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BAA311 Business Strategy

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Course Code: BAA311
University: University Of Tasmania

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Country: Australia

Question:

“The key benefit of Mergers and Acquisitions, over Strategic Alliances, is that they lead to the development of and access to new knowledge, particularly as this external development activity is fundamental in an organisation’s strategic development of knowledge.”
Critically evaluate this statement, using academic literature and current business examples.

Answer:

The purpose of this essay is to provide a brief introduction about the priority of merger and acquisition strategy of an organization over strategic alliance. The essay aims to explain the meaning and scope of merger and acquisition in an organization.  There are basically three or four ways to deal with the process of development and expansion in an organization. Organic growth is an internal process that helps the management to expand their scope of business and activities in the target market. This type of strategy includes reconfiguration, reallocation, redeployment and lastly development of resources. Further, the external development factors are merger and acquisition, and strategic alliance (Cuypers, Cuypers, and Martin 2017). All the aspects are considered in helping the organization to grow and succeed but merger and acquisition is the best way that helps a business to expand in the market successfully. Further, more details about this aspect are discussed below:
Critical Analysis
Merger and acquisition has become a strategic choice for the growth of organizations and achievement of business goals including profits, long term survival and market dominance. The process of merger and acquisition helps a business to systematically grow in the external market. Further, it should be noted that both the terms merger and acquisition are used together and interchangeably as well, however both the terms have specified meaning in real. Sherman and Hart (2006) expressed that merger is a combination of two or more organizations; under this process the assets and liabilities of the sold firm is used by the firm that is buying the organization. In this way one organization merges into another organization. One significant fact under this type of association is that the firm that is best sold merges its identity into another organization that is buying the company; one company has to certainly loose its identity anyhow. Also, aspect of merger is that one or more existing organizations can merger into each other to form another new and different organization (Sherman 2018). The merged company contributes all its assets and liabilities into the merging company. The shareholder of the merged company is also being held by the merging organization. Further, according to Krishna and Vishwanath (2008), acquisition refers to the process under which one company purchases the substantial part of the securities of another organization that is being regarded as the target company. Acquisition can be in the form of co-operation or hostile as under this case the purchaser company overtakes a small or large part of the target company’s shares. Under this case a larger firm purchases a small firm; and acquisition is also called takeover (Howson 2017).
Further strategic alliance refers to the partnership of one organization with another under which they decide to share the resources and undertake a specific mutually beneficial project. Strategic alliance is like joint venture but it is less binding and involves less involvement. It is a mutually beneficial project under which each company maintains its autonomy while gaining new opportunities. Further, relating the concepts with the above mentioned phrase, it should be noted that among all the strategies developed in the market for organizational growth and development, merger and acquisition is so far the best strategy that the organizations should implement while developing their business strategically (Drury?Grogan 2017).
Further, it should be noted that the organizations should adopt the merger and acquisition strategic tool over the strategic alliance because it provides various types of benefits to the company with the help of which both the organizations can earn reputable income in the target market. The initial motive of merger is growth; it is regarded as the most important motive to initiate prosperity for the business. Further, growth is broadly divided into two alternatives that are internal growth and external growth. In the process of internal growth, the organization needs to invest in their resources on order to create facilities for expansion (Appelbaum, et al., 2017). But this process is a slow and ineffective process, so the organization should make use of the external expansion strategies that helps the business to effectively earn in the target market. It is a faster way to achieve growth and acquire revenue to achieve competitive goals as well. So, it should be noted that the process of merger and acquisition successfully helps the business in achieving growth process. Another reason due to which, organizations should make use of merger and acquisition strategy is due to operating synergy. Synergy is one of the most important reasons to go for merger in an organization (Shodhganga 2018). The process of synergy simply explains that the merger of organization will be more than the sum of value of the individual organizations merged. The sum would be more than the amount of the combination of the value of both the companies. Symbolically
V (A Co.) + V (B Co.) < V (AB Co.) V (A Co.): Value of A Company V (B Co.): Value of B Company V (AB Co.): Value of merged company This process of increase in the value of the firm with the reduction in costs helps the company to attain high revenue as well. Operating Synergy activity believes that the economies of scale occurs in the industry and prior to the activity of merger and acquisition, the companies operate their activities at the levels that  fall short in helping the company to achieve the potential assumed for the economies of scale. Revenue is enhanced and costs of production and other activities are saved by the company through merger and acquisition (Motis 2007). Further, one of the motives for applying the method of merger and acquisition is that it provides financial synergy to the organizations. Better credit worthiness is received to organizations as it helps the business in purchasing goods on credit basis easily. As the name of the organization is linked with another organization having good credit rating gives an advantage to the company in initiating bank loans and raise capitals in the market. Further, the process of M&A also reduces the cost of capital as it increases the authenticity of the organizations (Kansal, and Chandani 2014). This process also provides various benefits to the business, resulting to which the companies should adopt this process over strategic alliance. Merger and acquisition helps in diversification of risks for the organizations. When an organization comes produces a single product then there is high degree of risk as the demand and supply for that product can fluctuates the profit margin of the organization (Lebedev, Peng, Xie, and Stevens 2015). This aspect increases the level of risks for the organization. The diversification in the product segment also diversifies the risks for the firm, as with the help of this process the companies can easily segregate their risks in different activities. Resulting to which, failure in managing one product will not affect another products growth in the environment (Shodhganga 2018). So, the merger of the organization that is providing negative returns will automatically disburse the loss with other organization and subsequently attain stability as well. Apart from diversification of risk, the process of merger and acquisition helps the organizations to build a strong empire in the target market. It is always said that two is always better than one alone; similarly two organizations working together are better than one single organization fighting alone the market. With the aspect of merger, the company gets the advantage to manage large firms with more power that results in better accountability at work (Angwin, and Meadows 2015). However, it should be noted that merger and acquisition have some good aspects and the bad one as well. Not in all cases the companies attain success with the aspect of the merger and acquisition, there are numerous examples of companies that have failed due to joining their alliance with other company by using the process of merger and acquisition. Apart from adoption of this strategy, many organizations face problems in implementing the actions of merger and acquisition at workplace. Now, critically challenging the above mentioned all the concepts it should be noted that the companies face a hard time in adopting the merger and acquisition strategies for the business (Greve, and Man Zhang 2017). Loss of experienced workers for the organization is one of the biggest opportunity loss for the merged firm. It depends upon the discretion of the ruling organization to hire the existing employees of the merged organization or not; also if they are employed then also the employees require re-skilling according to the changing business requirements (Zollo, and Singh, 2004). Internal competition also arises in organization with the effect of M&A as employees create groups in which they work and thrive to perform better that other merged organization. Cost of the organization also increases with the effect of diversification. In the above stanzas the diversification activity is acting as a benefit for the organization however it can act as a threat as well. Also, duplication of work increase if two organizations involved in similar business activities merges into each other. Lack of proper management and leadership at workplace can also increase the costs of the business. If the organization is unable to understand the real need of M&A in the business then it can negatively affect their resources and costs as well. The level of uncertainty increases with the merger and acquisition alliance of the companies. Also, if the loss of the merged organization suppresses the activities of merger organization then instead of increasing the profits, this process can negatively affect the growth of the organization. Flexibility of the company is also reduced with this process; although the act of M&A is itself an innovative process initiated by the companies for the purpose of growth, however after that process flexibility is reduced (Dutordoir, Roosenboom, and Vasconcelos 2014). Furthermore, relating the above mentioned issues to the example of some companies it should be noted that the companies face issues in implementing M&A due to various reasons. Like, Abbey National and Bank of Scotland failed to materialize the M&A activities because of the inability of the senior managers to agree on same terms. It is important for both the parties to create a contract that is beneficial for them and lead the organization according. However, sadly the senior management of both the companies failed to do so that resulted in failure of the alliance (Bena, and Li 2014). On the contrary, talking about a successful merger, it should be noted that the alliance of the company Disney with Pixar perfectly helped both companies to succeed in the target market. In the above mentioned stanzas it was discussed that M&A might fail due to the overlapping and repetition of similar activities if both the companies are involved in same business. However, both the companies ditched this fact as they perfectly co-operated with each other and gained success in the entertainment industry. The collaboration introduced various other successful movies as well (Tanriverdi, and Bülent Uysal 2015).  One similar merger was of the companies Adidas and Reebok in the year 2005 for $3.8 billion. With the effect of this process the shares of the companies Reebok increased by 30% Adidas by 7.4 %. The process was a friendly takeover under which Adidas bought all the shares of Reebok and joined hands instead of competing. This type of alliance helped both the companies to eliminate competition against Nike and share resources and improve as well. The similar type of work of both the companies did not hamper the growth of collaboration nor the different corporate culture as well. Now explaining about the companies that merged and failed severely are America Online and Time Warner. The merger of these two companies is regarded as the biggest failure of all times; in the year 2001, the company AOL acquired Time Warner in the form of a mega merger for $165 billion but after the dot-com bubble burst, the value of the company subsequently reduced. This aspect resulted in the process of writing-off the goodwill of the company AOL (Tarba, et. al., 2017). The company also faced difficulty to grab the opportunity of internet based search advertising. However, the company faced difficulty in initiating communication post-merger and acquisition along with which difference in values and goals also hampered the overall operations of the companies (Brueller, Carmeli, and Markman 2018). Thus, in the limelight of above mentioned events the fact that should be noted is that the use merger and acquisition technique provides several benefits to the companies in current era. According to the statement mentioned at the beginning of the essay, it was evaluated that the collaboration of companies by the way of merger and acquisition is better than strategic alliance. The statement holds true according to the benefits and growth gained to the companies using this process. However, it cannot be said that M&A always helps the companies to grow in the target market. The essay also discussed some of the examples of the companies that failed due to the process of merger and acquisition. The above mentioned essay successfully depicted the critical view of the merger and acquisition in the external market. References Angwin, D.N. and Meadows, M., 2015. New integration strategies for post-acquisition management. Long Range Planning, 48(4), pp.235-251. Appelbaum, S.H., Karelis, C., Le Henaff, A. and McLaughlin, B., 2017. Resistance to change in the case of mergers and acquisitions: part 2. Industrial and Commercial Training, 49(3), pp.139-145. Bena, J. and Li, K., 2014. Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), pp.1923-1960. Brueller, N.N., Carmeli, A. and Markman, G.D., 2018. Linking merger and acquisition strategies to postmerger integration: a configurational perspective of human resource management. Journal of Management, 44(5), pp.1793-1818. Cuypers, I.R., Cuypers, Y. and Martin, X., 2017. When the target may know better: Effects of experience and information asymmetries on value from mergers and acquisitions. Strategic Management Journal, 38(3), pp.609-625. Drury?Grogan, M.L., 2017. Mergers and Acquisitions. The International Encyclopedia of Organizational Communication, pp.1-11. Dutordoir, M., Roosenboom, P. and Vasconcelos, M., 2014. Synergy disclosures in mergers and acquisitions. International Review of Financial Analysis, 31, pp.88-100. Greve, H.R. and Man Zhang, C., 2017. Institutional logics and power sources: Merger and acquisition decisions. Academy of Management Journal, 60(2), pp.671-694. Howson, P., 2017. Due diligence: The critical stage in mergers and acquisitions. UK: Routledge. Kansal, S. and Chandani, A., 2014. Effective management of change during merger and acquisition. Procedia Economics and Finance, 11, pp.208-217. Lebedev, S., Peng, M.W., Xie, E. and Stevens, C.E., 2015. Mergers and acquisitions in and out of emerging economies. Journal of World Business, 50(4), pp.651-662. Motis, J., 2007. Mergers and Acquisitions Motives. Toulouse School of Economics. Pp: 2-30. Sherman, A., 2018. Mergers and Acquisitions from A to Z. USA: Amacom. Shodhganga., 2018. Introduction to Mergers and Acquisitions [online]. Available from < https://shodhganga.inflibnet.ac.in/bitstream/10603/12642/5/05_chapter%201.pdf> [Accessed on July 5, 2018].
Shodhganga., 2018. Mergers and Acquisitions [online]. Available from https://shodhganga.inflibnet.ac.in/bitstream/10603/117606/9/09_chapter%201.pdf [Accessed on July 5, 2018].
Tanriverdi, H. and Bülent Uysal, V., 2015. When IT capabilities are not scale-free in merger and acquisition integrations: how do capital markets react to IT capability asymmetries between acquirer and target?. European Journal of Information Systems, 24(2), pp.145-158.
Tarba, S.Y., Ahammad, M.F., Junni, P., Stokes, P. and Morag, O., 2017. The impact of organizational culture differences, synergy potential, and autonomy granted to the acquired high-tech firms on the M&A performance. Group & Organization Management, p.1059601117703267.
Zollo, M. and Singh, H., 2004. Deliberate learning in corporate acquisitions: post?acquisition strategies and integration capability in US bank mergers. Strategic management journal, 25(13), pp.1233-1256.

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