding an alliance with Sanderson Farms. One of the reasons is that the company will enjoy substantial economies of scale. When two companies combine, they will pull more resources compared to an individual firm. The size of operation will increase due to the merging and availing of significant scale economies.
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The economies come about because production facilities are utilized extensively. Also, making the most of the distribution channels and facilities meant for development enhance economies of scale. Companies dealing with similar products get these economies of scale. These companies can enjoy the economies of scale up to a certain level known as optimal point (Dhaval, 2018). An optimal level is where total average expenses are least. From this point, any increase in production will lead to an increase in cost per unit. The economies of scale will help the company reduce its total production cost hence maximizing its profits.
When two companies merge to form another company, there is an increase in the growth rate of the new firm. The growth rate of a company operating on its own may be hindered by the limited resources available, hence amalgamation with another firm will lead to balanced and satisfactory growth in the new company. The firm can go through various stages in the growth process at once. The extension through amalgamation is not only cheaper but also the risks involved are less (Dhaval, 2018). Costs and risks associated with the expansion of the firm and venturing in new product lines are avoided when companies amalgamate.
Merging the two companies will lead to diversification of their business activities. Risks encountered during the diversification process are minimized. In most cases when companies enter new lines, some problems are encountered when producing or in the marketing process. The individual operation of individuals faces different issues in their day to day activities hence when they merge, and the experience is shared among the mergers to find appropriate solutions (Schlachter&Hilderbrandt, 2018). Also, amalgamating increases the value of the firm. When two companies' fuse, the total amount of the newly formed firm goes high when compared to the sum of the two individual firms that were merged.
The financing of the merging companies also becomes easy and better. The firms that have merged will have more resources at their disposal, and the process of utilizing is better than when the companies are operating separately. The gestation period of the two merged companies is different. One corporation may have a short gestation period while the other having a longer one. The firm will utilize finances from the firm with a short gestation period to finance the other company. The financial position of the company as a whole will improve when the long period Gestation Company starts to earn profits.
Companies also need to merge due to economic necessity. The company may come in to force a merger with other companies to improve the working and overall financial position of the firms. A poorly performing company may need to merge with a well-performing firm to utilize on the resources, progress on the level of returns, and have improved management. Combining the two companies becomes a social necessity when the closure of the poorly performing company will lead to unemployment. (Schlachter&Hilderbrandt, 2018). The two companies that combine and are dealing with a similar line of product or service will reduce the competition against each other. Expenses on savings will decrease; increase the savings and commodities prices will also go down. When the companies lower their rates, consumers will access goods cheaply hence a considerable benefit to them.
The process of merging also helps a firm with losses accumulated to join another company making profits to have a better way of utilizing tax shields. Losses in a company make it hard to set future benefits since the unit is not earning any profit. The aspect of merging with another company that makes a profit is to set off a group of a loss with the other equivalent profit unit — the concern to gain levy advantage through the merging process.
Synergy is also one major reason why the Sanderson Farms and Tyson Foods firms are merging. Synergy adds an extra value to the firm in the sense that when two companies come together, their value will increase compared to the sum of the firms when separate. The synergy value equals
Net present value + premium
Where NPV used is for the new company formed.
The common laid rule of synergy value is 2 + 2 =5 showing how the value is higher when two firms merge to create on the company.
The need to cut on expenses drives many companies to have mergers. Low expense rates are the most significant sources of the value of synergy. There are various strategic reasons for having alliances with other firms. The positioning of a company to focus on future opportunities that will come up is one of the strategies. A company will merge with another when the upcoming opportunity is well utilized when two firms join (Schlachter & Hilderbrandt, 2018). The firms will also combine to fill in any gap available. Companies have different weaknesses hence the merger will help them utilize their strengths fully and minimize their weaknesses.
Revenue is one of the forms that synergy value takes. When two firms are combined, revenues earned will increase as compared to each company operating on its own. Expenses are also another form the synergy value will take. When a company is operating independently, expenses are prone to a bit higher compared to when the company combine and work as a unit. The overall cost of capital will decrease when two corporations merge.
Before any acquisition process commences, the firm acquiring another will have to work out the value of the other company. In this case, Tyson Foods will use the enterprise value formulae to determine the price.
EV = Market capitalization + Market value debt - Cash and Equivalents
Market Capitalization = Common Shares + Preferred Shares + Minority interest
The importance of using enterprise value is that it normally takes cash and debt into account and also used in trading comps for comparative analysis purposes.
In this case, Tyson Foods will pay a market capitalization value with other items added as per the equivalent value equation.
Payment methods vary from one company to another hence the two companies will reach an agreement on how they will make the payment. Tyson Foods will use exchanging stock as the means of acquiring Sanderson Farms. This means of payment is advantageous to the buyer in the case where the seller will overvalue their shares. Exchange of stock is the safest mode of payment because the risks sharing process is equal (Wenke, 2017). The company acquiring the other will exchange stock for shares.
The leadership structure of an organization after a merger is very crucial. The employees and the workers of the merging companies will be keenly watching to see how the top management will take shape. This process of getting leaders and structuring the new company is not an easy one, but it is a procedure that has to take place. Departments that are similar for both companies will get combined after the merging and acquisition process. Unfortunately, some employees will shift to other departments or leave the corporation. A thorough reviewing of the merging company's missions and goals and a comparison of how they relate to the new companies will follow (Lohrey, 2017). Let the employees take part in giving their perspectives on how they think of the new structure. The employees will provide the feedback to an integration team explicitly appointed for getting employees views. Then decisions based on the best features that integrate well with the new company will follow.
Post-merger period is the first few months of absorbing the new companies' operations and policies into the business. Impacts of post mergers can either be positive or negative. Some of the positive effects of a merger include reduced costs of production. Due to the reduction in the total cost of production, maximization of profits takes place in the newly formed company. Profits that are maximized, in turn, increase the total revenue for the company. Companies after merging tend to utilize the production process fully. Utilization of the production process is possible because of the availability of the economies in operations. Because of the economies of operations, the new company can produce efficiently and effectively hence make sure all the resources of the company are utilized in the required manner.
The newly formed company will also experience growth in the market after the merger ends. With the vast resources available for the newly formed company, it can reach a broader market. The company is also able to take advantages of various opportunities in the market that require large corporations and put them into good use. By doing this, the company will experience growth regarding capacity and reach. The merging companies will also help the edging out the competitors when two companies come together, they pool various strategies to work out on effective plans to outdo other competing firms. When a company is leading against their competitors, they enjoy a fair share in the market.
The adverse effects of a merger are that some employees will lose their job. The new business structure may not accommodate all the employees, unfortunately. The laying off of employees will, in turn, increases the number of unemployed individuals. The employees, on realizing their work is at stake, will develop stress which in turn will have a negative impact on their morale. The fear of losing their jobs will also have an adverse effect on productivity at work. When an employee is not settled at work, he or she will not give the best performance (Richards, 2018). The other challenge is the new employees joining the parent organization will have a difficult time adjusting to the new company's culture and way of doing things.
Also, the market shares of the acquiring firm may decline upon the announcement of the merger and acquisition deal. The participants in the market may think that the purchase price tag is too steep or not in correspondence to the earnings per share. Also, the shares will rise if the investors believe that the finances used in the funding of the acquisition process are through debts.
In conclusion, mergers and acquisition are common among different companies in our country. Mergers and acquisitions will enable the companies merging to achieve a lot in the market. When two companies come together, they can pull resources, share the various risks associated with the business, and also utilize their resources fully. The merging companies will also cut down the production costs and any other similar expenses incurred when both companies were working separately. Companies should always ensure that they use the best possible approach when in the process of merging. A straight merger is the recommended approach of merging two companies.
References
Christina TangoraSchlachter, Terry H. Hildebrandt (2018) The Reasons for Mergers and Acquisitions
Dhaval, S. (2018) Important Reasons for Merger. http://www.businessmanagementideas.com/business/merger/10-important-reasons-for-merger/4342
Lohrey, Jackie. (2017, September 26). How to Change Organizational Structure Due to a Merger. Bizfluent. Retrieved from https://bizfluent.com/how-5859277-change-organizational-structure-due-merger.html
Leigh Richards. (2018) The Effects of Merger and Acquisition on Employee Morale
Marlene Wenke (2017 February 1) Methods of Financing Mergers & Acquisitions https://www.docurex.com/en/6-methods-financing-ma/
Pistine, Edu. (2015, June 16) Mergers and Acquisitions. https://www.edupristine.com/blog/mergers-acquisitions
"Tyson Foods Inc (2016, June 26)- Company Description" . Bloomberg.com . p. 2.
Watrous, Monica (2018). "Tyson Foods to acquire American Proteins and AMPRO Products assets" . Food Business News. Retrieved 2018-05-16.
