prepare an order for the following course work attached.
The deal between Royal Dutch Shell and BG has been affirmed appropriate by the tutor. I shall update further instructions as and when required.
For a initial move, i shall be grateful if the writer can produce a draft which i coulkd givce to the tutor for comments that the work is on course to avoid any chances of going off tract.
The period 2014-2016 has been a difficult time for the energy sector due to the oil price
drop. Companies have had to achieve a balance between short term viability and
maintaining their long term objectives and investments as the oil price drop has impacted
on profits and spending on projects. During times like this energy firms consider different
strategies which will help to stabilise or improve their position through either gaining
access to new markets, technology or resources. Merger and acquisition is one strategy
that is used in the energy sector.
“The sharp decline in oil prices in the past year has put a damper on many big energy
producers’ prospects, but that hasn’t kept them from joining the gusher of mergers-andacquisitions
activity”. (Energy M&A Surges Despite Oil Slump, Mattioli, D and D, Cimilluca,
The Wall Street Journal, 2015)
Write a 2,500-word report critically analysing how the strategy of merger and acquisition
has been used in the energy sector during the oil price drop of 2014 to 2016.
The report should include the application of two appropriate academic models. One
academic model should focus on internal and external factors. The other model used in
the report should focus on strategy.
You should also consider the following when carrying out your research:
? The report should include appropriate energy examples of merger and acquisition
deals during the oil price drop of 2014 to 2016, and should critically analyse the
challenges and benefits of merger and acquisition as a strategy within the energy
? The report should not analyse any ongoing merger or acquisition deals.
Total Marks for Assignment: 100
Helge Lund is one lucky man. The new chief executive of BG only arrived in February, and within a month its chairman received a call from Royal Dutch Shell. The message was that Shell wanted BG, so were they interested?
They certainly were. And the good news for Lund was that his pay package is linked to how well BG’s share price performs. It is up 40% thanks to the Shell bid. Lund is likely to pick up £25m for being in the right place at the right time. Kerching!
There is more than a little irony in this. BG faced a huge shareholder backlash when it first appointed Lund and offered a £25m pay package. The Institute of Directors slammed it as “excessive, inflammatory and contrary to the principles of good corporate governance”. Such was the anger, the deal was scaled back and more stretching targets applied. But now he could get the full original payout, faster than anyone anticipated. He will simply have to stay at the helm of the business for about a year, until the merger is complete.
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BG says Lund knew nothing of the likely Shell approach before joining from the Norwegian oil company Statoil, but it should not have come as a complete surprise that the company would be sought out by one of the sector’s big boys. In the late 1990s and early 2000s – the last time the oil price was in the doldrums – there was a rash of mergers and acquisitions: ExxonMobil, BP-Amoco, and then Chevron and Total-Elf. And BG has been touted as a potential bid target ever since a series of profit warnings and the departure of Lund’s predecessor, Chris Finlayson, a year ago.
Those mega-deal days are now back, with the halving of the price of crude explaining why BG is attractive to Shell. Exploration and extraction in inhospitable parts of the world looks a lot less attractive after the price of oil halved to below $60 (£40) a barrel. Far better, Shell believes, to splash out £47bn so that it can get its hands on BG’s Brazilian reserves and its liquefied natural gas assets.
Pascal Menges, who manages the Lombard Odier global energy fund, is almost certainly right when he says the Shell-BG deal will be the first of many. Other companies, he says, will be looking to improve the quality of their portfolios by picking up smaller rivals made vulnerable either by underperformance, the falling oil price or, in the case of BG, both. Further consolidation of the industry looks inevitable.
Royal Dutch Shell to buy BG Group in £47bn deal
• 8 April 2015
• From the sectionBusiness
Royal Dutch Shell says it has agreed to buy oil and gas exploration firm BG Group in a deal that values the business at £47bn.
The two firms say they have reached agreement on a cash and shares offer which gives investors a 50% premium on BG Group’s share price on 7 April.
The deal could be one of the biggest of 2015 and could produce a company with a value of more than £200bn ($296bn).
BG Group’s shares opened up 42% on the London Stock Exchange at 1,293.5p.
Shell’s £177bn market capitalisation dwarfs that of BG, which now stands at £31bn after a 20% fall in its share price over the past year.
BG Group is the UK’s third largest energy company, and currently employs about 5,200 people in 24 countries.
It was created in 1997 when British Gas demerged into two separate companies: BG and Centrica.
BG took control of exploration and production while Centrica took charge of the UK retail business of the former British Gas.
In 2000, BG split into BG Group and Lattice Group.
Shell said BG Group shareholders would enjoy higher dividends, as it confirmed its intention to pay its existing shareholders $1.88 per ordinary share this year.
That compares with a dividend of just $0.14 that BG Group shareholders can expect to receive this year.
The oil giant also said it expected to commence a share buyback programme in 2017 of at least $25bn.
Shell said it would also provide BG Group shareholders with a “mix and match facility”, allowing them to vary how much they receive in cash and new Shell shares.
Shell and BG Group expect to make annual savings of $2.5bn following the deal.
But Shell chief executive Ben van Beurden said he remained committed to North Sea oil and expected to invest £4bn between 2016 and 2018.
Shell said the deal would also add 25% to its proven oil and gas reserves and 20% to production capacity, particularly in Australia’s liquid natural gas (LNG) market and in deep water oil exploration off the Brazilian coast.
BG Group shareholders will own approximately 19% of the combined group following the deal.
BG Group history
? BG Group’s roots go back to the 1950s, when it was part of the UK’s Gas Council and then British Gas.
? British Gas was privatised in 1986.
? In 1997 British Gas was demerged into two separate public companies: BG and Centrica.
? BG took charge of exploration and production as well as its British transmission and distribution business Transco.
? Centrica took over the UK retail business of British Gas.
? Another demerger in 2000 created two new public companies: BG Group and Lattice Group with Lattice inheriting the Transco business.
? Following the second demerger in 2000, BG Group developed a portfolio of major gas assets, in key countries such as Egypt, Trinidad and Tobago, and Kazakhstan as well as the UK’s North Sea.
The deal comes at a time of uncertainty for oil and gas companies. In the past six months the price of oil has fallen by about 50%. Meanwhile, analysts have warned that investment in North Sea oil exploration has all but dried up, threatening the entire industry.
Last month, the Chancellor, George Osborne, lowered the supplementary corporation tax levied against oil companies that operate in the North Sea.
BG Group warned in February that it would write down the value of its oil and gas assets by nearly £6bn ($9bn) due to the oil price slump.
Similarly, Shell announced in January that it would be cutting spending by nearly £10bn over the next three years.
As it announced the takeover bid, Shell said it expected to make asset sales totalling $30bn between 2016 and 2018, although it did not specify which assets it was reviewing for sale.
Asked about potential job losses in the North Sea, Shell and BG Group said they expected there to be “global synergies”, while adding that if the deal had not happened, they might both have had to make job cuts.
Current BG Group chief executive Helge Lund, who took up the post last month, will remain with BG Group while the deal goes through, but is expected to leave once it is completed.
BG Group chairman Andrew Gould said the BG board remained confident in the energy firm’s long-term prospects under Mr Lund, but that Shell’s offer “allows us to accelerate and de-risk the delivery of this value”.
Even so, the payout that Mr Lund is likely to receive, alongside the boost he will receive to his income from his BG Group shareholdings, could raise eyebrows.
In December, BG’s board revised Mr Lund’s proposed £12m upfront shares bonus, after shareholders and the Institute of Directors complained.
Analysts gave a mixed reaction to news of the deal. Investec analyst Neil Morton said a tie-up had “been mooted for about 20 years”.
He added: “BG investors receive what we see as a compelling offer. For Shell shareholders, we are less convinced of the merits.
“The deal is predicated on a strong recovery in oil prices ($90 per barrel from 2018), while we suspect that Shell is pouncing on BG’s imminent free cash flow to protect its burdensome dividend payout.”
Christian Stadler associate professor of strategic management at Warwick Business School said BG would fit well with Shell’s portfolio.
“Shell has a very good track record in offshore oil and gas fields, and BG will help them solidify this area,” he said.
He added acquiring BG would help Shell’s replacement ratio: the amount of oil fields Shell has lined up to replace the oil it is currently producing.
But he warned cost savings would be hard to achieve and “with the current downsizing in the oil industry you would expect some job losses”.
• 8 April 2015
• From the sectionBusiness
Image captionBG Group has a strong presence in liquefied natural gas in Australia
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It was President Barack Obama’s chief of staff, Rahm Emanuel, who once said, “Never let a good crisis go to waste.”
For the energy sector, the crisis this time is the falling oil price. At $58 a barrel for Brent crude, it is almost half the peak figure last year.
That has meant that energy companies have had to cut their cloth, reducing levels of investment and writing down the value of assets.
BG Group has been particularly hard hit. Profit warnings following problems in Egypt and Brazil, the departure of Chris Finlayson, its former chief executive, after only 16 months, and a sinking share price have made it a takeover target.
There were rumours that Exxon Mobil was preparing an offer at Christmas.
And senior figures close to Shell told me this morning that there were people in the company who had been working on a plan to buy BG Group for so long, many of them had retired. Shell has long seen the point of buying BG Group.
In the worldwide hunt for energy, Shell has now made a £47bn bet that buying access to new reserves is quicker and easier than finding them itself.
Its exploration project in Alaska, for example, has yet to discover any recoverable reserves, whereas this deal immediately increases Shell’s oil and gas reserves by 25%.
And don’t forget, BG Group is one of the biggest suppliers of natural gas to China, one of the world’s fastest growing markets, which Shell will find very attractive.
Shell’s takeover of BG Group could be the first of a number of mega-deals in the oil and gas industry as predators and prey circle one another.
Marc Kimsey, senior trader at Accendo Markets, got it right when he said this morning: “The deal between Royal Dutch Shell and BG Group will prompt sector consolidation.
“The decline in oil price over the past year has battered some stocks which are clearly now looking attractive.
“In the last year BG shares fell 30%, shares in Tullow Oil have fallen 65%, Premier Oil down 55% and Petrofac down 20%.
“By comparison, sector behemoths BP and Royal Dutch Shell have only shed 10% over the same period, leaving them in the position of predator rather than prey.”
With significant downstream businesses – that’s the bit that consumers see, such as the sale of petrol and refined oil products – a lower oil price means profits can still be healthy for Shell and BP as the profit margins for downstream businesses improve.
Yes, the Shell offer does come with a rich premium – 50% above BG Group’s 90-day average share price – but those close to Shell point out that before its travails, BG Group’s share price was above £13.
The market judges that there is certainly value there.
There are also some significant tests. Last year, BG Group made a loss and it is a company with serious challenges.
It overspent on US shale gas exploration, gas production has struggled amidst political unrest in Egypt and costs are rising in key markets Brazil and Australia.
Shell is also taking on more debt to finance the deal, which might put pressure on dividends.
Shell already pays out 8% of all publicly quoted company dividends to our pension and savings schemes. With BG Group, Shell would pay out more than 10% of the total.
So its dividends policy is important for millions of us.
Jason Gammel, of Jefferies Research, said: “The imperative now becomes for management to convince the market of the financial implications – near-term earnings dilution, a significantly more levered balance sheet and a higher priority for debt reduction versus dividends on cash utilisation.”
Although a small part of the overall business for both Shell and BG Group, the North Sea is of course important for the UK.
Shell employs 2,400 people supporting its North Sea oil operations and has already announced some job losses.
BG Group employs 1,500 in Aberdeen and at its headquarters in Reading.
In a major deal like this one, businesses talk about “synergies”. That’s another word for cost savings and efficiencies.
And although the Shell chief executive said the company remained committed to the North Sea, concern over the number of jobs the new, amalgamated company will need will be an important one to resolve.
On Wednesday, it was announced that Royal Dutch Shell Plc will acquire BG Group Plc for £47 billion, or roughly $70 billion in cash and shares. By combining Europe’s largest oil explorer according to market vale with the No. 3 U.K.-based energy producer, the deal will be the biggest the oil and gas industries have seen in nearly a decade.
The merging of Shell and BG is a significant response to the decline in oil prices, meaning it could be a catalyst for future acquisitions as the biggest energy companies look to cut costs and rebuild profits.
From a monetary point of view, Shell will pay 383 pence in cash and 0.4454 of its Class-B shares for each BG share. This is equal to approximately 1,367 pence a share, which will place BG’s value at about £47 billion, a premium of nearly 50% on BG’s closing market price on Tuesday.
The new company will possess an impressive market value that is twice the size of London-based BP Plc and will even surpass Chevron Corp (CVX -Shell’s CEO Ben van Beurden will lead the combined company.
With this merger, Shell’s oil and natural gas reserves will grow by 28%. They will also come into a management team that is known for their role in carving out a unique position in the production of liquefied natural gas, or LNG. The new company, then, will be the biggest manufacturer of LNG among international oil companies, an important feat due to the rising value of LNG for emerging economies seeking cleaner energy sources.
Shell was advised by Bank of America Merrill Lynch. BG worked with Goldman Sachs Group Inc and Robey Warshaw LLP.
Thanks to a report by Bloomberg, Shell’s B shares, the class of stock which is being used to finance the acquisition, fell as much as 6.9% in London. The company’s A shares dropped 3.9%. In contrast, BG shares soared as high as 43% to 1,300 pence.
Shell to acquire BG Group for $70 billion
HOUSTON, Apr. 8
By OGJ editors
Royal Dutch Shell PLC has agreed to acquire BG Group PLC in a $70.1-billion cash and shares deal intended to sharpen Shell’s focus on integrated gas projects and deep water.
If the transaction is approved by shareholders and completed, existing BG shareholders will own about 19% of Shell.
Shell said the acquisition would increase its proved oil and gas reserves by about 25% and its production by 20%.
In its 2014 annual report, BG estimated its natural gas reserves at 11.55 tcf proved, 5.8 tcf proved and developed, and 9.25 tcf probable under the Society of Petroleum Engineers assessment method. It estimated oil reserves at 1.69 billion bbl proved, 537 million bbl proved and developed, and 1.37 billion bbl probable.
BG in 2014 produced 606,000 boe/d of oil and gas in Australia, Bolivia, Brazil, Egypt, India, Kazakhstan, Norway, Thailand, Trinidad and Tobago, Tunisia, the UK, and the US.
Of $9.4 billion in capital investment by BG last year, $6.3 billion was in Australia and Brazil.
In December, BG started production from the first train of the Queensland Curtis LNG export project fed by coal-seam gas in Australia. When both of two planned trains are in operation, liquefaction capacity will be 8.5 million tonnes/year (tpy).
BG also has LNG liquefaction capacity totaling 7.1 million tpy in Trinidad & Tobago and Egypt and regasification capacity in the US, the UK, and Singapore.
The company reported a total operating loss in 2014 of $1.417 billion after a pretax impairment of $9 billion related to the drop in the crude oil price, sale of a pipeline in Australia, and downgrade of reserves in Egypt.
Shell executives said the acquisition would boost planned asset sales to $30 billion during 2016-18 and provide cost-saving opportunities of $2.5 billion in 2018. Capital investment will be held to below $40 billion in 2016 and lower than that in 2017, and spending on exploration will be reduced, they said.
“We will refocus the company on fewer, larger themes,” Shell Chief Executive Officer Ben Van Beurden said in a presentation to investors. He identified integrated gas and deep water as “Shell’s two strategic growth priorities.”
Royal Dutch Shell Plc agreed to buy BG Group Plc for about 47 billion pounds ($70 billion), making Europe’s largest oil company the pre-eminent player in global natural gas and adding fields in Brazil.
The deal, the industry’s biggest in at least a decade, will push Shell further into producing, shipping and selling gas as the company bets China and other emerging economies switch from coal and oil to cut pollution.
Investors were skeptical of the stock and cash acquisition, which isn’t expected to boost earnings per share until 2017. The price of the class of share being used to buy BG fell the most since 2008 on concern the company is overpaying.
“To assume that Shell can pay a 50 percent premium for BG, and extract significant synergies, deliver value for shareholders and maintain a dividend on an expanded shareholder base would require a more-than-healthy degree of optimism,” said Michael Hulme, commodities fund manager at Carmignac Gestion SA.
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The merged company, led by Shell Chief Executive Officer Ben van Beurden, 56, will boast a market value twice the size of BP Plc and surpass Chevron Corp. Shell, struggling to rebound from its worst production performance in 17 years, will swell its oil and natural gas reserves by 28 percent with the combination and inherit a management team that carved out a unique niche in liquefied natural gas, or LNG.
Shell, which helped pioneer the process of liquefying gas for shipment aboard tankers decades ago, and rivals such as Chevron are betting LNG will play an increasing role in emerging economies seeking alternatives to dirtier energy sources such as coal.
The fundamental logic of a merger “always existed, what has happened in the last month is that it has become very compelling from a value perspective,” Van Beurden said on a conference call on Wednesday.
The new company will be the largest producer of LNG among international oil companies and gas is a “very important” component of the deal, he said.
Buying BG also brings Shell a share in Brazil’s largest deepwater fields, consolidates its position in Australia’s gas industry and allow more participation in the U.S.’s emergence as a LNG exporter.
Shell will pay 383 pence in cash and 0.4454 of its B shares for each BG share, the companies said on Wednesday. That’s equal to about 1,367 pence a share, valuing BG at about 47 billion pounds, a premium of about 50 percent on BG’s closing share price yesterday.
To win over shareholders, Shell pledged cost savings of $2.5 billion, asset disposals of at least $30 billion within four years and a giant share buyback of $25 billion from 2017 to 2020.
Shell’s B shares, the class of stock being used to finance the deal, fell as much as 8.7 percent in London, the biggest intraday decline since 2008. The A shares dropped 5 percent.
BG shares rose as much as 43 percent to 1,300 pence.
Shell snaring BG disrupts the prevailing view among analysts and bankers who had expected merger activity in the industry to remain quiescent until later this year or even 2016.
The tie-up could presage a repetition of the wave of deals a decade-and-a-half ago that rocked the oil patch and created today’s so-called supermajors through deals that saw BP Plc buy Amoco Corp. and the creation of Exxon Mobil Corp.
Shell was advised by Bank of America Merrill Lynch and BG worked with Goldman Sachs Group Inc. and Robey Warshaw LLP.
The agreement includes a break fee of 750 million pounds and the deal is expected to complete in early 2016.
The new company will be the world’s biggest international LNG company with sales of about 50 million tons by the end of this decade, Shell Chief Financial Officer Simon Henry said. That would make it twice as big as its closest rival Exxon.
The size of the combination means Shell will require antitrust approvals from regulatory agencies in Australia, China, Brazil and the EU.
“We will need their support,” Henry said. “It’s difficult to say now if we expect any issues.”
BG was forged from the exploration arm of the U.K.’s former state-owned gas monopoly, British Gas, that was privatized by Margaret Thatcher in the 1980s.
The company was led for more than a decade by Frank Chapman, who built a global LNG business and drilled wells from Kazakhstan to Brazil. The company’s market value rose more than fivefold during his tenure, outperforming larger rivals including Shell and BP.
Chapman retired at the end of 2012 and his successor Chris Finlayson lasted little more than a year, resigning in early 2014 after profit warnings and disagreements with the board over strategy. He was replaced by Helge Lund, poached from Norway’s state oil producer Statoil ASA, who BG made the most highly paid oil executive in Europe to win his services.
He’s now agreed to the company’s sale just two months after taking the helm. Lund, 52, will leave the company once the deal’s completed, handing him about $43 million for a year’s work.
Shell to acquire BG
– Deal valued at $70bn
London, April 8 (Reuters): Royal Dutch Shell has agreed to buy smaller rival BG Group for $70 billion in the first major oil industry merger in more than a decade, closing the gap on market leader US ExxonMobil afte a plunge in prices.
Anglo-Dutch Shell will pay a mix of cash and shares that values each BG share at around 1,350 pence, the energy companies said on Wednesday. This is a hefty premium of around 52 per cent to the 90-day trading average for BG, setting the bar high for any potential rival bidders.
The biggest merger this year will give Shell access to BG’s multi-billion-dollar operations in Brazil, east Africa, Australia, Kazakhstan and Egypt. These include some of the world’s most ambitious liquefied natural gas (LNG) projects.
Stitched together by Shell CEO Ben van Beurden and BG chairman Andrew Gould, the deal comes after oil prices halved since last June, putting a premium on access to proven assets rather than costly exploration.
“We have been scanning quite a few opportunities, with BG always being at the top of the list of the prospects to combine with,” van Beurden said. “We have two very strong portfolios combining globally in deep water and integrated gas.”
Shell said the deal would boost its proven oil and gas reserves by 25 per cent. The firm also plans to increase asset sales to $30 billion between 2016 and 2018 on the back of the deal.
Britain’s BG had a market capitalisation of $46 billion as of Tuesday’s close. Shell was worth $202 billion, while Exxon, the largest oil company by market value, was worth $360 billion.
BG shares leapt 37 per cent for 1,250 pence, while Shell’s were down 2.2 per cent at 2,048 pence. BG shares have tumbled nearly 28 per cent since mid-June, when the slump in global oil prices started.
Ben van Beurden said the presence of two large firms in Australia, Brazil and China and the European Union might require a detailed conversation with anti-trust authorities but was unlikely to lead to forced asset sales.
The halving in crude prices on the back of a shale oil boom in the United States and a decision by Saudi Arabia not to cut production has created an environment similar to the turn of the century when many large mergers took place.
Back then, oil major BP acquired rival Amoco and Arco, Exxon bought Mobil and Chevron merged with Texaco.
Shell has long been seen as a potential purchaser, thanks to its healthy cash flow and relatively low oil price breakeven.
The company was able to maintain capital and operating expenses and pay dividend at a price of oil of around $75 per barrel without borrowing too much money. However, BG’s breakeven is as high as $145 per barrel, according to analyst estimates.
Last year, Gould hired CEO Helge Lund from Norway’s Statoil to turn around the company. Gould said on Wednesday Lund would remain the CEO through transition.
Advantages And Disadvantages Of Mergers And Acquisitions
Published: 23, March 2015
Submitted By: Yatendra Kumar
“Discuss the strategic rationales and motives for American companies wishing to execute mergers outside the American borders. Do you think it is correct for the European Union to restrict mergers between American companies that do business in Europe?(For example, the European Commission vetoed the proposed merger between WorldCom and Sprint, both U.S. companies and it carefully reviewed the merger between AOL and TimeWarner, again both U.S. companies). Make recommendations on whether such mergers in the European Union are a worthwhile investment for American corporations.”
Today’s business world is of growing economy and globalization, so most of the companies are struggling to achieve the optimal market share possible on both market level i.e. Domestic and International market. Day by day business person works to achieve a most well-known goal i.e. “being the best by what you perform as well as getting there as quickly as possible”. So firms work effortlessly to beat their rivals they assume various ways to try and do thus. Some of their ways might embody competitive within the market of their core competency. Therefore, it insuring that they need the best knowledge and skills to possess a fighting likelihood against their rivals in that business.
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In 21st century businesses are the game of growth. Every business want the optimum market share (growth) over their competitors, so companies are trying to get optimum growth by using the most common shortcut i.e. Merger and Acquisition (M&A). The growth main motive is financial stability of a business and also the shareholders wealth maximization and main coalition’s personal motivations. Mergers and acquisitions (M&A) provides a business with a potentially bigger market share and it opens the business up to a more diversified market. In these days it is the most commonly use methods for the growth of companies. Merger and Acquisition (M&A) basically makes a business bigger, increase its production and gives it more financial strength to become stronger against their competitor on the same market. Mergers and acquisitions have obtained quality throughout the world within the current economic conditions attributable to globalization, advancements of new technology and augmented competitive business world (Leepsa and Mishra, 2012). In the last decade, M&A are the dominant means of organization’s globalization (Weber, Shenkar and Raveh 1996). Merger particularly could be a growing development that has become an area of the recent business conditions and it’s apparent to possess affected each nation and trade (Balmer and Dinnie 1999).
Concept of Mergers and Acquisition
The main idea behind mergers and acquisition is one plus one makes three. The two companies together are more worth full than two classified companies at least that’s the concluding behind mergers. Merger is the combination of two or more firms, generally by offering the shareholders of one firm’s securities in the acquiring firm in exchange for the acquiescence of their shares. Merger is the union of two or more firms in making of a new body or creation of a holding company (European Central Bank, 2000, Gaughan, 2002, Jagersma, 2005). In other words when two firms combine to create a new firm with shared resources and corporate objectives, it is known as merger (Ghobodian, liu and Viney 1999).
It involves the mutual resolution of two firms to merge and become one entity and it may be seen as a choice created by two “equals”. The mutual business through structural and operational benefits secured by the merger will reduce cost and increase the profits, boosting stockholder values for each group of shareholders. In other words, it involves two or more comparatively equal firms, which merge to become one official entity with the goal of making that’s value over the sum of its components. During the merger of two firms, the stockholders sometimes have their shares within the previous company changed for an equal amount of shares within the integrated entity. The fundamental principle behind getting an organization is to form shareholders wealth over and higher than that of two firm’s wealth. The best example of merger is merger between AOL and Time Warner in the year 2000. In 2000 the merger between AOL and Time Warner is one of the biggest deal that later fails.
Advantages and disadvantages of Mergers and Acquisition (M&A)
Always on Time
Marked to Standard
The advantage and disadvantages of merger and acquisition are depending of the new companies short term and long term strategies and efforts. That is because of the factors likes’ market environment, Variations in business culture, acquirement costs and changes to financial power surrounding the business captured. So following are the some advantages and disadvantages of merger and acquisition (M&A) are:
Advantages: Following are the some advantages
The most common reason for firms to enter into merger and acquisition is to merge their power and control over the markets.
Another advantage is Synergy that is the magic power that allow for increased value efficiencies of the new entity and it takes the shape of returns enrichment and cost savings.
Economies of scale is formed by sharing the resources and services (Richard et al, 2007). Union of 2 firm’s leads in overall cost reduction giving a competitive advantage, that is feasible as a result of raised buying power and longer production runs.
Decrease of risk using innovative techniques of managing financial risk.
To become competitive, firms have to be compelled to be peak of technological developments and their dealing applications. By M&A of a small business with unique technologies, a large company will retain or grow a competitive edge.
The biggest advantage is tax benefits. Financial advantages might instigate mergers and corporations will fully build use of tax- shields, increase monetary leverage and utilize alternative tax benefits (Hayn, 1989).
Disadvantages: Following are the some difficulties encountered with a merger-
Loss of experienced workers aside from workers in leadership positions. This kind of loss inevitably involves loss of business understand and on the other hand that will be worrying to exchange or will exclusively get replaced at nice value.
As a result of M&A, employees of the small merging firm may require exhaustive re-skilling.
Company will face major difficulties thanks to frictions and internal competition that may occur among the staff of the united companies. There is conjointly risk of getting surplus employees in some departments.
Merging two firms that are doing similar activities may mean duplication and over capability within the company that may need retrenchments.
Increase in costs might result if the right management of modification and also the implementation of the merger and acquisition dealing are delayed.
The uncertainty with respect to the approval of the merger by proper assurances.
In many events, the return of the share of the company that caused buyouts of other company was less than the return of the sector as a whole.
The merger and acquisition (M&A) reduces flexibility. If a rival makes revolution and may currently market vital resources those are of superior quality, shift is tough. The change expense is the major distinction between the particular merger worth and also the merchandising value of the firm that can be of larger distinction.
This paper deals with the merger and Acquisition of the companies. The combination of two firms is measure additional value than two companies at least that’s the concluding behind mergers. This also includes the main strategic rationales and motives for American companies wishing to execute mergers outside the American borders and also is the European Union restriction on the American companies M&A with European companies is correct by the help of case study of merger between AOL Time Warner.
Strategic rationales and motives for American companies:
The main rationales and motives of American companies to merger outside the America are to extend their market, get new source of raw materials and tap in large capital market. The cross-border M&A is a widely used and popular strategic means for international companies looking to expand their business reach, widen new production facilities, enlarge new sources of raw resources, and tap into capital markets (Weston, Chung, & Hoag, 1990). Deals out of the borders’ have been many and large during the 1990s (Subramanian et al., 1992), and the deals like that are probable to attain new heights due to globalization trends, decline in unwieldy business regulations and red tape, and by the development of standardized accounting standards by various capital-starved countries (Zuckerman, 1993). Moreover, the main motive is to expend their business or market and develop new sources for raw material.
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Restriction for Mergers in European Union:
In the earlier times, the enforcement rules in European Zone against mergers were totally different. In the starting, the European Community wasn’t abundant involved concerning mergers. The founders of European Economic Community believed that division of markets resulted into unskillfully and for them largeness was never a problem or a haul (Bermann et al, 1993). They’d even thought of regulation as an answer for giant mergers instead of de-concentration. Actually, Mergers were generally accepted and cross-border mergers were most welcome which might facilitate mix the European Union. To the extent that the European Community started taking social control for mergers seriously, it majorly focused upon a drag that mergers would produce abuse of market power (Eleanor, M n.d). Finally, European Commission (EC) law thought of merger as a main growing concern. The EC authorities make certain that, once companies merge, the market balance is maintained and avoid distortion of competition and formation of dominant position that might be abused. Giant companies ought to take approval from the European Union and deliver them with necessary one.
The merger between AOL and Time Warner was declared on 10 January 2000 and it was worth $183 billion. That was the biggest merger in the history of American business world. AOL had about 40% share of online service in the United States and the Time Warner have more than 18% of US media and cable households. The merger is taken into account to be a vertical merger between one amongst the most important web service suppliers and this one amongst the biggest media and entertainment firm. The new company was formed and named as AOL Time Warner and was the fourth biggest company in the US, as evaluated by stock market valuation. After the merger deal, AOL become a subsidiary the Time Warner Company at stage and has operations in Europe, North American countries and Asia. As a web service supplier, AOL on look severely rival from Microsoft, Yahoo and different low price net access suppliers. Thus, the corporate tries to induce advertising and e-commerce growth, thereby separate it by rival (BBC, 2000).
Impact of deal on the performance
After the official announcement of deal merger between AOL and Time Warner growth rate in revenue has dramatically declined. The profitability suffered a good plunge when the alliance. The potency of the new united firm was terribly poor as determined from the asset turnover ratio. Even the liquidity of the firm suffered once the merger as evident from this ratio. There are several reasons for failure however the foremost vital reason was the unequal size of the companies, wherever AOL was overvalued as a result of web bubble. According to New York share exchange before the deal the share price of AOL is 73 and Time Warne is 90 but after announcement of the merger deal the shareholders dissatisfaction shown on share market of AOL and Time Warner and the shares drop down to 47 and 71 respectively. AOL and Time Warner fail to keep up shareholders satisfaction levels this conjointly one among the rationale to loosing stability of share holders according to the Times magazine (Kane and Margaret, 2003).
The market valuation of both the companies AOL and Time Warner were decline from the starting of the merger to end of the deal. AOL has drop down approximately 60 percent and Time Warner around 30 percent of market value once the deal has been closed. The market valuation of both the companies from 2000 to 2011 was dropped down drastically. The AOL market value has dropped from 167$ billion to 107$ billion and the Time Warner 124$ billion to 99$ billion and is the biggest dropped down of any company in American history.
Reasons for merger Failures
1+1 = 3 sounds great but in practice or reality every time it’s not work properly and go awry. Historical trends show that roughly 2 thirds of huge mergers can let down on their own terms, which implies they’re going to lose worth on the stock exchange. The motivations that mainly drive mergers are frequently blemished and efficiencies from economies of scale might prove elusive (Investopedia, 2010).
Adoption of the new technology takes time for the normal company. In late twentieth century dramatic changes has occur in web. Migration of recent mode of web service is connected with high barricade and a number of other social and legal problems was encircled around and recently established firms like yahoo, msn etc was giving high edge competition. Economical rate of inflation is high, to create economy stronger American government has modified the policy and taxation rules have throwing a dispute for AOL to beat this things merger with Time Warner became a fruit to the AOL. Public and private policies are one of the reasons for the merger failure. The reasons of merger failure is over valuation of AOL shares has shown a dramatic impact on the deal, where as stake holders are not satisfied and improper communication with consumers damages the trust of user. The merger’s fail was a result not only because of the replete of the dot-com bubble but it also the failings by AOL Time Warner management to ever really integrate the two firms.
One size does not match all. Several firms think that the most effective way to get ahead is to expand business boundaries through mergers and acquisitions (M&A). Mergers produce synergies and economies of scale, increasing operations and cutting prices. Investors will take comfort within the idea that a merger can deliver increased market power. The same thing happens with the America’s biggest merger deal between AOL and Time Warner. They think that merger is helpful for both the companies but it not matched for both of them. Both AOL and Time Warner synergies shows diversification is that the main goal of the firms to extend the revenue and to attain the value gain because of the amendment in mode of technology and increase in the competition for the well established firms. Throughout the phase of merger web bubbles also the main cause for over valuation of shares. In distinction Time Warner was the victim of net bubble. This type merger failure cases shows support the European Commission to restrict the American companies to merge with the European companies. European commission has a right to govern the European market and make stable the Euro Zone market. The European commission (EC) is thought of defending domestic companies from foreign rival and they encourage their zone mergers. So the European commission doesn’t want any problems like dis-economies of scale, clashes of cultures and reduction of flexibilities by the merger of American companies. So the merger is highly regulated by European Union to avoid major concentration of economic power in euro zone. The merger deals cases like AOL and Time Warner helps the European Commission (EC) to make strict rules to restrict the merger and acquisition (M&A) of American companies with the Euro Zone companies.
Acquisition Versus Merger
Acquisitions differ from mergers, and those differences often emerge in the aftermath of either process. Negotiations during a merger process involve the relative ownership interest each company will hold in the merged entity. In an acquisition, on the other hand, negotiations focus on the relative value of each company in negotiating a purchase price. The implication is that merged companies will operate on a cooperative basis, while an acquisition involves absorbing part or all of another company. This is especially true concerning acquisitions of companies in the same industry.
Economies of Scale and Increased Efficiency
Acquiring a company in the same industry can result in reduced costs due to economies of scale. A major example of the economies of scale involves Wal-Mart, the world’s largest retailer. Because of its sheer size, Wal-Mart can often decrease its expenses by buying in bulk and producing large quantities of goods in each production cycle. Acquiring a company in the same industry often results in enhanced economies of scale for a combined, larger entity, along with increased efficiency in production and other aspects of business operations.
Related Reading: What Are Some Disadvantages of Acquiring Another Company in the Same Industry?
Expanded Market Reach
If a company acquires a second company in the same industry, but in a different market area, the merged entity may cover a larger part of its market. This may come about by adding geographic areas, such as when a company that operates primarily in the east acquires a company in the same industry based in Los Angeles. However, expanded market reach also pertains to demographic and other factors, such as if a clothing store that traditionally caters to older women acquires a company with appeal to teenagers. This extended reach can be lucrative, but can also be difficult if the company fails to understand its new market, for example.
Tax and Legal Implications
Tax implications of acquisitions can be both advantageous and detrimental to the merged entity. In some instances, a profitable company can reduce its tax liability by acquiring a less profitable company in the same industry. However, in the United States and elsewhere, the law imposes limits on this process, sometimes resulting in reduced advantage for the acquiring company. Additionally, acquisitions accomplished through stock purchases can also result in potential liability for the company making the acquisition. Due diligence can limit this sort of exposure, along with a promise from the company selling shares to hold the acquiring company harmless, that is, exempt from adverse legal action.
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