Changes in technologies triggered by new implementations need to be considered closely. Strategy researchers argued that Merger & Acquisition (M&A) between related firms are superior to mergers between unrelated firms (Lubatkin, 1983; Porter, 1985). Since innovation involves many factors beyond research, the technical team and manufacturing engineering teams must constantly coordinate and facilitate the integration of research finding from other research teams in order to develop, adopt, implement and take advantage of new technologies ( Singh and Sohal, 1995 ) .
In the competitive technology arena, investors perceive corporate value through a different set of standards and experts with industry insight may spot undervalued assets (Boer, 1999). Mergers between similar companies are combinations of firms that sell the identical or similar products, serve similar markets or are vertically linked to each other. (Blackburn, Lang & Johnson, 1990). However, when identifying related synergies between companies is difficult, a new evaluation model composed financial performance criteria can be useful for both the sellers and the buyers. Buyers who are not familiar with the target companies in an M&A deal may overlook or overestimate potential synergies in marketing, production or management. Rockart (1979) suggest that the relative importance of functions varies among firms according to the type of strategy adopted. While many merger researchers have been previously argued that mergers play different roles in a company's development, there are only limited empirical researches linking these separate roles together.
Methodology
The proposed acquisition by TSE International Corporation is a way to solve the problems that Yeats must to face in the near future; namely, Yeats desires much more funds to develop a new program and a highly technological supporter let the project going smoothly. But there still have some shortcomings derived from the acquisition take place, such as the EPS of Yeats must divide to TSE. The stock price of Yeats will decrease once the word of acquisition is released. So, we must estimate the all impacts of advantage and shortcoming of the acquisition on its own company. If Yeats accepts the proposed acquisition by TSE, then there are two ways of acquisition that they have to value: common-for common and asset-for-stocks. We analyze many-faceted situations of these two exchanging methods by referring their finance data and then suggest a better solution for Yeats.
Data analysis:
Evaluations on firm acquisition can quantify the link between technological research and commercial payoff. There were a great number of earlier researches focusing on production processes that will enhance productivity. The goals for such processes were to lower cost, to decrease lead-time, and to increase manufacturing flexibility. The situation presented in this case, the CEO of Yeats Valves and Controls Incorporation was more concerned about how much profitability and wealth his company and shareholders could benefit from the acquisition proposed by TSE International Corporation. Form his point of view, if the price is right, the TSE International deal will be a good one.
A number of essential implications derived from the acquisition take place implied that Yeats Inc. has to consider carefully. A good number of the strengths influenced their decision regarding the acquisition are as follows:
1. Yeats Inc. will become an independent operating division at TSE International.
2. All Yeats Inc. top management teams and employees will be retained and they’ll probably have much more opportunities for bonuses and advancement than before.
3. CEO of Yeats will get 5-year options to purchase 80,000 shares of TSE International stock at 90 percent of its market price at the close of the acquisition and an incentive bonus that will drive his pay increase.
4. CEO of Yeats will be placed on the board of directors at TSE International.
5. Yeats Inc. needed a deep-pocked partner to expand, and to bankroll more research and develop projects.
6. CEO of Yeats believes that Yeats Inc. would benefit from gaining access to a large marketing and distribution network.
7. As the company continued to grow, it would need to gain production know-how for high volume manufacturing. Yeats Inc. did not have this kind of expertise.
8. There had been an increasing trend of consolidation in Yeats Valves’ industry over last year. Yeats feared without a strong-muscled partner, Yeats Inc. would be swamped by competition.
9. Bill Yeats, chairman, CEO, and founder of Yeats Inc., has playing a spiritually leading role in his company. He has got a wonderful top-management team there, but they are all specialists. As Yeats neared retirement, he started to worry about no one could substitute the specific position for leading his employees. There is stability in the TSE International combination that’s worth something personally to him.
As aforementioned strengths derived from the combination, this deal looks splendid for Yeats Inc., but still has a weakness influences their decision concerning the acquisition. The employees, who have gotten used to an independent and entrepreneurial culture at Yeats Inc., would have trouble adjusting at a big firm like TSE International. However, if we just only analyze the proposed acquisition relating to strength and weakness, then this merger is a move that will help fetch a better multiple in the future.
However, the substantial capital of TSE not only can reduce the upcoming risks that Yeats has to face, but the technology possessed by TSE can also help Yeats develops its scientific program termed “Widening Gyre”. Yeats Inc. still can keep the good reputation of its name and organization. That can make sure that Yeats will not lose its primary advantages.
The second place, we must analyze the financial situation of these two companies. If any company has financial problems, the proposed acquisition will contain much more uncertainty, at which point, the scenario must be analyzed by different perspectives.
Exhibit 1 and 2 present the historical accounting data of Yeats and TSE. In analyzing the finance data of these two companies, we realize both of these two companies have a good financial performance. Although there are the few existing problems such as the ratio of net income decreasing every year, but the total financial performance of these two companies still good. The most possible reason of net income ratio decreasing is along with investment increasing. Yeats develops a program called “Widening Gyre”. It needs much more funds and technology to develop the project. Depending on this situation and the historical data of these two companies, the proposed acquisition can be regarded as a double-win solution for both Yeats Valves and Controls Inc. and TSE International Corporation. However, the next step is to determine which of acquiring method will be adopted; “common-for-common” or “assets-for-stocks”?
Exhibit 1
Exhibit 2
There are two exchanging methods for acquisition: common-for-common and assets-for-stock.
Common-for-common:
We can obtain the market price of Yeats stock in Exhibit 3. If we adopt the close price in March 31 as the market price of Yeats, then the current market price of Yeats stock is 31.50 and the market price of TSE is 20.69. The total number of Yeats stock is 1,440,000 shares. It means that the total value of Yeats is $45,360,000. But if TSE decides to use the average accounting data of Yeats Company, then the total value of Yeats is $34,110,000.
Assets-for-stock:
The total assets of Yeats are $42,124,000. If we compare these two acquiring methods, then we can find that the exchange ratio of common-for-common method contains more variable than asset-for-stock method. It means if they adopt the common-for-common method, then the deciding right of exchange rate is controlled in the TSE Company. There still have another problem of Auden Company; this company decides to release its stocks of Yeats if Yeats is acquired by TSE; the number of Yeats stocks belonged to Auden is about 12 percent of Yeats total stocks. This action will decrease the stock price of Yeats. Another issue is the P/E ratio of Yeats is lower than TSE. It means that the stocks of Yeats can generate more benefit than the stocks of TSE. If they want to keep the right of Yeats shareholders, then they must adjust the exchange ratio of common-for-common stock exchange. Accordingly, we suggest Yeats choose the assets-for-stock method. But the small company does not have enough bargaining power with big company. If TSE insists to adopt the common-for-common stock exchange, then we suggest Yeats try to increase the exchanging rate of stock to keep the right of their shareholders and keep the market prices of their stocks.
Exhibit 3
Exhibit 4
Conclusion
As the result of analysis, advantages are much more than shortcomings in terms of the proposed acquisition. So, we think the decision of Yeats is correct because Yeats needs substantial funds and technical support to continually develop its marvelous project. Further, Yeats Inc. will be more stable once they get a deep-pocked company as their parent organization. Yeats still has to keep the right of its shareholders. So we strongly suggest the asset-for-stock method is the best way for certain that the total value of Yeats Inc. will not be swamped. But, if TSE insists to implement the acquisition using common-for-common, then we suggest Yeats try to endeavor a better exchanging ratio to keep the wealth of its shareholders and the value of its stocks.
