Economics Consideration of M and A

1. Purpose of M & A
Why does any enterprise resort to M & A? The theories which explain the reason for M & A can broadly be classified into two types.

One theory is based on the financial consideration. In this case, M & A takes place aiming at financial profits. This type of M & A explains the act from view point of owners and stock holders of the enterprise. Through this type of M & A higher efficiency of management is sought.

According to another theory, the M & A takes place in accordance with the management aims. This is a theory as seen from the view point of management. The management finds the expansion and growth very necessary for their own position and earnings, and they carry out the M & A.

2.Effect of M & A
One serious question which must come to everybody’s mind is why at all the enterprise should resort to growth from outside rather than the growth from inside, may it be the financial aim or management aim. What are the conditions under which the enterprise selects growth from outside rather than growth from inside.

In the case of internal growth, an enterprise has to bear all the expenses on various heads by its own. This includes the investment on equipment, research and development and human resource development. On the other hand, the growth from outside is the merger and acquisition of enterprise.
Let us try to understand the effect of M & A as compared to the growth from inside.

· Economy of scale
The first effect of the M & A which can be considered here is the economics of scale which is obtained through the expansion of enterprise. This is the remarkable characteristic in the case of horizontal integration. As a result of M & A, the cost such as sales cost and general management expenses reduce. Of course, this type of effect can be obtained by expanding the scales on the basis of growth from inside also. It is important to note that in the case of M & A, this effect can be achieved in a shorter period.

· Saving on investment cost
Normally, large amount of capital investment is required for starting any new operation. While comparing the capital requirement, in the case of growth from inside with that in the case of M & A, any enterprise shall resort to M & A, if the investment requirement in the case of latter is low.

This comparison can be explained properly through the theory of Tobin’s Q. The Q is a ratio of procurement cost in the existing enterprise to the cost of establishing new enterprise and it can be computed as given below : -
Q = Cost of procuring existing enterprise / Cost of establishing new enterprise
The growth from inside is selected when Q is more than one whereas M & A becomes the obvious choice if Q is less than one. In many case, Q becomes less than one and becomes possible to save the investment cost on the basis of M & A.

· Evading the friction due to entry into the market
Severe friction with the existing enterprises can always be expected in the case of entry into a new market irrespective of M & A of existing enterprise. Further, there are many cases when entry itself is not very easy because of restriction and loss against entry which requires permission or approval. Therefore, in the case of M & A of an enterprise, which is actively engaged in the said already, the entry into the market becomes very easy.

· Immediate raising of management resources
In the case of M & A, the management resources like information as well as the brand name, excellent manpower and technology required for expansion into new operations etc can be obtained in one go and in short duration without much efforts. It becomes possible to enter into the market in a short duration through M & A and there is no operation opportunity lost.

The development and accumulation of management resources require considerable amount of time and efforts in the case of growth from inside and one cannot avoid the loss of operation opportunity to some extent.

These were the major effects of M & A. Among these, the most significant effect of M & A is the “buying of time”. This factor gains particular importance in this age where prompt action is most important to meet the rapid changes in the environment.

3. Problems of M & A
The M & A has one big merit of possibility of buying the time, however, there are many problems also. Even in America, where M & A is very popular and is practiced very frequently, it is said that about half of the M & A cases end up in failure. Some of the problems related with M & A are listed below.

· Problems before the decision is made
The decision with regard to the merger and acquisition has to be taken in an extremely short period. Further, it is necessary to maintain a high level of secrecy. Therefore, there is a possibility of occurrence of a phenomenon of “Group Thinking”, where the decision making by the group may be diverted due to the group environment. As a result, there is possibility of wrong M & A, that too without any suspicion.

Moreover, the decision has to be made on the basis of limited information only. Therefore, M & A is extremely risky proposition in some cases.

· Problems from the management point of view
The organisational culture of one enterprise is different from that of the other and M & A always results in friction within the organisation. Therefore, it becomes difficult to accomplish the synergy, particularly the employees of the company which has been acquired or merged may have strong psychological resistance against the other company which is acquiring.

Further, it may not be necessarily possible to generate added value to justify the premium of operation even when M & A has been carried out successfully.

The management, particularly after the merger and acquisition is an extremely difficult problem. However, whatever may be the problems, there is probably not going to be major change in the concept of merger and acquisition, which shall remain one of the important strategies for the future.

Classification of M and A

As seen from the above explanation also, it became clear that there are various of M & A depending upon the time and the place. Let us try to classify and organise the different types of M & A here.

1. Merger and Acquisition
M & A (merger and acquisition) has so far, been explained as a single concept. However, strictly speaking merger and acquisition need to be defined separately.
A merger stands for formation of combined entity on the basis of a merger agreement by the two or more than two companies. According to the Commercial Law Act, there are two types of mergers, namely, the merger by absorption (merger) or the merger by new establishment (consolidation).

In the case of merger (by absorption), one by the two companies which are merging disappears, whereas, the other survives and continues. On the other hand, in the case of consolidation (new establishment), all the merging companies cease to exist and a new company is formed.

In the case of acquisition, the acquiring enterprises or the individuals aim at acquiring either partially or the total management right or control right of the other company and procures the assets, different operation departments and shares etc. of the company, which is being acquired.

However, the M & A is very often used as single concept and it is not necessary to over-emphasise on the strict boundaries. Now let us try to see the classification of M & A from different angles.

2. Classification on the basis of functions
While laying focus on the type of changes an operation structure undergoes as a result of M & A, it is possible to classify the M & A broadly into three, as understood by the history of M & A in America. These categories are given below.

· Horizontal M & A
Horizontal M & A is the merger and acquisition of enterprise belonging to the same industry. This type of M & A is executed while aiming at expansion of operation, increase in the market share and to evade competition.

· Vertical M & A
Vertical M & A is the merger and acquisition of enterprises which deal with different manufacturing stages of the same product. This type of merger and acquisition is executed in order to avoid application of Monopoly Prevention Act as seen in the case of second wave in the history of America or in order to establish the consistent manufacturing process and to stabilise the management.

· M & A for diversification
The M & A for diversification basically aims at diversification and it involves acquisition and merger of these enterprises, which posses such products that have no competitive relationship with the operations of one’s company. It is called Conglomerate type M & A when there is absolutely no relationship with the operations of one’s own company.

3. Rival M & A and friendly M & A
This is a classification based on the degree of mutual satisfaction or dissatisfaction among the partners. It is called friendly M & A when the partners, who have undergone merger and acquisition are mutually satisfied. The typical examples of friendly M & A are the relief acquisition etc. In contrast, it is called rival M & A when the enterprise, which is merged or acquired is not defensive steps as far as possible.

In Japan, as explained earlier also, there is almost no case of rival M & A.

4. Classification on the basis of mode of payment
There can be classification on the basis of mode of payment for the merger or acquisition. One is the payment in cash and the other is through transfer of stocks.

Actual State of M and A

Let us first try to see the actual state of M & A in America and Japan.

1. M & A in America
Itami, Kagono “Zeminaru Keieigaku nyumon” (Seminar Management Science Introduction), Nihon Keizai Shimbunsha (Japanese Economics Newspaper Company), 1989.

2. M & A in Japan
In May 1992, there was a big happening when the DAIEI, a big player in the distribution industry took over the Recruit Company under its umbrella, which was under huge debts. The DAIEI, so far, had been carrying out the organisation of its operations on the basis of volitional merger and acquisition. The “total life industry” as pointed out by DAIEI can probably be called as having entered the final stage by acquiring the information industry with its own umbrella.
Just before the merger of Mitsui and Taiyo Kobe bank and the merger of Kyowa Saitama bank were very much in the news, the reorganisation of financial industry was progressing in a big way. In this way, it can be said that the merger and acquisition was being carried out very actively. Let us try to find out if there were any conspicuous characteristics or trend in the M & A in Japan.

After that, the oil shock bought down the activity and M & A became calm. However, recently, M & A have shown a tendency of gradual increase with the recovery in economy. Though, it is said that merger and acquisition of enterprises do not go well with the traditional industrial customs and working in Japan, it can probably be said that M & A has become an established concept in Japan.

Still, even in the case of Daiei or the other M & A, all the mergers and acquisitions in Japan are of friendly nature. They are either merger on equal terms or merger for the sake of rescue. The example of acquisition of Koito Seisaku by T.B. Pickens, Jr is a very rare example in which foreign capital is involved. It can be said that there are almost no hostile cases of M & A in Japan.

The hostile M & A could not take roots in Japan. It is probably possible to explain this tendency on the basis of the way of thinking and the customs etc. which are followed by the Japanese enterprises like trying to restrict the special right of stock holders etc. However, the sense of morale of the Japanese like “taking over is bad” can be called as the most important factor for not allowing the hostile merger and acquisition.

M and A

The term M & A is heard very often. M & A stands for merger and acquisition. The growth on the basis of M & A is not achieved on the basis of resources accumulated by the enterprise within the house. This method brings about enterprise growth where the enterprise or the operation is acquired in the form of one set. It can also be called as growth from outside in order to have a contrast with growth from within.