The Impact Of Merges And Acquisition In The Global Economi
INTRODUCTION
What are the implications of mergers and acquisitions (M&A) for growth? Neoclassical theory is primarily concerned with why M&A occur and views them either as responses to industry shocks, such as new regulation, technologies, liquidity constraints, or competition or as responses to industry life cycles- growth, maturity, decline.
In today’s globalize economy, mergers and acquisitions (M&A) are being increasingly used world over for improving competitiveness of companies through gaining greater market share, broadening the portfolio to reduce business risk, for entering new markets and geographies, and capitalizing on economies of scale among other.
The last wave of M&A activity is a global one. It is primarily due to cross-border M&A operations. Researchers describe it as a wave of strategic megamergers occurring in industries undergoing deregulation, globalization and technological revolution. In that regard, M&A are an integral part of foreign direct investment (FDI).
The purpose of the paper is to analyze the impact of mergers and acquisitions (M&A) sales on economic growth. The analysis is conducted by sectors: primary, manufacturing and services. M&A sales are disaggregated by sectors and also into domestic and cross-border M&A sales.
To help analyze the potential implications of M&A for economic growth, we can relate the question to the endogenous growth literature. Part of the endogenous growth theory investigates the question of whether increased competition (decreased concentration) leads to growth.
Despite the fact that one-third of worldwide mergers involve firms from different countries, the vast majority of the academic literature on mergers studies domestic mergers. What little has been written about cross-border mergers has focused on public firms, usually from the United States. Yet, the vast majority of cross-border mergers involve private firms that are not from the United States.
Purchasers are usually but not always from developed countries and they tend to purchase firms in countries with lower accounting standards. A significant factor in determining acquisition patterns is currency movements; firms tend to purchase firms from countries relative to which the currency of the acquirer‟s country has appreciated. In addition, economy-wide factors reflected in the country‟s stock market returns lead to acquisitions as well. Both the currency and stock market effect could suggest either misvaluation or wealth explanations.
The volume of cross-border acquisitions has been growing worldwide, from 23 percent of the total merger volume in 1998 to 62 percent in 2013. Some of these cross-border mergers occur for exactly the same reasons as domestic mergers, e.g., synergies, market power, and/or managerial preferences. Yet, in an international context, there are a number of additional factors, such as cross-country differences in macroeconomic conditions, legal regimes, political systems, culture, regulatory environments, and tax systems, that could potentially affect cross-border mergers. Differences in valuation between potential acquirers and targets have been documented to be one motive for domestic mergers.
These valuation differences are likely to be even more important in an international context since movements in country-level stock markets and currencies provide additional sources of valuation differences.
Mergers and acquisitions are a topic of great debate in today’s business world. Some proponents argue that mergers increase efficiency whereas opponents argue that they decrease consumer welfare by monopoly power.
The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies – at least, that's the reasoning behind M&A.
This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.
In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEO’s agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly – that is, when the target company does not want to be purchased – it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors employees and shareholders.
Synergy
It is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:
Staff reductions – As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.
Economies of scale -. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies – when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.
Acquiring new technology – To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
Improved market reach and industry visibility – Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
That said, achieving synergy is easier said than done – it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two.
Acquisitions
An acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another – there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile.
In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.
Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares.
Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.
What are some motives for a merger?
The first motive, some might say the most important of a public company, is to increase profitability and shareholder wealth by an increase in stock prices. An increase in share price means an increase in shareholder wealth.
Another motive might be diversification of industry. This is one way to lessen risk of a one-product corporation. If the firm is a diversified corporation, they become less volatile. For example, two corporations can combine resources and become more efficient. This leads to economies of scale. Economies of scale can be defined as producing more at increased efficiency levels This is basically being able to produce more at cheaper rates. The bigger a corporation is, the moreefficient its inputs of capital and labor can be. Another motive for merger is geographic expansion. If one has a corporation in one area and want to expand to other areas, it is usually cheaper to merge with a firm in the same industry in a different location. It is also important to note that there are several anticompetitive effects that are also motives formergers. Firms might choose to merge to lessen competition in the marketplace or to achieve monopoly profits.
The focus of this research is to better understand market reactions to mergers and their impact in the Global Economy. This paper also aims to find a reliable, consistent change in shareholder wealth before the announcement and after the consummation of the merger.
LITERATURE REVIEW
The corporation is a complex organism evolving over time. Part of the evolution is with corporate culture and traditional aging of a corporation, but the area of evolution this paper focuses on is mergers and acquisitions. Over time, mergers and acquisitions have been increasingly important to the evolution of the corporation. There have been four merger waves and a modern movement in corporate merger history. According to Gaughan (1996), the first wave took place from 1897 to 1904. The mergers in this wave were mostly in the manufacturing and mining industries. One of the most famous mergers h they become an entirely new public corporation with tradable shares.
Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.
What are some motives for a merger?
The first motive, some might say the most important of a public company, is to increase profitability and shareholder wealth by an increase in stock prices. An increase in share price means an increase in shareholder wealth.
Another motive might be diversification of industry. This is one way to lessen risk of a one-product corporation. If the firm is a diversified corporation, they become less volatile. For example, two corporations can combine resources and become more efficient. This leads to economies of scale. Economies of scale can be defined as producing more at increased efficiency levels This is basically being able to produce more at cheaper rates. The bigger a corporation is, the moreefficient its inputs of capital and labor can be. Another motive for merger is geographic expansion. If one has a corporation in one area and want to expand to other areas, it is usually cheaper to merge with a firm in the same industry in a different location. It is also important to note that there are several anticompetitive effects that are also motives formergers. Firms might choose to merge to lessen competition in the marketplace or to achieve monopoly profits.
The focus of this research is to better understand market reactions to mergers and their impact in the Global Economy. This paper also aims to find a reliable, consistent change in shareholder wealth before the announcement and after the consummation of the merger.
LITERATURE REVIEW
The corporation is a complex organism evolving over time. Part of the evolution is with corporate culture and traditional aging of a corporation, but the area of evolution this paper focuses on is mergers and acquisitions. Over time, mergers and acquisitions have been increasingly important to the evolution of the corporation. There have been four merger waves and a modern movement in corporate merger history. According to Gaughan (1996), the first wave took place from 1897 to 1904. The mergers in this wave were mostly in the manufacturing and mining industries. One of the most famous mergers happened during this period – it was “the first billion dollar mega merger deal when U.S. Steel, founded by J.P. Morgan, later joined with Carnegie Steel, founded by Andrew Carnegie, and combined with its other major rivals. The resulting steel giant merged 785 separate firms. At one time U.S. Steel accounted for as much as 75% of the United States’ steel making capacity (Gaughan, 1996).” This is one example of a large firm created by merger still in existence today. But, U.S. Steel has seen its heyday and is now barely in existence due to overseas cost efficient production.
The second wave occurred between 1916 and 1929. It is surprising that so many mergers occurred during this period, because the antitrust laws (Sherman and Clayton Acts) were enacted during this time to deter monopoly action. This wave came to a crashing halt on October 24, 1929, Black Thursday (Gaughan, 1996). The third wave was between 1965 and 1969, also known as the conglomerate period (Gaughan, 1996). Many large firms were created during this period. The fourth merger period was from 1981-1989 (Gaughan, 1996). During this wave, mergers became larger and some even international. The current wave of mergers occurred during the mid to late 1990’s. This was a time of great economic gains and usually with gains comes the possibility of a merger or an acquisition.
Important facts to know about mergers are that they are regulated by antitrust laws and the Department of Justice. Antitrust laws include the Sherman Act of 1890 and the Clayton Act of 1914.
The meaning of these laws has evolved over time, while at first, they were loosely enforced because the government did not have the resources to fully enforce the laws, but now, these laws play a huge role in the workings of corporations.
There are three major types of mergers: horizontal, vertical, and conglomerate. A horizontal merger is a merger that is between direct competitors in the same geographic and product markets (Waldman, 2001). A vertical merger involves corporations that are in different stages of manufacturing (Waldman, 2001). For example, a tire manufacturer would merge upstream with a rubber tree farm. The last major section of mergers is conglomerate mergers. These involve corporations that operate in different product or geographic markets (Waldman, 2001). This study looks at mergers across type and does not focus on only one category.
Despite the fact that a large proportion of worldwide merger activity involves firms from different countries, the voluminous literature on mergers has focused primarily on domestic deals.
While this literature is also relevant to understanding international mergers, it does not address a number of factors related to country-based differences between firms. Nonetheless, there has been some work on cross-border mergers, much of which either lumps together mergers with other international investments as FDI or considers solely mergers between public firms.
Much of the earlier work on cross-border mergers focuses on synergies, marketing ability, or technological advantages to explain why a foreign firm would value domestic assets more highly than would a domestic firm (see Graham and Krugman (1995) for a summary). Other factors proposed include trade tariff-jumping, tax incentives, and macroeconomic conditions. Empirical work focuses on explaining the general pattern that FDI flows from developed to less developed countries (e.g. Cushman (1987) and Swenson (1994)).
However, none of these studies provide theoretical justification for a relation between currency movements and cross-border mergers or other components of FDI. Froot and Stein (1991) suggest one such story, in which wealth effects matter because information problems in financial contracting cause external financing to be more costly than internal financing. When a firm’s value increases, so does its access to capital relative to alternative bidders whose value did not increase by as much. Consequently, when a potential foreign acquirer’s value increases, for example through unhedged exchange rate changes or stock-market fluctuations, then the potential foreign acquirer can bid more aggressively for domestic assets than domestic rival bidders. In equilibrium, relative value changes lead to an increase in cross-border acquisitions by firms in the relatively wealthy country. Because this explanation for a relation between currency movements and cross-border mergers is based on asymmetric information, it is likely to be particularly relevant in the case of private targets, for which asymmetric information tends to be high relative to otherwise similar public targets.
An alternative explanation for the relation between price levels and cross-border mergers stems from differential mispricing of stocks between countries. Shleifer and Vishny (2003) develop a model in which managers of an overvalued acquirer issue shares at inflated prices to buy assets, ideally, an undervalued or at least a less overvalued target. This transaction transfers value to the shareholders of the acquiring firm by arbitraging the price difference between the firms‟ stock prices. This model seems particularly applicable in an international setting, since differences in valuation are likely to occur because of either movements in exchange rates or stock prices.
There has been some recent work on cross-border mergers that has mostly studied publicly-traded firms, and has focused on reasons for mergers other than valuation, such as corporate governance, foreign institutional ownership and the formation of the European Union. Rossi and Volpin (2004), Bris and Cabolis (2008) and Bris, Brisley, and Cabolis (2008) all consider governance-related explanations: Rossi and Volpin (2004) construct country-pair samples based on deals involving public firms and find that differences in investor protection affect the incidence of cross-border deals. Firms in countries with weaker protection tend to be targets of firms from countries with stronger protection, presumably because the better investor protection provides an incremental source of value. Similarly, Bris and Cabolis (2008) find that the better the shareholder protection and accounting standards in the acquirer‟s country, the higher the merger premium in cross-border mergers relative to matching domestic acquisitions, while Bris, Brisley and Cabolis (2008) find that the Tobin‟s Q of an industry increases when firms within the industry are acquired by foreign firms coming from countries with better corporate governance.
Chari, Ouimet and Tesar (2009) find that acquirers from developed markets experience positive and significant abnormal returns when targeting firms in emerging markets. Developed-market acquirers benefit more with weaker contracting environments in emerging markets and in industries with high asset intangibility. Kumar and Ramchand (2008) find evidence suggesting that the international takeover market improves corporate governance standards across countries. Ferreira, Massa and Matos (2009) find that foreign institutional ownership is positively associated with the intensity of cross-border M&A activity worldwide, which could occur for a number of reasons, including foreign ownership facilitating the transfer, foreign ownership being correlated with more professionally managed companies, or foreign owners being more likely to sell to foreign buyers than local owners.
THE CONCEPTUAL FRAMEWORK
Reasons for mergers and acquisitions are numerous and include:
• to diversify or expand markets;
• to acquire particular production technologies;
• to take advantage of work forces with particular skills; or
• to benefit from "good opportunities" to take over a corporation.
These motives are ultimately related to a common objective: maximizing profit or returns for shareholders.
Profit for a given period (month, year, etc.) is defined simply as the difference between total revenues from the sale of a company's goods and services and the costs incurred to purchase the factors of production needed to produce these goods and services over the period in question. In reality, there are many different factors of production.
The inclusion of the capacity utilization rate may seem surprising. In response to changes in their environment, corporations may decide to change their production levels without altering their demand for other factors. Suppose, for example, that the demand for a product declines. If the corporations that supply this product expect the decline to be temporary, they may decide to reduce their capacity utilization rate. This implies under-utilization of all factors of production, including labour. However, this option, which reduces profits in the short-run, could prove beneficial in the long-run. Had the corporation reacted, instead, by cutting jobs, the costs associated with dismissing people and then re-hiring could have been higher than the costs associated with the underutilization of factors. This process would thus generate losses which could be higher than the losses associated with reducing the capacity utilization rate. It therefore appears possible and, in some cases, profitable for corporations to change their capacity utilization rates rather than their demand for other factors of production.
In order to produce the goods and services they sell, corporations use labour and various stocks of capital in specific proportions. Following a takeover, corporations may decide to change their utilization of various factors of production. For instance, when corporations attempt to reorganize or increase efficiency, they often decide to reduce the number of jobs. This has an immediate impact on productivity and profit.
However, the use of some other factors of production, considered fixed in the short run, can also be modified without having a strong, immediate impact on profit (other than through direct investment costs). Such factors are physical, technological and human capital. In changing their production methods, corporations may decide to change the proportion of each of these capital stocks. They could increase their capital/output ratio by increasing gross fixed capital; they could attempt to strengthen their technological advantages by increasing their investments in research and development; or they could change the skill mix in their work force by increasing their investments in education and job training.
These measures are aimed at changing production processes in order to improve profitability. They only take effect gradually over the long run. In the short run, profit is not necessarily positively affected by these new investments, since only current expenditures are included in calculating profit. Corporations that are restructuring might thus accept a temporary, short-term reduction in profit. That is not to say that the takeover is not profitable. In this case, the short-term decline in profit is only temporary, and the long-term profit increase is presumably strong enough to compensate for the short-term decline.
Event Studies and the Efficiency of Mergers
The Conventional Wisdom
The evidence from event studies on the efficiency of mergers is so extensive and consistent that a brief summary suffices. Acquisitions always entail a large gain for the target firm’s shareholders over the market value of the freestanding entity. The proportional gain if anything has been rising over time and amounts to a premium of 30 percent for the change in corporate control via takeover, 20 percent via merger (Jensen and Ruback 1983). The average return to the bidding firm’s shareholders is less clear. Some studies have found small but statistically significant gains, others small losses. It seems safe to conclude that the bidder’s shareholders approximately break even. A bundle for the target’s shareholders plus zero for the bidder’s still sums to a bundle, supporting the conclusion that mergers create value and accordingly are economically efficient.
These results evidently invite the conclusion that mergers are profiable and therefore socially desirable. Yet the event studies themselves leave important doubts. Have we really established that the dollar value of the gain to bidder and target taken together is positive? Acquiring firms are typically much larger than their targets, and the sum of the target’s proportionally large gain and a zero-mean and variable change in wealth.for the bidder need not sum to a significant positive value.
Firth (1980) found for British mergers that the mean sum is negative but insignificantly different from zero. For the United States, as Roll (1986) pointed out, relatively few studies have performed the exercise of calculating and testing the significance of mean dollar-value measures of gain, and those have obtained insignificant positive values. Although we shall continue to treat a positive ex ante dollar value of mergers as a stylized fact for purposes of this paper, the "fact" is not established with statistical confidence.
A second question arises for the bidding firms. If their shareholders on average get nothing from deals that absorb .much managerial time and other transaction costs, what keeps the bidders in the game? It is suggested that a target (or its investment banker) can readily stage an auction that puts bidders into a Bertrand competition that drops all the surplus into the outstretched hands of its own shareholders. That may be true. However, if the average bidder’s shareholders break even, that means they lose about half the time. Do we call this random noise, or do those shareholders correctly perceive that their wealth is impaired? This thought certainly raises a question about the motives of bidders’ managements, even if it does not impugn the creation of value by the average merger.
Some event studies have implicitly addressed this problem of what the bidder’s shareholders are valuing. It is not necessarily the individual merger against the alternative of "do nothing." The financial resources expended on the merger at hand might have been used instead for another investment in physical or corporate assets that would also create value, though not so much. Or the market may value a bidder’s larger strategic plan that entails a series of mergers and (perhaps) other transactions; then its valuation of the individual merger "event" rates this transaction not against "do nothing" but for its efficacy in pursuing the preannounced strategy. Empirical evidence has given this hypothesis only mixed support. Be that as it may, doubts about what the market is valuing ex ante do nibble ominously at the claimed sufficiency of these valuations for establishing the expected productivity of merger transactions.
A third concern with the event studies arises from the behavior of market valuations following the "event"–the announcement date of the merger or (in a few studies) its date of consummation. At the moment a merger is announced, securities-market participants react with what information they have at hand. As time passes, they can invest in securing more information, and also a good deal of previously confidential information is likely to be revealed. Expectations are likely to be refined, but no obvious bias should carry this adjustment either upward or downward. If the managers who contracted the merger hold insider information on its productivity, of course, the post-announcement valuation would rise. However, the studies that have followed post-announcement valuations for bidders have observed a change that is usually negative and (when negative) statistically significant. The studies range in temporal coverage from a month or so following the announcement to several years after the consummation.
The Causes of Mergers
Mergers occur when two or more companies join together to form a single company. Many explanations have been supplied as to why mergers occur
.According to neo-classical economic theory, mergers occur as the result of a profit-maximizing behaviour. Companies may wish to merge because they want to better their productive, distributive, and/or financing capacity by achieving economies of scale or scope. Or they might wish to increase their market power, thereby enhancing the monopolistic characteristics of the market they operate in.
Another reason is the search for cost efficiencies and synergies, deriving for instance from the acquisition of technology or of intangible assets such as the knowledge of the market. Also, mergers might occur to displace inefficient management. There are however also other, non-profit maximizing reasons, related to managerial objectives. Especially in large companies, when ownership is spread among thousands of shareholders, managers may have plenty of power to pursue their own goals, like maximizing sales or growth; reducing cash-flow risks; or simply trying to make themselves look grand. In such circumstances managers can initiate a merger not to maximize the value of the company (i.e. the net present value of future profits), but their own utility.
The Causes of Mergers: the Market for Corporate Control
When corporate ownership is separate from corporate governance, managers representing shareholders are assumed by neo-classical economic theory to pursue the goal of value maximization, i.e. to maximize the net present value of future profits. However, this is not always the case. Managers often pursue objectives other than pure value maximization (Jensen and Meckling, 1976). The question arises of how to detect, punish and rectify such behavior.
In the absence of effective internal control mechanisms to force managers to act in the best interest of the corporation, the market provides a good external disciplinary device in the form of hostile mergers, or take-overs. Technically, the difference between a take-over and a merger is that in a take-over the raider buys shares in the target company directly from its shareholders, while a merger implies negotiations between the raider and the management of the target. The target's senior managers in a hostile take-over bid are well aware that they will be replaced if the bid is successful, and are therefore unlikely to surrender without a fight. They have a few ammunition available, and these consist of devices aimed at increasing the take-over costs to the raider, or at imposing new conditions that need being met before the take-over can take place. Some such devices require the shareholders' approval, some others do not. They are very well developed in the US, and are being imported into the UK at considerable speed.
Defensive measures that require the approval of the target shareholders include severance contracts (so-called "golden parachutes"), supermajority amendments, dual class recapitalization, and reductions in cumulative voting rights. Defensive measures that do not require the target shareholders' approval are Court litigation, targeted stock repurchases (so-called "greenmail"), and poison pills. Golden parachutes are contractual provisions to compensate managers in case of dismissal following a take-over. Using supermajority amendments allows management to increase the majority of voting shares required for approving a merger. Dual class recapitalization involves splitting the equity into two classes of shares with unequal voting rights, or with and without voting rights. There is evidence that shares carrying voting rights are worth more (Lease et al., 1983). With cumulative voting rights it is possible to a minority group to elect a member on the board of directors even against the will of the majority of shareholders; so that reducing these rights gives more power to the management to resist a takeover bid. Greenmail is that action by which the management of the targeted company buys back the raider's holding at a premium. Finally, poison pills make take-over extremely expensive and are thus very successful; they are usually set into action when one single acquirer obtains a certain proportion of shares; at that point the other shareholders gain the right to either buy extra-shares or sell their shares to the target at a very good price.
The Causes of Mergers: Cross-Border Mergers
Similarly to countries' foreign trade, also cross-border mergers can be explained in terms of comparative advantage. As we have discussed above, there is a market for corporate control, and mergers are the instruments by which the market operates. Not all countries are equally endowed when it comes to competence for governing companies, just as different countries have different production capabilities. As pointed out by Hannah (1993), production processes and markets are becoming increasingly complex; moreover, the skill mix of different countries workforces is varied. Thus it pays to substitute national trade with intra-firm trade within single multinational companies. In such a way, the corporate governance is exercised by the country with the comparative advantage in that field, while subsidiaries around the world are built or acquired according to the comparative production advantages of the countries they are in. Cross-border mergers then can be viewed as an important instrument for an efficient allocation of resources. Sizeable synergies can be achieved through them.
Together with the exploitation of comparative advantages, cross-border mergers can be prompted by the desire to expand into a new market. The acquiring company will then not only acquire the usual tangible assets of the target, but also intangible ones -the most valuables- as the knowledge of the market and business practices. The creation of such “information synergies” is one of the most appealing features of cross-border mergers, as Davis, Shore and Thompson (1993) point out. Such synergies are best exploited, and thus more cost-saving, when the merging partners have the same objective, i.e. they target the same customers, but with complementary characteristics (for instance one of the partners is a famous brand in its country while the other is strong in distribution).
The Consequences of Mergers: Market Structure and Welfare
The analysis of the effects of mergers on economic welfare is set in the structure-conduct-performance paradigm developed by Bain (1951, 1956). According to this well-known view, it is the structure of the market which determines its performance, via the conduct of the market participants. By performance it is intended the ability of market participants to charge a price which is over and above the competitive price, thereby earning a positive mark-up. The degree of concentration in a market has long been considered one of its major structural characteristics. Thus it can be argued that by facilitating collusion or by reducing a competitive market to an oligopoly, high concentration determines the performance of market participants as measured in terms of profits. The completion of a merger in an industry reduces the number of market participants and can therefore result in enhanced collusion or tighter oligopoly. On the other hand, mergers can induce synergies and cost efficiencies. Williamson (1968) pointed out that the net effect of a merger on economic welfare is given by the balance of the trade-off between the price increase due to a reduction in industry output, and the price reduction due to efficiency gains. Thus the main social costs that can arise from a merger are associated to its anti-competitive effects. Industrial economists have developed two groups of models to explain this effect: collusion models, and non- cooperative oligopoly models.
A merger, by reducing the number of competitors in the market, makes it more likely for them to collude. The outcome of collusion can be much worse than that of monopoly. First of all, it involves waste as larger and more efficient firms may produce below capacity, while inefficient firms may remain in the market rather than being wiped out.
This increases prices even further. Secondly, enforcing collusive agreements is very expensive as it involves a great deal of monitoring to make sure nobody cheats (Baumol, 1992). The threat of collusion emerging from a merger is thus one of the main preoccupations of anti-trust authorities throughout the world.
Collusion however is not sustainable in the long run unless there are barriers to entry in the market. Barriers to entry were first defined by Bain (1956) as all those factors that make it possible for incumbents to enjoy supra-normal profits whilst making entry to the market undesirable. The existence of high economies of scale is the typical Bainian barrier: the incumbents can set pre-entry output at such high levels that new entrants would be forced to sell at below cost. Baumol et al. (1982) showed that this kind of barrier does not operate unless the industry is characterised by high sunk costs. Cost advantages or switching costs also represent barriers to entry (Schmalensee, 1991). Stigler (1968) redefined entry barriers as costs the entrants have to bear while the incumbents did not have to. If this definition is adopted, economies of scale cannot be considered as barriers.
Collusion models thus support the idea that mergers, by increasing industry concentration, may lead to collusive behaviour, and identify factors explaining why this may be so. However, these models do not offer clear predictions about what actually is going to happen after a merger has taken place. These are questions which have to be addressed empirically. Also, it is not clear how big entry costs need to be or for how long must investment be committed to deter entry (Hay and Werden, 1993). Non-collusion, or oligopoly models give clearer predictions.
The private unprofitability of a merger in the Salant et al. model derives from the assumption of constant marginal costs. Perry and Porter (1985) relax this assumption and develop a model with increasing marginal costs and constant returns to scale. Due to the constant-returns technology assumption, any merger necessarily results in decreased output. Then any two firms will find it profitable to merge and form an oligopolistic firm, provided the increase in market price is high enough to offset the decrease in post-merger output. As to social welfare, Perry and Porter (1985) show that it is more likely to increase if the market shares of the merging partners are small and the industry is highly concentrated. From the assumptions underlying the Perry and Porter (1985) model, the output response to a decrease in the rivals' output is larger for larger firms. Then if there are large firms in the market, i.e. if the market is concentrated, any reduction in the output by the merged firm will be met by large responses from the rest of the industry.
When a merger occurs, there are three possible scenarios. First, if all firms have constant and equal marginal costs, as in Salant et al. (1985), the only reason to merge is to increase market power. Second, if firms' marginal costs are different then a merger could help to better allocate output away from the firm with higher marginal cost, without developing a better technology. This is the case portrayed in Perry and Porter (1985). Farrell and Shapiro (1990) prove that the only way for the market price to fall after merger is if the marginal cost of the new firm is much lower than those of the merging partners. This reduction will not be sustainable in the long run, as all the other firms in the market will adopt the cost efficient technology. Finally, mergers can create synergies by, say, combining two complementary technologies. This is the only case in which a merger can actually generate a price reduction, and Farrell and Shapiro (1990) provide the necessary and sufficient conditions for it to happen: the smaller the industry elasticity of demand, and the larger the market shares of the merging partners, the larger synergies will be needed to generate a fall in price.
All the oligopoly models presented above deal with mergers between firms operating in a single country. However, in many countries a great deal of competition arises from goods produced abroad, or by foreign owned firms. Barros and Cabral (1994) extend the Farrell and Shapiro (1990) model to the case of an open economy, providing welfare analysis and policy hindsight for the regulator concerned about the effects of mergers in the domestic economy. They also consider the case of a single market made up by many different countries, like the European Union. In this case, a merger can generate welfare effects which are overlooked by domestic regulators: the situation therefore calls for the intervention of a supra-national authority.
In the case of an open importing economy, Barros and Cabral (1994) find that a merger has a positive net welfare effect on domestic firms outside the merger and consumers if the sum of the market shares of the merged firm and foreign producers is less than the sum of the market shares of the other domestic firms in the industry, weighted by their respective conjectural variation terms. This result does not depend on whether the merging partners belong to the same country or to other countries, and it implies that the existence of foreign competition makes it more difficult for a merger to generate positive welfare effects. In the case of an open exporting economy, consumers are very few but the domestic firms tend to be quite large. Then the welfare effects of mergers tend to be overwhelmingly positive.
The case of a single market made up of different countries is different as the welfare effect from a merger from the viewpoint of the market as a whole might be different from the welfare effect considered from the perspective of the country where the merger takes place. Of course, the condition for a merger to be welfare-enhancing from the point of view of the market as a whole is the same as in Farrell and Shapiro (1990). Barros and Cabral (1994) show that from the point of view of any one country in the Union, a merger has a positive net welfare effect on domestic firms and consumers if the difference between the country's shares in the Union total demand and supply, plus the market share of the merged firm is less than the sum of the market shares of the other domestic firms in the industry, weighted by their respective conjectural variation terms.
Thus, if the country is a net exporter the other firms' weighted market share need to be larger in order for the merger to have a positive effect on welfare. The welfare effects from the perspective of any country and of the Union will only coincide if the country's shares in total demand and supply are identical. This of course has serious repercussions for policy, as that would be the only case when there is no need for a supra-national authority to intervene.
Today’s headlines may be dominated by the global economic downturn, but when privately held businesses (PHBs) are asked about their plans for the next three years, a more balanced picture emerges.
Findings of the Grant Thornton IBR 2009 show the medium term outlook for M&A amongst PHBs remains robust. This is despite the current difficult economic environment and a drop in the value of the global M&A market in 2008.
There are some important regional differences, notably that companies in BRIC economies (Brazil, Russia, India and mainland China) are planning to be much less acquisitive. But the medium term acquisition plans of PHBs in mainland Europe have actually increased and those in many other developed economies have held comparatively steady.
Globally, 57 per cent of respondents stated that access to new geographic markets was the most important driver behind their acquisition plans. However, here too there were some important regional differences. In India, acquiring new technology and new brands was given as the most important driver (50 per cent). Only 31 per cent cited access to new geographic markets, confirming the importance of technology and brands for Indian PHBs as they continue to develop.
For those PHBs with the financial capability to make an acquisition, the next twelve months is likely to be a ‘buyers market’ and offers the prospect of picking up strategic acquisitions at attractive valuations. However, for PHBs looking to expand through M&A, it has never been more important to make sound strategic decisions based on solid due diligence and ensure the correct financing structure is in place to cope with possible downsides in the short term as a result of the sluggish economy.
Not surprisingly, our survey also reveals that the turmoil in the financial markets has reduced the appetite of PHBs to raise capital through a public listing, with the proportion of respondents globally falling from 22 per cent to a meagre 10 per cent, with the steepest fall in interest amongst the BRIC economies.
Unsurprisingly in light of the economic difficulties, the results show a fall in business owners anticipating selling their business in the next three years, down from 8 per cent to 6 per cent. For those business owners who can choose when to exit, some may decide to ride out the current economic storm hoping they will achieve a better valuation as the world economy improves.
However, not every business loses value in a recession and for those planning to sell in the immediate future, exits at attractive valuations will still be possible, especially for high performing PHBs with robust earning streams. Soundly managed businesses that perform well during the downturn represent a choice target and will continue to attract interest from corporates and private equity houses looking to acquire high quality assets.
Overall, 37 per cent of PHBs in the region expect to make acquisitions in the next three years, up from 30 per cent last year. There were some notable differences across individual countries, for example Poland showed the greatest increase (up 29 per cent to 59 per cent) whereas more modest rises were recorded in France, Germany and Sweden, and fewer respondents in Denmark and Italy anticipated making an acquisition in the next three years (down to 41 per cent and 20 per cent respectively).
For European businesses, access to new geographic markets was considered the most important driver behind their acquisition plans followed by a desire to build scale.
BRIC economies
Overall, PHBs in the less established M&A markets of Brazil, Russia, India and mainland China show the biggest changes since our last study, with only 41 per cent of companies intending to make acquisitions in the next three years compared to 59 per cent last year . Mainland Chinese companies in particular, which showed a burst of enthusiasm for dealmaking last year, have revised their plans in the new climate, with only 41 per cent now looking for targets as against 67 per cent previously.
Indian PHBs are also much less acquisitive (down to 30 per cent from 46 per cent), although Brazilian and Russian companies are only marginally less likely to be seeking targets than last year.
Nonetheless, even among mainland Chinese and Indian companies there remain strong strategic factors encouraging them towards transactions.
Mainland China and India also show the biggest fall in businesses planning a public listing in the next three years. Whereas a year ago 60 per cent of PHBs in mainland China and 37 per cent in India were bullish about listings, this year the figures have dropped to 20 per cent and 22 per cent respectively.
A number of other developing economies are less positive about the future too, although the picture is mixed. Mexico is a dramatic case: last year 50 per cent of respondents had acquisitions plans, but now only 23 per cent say they intend to buy a company in the next three years. Overall, only 42 per cent of Latin American PHBs are acquisitive this year compared to 51 per cent last year. By contrast, PHBs in Australia are marginally more acquisitive compared to last year. However, they have seen a significant drop in the proportion of PHBs planning on selling up. In Australia, only 14 per cent said they would sell in the next three years compared to 22 per cent last year, reflecting falling valuations amid the general slowdown in China and Southeast Asia.
Globalization through merges and acquisitions
The environment in which individuals and organisations function is rapidly changing and the impact of these changes on individuals and organisations are manifold. Globalisation, and the resulting mergers and acquisitions, reengineering and downsizing, have had major impacts and consequences on individuals and organizations.
The two areas are dynamically linked. New market opportunities, increased competition, changing business models, privatisation, foreign direct investment, rapidly developing technologies, free trade initiatives, and trade liberalisation that are all associated with globalisation have resulted in organisations turning to mergers and acquisitions, downsizing and reengineering.
Jones (2002) describes the characteristics of globalisation as “key drivers” in organisational restructuring: in order to be more effective and competitive in the global economy, organisations are undergoing massive reengineering and downsizing, labour intensification, an investment in new technologies and a change in organisational strategies.
Appelbaum, Schmidt, Peytchev & Shapiro (1999:436) state that downsizing is an inevitable result of “technological advances, business process reengineering, and a trend of cost-cutting brought on by economic downturn and a globalisation of the economy”. Morrison (2003) adds that free trade initiatives lead organisations to reengineer and downsize so that they remain competitive in the global economy. In turn, mergers and acquisitions (M&As) are believed to have accelerated globalisation by way of foreign direct investment (FDI), which have inclined towards M&AS rather than other types of investments.
Furthermore, because M&As are now taking place across most sectors and industries, it reflects an additional need to reengineer and downsize in order to strengthen competitiveness in the global economy. Like downsizing is seen to be a direct result of reengineering, M&As is also increasingly bringing it about. The increasing lack of trade barriers because of globalisation, as well as liberalisation and privatisation, have facilitated multinational corporations (MNCs) access to acquisitions in other countries which help them to secure new markets as well as to acquire human and technological resources from these countries. Also, because of increased imports and falling demand for local products, market pressures have compelled organisations to reengineer and downsize.
THE DETRIMENTAL EFFECTS OF GLOBALISATION
In SA, the government’s focus on globalisation and its’ decision to liberalise and intensify trade has had detrimental effects on individuals and work. When the mining sector reengineered to adjust to market prices and global competition, 100,000 jobs were lost. When the clothing and textile industries downsized in response to global pressure, employment dropped drastically from 300,000 to 185,000 workers.
Globalisation has in many ways also impacted on the type of labour that is now in demand in SA. The current labour market favours skilled labour and with the intensification of trade, the demand for skilled labour has increased. This has resulted in massive downsizing of unskilled labour. The liberalisation of trade has also meant cheaper goods being available, creating a competition with local goods, especially in the clothing industry.
Went (2000) discusses four aspects of the impact of merges and acquisitions in globalisation that has changed the functioning and organisation of the world. First, the world economy is becoming one, as global markets replace national markets. Second, the influence of MNCs keeps growing and global companies are now organising employment, production and distribution globally, with major consequences for organisations, work and employees. Third, power has shifted away from governments to supranational organisations like the World Bank, International Monetary Fund (IMF), G7, and the World Trade Organization (WTO).
Fourth, macroeconomic policies are being globalised, with the neoliberal paradigm becoming unchallenged globally. Full employment under these policies are no longer a goal, instead the emphasis is on export-oriented growth, free trade, labour market flexibility, market policy, liberalisation and privatisation.
Globalisation can be considered under the following subheadings: trade, mergers and takeovers, technology, the global assembly line, multinationals and regional blocs (Went, 2000). The world economy is therefore becoming more open. There is also a rapid increase in M&As and FDI. FDI especially has prompted globalisation faster than international trade. By 1997, 143 countries had adopted special laws to encourage FDI and most countries have adapted their economy in some way to attract foreign investors. World FDI stock, which is the capital base for MNCs, increased to around $3.5 trillion this year. SA is one of the many countries working to attract FDI.
FDI includes export-oriented investment and M&As. The advantages of FDI are: growth, higher income, lessening of poverty, increased tax revenue, technology and management skill transfer, incentive structures, improvement in skills and wages in the labour force, increased demand for local producers and suppliers, and increased access to export markets. The downsides are: damaging competition for local firms, market dominance by MNCs, social disorder, environmental degradation, and a volatile economy.
Advantages of globalisation such as increased employment, new technologies, new types of work organisations and a shift from „blue-collar‟ to „white-collar‟ work, have largely benefited industrialised countries. For developing countries like SA, globalisation has meant an increase in the assembly line, low-quality jobs, little option for advancement, and an increase in insecure, casual employment. This has a major impact on occupational health, which is generally less evident in developing countries.
Mergers and acquisitions, or takeovers, involve the amalgamation of two organisations, for rapid growth and strategic change. The reasons behind M&As are: diversification or vertical integration; increased access to global markets, technology or resources; and gaining greater innovation, or resource sharing. Globally, in 2002, there were 23,500 M&A deals worth approximately $1.4 trillion. Failure of M&As result from: insufficient due diligence processes, lack of strategic rationale, impractical expectations of synergy, paying too much for the combination, and incompatible corporate cultures.
According to reports, M&As in SA rose sharply in 2007, total deals increased 81% from the previous year, the top ten deals were worth R208.1 billion, and there was a 51.5% increase in the top ten deals from 2006. The report stated that SA mirrored international trends in terms of private equity deals: “This trend was most evident in the sale of clothing retailer Edcon to a private equity consortium, which was the third- largest overall deal in SA last year and the largest private equity deal in emerging markets as a whole” (SAinfo report, 2008:1). The main force behind M&As is Black Economic Empowerment (BEE), in keeping with the aim to create a new and inclusive SAn society. The largest M&A deals were transnational and global, so that organisations would gain a larger presence.
Another report found that the high rate of M&A deals were directly related to BEE in that BEE ensures a business’s sustainability, and in this way SA “offered the greatest opportunity for a new generation of business leaders” (2007, SAinfo report). It was found that globalisation is directly linked to the increase in M&A deals in SA, with foreign direct investment (FDI) playing a major role in M&A deals: “The year’s biggest announcement was the 20% investment by China’s largest bank, Industrial and Commercial Bank of China (ICBC) into Standard Bank. Valued at R36.7 billion, the deal was also the largest investment made into Africa in 2007” (SAgoodnews report, 2008:1). The reason behind this is that SA’s emerging markets is attracting international interest as it has shown higher growth than developed markets.
Many foreign private equity groups find the SAn market attractive because of the rate of growth, its‟ richness in resources and its’ infrastructure development opportunities. BEE is also thought to play a major role in that it provides the major difference between international and local M&A deals. The 2010 Fifa World Cup was also a major contributing factor to the increasing interest.
DOWNSIZING AND REENGINEERING – result of M&A
Downsizing concerns interventions intended to reduce the size of the organisations. This happens by means of layoffs, attrition, early retirement, or reducing organisational units through outsourcing, divestiture and delayering. A major consequence of downsizing is the rise of a contingent workforce: like outsourcing and temporary workers, discussed above in relation to SA. The smaller full time and larger contingent workforce has major benefits for the organisation, the most important one being cost reduction.
Downsizing is generally a response to four conditions: it is related to reengineering, M&As; it is an effect of organisational decline due to loss of revenues and market share and industrial and technological change; it can occur when organisations adopt a new structure; and, there is social pressure that smaller organisations are better and more flexible.
Conclusion: Globalisation, mergers and acquisitions, as well as reengineering and downsizing, is not positive for everyone. It is changing everything, especially the nature of work for individuals, and national states or trade unions can do very little or even nothing about it. As with all other developing countries across the world, SA is also experiencing the consequences and impact of these changes.
With the rapidly changing environments and the widespread results that these changes are having on individuals and organisations, Organisation Development (OD) is more relevant today than ever before. Although some argue that because of the cultural foundation of OD, it may be inapplicable in certain cultures like SA‟s diverse society and its‟ range of cultures, others argue that the cultural background of OD is irrelevant.
Despite the different positions, because of the massive organisational changes and restructuring that the global economy is bringing about, change today has become constant and inevitable, and since OD is synonymous with change, OD practitioners are needed to manage, facilitate and deal with this change.
World Economy
The year 2012 witnessed a weakened World economy thus posing threats to the growth of the year 2013. A large number of developed economies in Europe have seen a double dip recession in the year 2012. Many developed economies went through high unemployment, lower demands, huge public debts, etc. Economic depressions of developed countries caused a spill over effect on developing countries because of lower export demands, increased unpredictability in capital flows and commodity prices. The financial crisis witnessed resulted in lower investment demand across various economic sectors. All these pitfalls of the year 2012 have made the prospects of growth for the year 2013 very challenging and risky.
The situation in Europe is very challenging. The increased rate of unemployment aggravates the problems making recovery difficult. Greece and Spain are in a dangerous state facing huge impediments in the path of revival. Only a few economies in Europe like Germany, Luxembourg, Austria and Netherlands registered low unemployment rates. The global slowdown and increased risk to employment in the developing countries will lower down the rate of reduction in poverty. All this will reduce the pace of attainment of Millennium Development Goals in the year 2013. Increase in world food prices resulting from droughts in various countries, sky-high oil prices and some constraints in supply side factors may push up the inflation rate in developing countries in the coming years.
Just as mergers and acquisitions may be fruitful in some cases, the impact of mergers and acquisitions on various sects of the company may differ. In the pages below, details of how the shareholders, employees and the management people are affected has been briefed.
Mergers and acquisitions are aimed at improving profits and productivity of a company. Simultaneously, the objective is also to reduce expenses of the firm. However, mergers and acquisitions are not always successful. At times, the main goal for which the process has taken place loses focus. The success of mergers, acquisitions or takeovers is determined by a number of factors. Those mergers and acquisitions, which are resisted not only affects the entire work force in that organization but also harm the credibility of the company. In the process, in addition to deviating from the actual aim, psychological impacts are also many. Studies have suggested that mergers and acquisitions affect the senior executives, labor force and the shareholders.
Impact Of Mergers And Acquisitions on workers or employees:
Aftermath of mergers and acquisitions impact the employees or the workers the most. It is a well known fact that whenever there is a merger or an acquisition, there are bound to be lay offs.
In the event when a new resulting company is efficient business wise, it would require less number of people to perform the same task. Under such circumstances, the company would attempt to downsize the labor force. If the employees who have been laid off possess sufficient skills, they may in fact benefit from the lay off and move on for greener pastures. But it is usually seen that the employees those who are laid off would not have played a significant role under the new organizational set up. This accounts for their removal from the new organization set up. These workers in turn would look for re employment and may have to be satisfied with a much lesser pay package than the previous one. Even though this may not lead to drastic unemployment levels, nevertheless, the workers will have to compromise for the same. If not drastically, the mild undulations created in the local economy cannot be ignored fully.
Impact of mergers and acquisitions on top level management:
Impact of mergers and acquisitions on top level management may actually involve a "clash of the egos". There might be variations in the cultures of the two organizations. Under the new set up the manager may be asked to implement such policies or strategies, which may not be quite approved by him. When such a situation arises, the main focus of the organization gets diverted and executives become busy either settling matters among themselves or moving on. If however, the manager is well equipped with a degree or has sufficient qualification, the migration to another company may not be troublesome at all.
Shareholders:
Impact of mergers and acquisitions on shareholders:
We can further categorize the shareholders into two parts:
The Shareholders of the acquiring firm
The shareholders of the target firm.
The shareholders of the acquired company benefit the most. The reason being, it is seen in majority of the cases that the acquiring company usually pays a little excess than it what should. Unless a man lives in a house he has recently bought, he will not be able to know its drawbacks. So that the shareholders forgo their shares, the company has to offer an amount more then the actual price, which is prevailing in the market. Buying a company at a higher price can actually prove to be beneficial for the local economy.
Mergers are a major feature of market economies which have potentially conflicting effects on competition. According to conventional economic theory, they tend to increase the degree of monopoly power and so reduce competition and its beneficial effects on economic efficiency. However, in reality, in an monopolistic world where size matters, they can increase the effective degree of competition. In other words, in markets where competition takes place between relatively few large producers, mergers can be an important means of increasing the economic and financial strength of smaller companies and enabling them to compete on more equal terms with larger companies. As such, mergers can create a countervailing force to combat the dominant position of the latter and therefore put pressure on them to seek ways of continuously improving their efficiency, as much as competition between a large number of small companies is supposed to do in competitive markets.
Competition tends to take place not only in terms of price, as assumed by conventional theory, but also at least as much if not more in terms of product design and quality, as well as the ability to deliver to customer specifications. Therefore, it is the capacity to innovate and to invest in product development and improved methods of production that are ultimately the key factors of competition rather than the simple ability to reduce costs. These factors – which are dynamic rather than static – tend to be linked to varying extents, depending on the sector in question. In this regard, the size of a company and its command over investment resources as well as its research and development (R&D) capacity and not so much its efficiency are defined in static rather than dynamic terms.
How far this alternative view is valid and how far, on the contrary, mergers tend to be a source of increased monopoly power depends in practice on prevailing circumstances, which is why competition authorities – or anti-trust bodies – across the world have come to adopt a pragmatic approach to policing company activities in this respect. They have, moreover, had to take increasing account of the process of globalisation, and of the liberalisation and expansion of trade and capital flows and the removal of restrictions on business ownership that have accompanied it. This, therefore, has led to a widening of the definition of markets in which the extent of competition needs to be assessed, which can no longer be restricted to the domestic market, while at the same time expanding both the opportunities and pressures for mergers.
As a result, the tendency has been for national and regional – at the EU level – authorities to adopt a more lenient attitude towards mergers between large companies and to pay more attention to the way that competition between large companies operates in practice. At the same time, national governments have become more aware of the potential effects of mergers on jobs. They consider mergers both as a threat to jobs in cases where they lead to a rationalisation of activities and as a possible means of safeguarding jobs in cases where a company in financial difficulty is taken over by a successful one, often a multinational company based abroad.
The purpose of this report is to find out more about the factors that motivate companies to merge with, or to take over, other companies and the consequences of this both for the companies involved and their workforce. This is done by examining particular merger or acquisition cases in the different EU Member States that have occurred in recent years and considering these various aspects.
The concern, therefore, is broadly threefold. First, it relates to the effect of the merger on the companies involved, in terms of:
the underlying reasons for the action taken by the companies;
the policy followed in the aftermath of their operations being merged, or at least controlled by the new entity;
the longer-term outcome, to see how far the initial expectations and the plans formulated were realised in practice, thus justifying, from the business perspective, at least the initial decision to merge.
Secondly, the effect on employees is of concern, in terms of:
the extent to which the merger was accompanied by job losses because of the rationalisation of operations or a concentration of activities on particular markets;
the extent to which employee representatives were involved in the decisions leading up to the merger and/or were consulted regarding the consequences for the workforce;
the actions taken by the company to alleviate the effect of job losses on employees;
how far the merger led ultimately to business expansion because of a strengthening of the operation concerned and the creation of additional jobs.
Main reasons for mergers
The case studies illustrate the fact that mergers can occur for a variety of reasons, involve companies in different circumstances and be initiated by companies looking to be taken over as well as those seeking to expand or strengthen their financial and/or market position by taking over another company.
Privatisation cases
The cases reviewed, therefore, cover a number of acquisitions of previously state-owned companies in the new EU Member States (NMS) that were effectively initiated by the government of the country in question in order to privatise the business. The motivation in this regard is generally to find a suitable, usually foreign-owned, company to take over the company in question in order to develop its potential, to modernise its working methods, to invest in new plants and equipment, to redesign the product range and to extend its markets. This was the case, in particular, in respect of the privatisation of Slovak Power Plants (Slovenské elektrárne, a.s., SE), an electricity generating company in Slovakia, Mažeikių Nafta (MN), a state oil company in Lithuania, Automobile Dacia, a car manufacturer in Romania, Maltacom, the state-owned telephone company in Malta, and Budapest Airport in Hungary. In the last two cases, an additional reason for privatisation was a concern to reduce the public sector borrowing requirement through the money received from the sale of the companies.
Such privatisation exercises, however, do not always proceed as planned. In the case of Budapest Airport, therefore, the British airport operating company BAA, to which the sale was made, took virtually no action to develop or expand the facility in the 18 months following the acquisition and subsequently sold its shareholding in the airport to the German HOCHTIEF Group, one of the largest construction companies in the world. HOCHTIEF has since started a development programme, having previously – after six months – sold off the ground handling services to the Turkish company Celebi Ground Handling (Çelebi Hava Servisi).
Similarly, in the case of SE in Slovakia, the government sold off 66% of its shareholding in the expectation that the remaining 34% would enable it to exercise a measure of control over the subsequent policy followed by the Italian energy group Enel, only to discover subsequently that it would actually need a 35% holding for this. As it happened, however, the company under its new ownership, although it has rationalised operations and reduced the workforce substantially – a policy initiated when the company was in state hands – has also markedly increased efficiency.
In Malta, the sale of Maltacom to Emirates International Telecommunications (EIT), a government-owned joint venture in Dubai, has resulted in both an improvement in the efficiency of the company – now called GO plc – and the development of a new information technology (IT) village designed to host top international IT companies, which was part of the deal.
In Lithuania, the sale of the state-owned oil company MN differed from most other privatisation cases in the NMS in that the purchaser was a company from another new EU Member State, namely the Polish company PKN Orlen, which has since become the largest oil refiner in central and eastern Europe. The sale, however, has resulted in the modernisation of the MN refinery and the strengthening of the oil sector in Lithuania.
In Romania, the sale of Dacia to the French car manufacturing company Renault has perhaps had the most pronounced effect in strengthening the domestic sector. It has, therefore, resulted in the design and quality of the cars produced improving dramatically, extensive training of staff, an enhanced sales network and a doubling of car production in three years. Apart from this, however, it has stimulated increased inflows of foreign direct investment across the whole car industry in the country, contributed considerably to net exports and, accordingly, boosted Romania’s growth performance and real income levels.
The Irish case, which can be included under this heading, was somewhat different from other cases. It involved the Trustee Savings Bank (TSB), which was state-owned but a viable and financially-sound enterprise, being acquired by Irish Life and Permanent, which was itself publicly owned in the past. Although the acquisition led to some rationalisation of operations and initial job losses, like the other cases outlined above, it also led to significant job creation in the long-term as the new business under the name Permanent TSB was expanded.
Cases of companies saved by merger
In practice, most of the privatisation cases involved enterprises in the NMS that would not have survived, or would have struggled to do so, without being taken over by a company with an established presence in the sector in question and, accordingly, with both the technical and market knowledge to be able to develop the business. At the same time, the companies purchasing other enterprises saw gains for themselves in expanding their operations in the national market concerned and beyond. Other cases exist that did not involve privatisation as such but are much the same in that they concern companies that were threatened with closure until being taken over.
A closely-related case, therefore, although not strictly one of privatisation, is that of Saturnus Avtooprema (SA), a Slovenian manufacturer of headlights and fog lights for cars, which lost its protected market position in the early 1990s and gradually lost its traditional customers in subsequent years. The only way to survive was through some form of alliance with a stronger and larger company, which in practice led it to merge with – or be acquired by – the German company Hella, which operates in the same industry. Hella was already supplying technology and know-how and was looking for low-cost means of manufacturing for the neighbouring Italian market – or more precisely to become a supplier to the Italian car manufacturer Fiat.
A number of the other cases also involve a company that is insolvent, or close to becoming insolvent, being taken over by a stronger company, thus enabling the former company to remain in business rather than closing, as would happen in an apocryphal competitive market, and the latter company to expand its operations. Jobs are maintained, or more precisely fewer jobs are lost, and the prospect emerges of increases in the efficiency of the sector concerned if production techniques and ways of working are transferred from the stronger company to the weaker one. Accordingly, in this scenario, there seem to be only winners and no losers. Although competition in the sector concerned might decline, the longer-term effects of this on efficiency tend to be intangible and difficult to identify. On the other hand, as noted at the outset, competition in some sectors is more likely to increase than to decline as a result of a merger because of the nature of competition and its focus on quality and innovation in addition to price.
The Czech Republic case is similar to the Slovenian one, except that it involves an insurance company rather than an automotive enterprise. In this case, Česká podnikatelská pojišťovna (CPP), the eighth largest insurance company in the country and under the financial supervision of the Czech Ministry of Finance (Ministerstvo financí ČR, MF CR) because of the losses suffered as a result of the floods in 2004, was taken over by Kooperativa pojišťovna, a.s., a subsidiary of Vienna Insurance Group (VIG), the largest Austrian insurance company. No major changes occurred in the company’s activities and the company name was retained, but as a result of its increased financial strength and more effective management, it expanded its market share and increased its workforce by some 40% between 2004 and 2007.
The Austrian case is also similar, although the company taken over, Austria Frost, a food processing company specialising in instant meals and deep-frozen desserts, had actually gone bankrupt and was about to close down completely when it was rescued by the German frozen food manufacturer Frenzel, which was looking to extend its range of products. In this case, the takeover not only saved jobs – despite some being lost initially through a streamlining of operations, employment expanded later as new product lines were developed – but also maintained the income of local farmers who were dependent on the company for most of their sales. Nevertheless, the continued survival and growth of the company and the jobs and incomes dependent on it remain uncertain.
The Swedish case involves much larger companies but much the same underlying motivations. In this case, Ericsson, the leading manufacturer of telecommunications equipment, took over Marconi, a British electronics company, which had experienced financial problems for a number of years and had recently gone through a downsizing process involving 800 redundancies. These problems made the Marconi company a target for takeover and the only real question that remained related to the identity of the company concerned and how far the existing operation could be maintained. In fact, although the takeover was followed by further large-scale job losses (of about 1,000 redundancies), the two businesses were reasonably complimentary in terms of their areas of specialisation and the merger has led to the growth of both. In the case of Ericsson, it completed further acquisitions in related areas, including two communications companies in the United States (US), a Norwegian television company and a German software company.
By contrast, the Luxembourg case concerns two much smaller companies in a more traditional industry, the manufacture of vinyl flooring. This case again involved a plant in danger of closure operated by the French company Tarkett and a company seeking to expand in the market concerned – namely the Belgian manufacturer IVC. In this case, no rationalisation of production and no loss of jobs occurred. In fact, in the longer term, additional jobs have been created.
Cases of merger to expand market share
Most if not all of the cases noted above involve companies seeking to expand their market share through acquisition rather than internal growth and taking over companies in difficulty. As such, both sides benefited from the move. The cases reviewed in this section, however, also include those where neither company was necessarily in danger of closing but both could see advantages in merging and either strengthening their market position or extending their activities into other areas, to the mutual benefit of both businesses.
In some cases, the aim of merging was to strengthen the position of both companies in relation to a dominant company in the market. This was the case for Neuf Telecom and Cegetel, two of the smaller telecommunications companies in France, which had both been in relatively weak financial positions but were both subsidiaries of large multinational groups – Louis Dreyfus, a large French private holding company, in the case of Neuf Telecom, and Vivendi and Vodafone in the case of Cegetel. By pooling their resources and know-how, both companies have since gained the financial and technological strength to compete in the French market with France Telecom and Free, the largest internet service providers in the country
In the Cyprus case, the three companies involved in the merger to create Marfin Popular Bank – Laiki Bank in Cyprus as well as Egnatia Bank and the Marfin Financial Group in Greece – also saw mutual benefits in pooling their resources and efforts in order to facilitate expansion not only in the Cypriot and Greek markets but also in the wider banking and financial market in the Balkan states and southeastern Europe.
The merger has succeeded in increasing the growth of the business, the market share of the new company in the region and its profitability. This growth has also resulted in intensifying competition in the banking market, creating pressure on other banks to expand in the same way and leading to further rounds of merger activity. Competition, in other words, has come, in part, to take the form of growth through acquisitions.
The Polish case provides an example of a company seeking to exploit its existing resources more fully through merger. In this case, therefore, Bauer Publishing, a German newspaper and periodical publisher and owner of a radio station, acquired Interia.pl, a Polish web portal provider, as a means of expanding its multimedia activities and exploiting the opportunities offered by the internet to make additional use of the output from its other media. As a result, Bauer has not only succeeded in expanding its activities but Interia.pl has also been able to offer a wider range of material on its website and accordingly has expanded its market share. At the same time, following the merger, Bauer has become one of the leading players in the media market, putting pressure, as in Cyprus, on other companies to pursue a similar strategy.
In the German case, the acquisition by chemical giant Bayer of the German pharmaceutical company Schering was intended to expand its market share of the pharmaceutical and consumer health product markets as well as to increase its R&D capacity, while for Schering the main motivation was to avoid a hostile takeover bid from the pharmaceutical company Merck. The strategy seems to have succeeded insofar as Bayer has been able to regain its position in the top 10 global pharmaceutical companies while reducing its costs substantially and streamlining its research activities.
The Estonian case is somewhat different in that it involves a Swiss investment company, Sorbes AG, expanding its existing shareholding in Repo Vabrikud, an Estonian manufacturer of melamine-faced chipboard, to acquire complete ownership. With this move, Sorbes aimed to gain the maximum return from its planned investment to expand the company’s production. Although the concentration of production on a particular section of the market meant the closure of a factory producing hardboard and the resulting loss of 150 jobs, the investment has led to the company’s profitability increasing and to it becoming the biggest producer of melamine-faced chipboard in the Baltic region and one of the biggest exporters in Estonia. While this growth has not been accompanied by job creation, it has safeguarded the remaining jobs and generated valuable income for the local as well as national economy.
The Bulgarian case is different again but with much the same outcome in terms of business. In this case, UniCredito SpA, an Italian company and the largest banking group in central and eastern Europe, consolidated its activities by merging two of its subsidiaries in Bulgaria, HVB Bank Biochim and Hebros Bank, with a third bank, Bulbank, to form UniCredit Bulbank. While the merger led to rationalisation of operations, with about 300 job losses, it has created the biggest and most profitable bank in Bulgaria, which has significantly increased its share of the lending market since the merger. Nevertheless, as in other cases, few signs are evident that the merger has reduced the degree of competition in the sector, although it may have created pressure on other banks to expand through external rather than internal means.
The Norwegian case is the only one involving a merger between two state-owned oil companies, namely Statoil and Norsk Hydro ASA, to form StatoilHydro ASA. The reason for the merger, however, was much the same as in the other cases – to create a more efficient and financially stronger organisation to increase its share of the domestic and global markets. In this case, however, the merger led to the creation of the largest deep-sea oil and gas producer in the world and the largest enterprise in any sector in the Nordic region. Nevertheless, the companies involved considered that the company needed to be of this size to compete with large US and other European oil producers in global markets, especially given the gradual depletion of North Sea oil and gas reserves and the corresponding importance of expanding operations outside Norway. At the same time, the merger has inevitably led to a duplication of activities and to large-scale job losses as a result of rationalisation of operations.
In the UK case, the merger of Boots, the British manufacturer and retailer of pharmaceuticals and beauty products, with Alliance UniChem, the French wholesaler of such products, formed the new company Alliance Boots. The purpose of the merger was to realise the benefits of a larger scale of operations and to widen the product range. Although the merger resulted in rationalisation of administration in particular and job losses as a result, it also led to the expansion of the merged company’s international business.
The subsequent takeover of the company by Kohlberg Kravis Roberts, a New York-based private equity company, which specialises in acquiring companies that are underperforming, suggests, however, that the merger had not led to a sufficient increase in profitability. The concern after the latest acquisition is that the new owner’s focus on short-term profits will see further rationalisation of operations and a possible reduction in the Boots chain of retail chemist outlets as well as in R&D activity.
Cases of acquisition
Most of the cases listed above concern takeovers rather than mergers as such, in the sense that effectively one company purchased the assets of another. They generally, however, involved both parties to the transaction considering the move beneficial, with often the company taken over continuing to operate as a separate entity. The other cases are more traditional examples of takeovers, with one company acquiring another and integrating it into its own operations.
The latter applies in the Greek and Portuguese cases, which are similar in that a domestic company or group took over the subsidiary of a large multinational company in the country – in the Greek case, the Mytilineos Group of metal producers acquired Aluminium de Grèce, the leading Greek producer of aluminium and a member of the Alcan group, a leading multinational industrial group operating in the aluminium and packaging market, as well as in aluminium recycling; in the Portuguese case, Sonae Distribuição, taking over Carrefour Portugal, the chain of hypermarkets operated in the country by the French Carrefour group. In both cases, there was relatively little effect on employment as the operation remained much the same after the acquisition as before.
This type of takeover also applies in the Italian case of ABB, a large Swiss multinational operating in the electromechanical industry, acquiring Elsag Bailey, an electrical engineering company, from the Iri-Finmeccanica group owned by the Italian state. Although in this case, an element of privatisation was also involved. The acquisition led to ABB becoming the leader in a number of market segments, including automated systems for electricity substations. Although the takeover initially led to the closure of a plant and the loss of 200 jobs, in the longer term, it has resulted in business expansion and net job creation.
The traditional example of a takeover again applies in the Finnish case of the Tallink Finland Oy shipping company, a subsidiary of the Estonian AS Tallink Group, a major operator of ferry and cruise ships in the Baltic Sea, acquiring the Silja Oy Ab company, owned by the Bermuda-registered Sea Containers Ltd. The new company was renamed Tallink Silja Oy. In this case, however, the acquisition was followed by substantial rationalisation of operations, particularly administrative and booking activities, which led to large-scale job losses. While the company’s share of the passenger shipping market in the region has expanded, therefore, employment in the sector has declined and with it, to some extent, competition, with some signs of a deterioration in services.
The remaining two cases both involve contested acquisitions where the company taken over was initially opposed to the merger. The first involves the Belgian case of Mittal Steel, the large Indian-owned steel company, taking over Arcelor, a Luxembourg-based steel company with plants in France and Spain as well as Belgium, to form ArcelorMittal. In this case, contrary to the norm, the acquisition in Belgium has been followed by a reversal of Arcelor’s decision to close the Seraing blast furnace in Liège in the Wallonia region of the country and the reopening of the plant together with the suspension of plans to shift steel production from other plants in the Liège region to coastal regions until 2012 at least. This move by Mittal, which resulted from pressure from both the trade unions and local authorities together with developments in the steel industry, has provided a breathing space for the authorities in the region to implement policies for stimulating other forms of economic activity to replace the jobs in steel operations that remain vulnerable in the long run.
The final case is the takeover of the Dutch bank ABN AMRO by a consortium comprising the Royal Bank of Scotland (RBS), the Belgian-Dutch bank Fortis and Banco Santander of Spain. In this case, the Dutch bank had been underperforming for some time and was, therefore, vulnerable to a takeover bid. The only real question is this regard, as in the case of Marconi above, regarded identification of the purchaser and the state of the bank’s operations after the event. As it turned out, the management’s preferred purchaser, Barclays bank in the UK, with which it had agreed how the business would be reorganised once the acquisition was completed, was unable to match the price offered by the RBS-led consortium. The latter group had planned to divide between themselves the bank’s various activities in different parts of the world.
However, in the meantime, the ongoing global financial crisis has hit RBS and Fortis particularly hard. RBS, therefore, has been nationalised by the UK government, while Fortis has had the Dutch part of its business nationalised and the Belgian part taken over by the French bank Paribas. As a result, ABN AMRO continues to operate under its own name, since the integration of its retail banking operations with Fortis had not occurred.
Effects on employment
As indicated above, the effects on employment of the mergers or acquisitions reviewed in the different countries vary from case to case. In many instances, they have resulted in job losses, sometimes on a large scale. This was the case as a result of the Bayer acquisition of Schering where, because of the scale of the companies involved and the scope for rationalisation, about 5,350 jobs were planned to be cut, some 3,150 of them in Europe. This prompted the German Chancellor to request the company to minimise job losses in Germany. Furthermore, in the case of the Statoil-Norsk Hydro merger in Norway, planned redundancies affected almost 3,500 jobs.
Reductions in employment tend to be frequent occurrences following mergers, especially if they involve companies in the same industry. In this case, there is usually scope for rationalisation and the elimination of duplicate functions being performed, particularly in respect of administration, where the operations of the two businesses can, if they are combined, be supported in most cases by fewer staff than employed by the two companies separately. Similarly, the scope for rationalisation has typically been significant in most privatisation cases in the NMS, where the enterprises concerned were using inefficient production techniques and outdated production plants and equipment. In both cases, subsequent expansion of the business could occur without a parallel increase in the workforce.
The importance of mergers, and the associated rationalisation of operations, as a source of job losses is confirmed by an analysis of the cases reported in the European Restructuring Monitor (ERM) over the period 2002–2007. Of the approximately 3.7 million job losses announced as a result of restructuring, some 6.5%, or about 240,000 jobs, arose from cases where mergers or acquisitions were involved. Moreover, the relative importance of mergers as a cause of job losses was more significant in the last two years of the period referred to than the first four years, amounting to 11% in 2006 and about 10% in 2007 (see table below).
The cases reviewed, however, also demonstrate that not all mergers lead to job losses even in their immediate aftermath. This was the case, in particular, in respect of the Greek and Portuguese cases, where the merger concerned involved a change in ownership without any substantial change in business operations. It was also the case in instances where the merger involved companies extending their activities into other areas of activity and taking advantage of the fact that their operations complemented each other and the opportunities for making better use of their resources or exploiting the output from other parts of business. For example, this occurred in the Polish case of a publishing company merging with an internet portal provider.
In addition, the cases equally indicate that, while mergers might result in initial job losses, the strengthening of the business and of the financial and market position of the enlarged company can result in the growth of jobs in the long term. This is the case, for example, in respect of the merger between insurance companies in the Czech Republic, where employment increased by 40%, or the ABB acquisition of Elsag Bailey in Italy. It was also the case in Ireland with the merger of TSB and Irish Permanent where employment is now some 30% higher than at the time of the merger, despite initial job losses.
Even where jobs in the merged company are lost, however, the ones remaining tend to be more stable and less vulnerable than they were previously because of the company’s increased economic strength. In a number of cases, this has also had wider beneficial effects on the local or even national economy, such as in respect of Renault’s takeover of Dacia in Romania or the expansion of melamine-faced chipboard production in Estonia.
It should also be noted that where job losses have occurred, they have in many cases been achieved by voluntary redundancies or early retirement, often under relatively generous terms, rather than by compulsory redundancies. This was even true in the case of the Statoil merger with Norsk Hydro, where substantial job cuts have occurred but where nobody has so far been faced with compulsory redundancy.
Few cases occur where the terms and conditions of employment worsened as a result of the merger, such as in respect of Tallink’s acquisition of Silja Oy Ab in Finland. However, according to the trade unions (although not the management), in the great majority of cases, employment terms and conditions seem to have remained much the same after the acquisition as before – in some cases, with companies taking special care not to antagonise employees when rationalisation measures are underway or planned.
List of company case studies
Belgium: Arcelor and Mittal Steel
Bulgaria: HVB Bank Biochim, Hebros Bank and Bulbank
Czech Republic: Kooperativa pojišťovna, a.s. and Česká podnikatelská pojišťovna, a.s.
Germany: Bayer and Schering
Estonia: Swiss investment company Sorbes AG and Repo Vabrikud
Ireland: Irish Life and Permanent and Trustee Savings Bank
Greece: Aluminium de Grèce and Mytilineos Group
France: Neuf Telecom and Cegetel
Italy: ABB and Elsag Bailey
Cyprus: Laiki Bank and Egnatia Bank and Marfin Financial Group
Latvia: Tapeks and Aile
Lithuania: PKN Orlen and Mažeikių Nafta
Luxembourg: Tarkett and IVC
Hungary: Budapest Airport Rt and BAA/Celebi Ground Handling Inc./HOCHTIEF AirPort
Malta: Emirates International Telecommunications Malta Ltd and Maltacom PLC
The Netherlands: ABN AMRO and Royal Bank of Scotland/Fortis/Banco Santander
Austria: Austria Frost and Frenzel
Poland: Bauer Publishing and Interia.pl
Portugal: Sonae Distribuição, SGPS, S.A. and Carrefour
Romania: Renault and Automobile Dacia
Slovenia: Saturnus Avtooprema and Hella
Slovakia: Slovenské elektrárne, a.s. and Enel
Finland: Tallink Finland Oy and Silja Oy Ab
Sweden: Ericsson and Marconi
UK: Boots and Alliance UniChem
Norway: Statoil and Norsk Hydro
Individual case studies
Romania: Renault and Automobile Dacia
In July 1999, the French car company Renault acquired Automobile Dacia, a car producer owned by the Romanian state. At the time of the acquisition, Dacia and its subsidiaries employed some 27,560 people, while Renault employed over 133,000 people in its various plants. The cost of the acquisition was only USD 50 million (about €36 million as at 6 January 2009).
Reasons for merger
Renault’s reason for purchasing Dacia was to use it as a lower-priced brand to sell in developing countries and to market vehicles made to European standards at competitive prices. The intention was to upgrade both the existing plant by installing modern technology and the cars produced so that they would meet international quality standards. The aim of the merger was also to modernise and extend the sales network. A central objective was to manufacture a new stylish and reliable family car for launch in 2004 and to use this as a spearhead to enter emerging markets.
Involvement of trade unions/employee representatives
Neither trade unions nor employee representatives played any role in the decision-making process leading up to the acquisition. The trade unions in Dacia were informed of the purchase prior to negotiations between the State Ownership Fund (Fondul Proprietății de Stat, FPS) and Renault and were consulted during these negotiations. The trade unions were in favour of the acquisition and supported Renault’s proposed strategy for Dacia.
Effects on employment
The acquisition involved restructuring of Dacia and its subsidiaries, which were largely car component manufacturers, to modernise plants and methods of production. The plan was to reduce the number of staff to a minimum of 16,280 employees, representing a cut of almost 11,300 jobs, over 6,000 of which were to be in Automobile Dacia. The process was to take place in 20 phases every three months, beginning in December 1999 and finishing in September 2004.
A special department – the ‘Social Reinsertion Service’ (Serviciul Reintegrare Sociala) – was set up to provide counselling and guidance to those made redundant, advising them on finding a new job or starting a business. The Argeș County Agency for Employment (Agenția Județeană pentru Ocuparea Forței de Muncă Argeș, AJOFM ARGES) helped to provide training courses geared towards local labour market needs. The company worked with the trade unions to define the criteria for deciding which workers were to be made redundant and to agree a package of support measures for ‘socially-sensitive’ cases.
Outcome for company
strategy was pursued as initially planned. At present, Dacia produces cars at its Mioveni plant in southern Romania, which has been modernised since the acquisition. The design and quality of cars produced has improved dramatically, personnel have received extensive training and the sales network has been strengthened. Dacia is now a major part of the Romanian car industry. The merger with Renault has boosted company growth and has been the catalyst for substantial foreign investment across the entire car industry in the country. Car production in Romania doubled between 2004 and 2007 – from 122,000 units to 242,000 units – and Dacia’s share of national output rose from 77.5% to 92%. Present estimates are that the jobs of some 120,000 people in Romania are dependent on Dacia.
Wider consequences
According to company representatives, the acquisition has had a significant effect on the region’s economy. It has generated economic and social development, including higher living standards through the provision of a stable long-term source of income. It has also resulted in more opportunities for training in skilled trades.
At the same time, the acquisition has led to the development of the region’s road network, and the company has contributed considerably to Romanian net exports and the state budget. Additionally, it has improved Romania’s image abroad by demonstrating the stability of the business environment and by providing an example for foreign investors interested in developing related businesses.
Belgium: Arcelor and Mittal Steel
In January 2006, Mittal Steel, the Indian-owned steel multinational, launched a bid for Arcelor, the steel company formed several years earlier by the merger of Usinor in France, Arbed in Luxembourg and Aceralia in Spain. In June 2006, the companies reached agreement on the terms of the takeover and by the end of July Mittal had acquired a 92% share in Arcelor. In all, Mittal paid some €27 billion, partly in shares and cash.
At the time of the merger, Arcelor was the second largest steel manufacturer in the world employing in the region of 13,000 people in Belgium, 78,000 in Europe and 96,000 worldwide, while Mittal, the largest producer in long steel, employed 220,000 people in its plants around the world. After the takeover, in 2007, the merged group ArcelorMittal had a total of 310,000 employees worldwide.
Reasons for merger
The motivation behind the takeover was essentially to give Mittal more control over the steel market, to expand its size to three times that of its nearest competitor Nippon Steel Corporation and to increase its bargaining power in relation to customers. At the same time, the purchase gave Mittal a significantly increased presence in western Europe, one of its weaker markets, and strengthened its product range in the long steel end of the market, where Arcelor was the leading producer, as well as giving it access to Arcelor’s technical know-how and R&D centres.
The bid was initially contested by Arcelor, supported by the French and Luxembourg governments which were opposed to the takeover, as was the Belgian government but much less so. The French and Spanish trade unions as well as the European Metalworkers’ Federation (EMF) were also strongly opposed to the bid, fearing substantial job losses as a result of restructuring. The various Belgian trade unions were less hostile since Arcelor had already decided to close the Seraing blast furnace in Liège. The trade unions involved included: the Confederation of Christian Trade Unions (Confédération des Syndicats Chrétiens/Algemeen Christelijk Vakverbond, CSC/ACV), the Federation of Liberal Trade Unions of Belgium (Centrale Générale des Syndicats Libéraux de Belgique/Algemene Centrale der Liberale Vakbonden van België, CGSLB/ACLVB) and the Belgian General Confederation of Labour (Fédération Générale du Travail de Belgique/Algemeen Belgisch Vakverbond, FGTB/ABVV).
Although Mittal had expanded through a series of takeovers over the preceding 25 years, the companies acquired were generally underperforming ones. Arcelor was different in this respect as it was relatively profitable and not in financial difficulty.
Involvement of trade unions/employee representatives
Focusing on the situation in Belgium, Arcelor informed its workforce about the bid through the European Works Council. Mittal undertook to honour collective agreements concluded by the Belgian trade unions with Arcelor in 2003 so that workers could expect to be in a similar position if the takeover went ahead. After the merger, a committee was set up in order for trade unions to meet with top management. As a result, the unions prepared a report to demonstrate the efficiency of the Seraing plant and argue against its closure.
Effects on employment
Mittal initially undertook to maintain the Arcelor strategy in Belgium of shifting production to coastal plants and closing the ‘hot phase’ and blast furnaces in the Liège region by 2009, involving direct job losses of about 2,700 and some 2,280 jobs from the closure of ‘cold phase’ plants, with many more indirect job losses.
Developments in the steel industry and pressure from trade unions and the Walloon regional government led Mittal to reassess the case for closing the plants. In 2008, it agreed to reopen a blast furnace closed in 2005 at a site in Seraing and to maintain ‘hot phase’ production up until 2012, the expressed aim being to keep steel-making in Belgium for as long as possible by developing new techniques. The jobs to be lost were therefore maintained and 180 new jobs were created. At the same time, terms and conditions of employment have been maintained, as initially agreed by Mittal.
Outcome for company
The takeover was successful in meeting Mittal’s objectives of strengthening its global position in the industry. Since the takeover, the company has acquired a number of other steel companies around the world in countries like Austria, Estonia, Italy, Mexico, Slovakia, Turkey, the UK and Uruguay.
Wider consequences
The decision to reopen the blast furnace in Seraing and maintain production elsewhere has given local authorities more time to develop plans for diversifying the local economy. However, an acute shortage of jobs has been recorded in the region, with unemployment at 20% in Seraing. Therefore, major changes need to occur before 2012 if those in danger of losing their jobs once the present agreement comes to an end are to have a reasonable chance of finding new positions.
Sources
Capron, M., ‘L’acier en fusion. Le duel entre Mittal et Arcelor’, La Revue Nouvelle, No. 3, March 2006.
Sohlberg, P., ‘La guerre des géants de l’acier’, Alternatives économiques, No. 245, March 2006.
Interview with Jean-Luc Rader, Belgian General Federation of Labour – Metal section (FGTB Métal), Liège, 30 June 2008
CONCLUSION
This paper has yielded some new evidence regarding the effects of different types of mergers and acquisitions on economy and employees; the last being the true engine of the economical growth since the development of industry. The fact that mergers are found to be occurring in waves, and that the evidence does not unequivocally point at a significant correlation between merger activity and the economic and financial cycle points to some other reason why mergers happen in clusters. In non-competitive markets, the reason might be the existence of oligopolistic reaction. Whatever the causes of mergers might be, their consequences on market structure are of paramount importance to the policy maker, the main preoccupation here being the anti-competitive effects of mergers. By reducing the number of actors in a market, mergers can encourage collusion, and this would have bad consequences on welfare. It has to be stressed however, that collusive behaviour can only be sustained in markets where there are barriers to entry and high sunk costs. Theoretical models of non- cooperative oligopolistic behaviour have been developed to analyse mergers, and they show that mergers do not always reduce welfare. If a merger can generate enough savings so as to reduce marginal costs, then it is welfare enhancing.
By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies. M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.
Despite the dreadful levels of M&A over the last few years, there is still cause for cautious optimism. The completion of political elections in the USA and China has reduced a lot of political uncertainty globally and measures are slowly coming into place to reduce doubt surrounding the European economy. Financing remains a problematic area but many companies are sitting on large amounts of capital and are unlikely to continue waiting patiently for organic growth. The increase in cross-border deals and work in emerging markets promises a surge in M&A once confidence has returned.
It has been a slow year for global M&A. Most regions have reported a drop in the number and value of deals and only a few pockets of activity remain. The major trend of 2012 seems to be the increase in cross-border deals, as companies with a troubled domestic economy look elsewhere for growth. This has had an enormous impact on the global legal market, where we have seen many international mergers as law firms strive to increase their global footprint to offer clients the most comprehensive service. Despite the depleted deal numbers this year, lawyers continue to anticipate future growth in 2013. Hopefully, with many political and economic uncertainties dealt with and the availability of financing in many countries, our predictions from 2012 will be proved correct.
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