Acquisition and mergers are key elements in corporate finance. Incorporate strategy and management of an organization, acquisition and mergers help an organization grow faster by accelerating its functions. The company's growth can take place in the new location or the previous location where the purchase of the company has taken place. In acquisition and mergers, there is a combination of various organizations to create a new subsidiary and a joint venture. The main challenge of the most organizational manager is differentiating between acquisition and merger of an organization in an economic outcome. Form a legal point of view, mergers refer to the consolidation of two companies through a legal procedure to form a single entity.
On the other hand, the acquisition will happen when an organization takes over another company and becomes the new company's sole owner. The structure of the two organizations that are coming together can either result in economic or financial consolidations. The merger of equal refers to a combination through the legal procedure where both companies are of equal measure. There are situations where the CEO's of two different companies decide to come together because of common interest. However, coming together might not be friendly; the process is referred to as an acquisition. It is advisable that the companies that are coming together to have the same interests, goals, and objectives can make the acquisition process easy and effective.
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Acquisition
The accusation is the purchase of one company by another. The main focus of acquisition in most instances in the shares of the company. If the company decided to purchase another company's shares, then the process is referred to as acquisition. The main focus of the process is ownership. The company that purchases another company's shares implies that they own a section of the enter company depending on the policies in place. The acquisition process can be 100%, where the company wholly owns the other company or slightly lower than 100%. When the acquisition process is successful, and two companies become one, the process is not referred to as consolidation. The two companies deviate from operating as single entities and start operating as one company. The acquisition can either be through the public or the private domain. A key consideration is whether the merger or the acquisition company is listed in the stock exchange market. If the company is in the stock exchange market, then the acquisition process is public, and if not, then the process is private. The process of acquisition is complex as it involves several procedures of legal documents and takes time. Nearly 50% of the acquisition processes fail because of the long procedures that are involved. The primary factor in the acquisition process is integration. Integration represents how the two companies that are merging combine their goals, objectives, and operational activities. Despite the long and complex process, some companies usually manage to go through with it and be successful.
There are several reasons why companies decide to go through the acquisition process. Some of the reasons include dealing with competition, gain access to other markets, realize their new capabilities, and potentials and focus on diversification of their operations. The process of acquisition might be tiresome, but the merits are mode and of great importance. Merging is different from acquisition because, in the process, two companies come together. The main of merging is for the two organizations to pull their resources together. One company or both might be having limitations on resources to run their operations. Through merging, they will combine their resources and assist each other in moving forwards towards achieving their set goals and objectives. There is a variation between merging and acquisition. In merging, there is a sharing of responsibility between the management of the two companies. The situation is different in acquisition as the management becomes one that runs the operation. Also, in merging, each of the two companies retains their names because of branding and consumers. Acquisition leads to creating a new name that the new organization will use in branding their products. Since each of the companies in merging retain their names, the process becomes easy, unlike in acquisition. The two companies need to have an agreement on their terms and conditions of merging. The management of each of the organizations air their views, after which the schedule and meeting. In the meeting, they go through the views together and reach a consensus.
Resources that are unique to each of the organizations are brought together. There are several reasons why companies decide to merge other than sharing resources. Some of the reasons include creating a defensive more. A defensive move aims and making the two organizations effectively deal with economic growth. Another reason is to avail the synergies as they can work more effectively when they are together. They will be able to bring the two organizations' skills and culture and make the accomplishment of the daily operations an easy task. It is a good idea for companies to merge as they will be able to traverse the market and keep up with the pace of economic growth. The acquisition process takes three main steps. The steps are identification and valuation, ownership change transaction, and management of post-acquisition. In the first stage of acquisition, the buyer realizes a potential acquisition company. There is a need to know the defined focus and the company's corporate strategy before the acquisition process. They will make the tender to be public and recommend all the shareholders of the company. The company will then have to wait until enough shareholders are willing to go on with the process. Enough shareholders mean that the company has acquired control and is in a position to influence the organization's management.
After gaining control, valuing the company starts taking place. The process of valuing entails the use of strategic evaluation techniques to realize the worth of the company. From the worth, the company can now stipulate the amount that needs to be paid; the valuation and valuing of a company in the oversees is hard for a locally based company. The second stage of the process starts where there is a change of ownership through transactions. The process entails getting approval from the management of the company and relevant authorities from the government. Acquisition needs to follow a legal procedure, and that why several government bodies need to be incorporated. In the second stage, there is also a determination of the method of compensation that the company intends to use. The last state is management to ensure that the acquisition process was successful and effective. There is the implementation of synergies that will lead to capital or cash injections to finance the new combination in this stage. The main focus is to minimize the corporate culture, which is challenging to integrate. There is always a variation in the culture of two organizations. In the merging process, integrating the culture is not that challenging as the two organizations' management will be available. In an acquisition, the integration of culture is challenging as there is new management, implying a need to create a new culture for the new company's employees.
Ethical Issues in Acquisition and its Implication on an Organization
In the acquisition process, there are several ethical considerations that a company may face. Failing to address the ethical issue means that the acquisition process will be challenging and may even fail in the long-run. At the start, the process might appear to be successful, but it might fail because of several ethical considerations in the future. The phrases merge and acquisitions refer to the strategy, finance, and management of the company. There is a need to deal with the selling, buying, and combination of activities that can aid in the company's growth without competition. A true acquisition will occur when the two companies dissolve, fold their assets and liabilities, and form a new entity. One of the ethical issues that might arise is a transaction. Transactions aid half of the success of the acquisition process. Some of the transactions that will take place aim at achieving domination, where the company takes part in the dominant sector. Also, because there is a grouping of two behemoths, there is the creation of a monopoly. In such a situation, the transaction will have to continue with the gauntlet of power and scrutiny from the authority that might appear to be rigid. The transaction issue is a problem because there are cultural, legal, and official disparities in mergers and acquisitions in different countries. The transaction is an ethical issue that creates problems as it provides the stakeholders with the chance to cash out on a premium that might be important.
When the transaction is on all cash contracts, then the ethical issue becomes more of a problem. When the potential target for the acquisition is big, the more risk the acquirer is in a while conducting the procedure. Once the transactions in the acquisition have been closed, the outcome of the acquirer is very vital. There will be a variation on the acquirer's organizational structure based on how the acquisition process was designed. Another ethical issue that might arise from the acquisition process is the company's inability to take advantage of the diverse portfolio. The reason for the inability to extract from the vase portfolio is because of the acquisitions. The growth of each of the companies in recent years has been taking place through investments. The process has created a culture where there is the provision of autonomy to the firms that have been absorbed. The approach aimed to develop an entrepreneurial outcome. However, the consequences of the process are harmful as it has prevented the company from accessing opportunities that would grant them the relative contribution of the issues. They are not able to look for collaborations that they can combine their different sections of expertise.
After consolidation, three main forms of the transaction are likely to take place. The transactions include downstream, upstream, and lateral transactions. A downstream transaction is where there is flow from the parent company to the company's subsidiary that has been acquired. The transaction will only be visible to the Parent company and the stakeholders and not to the subsidiaries. For example, Walmart can be selling assets or inventory to either Sam & Real Estate or ASDA Group, which are subsidiary companies. The upstream transaction is the opposite of downstream as the flow is from the subsidiary company to the parent company. In Walmart's case, the flow is from Sam & Real Estate and ASDA Group to Walmart as the parent company. The two subsidiary companies will note down transactions and the relevant profit. For instance, the two subsidiary companies may transfer an executive to Walmart for one year, and they will charge Walmart for the executive services. The majority and the minority of the interest in stakeholders both in the parent company and the new organization will share the low profit since there is equal sharing in the new collaboration. The lateral transaction will occur between the newly acquired company and the parent company, but they will not affect the parent company's transaction. If there is 100% ownership in the acquisition, then it is a clear indication that there is equal sharing of each of the companies' subsidiaries. Thus, the profit or loss made by the subsidiary company will also be shared equally.
In the past, the growth of companies has been due to the acquisition of other firms. However, they have now ventured into a more challenging business. They are venturing into a complex enterprise, and that means they will have several subsidiaries. The act will limit the expansion of the new company and is not able to increase their production. They will lack the autonomy to expand and venture into more product lines. Being independent has contributed to the growth of a company and an entrepreneurial attitude. If the company has autonomy, they are in a position to respond to the available opportunities effectively. But with the isolation of a company, growth is challenging, and there is a need for partnership. When companies partner, they can share business operations (Sarala, Vaara, and June 2019). Also, they will improve on the likely hood of survival in the future. But, the absence of collaboration results in a decrease in the diversification of operations. Companies that have undergone acquisition cannot take advantage of the existing portfolio due to variations in the production line. Collaborations with the subsidiaries limit the company's capabilities to venture into more than a single product line. Their focus is mainly on the product of the subsidiary company. In the long run, the company losses share in the markets and cannot gain a competitive advantage. There is diversification without a plan. That makes the company unable to handle the diverse portfolio of activities and products.
Therefore, companies' acquisition needs to be a strategic process that will not lead to ethical issues. There are certain strategies that companies can take to prevent ethical issues during the acquisition process. Specialization is the right solution for the company to consider. Specializing in a single product means they will gain competence in the market during the acquisition process. They need to ensure that their products are of high standards and meets the utility of the consumer. A diverse portfolio means that they are risk-averse and can easily manoeuvre in the market when there are undergoing acquisition (Angwin et al., 2016). Even while collaborating with the subsidiaries or merging with a new company, they should not leave their portfolio behind. The focus should be on what already exists in the portfolio and not and other products at the moment. Another solution is to push for much tighter integration with the subsidiaries. The integration will be to tie together the company's units with that of the subsidiaries. The integration even includes the management of the company (Canterino et al., 2016). After the collaboration, the entire company should be under a single direction. The open government will assist in the creation and implementation of policies. There will be no variation in the units as there is available management. A company needs to consider undergoing an acquisition process with another company in the same production line. Being in the same line of products will make the acquisition process easy and faster. They will be sharing the aims and objectives that will make the process effective and efficient.
For an effective and efficient acquisition, the finance vice president and the other executive team members need to modify the fiscal figures. They should try to make changes to the accounting estimates so that there will be no misuse of the stakeholders' funds. Thus, there will be an ethical issue on the new company's accounting standards, especially in situations where the acquisition is not 100%. While each of the organizations was operating independently, they had their bookkeeping procedures and standards. The acquisition means that they have to share some accounting principles, and any alteration will be unethical. The two companies will have to complete the general population that operates in the organization because of bookkeeping's inventive form. However, there will be an endless supply of his leadership from the consolidation process. The organization and the international bookkeeping standards team will have to consider the manager responsible for their acts. According to the Institute of CPA, disciplinary actions need to be taken against anyone found guilty of the set and universally accepted rules in a consolidation agreement (Paul, Jerry & Donald, 2015). The main concern of the management and plan for the bonus payment is towards the shareholder's interest. The financial statement should be clearly and accurately stated and computed as it will provide a net income reflection of the company.
Conclusion and Recommendation
A company going through acquisition might be having an increase in its profits in recent years. The increase will be due to the effective management of dividends and collaboration established through acquisition. However, they face challenges with getting the most out of their portfolio in the future because of the acquisition. The challenge will be arising from the partnership they have made with subsidiary companies. The collaboration will deny them the opportunity to exercise their areas of expertise fully. Thus, there is a need for a solution to tackle the issue at hand. A company can consider an integration after the collaboration or acquisition. The integration involves having single management for both companies. The strategy will allow the company to bring their units together and makes the management easy. Equally, they can consider focusing on a single product line after the collaboration to gain a competitive advantage. In the long run, they will be risk-averse and will gain more from their portfolio.
References
Angwin, D., Mellahi K., Gomes E., & Peter E. (2016). How Communication Approaches Impact Mergers and Acquisitions Outcomes. International Journal of Human Resource Management, 27 (20), 2370-2397.
Canterino, F., Shani A., Coghlan D., & Brunelli M. (2016). Collaborative Management Research as a Modality of Action Research: Learning from a Merge-Based Study. Journal of Applied Behavioral Science, 52 (2), 157-189.
Paul, D., Jerry, J., & Donald, E. (2015). Accounting Tools for Business Decision Making (6 th ed.). Wiley.
Sarala, R., Vaara E., & Junni P. (2019). Beyond Merge Syndrome and Culture Differences: New Avenues for Research on the “Human Side” of Global Mergers and Acquisitions (M&As). Journal of World Business, 54 (4), 307-321.
