Alliances Acquisitions: Advantages of Mergers and Acquisitions

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ALLIANCES

Acquisitions
- Definition: a combination in which one company, the acquirer , purchases and
absorbs the operations of another , the acquired .

- Feature:

 These are not voluntary. It’s a forced action when larger firm buys a smaller
firm which becomes a subsidiary.
 These are also known as hostile take over, where strong entity takes over
operational management of smaller entity.
 Acquisitions involve large amount of cash outgo from large entity to the
owners of the taken over entity.

- Benefit:

 Accessing a wider customer base and increasing your market share. Your target business may
have distribution channels and systems you can use for your own offers.
 Diversification of the products, services and long-term prospects of your business.A target
business may be able to offer you products or services which you can sell through your own
distribution channels.
 Reducing your costs and overheads through shared marketing budgets, increased purchasing
power and lower costs.

Advantages of Mergers and Acquisitions


The following are the advantages of the mergers and acquisitions:

Synergy
The synergy created by the merger of two companies is powerful enough to enhance
business performance, financial gains, and overall shareholders value in long-term.

Cost Efficiency
The merger results in improving the purchasing power of the company which helps in
negotiating the bulk orders and leads to cost efficiency. The reduction in staff reduces
the salary costs and increases the margins of the company. The increase in production
volume causes the per unit production cost resulting in benefits from economies of
scale.
Competitive Edge
The combined talent and resources of the new company help it gain and maintain a
competitive edge.

New Markets
The market reach is improved by the merger due to the diversification or the
combination of two businesses. This results in better sales opportunities.

Disadvantages of Mergers and Acquisitions


The following are the disadvantages of the mergers and acquisitions:

Bad for Consumers


With the merger, competition can reduce the industry and the new company may have
higher pricing power.

Decrease in Jobs
A merger can result in job losses. An acquiring company may shut down the under-
performing segments of the company.

Sometimes Dis-economies of Scale


The increased size may lead to dis-economies of scale for the new company. It may not
have the control required for running a bigger company.

Conclusion:
Though mergers and acquisitions are considered as synonyms, both the business
combinations are different in their own ways. A company needs to understand the
process and the resulting advantages and disadvantages well to appreciate the
complexities involved.

PROCESS
Process of Merger and Acquisition
The process involving merger and acquisition is important as it can dictate the benefits
derived from the deal. The process involves the following steps:
Preliminary Valuation
This step primarily focuses on the business assessment of the target company. Not only
the latest financials of the target company are scrutinized, its expected market value in
future is also calculated. This close analysis includes the company’s products, capital
requirements, brand value, organizational structure, etc.

Proposal Phase
Once the target company’s business performance is analyzed and reviewed, the
proposal for the business transaction is given. It could be either a merger or an
acquisition. Generally, the mode of giving a proposal is an issuance of a non-binding
offer document.

Planning for Exit


After the proposal is given to the target company and it takes the offer, the target
company then engages in planning for the exit. This includes planning the right time to
exit and considering all the options such as a full sale or partial sale. This is also a time
for tax planning and evaluating the reinvestment options.
Marketing
Once the exit plan is finalized, the target company engages in a marketing plan and
aims to achieve the highest selling price.

Agreement
In the case of an acquisition deal, the purchase agreement is finalized. In the case of a
merger, the final agreement is signed.

Integration: This is the final step that involves the complete integration of the two
companies. It is important to ensure that the same rules are followed throughout in the
new company.

The Risks of Mergers and Acquisitions


Even when the CEO and the board of directors are honestly motivated to merge
with or acquire another corporation to improve the company's financial position
somehow, things sometimes don't work out as intended.

Shortly after the massive merger of communications giants AOL and Time-
Warner, AOL—the acquired company—posted an almost unimaginable $100
billion loss, putting Time-Warner in financial jeopardy. It led to the problematic
exits of top executives in both companies when they were held responsible for
the financial disaster. In some ways, the underlying cause was simply bad timing
because the merger coincided with a growing dot-com financial meltdown.
Mergers can also fail because the corporate cultures of the two corporations are
simply incompatible. At other times, mergers can achieve the desired financial
goals yet operate against the public good, creating an anti-competitive monopoly.

Central Group acquires Big C Vietnam


Released at: 15:50, 29/04/2016

Thai group buys giant retailer for an enterprise value of $1.14 billion.
by Hoang Thu
The Casino Group announced on April 29 the closing of the sale of Big C Vietnam to Thailand’s Central Group, for an
enterprise value of $1.14 billion.
The proceeds will amount to $1.04 billion in total.
The Central Group is one of the main family-owned conglomerates in Thailand, with interests in real estate,
department stores, retail, hospitality and restaurants.
Casino Group has made significant investments for more than 18 years in developing its subsidiary Big C in Vietnam
and to create a leading food retailer in Vietnam. Big C Vietnam consists of a network of 43 stores and 30 shopping
malls and in 2015 recorded turnover excluding taxes of $665 million.
Big C Vietnam has built strong relationships with Vietnamese suppliers and farmers, customers, employees and local
authorities and communities, which allowed the development of modern retail in the country. Japan’s Aeon, Vietnam’s
Masan, South Korea’s the Lotte Group, and Thailand’s the Central Group and Berli Jucker all competed to buy Big C
Vietnam.
The Central Group, in partnership with the Vietnamese group Nguyen Kim, will continue with the Big C Vietnam
strategy regarding the sourcing of goods produced in Vietnam for Big C stores.

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