- Law and Regulations-The laws and regulations prevailing during the time affects the strategic decisions. For an example there may be new rule that an acquirer has to make a public announcement before an acquisition. If the acquirer fails to make any public announcement, no acquisition will be approved by the law. All the deals are made according to the provisions of rules and regulations.
- Economic factors – Economic factors are the patterns of the demand and spending which the consumers want to follow. Customer tastes and preferences also change from time to time. There is no point in making a deal and acquiring an entity which deals in the product for which market is low and there is no demand.
- Technology Development – With the world growing with technology, there might be decrease and increase in the demand of a product. Also there might be an improvement in the product. The improvements make the habits and fashions change much quicker.
Define economies of scale and specialization as they are used in the content of mergers and acquisitions.
Answer: Economies of scale refer to fall in cost. Operating economies occur due to larger scale of operations. A merged business, due to its bigger size, is likely to enjoy more leverage in negotiating with suppliers, customers and other external parties. For example, a merged business may buy higher quantity and hence may claim higher quantity discounts or may ask for more favourable payments terms. A merger may allow savings in costs of common activities by avoiding duplication. For example, suppose A Corp and B Corp have 5 wagons each to carry their output to warehouse. Activities of both are seasonal. If season for A is summer and that for B is winter, a merged company can do the same work by 5 wagons instead of 10.
Specialization implies that every person or region specialises in the production of one particular commodity or service or some small process of production. An existing business may take over another business in entirely different line of trade. The principal incentive for such amalgamations, called conglomerate mergers is diversification. In the context of merger, it is the process of combining activities in such a way that worst of one matches with best of the other. The outcome of the combined activity is less susceptible to random fluctuations because both the entities are specialized in different areas. Suppose A Corp carries on production in India but earns most of its revenue from exports to USA. Another company, B Corp. Imports from USA and sells the imported articles in India. A Corp gains if rupee depreciates against dollar, i.e. when number of rupees available per dollar received from USA is more. B Corp gains if rupee appreciates against dollar, i.e. when number of rupees payable per dollar to be remitted to USA is less. So both will earn moderate profit. Since profits of the merged business are more predictable than those of the merging companies, risk, and consequently the cost of capital of the merged business should be less than that of merging companies.
What were the reasons behind the merger & acquisitions waves of the 1980’s and 1990’s?
Answer : The reasons behind the merger & acquisitions waves of the 1980’s and 1990’s are technological change, globalization, in addition to favourable economic and market conditions according to Weston et al. (2001)4 (Source : Weston, J. F Siu J. A B. Johnson. 2001. Takeovers, Restructuring and Corporate Governance. Third Edition ed. New Jersy: Prentice-Hall).
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The Technological Change: These contributed to the reduced costs and economies of scale more advanced distribution Channels, and development of new financial products.
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Deregulation - The industry-specific deregulation movement began in 1978 with the Airline Deregulation Act, which initiated the elimination of airline regulations and the Civil Aeronautics Board over a period of several years. Also in 1978, the Natural Gas Policy Act phased out the controls on new gas prices by 1985. The end of controls on domestic oil prices began in 1979 with an edict from President Carter.
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The Globalization – With the growth in technology, there has been introduction of cheaper and enhanced way of communications. The improved communication way has increased the globalization of every business.
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Economic and Market Conditions - The 1990s merger wave was also accompanied by economic recovery after the Gulf war, low interest rate levels and a recovery of the junk bond market. Share repurchases contributed to favourable cost structures. Haunschild (1993) observed that for the 1980s wave, board interlocks allowed knowledge about M&As to disseminate, diffusing the practice among firms.
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Tax Code Changes - The 1980s saw two major revisions in the tax code, the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986. Both contain provisions important to mergers. The 1981 act lowers the capital gains rate and accelerate the depreciation of stepped-up assets. The 1986 act eliminated many of the tax inducements to mergers by equalizing capital gains and personal income tax rates and restricting the advantages of step-ups and tax loss carryovers.
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Easing of Antitrust Enforcement - The 1982 guidelines clearly raised the market share cut-offs. For example, in highly concentrated markets, those with a CR4 of 75 percent or an H-index of 1800, the 1968 guidelines indicated government opposition to mergers between firms in which both the acquired and acquiring had more than 4 percent of the market. The 1982 guidelines raised this level to 5 percent.
