During the last decade mergers and acquisitions (M&A) have acquired popularity and mostly big corporations are merging. The trend is not restricted to a particular industry and form 1994 to 1999 the value of total deal in the USA had progressed form $227 billion to $1.426 trillion in the year 2000 and to nearly $1.800 trillion after the year 2000.
There are pre-and post-sanction aspects of corporate mergers and acquisitions. In the pre-sanction stage all the procedures and formalities for obtaining the sanction from government are observed and followed. The post-sanction aspects of mergers starts with the fulfilment of legal obligations, re-grouping of different departments for establishing better operational control, re-organisation of financial structure, toning up production and marketing departments, rationalising financial resources, installation of top management, consolidation of operations, fulfilment of legal obligation etc.
Definition: M&As’ are separate terms although used collectively. It is a form of corporate re-structuring. “Merger” is a union of two or more firms where one or both may lose their original identity. It is an all-inclusive concept referring to business combination to form a single new entity.
“Merger” is basically of two types: “horizontal and “vertical”. Horizontal merger involves union of two firms in the identical type of business (merger of two spinning mills, mergers of two pharmaceutical firms making two identical products etc). Vertical merger involves union of two firms engaged in different stage of production process (merger of textile spinning company with a textile weaving unit or merger of an oil refining company with an oil marketing company).
“Merger” is a combination of two or more companies into single entity whereby: the survivor retains the identity and legal status (if any); survivor acquires the assets and liabilities of the other identity; and the other entity lose their corporate and legal entity (if any).
An “acquisition” (absorption and take-over) involves the purchase of an entity by another. No new entity is formed and the entity continues to operate under the direction and control of the acquirer. “Acquisition” may be affected by: an agreement with the shareholders holding majority interest in the acquire company’s management; purchase of shares form open market; make/take-over offer to the general body of shareholders of the company going to be acquired; purchase of new shares through private treaty; and by acquisition of share capital of one company by issue of shares in cash, issue of loan capital etc.
MBO: Management buyout (MBO) is a form of corporate disinvestment which is very popular in UK, the USA and the European countries. Shareholders offer their equity to the senior management executive or employees management group to pass on the management to the company employees.
Senior management executives or employees finance the share purchase from their provident fund or other benefits or pay in cash or a combination of benefit(s) and cash. Such type of taker over are generally called “employees stock ownership plan” (ESOP) which provide opportunity to employees to acquire ownership of a company. Employees can also arrange funds from the market.
The example of ESOP in Pakistan is the Allied Bank LTD, the Millat Tractor LTD; the Exxon Chemical etc.
Downside: A recent survey has concluded that only 45 percent of the merged companies have over taken other companies in the relevant industry which reflects the dark side of merger. It further means that 55 per cent of the merged companies did not perform well. The latest survey of the KPMG discloses that two third of M&As’ had failed to achieve their stated goals.
M7As are mostly done for the monopolistic power and the cost-saving mostly results in the employees’ lay-off. Recent newspaper reports suggests that thousands of employees lost their jobs due to M&As in Europe, Japan and the USA.
The concept of the M&A has become more pronounced recently and mostly “multinational” corporations are merging but it is not confined to these corporations alone. At international level it is not restricted to a particular industry e.g. (a) merger of Dailmer/Chrysler; (b) service providers — Price water house with Cooper & lybrand (Chartered Accountants firms), (c) computer manufacturer’s: Texas instruments with Burr Browns (d) Internet companies: America online/ nestcape/ net2phone. In April 2002 Hewlett Packard (HP) announced planned merger with “Compaq”.
On the average, seven to ten mergers were announced every day in the year 1999. During 1994 to 1999 the value of total M&A deal has progress&.from $227 billion to $ 1.426 trillion and in the year 2000 it has touched nearly $1.800 trillion, up to May :2000 M&A was more pronounced in the area of (a) computer software supplies & services (1,511 deals), (b) communication (222 deals), (c) brokerage, investment and management consultancy (210 deals), (d) electrical equipment (13 deals) etc.
In Europe, M&A is more pronounced in banking and financial sector which is true in the case of Japan also due to large infected bank portfolio.
Pakistani scenario: In Pakistan mostly, there is merger in the same industry (horizontal merger) and is confined mostly to multinational firms. There are instances of financial sector merger as well. Instances of financial sector merger especially in leasing and modaraba sector (In July 2002, Security Leasing Corporation LTD announced proposed merger with Lease Pak LTD). Regulatory authorities especially the SBP may pursue banks (especially smaller ones) to merge with bigger banks. If these institutions do not merge the SBP and the SECP may force them to do so.
With the increased paid-up capital requirements of banks and leasing companies to Rs1.00 billion and 0.3 billion respectively mergers and amalgamation in these two sectors is imminent and already these are reports of merger of leasing companies with other leasing companies and or banks. Insurance sector also may follow suit in order to meet minimum capital adequacy requirement. Textile sector which almost handles 60 per cent of Pakistan’s export merger is long over due. Recently the National Development Leasing Corporation (NDLC) LTD announced merger with IFIC Bank (a Bangladeshi bank).
It is estimated that more than Rs200 billion is sunk in sick units which is a big problem for Pakistan, these can be merged with good productive units where feasible. Corporate Industrial Restructuring corporation (CIRC) can be of great ‘help in this area. A substantial tax advantage can be availed which allows accumulated loss of a sick industrial unit to be set-off against acquirer’s income in the year of acquisition and two following years.
Recently there-has been proliferation of merger and acquisition activities in pharmaceutical industry owned by multinational companies. “Boots” (a UK company) merged with the BASF (a German company), Well come pharmaceuticals (a UK-based company), merged with Glaxo Pharmaceuticals, -SK&F with Beecham, knoll Pharmaceuticals LTD, announced amalgamation with Abbott Laboratories (Pakistan) LTD.
Pangs: Mostly merger(s) and acquisition(s) result into employees sacking. According to the ILO, nearly 300,000 Jobs in Banking & Financial sector .of Europe vanished in the year 2002 due to M&A. High paid jobs are being replaced by low paid/skilled jobs. Very little attention is paid to humanitarian aspect - the effect of firing and job reduction - which is one of the greatest social issue.
Why merger and acquisition mostly result in job reduction and widespread redundancies has to be answered and solved by all the stakeholders (Regulatory agencies, business community, trade unions, acquirer and acquiree and all the companies involved in merger etc). In Asia merger(s) and acquisitions) is mainly driven by tough economic conditions. Developing countries like Pakistan where already employment rate is around 7 per cent should address redundancies issues more seriously as compared to developed countries (Europe, Japan, U.S.A. etc). This may bring social as well as economic disaster if not properly attended to.
Conclusion: M&As should be properly planned. The scheme should be properly followed. They should be closely monitored by regulatory authorities (SECP, SBP in Pakistan). Efforts should be made for avoiding formation of monopolies & cartels. Human miseries (especially in developing countries) in the shape of unemployment should be avoided as for as possible.