Topics: Mergers and acquisitions, BP Pages: 16 (5399 words) Published: January 25, 2012
FINANCE 2 ASSINGMENT 2011-2012 Nikesh Hindocha (10044607)

Part A.
As part of my assignment, I have been asked to discuss the following statement “Mergers and acquisitions can be value destroyers or value creators”. A merger can be defined as when two equal businesses in terms of profit margin and status, combine in order to become one legal entity. Initially, the fundamental reason for this merge is to produce a company that is worth more than the sum of its parts. An acquisition is where one company acquires a controlling interest in another company. The combination of these unequal companies can produce the same or even more benefits as a merger would. In different cases, these mergers and acquisitions are either considered as the creator of value or the destroyer of value or even possibly both. A company that is considered as a value creator is carrying out their primary value-adding activities in the right manner. In contrast, a company that is seen as a value destroyer does the complete opposite meaning that the company is less appealing to employees, customers and potential investors. Value Creation

Mergers and acquisitions are formed in the hope that they will create value and there is a vast amount of reasoning on why they have been introduced. Businesses will try and create value for the company, shareholders, customers and employees. The present value of all performance enhancements attributable to management change would result in the increase in value from just by managing the assets more efficiently (Damodaran, 2005). Horizontal and Vertical Integration of Mergers and Acquisitions Mergers that are of a large scale may have been introduced in order to occupy a large share of the market, whereas acquisitions may have been formed in order to eliminate the competition. The mobile phone group of the recent merge between t mobile UK and orange UK could be potentially the biggest value creating company of all time. There aim is to take advantage of the fact that their products are related so that they can build of each other and therefore create profit and value for the customer (synergy) i.e. customers will be able to use either network of t mobile and orange. Tom Alexander, CEO of Everything Everywhere – the company that runs Orange and T-Mobile - said: ‘This is the beginning of an ambitious plan to give our customers instant access to whatever they want, wherever they are – instant access to everything everywhere. This form of merging is regarded as horizontal integration, where growth is achieved through mergers and acquisitions offering similar products and services. However, the size of the mergers determines the effect it imposes on the market. In the case of the merge between Morrisons and Safeway, the market as a whole was affected, whereas two companies of a smaller size wouldn’t have as big of an impact. Another form of merging is called vertical integration. Vertical integration acquires businesses in the same industry but at different stages of the supply chain. The benefit of vertical integration involves the ability to secure supplies and future orders. An example of vertical integration is the acquisition of Amstrad from BSkyB, which in turn led to a reduction in costs of its supply chain. Sir Alan Sugar said- "I cannot imagine a better home for the Amstrad business and its talented people. Our companies share the entrepreneurial spirit of bringing innovation to the largest number of customers”.

This implies that the merger is creating value towards the employees, because employees who have an in depth understanding of the business can interact there knowledge with their colleagues. The merge will also add value towards customers due to the business providing improved efficiency and the introduction of innovation. Value creation of Shareholders

Managers need to exercise various strategic approaches in order to create shareholder value or to increase it....

References: Bertoncelj, A. (2006) “Corporate restructuring and controlling interest”, Studia Universitatis Babes-Bolyai, Oeconomica, Vol. 51, No.1, pp. 59-73.
Bertoncelj, A. (2007) “Balanced Management of Key Success Factors in Mergers and Acquisitions”, Organizacija – Journal of Management, Informatics and Human Resources, Vol.40, No.5, pp. A147-A152.
Bruner, R.F. (2004) Applied Mergers and Acquisitions, Wiley Finance, New York.
Damodaran, A. (2005) The value of control: implications for control premia, minority discounts and voting share differentials, Stern School of Business, New York.
Hassan, M., Patro, D.K., Tuckman, H. and Wang, X. (2007) “ Do mergers and acquisitions create shareholder wealth in the pharmaceutical industry?”, International Journal of Pharmaceutical and Healthcare Marketing, Vol. 1, No. 1, pp.58-78.
Weston, J.F. and Weaver, S.C. (2001) Mergers & Acquisitions, The McGraw-Hill Executive MBA Series, New York.
Nakamura, H.R. (2005) Motives, Partner Selection and Productivity Effects of M&As: The Pattern of Japanese Mergers and Acquisition, Thesis (Ph.D.), Institute of International Business, Stockholm School of Economics.
Shrivastava, P. (1986) ”Post-merger integration”, Journal of Business Strategy, Vol. 7, No.1, pp.65-76
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