Merger and Acquisition - Part 2
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Merger and Acquisition are the two most commonly used words of today’s business world - Merger and Acquisition introduction. Now every businessperson has realized that if they want to live in the business for long term, then they would necessarily have to grow. Growth in business is now as much necessary as much as blood is for veins.
Growth in business is achieved either through Integration or diversification. Integration can be both forward and backward. For instance, if a car making company opens it retail outlets for display of car then it is forward integration. And if the same company buys a steel and Iron producing plant than it will be backward integration. Diversification is another method of growth of a business. Let’s take the same car making company example. Say if a car making company starts its production for rubber wheels, car accessories or may even go for another line of production like fabrics, furniture etc. than its called diversification.
Let’s now have a view why these Merger and Acquisition take place.
Need of Merger and Acquisition:
Merger and Acquisition started with the aim of retaliating against the increasing competition in the market. After the Industrial revolution, their were a number of industrial units set up to gear up the supply of various items that can be sold in the market and that too at low rates. The results were an increase in supply and competition to sell products. To overcome this problem of competition, various small companies agreed to make Mergers, while the big companies started making Acquisition.
Through merger of two or more companies, one big company is created which could fight the growing competency in the market. The expertise of various small industries was used in a way to help all other merged companies to stay alive in the growing competition. Not only that, when these merged companies proved their supremacy over the market as leaders, their rates were also set to give them comfortable profit margin thereafter. Thus the result was the benefit of all those units who joined hands, came together and shared their synergy with the other companies in the group.
Acquisition also started due to Industrial revolution. When some small units were not able to cope up with the growing competition they got closed or their wanted to sell their properties so as to get a break out. At such time the big business owner’s used to buy these small and shutting down business units so as to increase their production capacity and use the plus points of that very units to increase profit margins. Acquisition of other business units, which are by no way connected to the present business, is also observed from the last few decades. That is a car making company is buying shoe-making units, Cloth manufacturing unit etc.
Thus through Integration and diversification the existence of the business for the longer period is confirmed. Merger and Acquisition is a tool achieves this goal. These days Mergers and Acquisition are mostly seen in the airlines industry. Delta airlines, Northwest airlines, United airlines etc are all moving towards this process.
A case study 1: Delta Airlines and Northwest Airlines.
Northwest Airlines is one of the world’s largest airlines with its hubs at various international places around the world. It includes Detroit, Minneapolis/St. Paul, Memphis, Tokyo and Amsterdam, and many more. In an estimate the company has almost 1,400 departures on daily basis. Not only that the company is also a member of SkyTeam, a kind of airline alliance that offers customers one of the world’s most extensive global networks and various international level facilities.
Delta airlines operates service to more worldwide destinations than any airlines in the world. Nearly 306 destinations in around 58 countries is the special feature of the company. The airlines also offer 517 weekly flights to 57 destination in Latin America and the Caribbean. The company also helps customer get benefited by earning and redeeming Skymiles. This company is also a member of SkyTeam and promises to give the extensive global network and international level facilitation.
In the last few months, Delta Airlines and Northwest Airlines were both in a talk for a merger, but no decision was taken for a long time. In the start of February, Richard Anderson, the chief executive of Delta Airlines told senator Amy Klobuchar (Minnesota Democrat) that both the airlines are having a talk and even working on the issue of Merger but till now they have not reached any agreement as such. Also the talks with the pilot’s of NorthWest Airlines are on the move to get the union support for consolidation. On the other side Doug Steenland, the chief executive of Northwest Airlines, discussed the vision of consolidation, in which the both parties expect no to make an agreement which results in massive loss of jobs for the people working in the company.
The main motive behind the merger was to take control over the skies and leave behind all the competitors. With this merger Delta airlines will become the number airlines carrier in the United States. The other reason, which was told by the management of both the companies, was rising fuel prices. By merger the companies expects to taker over the various surcharges that they have to pay over fuel and bring down the cost of flying.
Actually the cost of jet fuel in New York is more than $3.50 a gallon as compared with $2 in the last year. This hike in fuel prices became the root cause of this merger. Through this merger the company promises to create a roughly figure of cost savings of about $1 billion. Not only that the supremacy of the company will rise over the skies, that will result in giving the customers a more competitive rates of foreign travel.
The only problem here was the tension between the government, the pilot’s and the company regarding the possible elimination of jobs. It is expected that nearly 1,000 job positions will be cut down so as to bring down the costs of travelling industry.
On April 14th, the decision for the merger of the Delta airlines and the Northwest American airlines came in the public. The new company coming out of the merger, is expected to be named as Delta. Its base will be in Atlanta and the company will run under the services of Mr. Anderson. The first reaction of this merger cam from the stock market, when the stock price of the North west airlines declined. Reason being that for every one share of Northwest airlines the shareholders are expected to get 1.25 Delta shares. This resulted in the $1 Billion off the value of the stock price of Northwest airlines.
Case study 2: United Airlines looking for merger.
United airlines is one of the most popular airlines with its worldwide destinations As per the latest news from the Reuters (New York) United airlines is also looking for a merger. Reason is again the same. That is to come over the competitive rates of travelling and bring down the losses due to increasing fuel prices.
Jake Brace, the chief executive of united airlines, told analysts of Merryll Lynch that there is search going for a merger with the Airlines Company. They expect to join hands with those companies only, which has a strong hold over the Atlantic. Actually the hold over Atlantic signifies those companies only has more flight in the Europe and Asia. Not only that the company intends to strengthen its Caribbean and Latin American air travels. The company showed its clear interest in Northeast airlines, which has a good hold over customers in the Latin America and other southern countries. Still the company has not opened its secret regarding its interest in the specific company.
Thus the company has opened its door for any of the merger interested partner. As it wants to cover all its debts and bankruptcy position which rose after the September 11 attacks. Actually during 2001 and especially after the attack on United States the company came to the position of bankruptcy. And from many years it has been trying to fulfil their losses from that point of time.
Let’s now have a look at the number of benefits that the business people are getting through Merger and Acquisition.
Benefits of Merger and Acquisition in general and as per Delta management claims:
Merger and Acquisition has benefited the business people in number of ways. Among them the noteworthy benefits are stated below.
a) Existence of the company is confirmed, in any industry it may have diversified.
b) The synergy system increases production capacity.
c) Production or services are made available at lowest possible.
d) The benefits of the existing brand name can be used to boost the sales of the Merged or Acquired Company.
e) One business helps the other business to grow and expand its wings in different areas.
f) The companies through Merger and Acquisition can reach global level.
g) A big and improved brand name for the company comes to existence.
h) Profit margins also rise.
Benefits to the Employees as per Delta management. On April 29, 2008, Delta gave an enhanced program for its 100,000 employees and retirees. The program includes the facility to travel more than 390 destinations in 67 countries worldwide for free. This facility will be effective from May 6 onwards. The travel will be free on any of the two company’s flights. In addition of enhanced travel privileges following other privileges are also announced.
i. International employees are expected to receive a cash payment in lieu of equity holding by them.
ii. Increment in pay scale will also be considered.
iii. No voluntary retirement will be imposed on the employees.
iv. Protection of present pension plans for both companies’ employees is also confirmed.
Benefits to the customers as per Delta management. The combination of Delta airlines and Northwest airlines will give more choices to the customer about travelling around their various destinations inside United States or outside. Moreover the rates will be brought down to more competitive levels. The company also promises a superior travel experience. Regular upgrading the fleet and the services that makes flying more convenient and enjoyable by the customers is the target that company keeps before it enjoyable for customers. Additional benefits to the customers include the following.
An enhanced service to 390 destinations in 67 countries is promised.
An attempt to cover every important destination in around the world is expected.
Access to nearly 840 destinations in 162 countries is also expected to reach through SkyTeam Alliance.
Investment in 20 new wide body jets is also on the cards of the company.
Risks related with Merger and Acquisitions:
A number of risks also rise with the Mergers and Acquisitions. These includes the followings.
A. The losses or the bad financial conditions of other company may also effect the profitability of the present company.
B. Synergy as expected may not be achieved. Instead a weakness may have to be born by the Buyer Company.
C. The financial market may also turn down the proposal and brings down the value of stock of the Buyer Company.
D. The loss making conditions of either of the company may not improve and both the companies may move in more debts.
E. Management-Labor problem, Inter-Management problem or even Inter-labor problem may rise and the dream of success may fade.
Thus, the decision of Merger and Acquisition needs to be taken after careful consideration .Reason being that this decision on one side can change lives of Buyer companies to heaven. On the other side it may take the existing profit making company to the hell of debts.
Merger and Acquisition are two terms used very commonly in the business world. Its existence came into being right from the Industrial revolution. There are a number of benefits of Merger and Acquisition that attracts the present businesspeople to move in this direction. A number of business targets like low costs, high profit etc are achieved.