Financial crises, especially those termed as global financial crises, have made businesses of all sizes (small, medium and even larger ones) to enter in to a very undesirable situation. They have formed what can be termed as a new world order in which local and global companies are using a lot of resources to survive. Mergers and acquisitions become very common during financial crises as many companies are struggling to survive. Companies struggling to stay alive takes advantage of tax efficiency that is assured during internal reorganizations. The mergers and acquisitions are the most common means of dealing with the problem of financial crises. Mergers and acquisitions activities are very vital in assessing the performance of some markets and also for economic environment in a given country. The investors may use the results of mergers and acquisition to assess if the country or a certain market is worth to invest in. Mergers and acquisition is a very important activity in the financial market and thus may have some links to the financial crisis. In recent years, may researchers have attempted to investigate the impact that financial crises have on merger and acquisition. Mergers and acquisition, commonly referred to as M&A, denotes a part of corporate strategy pursued by organization when they combine two companies to form one. The two terms merger and acquisition are normally used together but they differ in some respects. Acquisition arises when one company takes over another and become the legal owner of its assets and operations. The acquiring company gains full control of the acquired and claims ownership of all aspects of that company. Merger, on the other side, is a complex activity and may take different dimensions like triangular merger, and statutory mergers among others. Merger is defined as a combination of or two or more companies to form one large company. The decision in this case is usually agreed between the two firms.
The concept of M&A is beyond transferring the rights to an asset of one company to another. It also includes distribution of the likely risk between the two firms. He terms of transaction between the two firms are more confined to the distribution of risk. The documentation made in the process is meant to obligate the parties to legally distribute the risks as agreed. The practice has greatly been affected by the financial crises that have been taking place in various parts of the world. According to Grave, Vardiabasis and Yavas (2012), “The global financial crisis is changing the landscape for mergers and acquisitions (M&A) and identifying new M&A targets that indicate a shift with significant impact to our global business practices” (p. 1). The companies have become very cautious in the manner they make investments. They are diversifying their investment portfolio to other parts of the world or other countries due to the risks that are brought about by the financial crises. The geographic diversification and investment are also extended to the secondary markets in order to mitigate the risks. Financial crises arise when there is a sudden loss of a large part of the nominal value of financial assets in the financial market. The other aspects of financial crises include clashes in the stock market, financial bubble bursts, and currency crises among others which have many times hit the financial market in the world. Sovereign debts defaults have also be experienced in the purview of financial crises. Financial crises do not necessarily affect the real economy but causes a great loss in the paper wealth. Though many theories have been developed to explain how the financial crises come about, there is consensus among the economists concerning how they can be prevented. Mergers and acquisitions aims at uniting companies to create a more powerful company with structure that can withstand hard economic times. They are also used when a company is considering expanding into new markets which have new prospects. Companies that do not find it imperative to take mergers and acquisitions opt for internal restructuring. According to Eurofast (2010), restructuring the internal activities is done in such a manner as to ensure that there is efficiency and significant cost saving. Although the recent financial crisis that occurred in 2007-2008 had its epicenter in the United States, its impacts spread to different parts of the world. For instance, it spread in Europe and greatly affected the performance of the financial markets. The spillover was possible due to the correlation between American Market and other markets in the other parts of the world. The global markets are normally related through contagion and risk sharing. According to CernatGruici (2009) the financial markets, especially the stock market, are closely related to mergers and activities. This may not be the sentiment by some researchers but Cernat-Gruici confidently states that the most recent global financial crisis greatly affected merger and acquisition activities in European market. The most affected region in the European Union is the Romania region. According to Grave, Vardiabasis and Yavas (2012), the wave of merger and acquisition are believed to be ended by a financial crisis or regulatory changes that are major enough to quench the wave. This shows that Mergers and Acquisition are majorly affected by the overall economic environment in a given economy.
The main idea of this research is to explore and validate the impact that financial crises have on M & A operations. The information regarding financial crises generally will be reviewed from the available literature. The literature about the mergers and acquisition and how they relate with the financial crises will also be reviewed. A case study of a failed takeover in 2007 – Royal Bank of Scotland RBS & ABN Amro will be reviewed and used to meet some of the research objectives. The changes that are induced by the financial crises in the M&A market will be addressed in this research.
Significance of research
The research will be helpful to a number of parties taking part in the M&A operations and other who are affected by the financial crisis. It will specifically be significant to the following parties:
The parties to the M&A operations
These parties will learn the effects of carrying out the operation during the financial crisis. They will be in a position to take the necessary considerations before they undertake the operation.
The external investors interested in the Merging companies
They will learn if it is worthy to invest in a company that is taking M&A during the financial crisis period. They will know the implications of making the investment at that period.
The Authorities and financial services regulators
They will know the measures to take regarding M&A operations, especially during the periods dominated by financial crises.
Originality of the subject
There is a lot of research done on financial crisis and M&A. However, the researchers normally concentrate on researching about the causes and general impacts of financial crisis. They also analyze the success and failure of M&A operations. This research is unique and original because it concentrates on the impacts that financial crisis has on the M&A operations, a field that is hardly researched on. It analyzes the situation based on a case study of acquisition that happened and failed recently. The acquisition of ABN Amro by Royal Bank of Scotland RBS and other parties happened in 2007, a period that was dominated by a major global financial crisis. This makes this research original and unique.
Financial crises have become very common in the world today. Individual countries may face crises but also the crisis may also be of global nature affecting many countries. There have been major crises in the world that have made history. For instance, the great depression that took place in 1929 and the global financial crisis that happened recently in 2007. They began in the United States of America but spilled over to other countries in the world. Researchers have tirelessly been trying to figure out the major courses and they come up with different causes but which complement one another. According to Roberts & Jones (2009), self-interest of the organizations and institutions that are players in the financial markets play a big role in the emergence of financial crisis. He further argues that the fall and the rise of the markets of collateralized debts is the main cause of the crisis, especially the recent crises. There has been instability in this market and there is a lot that need to be done to ensure that the situation does not worsen. The borrowers defaults the credits advanced to them and the financial institutions collapses. According to Krugman (1999), the financial crisis also hits the currencies in the world. The crisis does not affect the banks a lone and therefore cannot be solved by concentrating on the banks a lone. The epidemic of financial crisis is one of the major results of the debt crises and cannot be solved by fixing the banks alone. More strict measures need to be taken to ensure that all dimensions of the crises are taken care of.
The relationship between financial crisis and M&A
The financial crises greatly contributed to the deterioration of the business environment. The success of a business depends on the economic performance of the economy as a whole. Economic performance of a country is directly affected by the existence of a financial crisis. The relationship between a business performance and the economic performance is direct. The companies wishing to restructure their operations should be very keen to observe the economic times and situations at the time of restructuring. Most of mergers and acquisitions that are carried out during the periods dominated by economic crises hardly succeed. The performance of most businesses tends to decrease during the period of economic meltdown. Financial institutions are the most affected during the financial crises. They perform activities that are very vulnerable to harsh economic conditions. For instance, giving mortgages to people, advancing other credits facilities like personal and business loans, all of which are vulnerable to financial crises. Mostly during the periods of economic crises, the cost of living tends to go up and the means of earning income also become rare. Companies start retrenching because they cannot manage to cater for the salaries of the workforce. On the other hand, the cost of lending increases and most people and corporations are unable to service the loans. The rate of defaults of credit facilities increases and banks and other financial institutions suffer from liquidity shortages. The customers develop fear that these financial institutions might collapse. They worsen the situation, especially in the case of banks, where the customers withdraws their assets for fear of losing them should the company collapse. When in the case of banks withdrawals exceed deposits per day or a given period of time, the banks suffer from cash drain. They cannot recover the money lent out as loans at the same rates as deposits are being demanded by the customers. In most cases, these banks end up collapsing or in rare cases bailed out, mostly by the state. The major areas of business (mostly those dealing with the financial services) that are affected by the financial crises are business performance, the rate of borrowing, repayments of loans and cases of defaults, and customer acquisition and retention among others. During the financial crises periods, the performance of businesses goes down because the cost of living is high and the consumers reduce their rate of consumption. The rate of deposits and savings, in the case of banks, reduces. The level of profitability of companies reduces due to market constriction. The rate of obtaining mortgages and repayment increases as well as that of other credit facilities. The number of mortgages and loans taken by investors reduces and most of existing ones are defaulted. The banks cannot recover them because any attempt to sell the customers’ assets to recover the loans frustrates them. The asset value reduces to decreased demand and, therefore, they can only be sold at a loss. The companies will be struggling to survive and they look for every means to survive like Mergers and Acquisition. However, mergers and acquisitions are rare during financial crises because of poor performance of companies.
The relationship between financial crises and M&A can be justified by looking at the discussion above about the impact of the financial crisis on the business. The number of transactions in M&A reduces significantly during the financial crises periods. According to Ermolenko (2009), “the financial crisis has moved through the M&A like a glacier and as usual it has been painful for the market” (p. 1). He states that the main feature that characterizes the presence and impact of financial crisis in M&A is the decrease in the number of transactions that are carried out. He further states that the current economic condition is a very crucial factor that cannot be ignored during M&A operations. The relation between financial crisis and M&A exist in the sense that it has to be considered during the transaction. The performance of the company has to be considered during M&A operations. This performance depends of the financial status of the economy. If there is financial crisis, the performance is poor and the company cannot be attractive M&A. The purchase and sale of business considers a number of factors and financial condition of the business is a major one.
Economic literature on financial crises
The year 2007 marked the beginning of financial crises (Sharma, 2010). Financial stability became the concern of financial institutions and governments all over the entire globe. There are various speculations about the possible causes of the crises. It is believed that this crisis began when the U.S lowered its lending rates on mortgages in beginning of the millennium. Various financial institutions were affected as a result of the increasing levels of delinquency as well as in foreclosures. It is still unclear why the financial crises arising from housing became very hard to contain. It is also unclear why the tools that were used in the past to contain such situations failed to work in the global financial crises. In addition, it is still a mystery how the financial crises that is believed to have started in the United States affected many financial institutions globally.
Despite numerous efforts to contain it, the global financial crises intensified in 2008. In early 2009, the situation was getting worse and almost the entire globe was feeling the effects. Negative news on the magnitude of financial crises was increasingly becoming common. Although there have been attempts to try and explain the origin of the global financial crises, it seems the debate will continue for a long time since no answers are forthcoming. Scholars are still trying to figure out the actual cause of this financial crisis that affected a lot of businesses and individuals.
Financial and economic crises were experienced in the in the whole world. The impacts are not easy to assess. The fear of the consequences associated with this crisis is real and companies have to face it every day. One of the ways that companies can use to gain strength is through mergers. This is can be a lasting solution to companies that are not able to pay for various operational costs. This is a very effective strategy that can help in financial recovery.
Undoubtedly, the global financial crisis has had a negative impact on all countries. Countries are experiencing serious recession that has not been experienced in the past few decades. It is hard for economic experts and analysts to accurately predict the duration that this crisis will last. The impacts of the crisis are also hard to predict or estimate. Due to the intensity of the impacts of this crisis, countries such as the U.S have tried to come up with measures to mitigate the effects of the crisis. Financial institutions are the ones that have been hit hardly by the effects of the crisis. Consequently, large and medium sizes enterprises have also suffered from the effects because they are not able to receive funding from these institutions. It is not uncommon to hear on a weekly basis of banks or other companies seeking to be protected from bankruptcy. It is also common for the government to intervene in many instances where such institutions are threatened with bankruptcy. This is usually done to protect the economy of a country. Some of the countries have put forth measures to mitigate the impacts of the global financial crisis on its economy. For instance, the UAE government has availed some amount of money to help banks deal with the impacts of the crisis. Moreover, it has laid down clear strategies to help in ensuring that bank deposits will continue for three years. A bill has been drafted to serve this purpose. The central bank also gave some international banks licenses to help in giving money for banking operations as well as for commercial projects.
The move came after the central bank had decided not to offer international banks licenses for a while to reduce the rate of competition between these banks and the ones operating locally. After opening up the process of issuing licenses, they were only given to the business sector and not to businesses being run by individuals. Despite this move, the central bank did not reduce its interest rate. This was mainly due to the rising inflation rate in the UAE. To deal with inflation, it was important for the interest rates to remain high. This has led to a decrease of liquidity on the market.
Monopoly had serious negative consequences on how the markets performed. This made the US enter into a financial crisis that started in 1904 and ended in 1907. During that period, major institutions were affected. They included the National Bank of Commerce, which was the biggest bank in America at that time. The effects of the financial crisis on this bank were very severe to an extent that it went bankrupt. Other banks therefore, feared to deposit their money there. To address the issue of monopolistic conglomerates, the U.S came up with laws that would help deal with the issue effectively. These legislations include Sherman Antitrust Act and the Clayton Act. The laws helped in dealing with the increasing cases of horizontal mergers.
Amidst the global financial crisis, the rate of mergers and acquisitions has also gone high. This is happening in both financial institutions and other companies. Some analysts believe that such a move will go a long way in helping companies to become stable and continue operating. However, there are others who believe that the current financial crisis do not offer a favorable environment for mergers and acquisitions to take place. This is particularly because of the possibility of failure because of lack of enough funds as well as constraints in getting credits.
Mergers and acquisitions are becoming increasingly common in the business world. The number of companies involved in these activities is growing at a high rate. The increasing rates of M&A are attributed to globalization, global financial crises and low cost in funding (Moeller & Anna, 2009). This makes it needful for companies to build large entities in order to compete effectively with others in the market as well as increase profits. Globalization has also led to an increase in the level of investment causing companies to expand to other countries through mergers and acquisitions. Mergers and acquisitions are frequent occurrences in companies today. Mergers of equals entail the fusion of two companies which have equal status. They borrow the best practices from each other.
According to Roberts & Jones (2009), the rational choice theory has been used to attempt and explain the causes of the credit crisis experienced by many countries globally. The theory postulates that one of the causes of the financial crisis is people who do nothing. During this crisis, it was feared that credit markets would be unable to continue functioning. People feared to move out of their perceived autonomy and invest their money in various projects. During this people would not risk getting into any business deals because they were afraid of the risks that they exposed themselves to. In an attempt to protect themselves from the risks associated with investing their money, people actually contributed to the financial crisis. The crisis caused panic among many people as little information was available about it. People had a false sense of security by failing to invest their money without knowing that what they were doing was actually contributing to the crisis.
It has been speculated that participants in various markets were aware of the imminent crisis but kept on with their activities with the hope that they would not be affected since they were big enterprises. There were clear warning signs of the imminent that many markets ignored. This is because they believed that they knew what they were doing and that they would not fail since they were big. Failure to acquire knowledge about the crisis led to the creation of a favorable environment for a market collapse. Too much concentration on self-interest by institutions accelerated the financial crises.
The financial crisis witnessed in the 19th and 20th centuries was mostly caused by numerous recessions that happened in the business world. There are many theories that have been advanced in an attempt to explain financial crisis and the possible steps that can be taken to deal with this problem. One of the examples of cases of financial crisis includes banking crisis. This is a situation whereby people who have bank accounts withdraw large amounts of money from their accounts. Most of the money that banks lend out is got from the deposits that customers make. Therefore, when most of the customers demand for a lot of money in withdrawals, it becomes hard for the banks to give their customers this money. An example of such a case is the banking panic that occurred in the United States in the year 1931. Banking crisis usually happens when banks take a risk in their lending process and as a result, most of the loaners fail to pay back.
Another example of a financial crisis is speculative bubbles and crashes. This occurs when a lot of people buy some commodities with the aim of selling them later at a profit. When there is a bubble in the markets, the risk if collapse in the prices of assets is usually very high. Buyers continue purchasing more assets with the ultimate goal of selling them at a higher price in future. However, what buyers forget is that when they decide to sell these assets, the prices will fall instead of increasing because many people are selling the same items. It is not easy for buyers to accurately identify bubbles in order to avoid the risks associated with such deals. One of the most recent bubbles is the one witnessed in the housing sector of the United States. This started in early 2000 at a time when the prices in housing were favorable for many people to buy but lacked people to sell to when the people wanted to sell them.
For a lengthy duration of time, nations in the world have experienced recession. This refers to a situation whereby a negative GDP is experienced. In case the recession takes an unusually long duration, the period is normally referred to as depression. When a country experiences long durations of very slow growth that is not necessarily negative growth, the situation is referred to as economic stagnation. There have been arguments as to the causes of recessions. Financial crisis is one of the reasons that have been attributed to economic stagnation. A good example of this is the great depression. Before the great depression, man y countries went through periods of bank runs and crashes in the stock markets. The great depression affected many people globally.
For an investor to be successful in the financial market, it is vital for them to accurate speculate what their competitors in the same market are up to. Financial crisis at times arises when investors fail to invest their money in specific assets because they expect that others will do so. There are certain theories that have been advanced to try and explain financial crisis. They include the Austrian theories, Marxist, Minsky’s, and coordination games theories. The extent to which the Marxist theory is applicable depends on the profit that the government gets from the taxes as well as the proportion of that money that is invested in form of welfare and other benefits to help its people. It also depends on the number of people in the country who are employed as opposed to those who have their own businesses. Some businesses are not easy to start since they require a lot of resources to operate.
Misky’s theory of financial crisis is mostly valid in a closed economy. He states that one of the most dominant features of a capitalist economy is financial fragility. When an economy is characterized by high fragility, the possibility of a financial crisis being experienced is also very high. He further recommends three approaches that companies can use to fund their operations. The first is hedge financing. The other one is speculative finance while the last one is Ponzi finance. Among these three, the last one is the one that is responsible for financial fragility. This is because this does not cater for costs in interest. Therefore, companies are forced to borrow more money or dispose some of their assets in order to pay any debts. This is done with the hope that either the value of the assets they own will increase or they will get more income to help them service their loans.
Companies opt for hedge finance after they go through a recession since they lose much financing during this period. However, after full recovery from the effects of a recession, firms opt for speculative finance. This means that the profits they get will not be used to pay off the interest always. They continue operating with the assumption that they will get a lot of profit which will help them pay their loans without any problem. The availability of more loans leads to an increase in investments which results to economic growth.
The effects of the recent global crisis began to be felt across many countries globally between 2007 and 2008. The crisis was characterized by a decline in the world stock markets, and the collapse, mergers and acquisitions of large financial institutions.
Efforts being put to contain the crisis are only helpful to those who are responsible for causing it. The crisis has affected people all over the world, particularly because of globalization which has made the world a global village. Analysts believe that the crisis could have been avoided if the ideologies adopted in various economic sectors were more considerate of other people’s concerns. The effects of the crisis are so adverse that some of the largest financial institutions have experienced a shake-up. Some have been bought by other institutions which have been able to withstand the effects of the crisis. Some large banks and financial institutions that play a major role in the government’s economy were bailed out by the government. The amount of money that has been used by governments to bail out financial institutions that have been affected by this crisis has gone up. To encourage foreign investors to start business in their countries, various governments have moved to try and give confidence to the investors that their countries are safe for their business operations. In some countries in Europe, the governments have come up with strategies to lure investors which include an increment in depositors’ savings. Another strategy has been nationalization of banks. The people who are adversely affected by this crisis are the poor and people who own small businesses since they do not have an opportunity to be bailed out by the government as it is the case with large financial institutions.
Mergers are transactions that play a very major role the continuity of a business. It is not only important for the organizations taking part but also to the stakeholders. There are many consequences that the organization and its stakeholders, such as the community and creditors, have to face in case merger ventures succeed or fail. The employees and the competitors also experience some of the consequences of either success of failure of a merger. Despite the optimism that many companies have when getting into a merger, there are usually cases of failure in these deals. These failures are especially experienced by stakeholders when the merger fails to create value for them. Therefore, it is important for an organization to know the possible causes of failure for mergers and try to avoid any pitfalls to make their venture successful (Mallikarjunappa & Nayak, 2007). The use of internal auditors is one way that companies can avoid failure in mergers.
It is common to find mergers and acquisitions analyzed as if they are the same in various business literatures. However, the two are not identical and a clear distinction should be drawn between the two. In the case of a merger, two organizations come together and the result is a single organization made up of the two companies that have joined together. In the case of an acquisition, one business becomes dominant over another. This means that the dominant company controls the operations and net assets of the other company. This makes the resultant entity more competitive. The number of mergers and acquisitions is increasing. October 2008 was a very significant year for M&A. this is the month that recorded the highest number of M&A withdrawal. This is mostly attributed to the global economic crisis and other factors such as lack of liquidity.
Some scholars argue that the probability of mergers succeeding is very low. They view the success of mergers as something that is contrary to the reality in the world of business. Statistics indicate that only 20 percent of the merging companies create value. The rest do not help in value creation (CernatGruici, Constantin & Iamandi, 2010). The process of merging two companies is not usually easy. There are risks associated with it which could lead to loss of sales as well as the loss of people who are very important in an organization. Therefore, it is important for companies considering having mergers to have a fair and disciplined approach when doing so in order to increase their chances of success.
Before a merger fails, Law Update (2009) outlines some warning signs that every company should look out for. They include signs in financial strains for instance cessation of any links with internal and external auditors, alterations in accounting methods, and people in leadership positions in the company selling their shares. All these are signs that may point towards a possible insolvency of the company.
Some warnings signs may also be signaled by various operation areas within the company. This includes a very high turnover which is a major pointer of the possibility of the company’s instability. Additionally, inability of a company to pay huge debts that it may have taken from state bodies or other organizations may be an indicator of an imminent failure of the company. Other warning signs may be from the transaction itself. This includes the violation of various laws involving transactions and taxation.
Factors that leads to failure of a merger
Lack of experienced managers when a company decides to form mergers is one of the leading causes of failure of mergers. It is not common to find managers who have gone through the experience of a merger as such occurrences are not daily happenings in the business world. Therefore, companies forming mergers may not have experienced managers to take them through this process successfully. It is vital for managers to consult widely with people who have the experience as well as other specialists to ensure that their venture is successful.
Another possible cause of failure in mergers is the absence of due diligence analysis. This refers to an in-depth analysis of the company forming the merger or the company being acquired. Before any merger or acquisition takes place, it is important for a company to do an in-depth analysis of the assets, finances and the management of the new company. The company involved in mergers and acquisitions should put forth a team of specialists who include lawyers, accountants and tax experts among others. The accountants help in making a review of the company’s financial statements. Lawyers help in carrying out investigations concerning any exposure of the company to various liabilities to other people or organizations. The team that is put forth should be comprised of independent people to avoid bias and compromise in their investigation.
The process of due diligence examines various issues such as: reviewing the company’s financial statements to know the assets that a company has as well as the financial profit and loss account of the company. A review of the management and various activities in the company is also carried out. This helps in the understanding of the financial statements. It is in this process also that the company’s level of conformity with the necessary laws is checked. In so doing, a company is able to determine if there are any past incidences that may have legal implications on the new company. The process also involves the review of transactions and important documents in the company. This ensures that there is adequate documentation of all the important information about the company to make it easily accessible to the other company. Finally, a tax review is also carried out. This helps in confirming whether the company has complied with the tax requirements of the country where it is operating in.
In addition to these, it is vital for a company to look keenly into the manufacturing process, characteristics and marketing issues of a company before any merger or acquisition takes place. Product design, advertising strategies, the customer base and the profile of employees are some of the issues that the company should also consider. The location of the headquarters of the company should not be used to determine the eligibility of acquiring or merging with a company, regardless of how prestigious the building where the headquarters is located.
Another point that should be considered is the issue of cultural practices. Companies with two different cultures may experience major problems if the merge or acquisition takes place without considering the differences in culture that exists between them. The issue of cultural differences is usually ignored as people concentrate on an in-depth analysis of systems and various business processes. As a result, some people try to impose some of the existing cultures on others which may not always be successful. In most cases, the employees may resist accepting any cultural change in the organization. It is important for managers to be conversant with the cultural differences that exist between the companies. This will help in avoiding conflicts and will enhance post-merger success. Understanding the culture of the two merging companies helps the managers to look for ways of making them compatible.
Lack of communication is also a leading cause of failure for many mergers and acquisitions. Failure to communicate leads to lack of certainty and lack of security among employees. This may cause them to leave the organization and replacing them may not be very easy. Employees working for these organizations may start relying on rumors to get important information about the organization. The information they get may be untrue but since they do not have any credible source of information, they may be forced to believe what they hear. Managers should communicate with the employees about the merger or acquisition and ensure them that although the process is not easy; it is possible because it is a great opportunity for the company.
Another cause of failure in mergers and acquisitions is the lack of managers who have experience or ability to exercise control over companies in different industries (Ravichandran, 2009). Specialist advice should always be sought by managers to ensure success in their ventures. Managers should also make sure that there is a clear definition of the roles and responsibilities of various people working for the company. This will help in eliminating any conflicting roles that may arise in the cause operation.
A merger leads to doubling of functions. The team that is in charge of integration should ensure that communication of responsibilities and duties is done early enough. This also motivates the employees and increases productivity. The team should also offer employees opportunities for personal development and give them remuneration commensurate with the roles assigned to them.
Internal audit of a company is a very vital process in forming of mergers and acquisitions. Internal auditors are involved the due diligence process. According to Davison (2001), some internal auditors ranked cultural differences and poor planning as the leading causes of failure in mergers and acquisitions. Involving internal auditors can go a long way in improving the quality of management in the process involved in mergers and acquisition. According to Selim (2002), it seems that managers do not have an in-depth understanding of the importance of involving internal auditors in the whole process of mergers and not just in the due diligence stage only. Internal auditors should be involved from the earliest stage. There is need for companies to communicate with internal auditors about their plans to form mergers and acquisitions. The company that is being targeted for a merger might have different systems from the other company. The cost of integrating the systems of the two companies can be reduced significantly if documentation is done effectively. Auditors can help in identifying the risk involved in the mergers. However, companies involved in mergers assume that the role of internal auditors starts after the actual act of merger has taken place.
External consultants should be involved in the merger process to ensure success in the fusion. Internal auditors provide vital information about the acquired company including its financial status. Information given by auditors should be followed to avoid cases of failure in the mergers.
Distinction between Merger and Acquisition
Merger refers to the fusion of two companies whereby one company hands over everything it owns to the other company. Therefore, the recipient company continues to exist while the other one ceases to exist. The existing company assimilates the other one together with its assets and the shareholders. In the case of acquisition, one company buys the assets and the stock of another company.
The processes of merger and acquisition are done differently by different companies. The position of the shareholders is one of the major differences of M&A. In the case of a merger, the shares owned by shareholders of the company being assimilated are exchanged for the shares of the other company. In the case of an acquisition, the target organization continues with its operations and the shares it owns are handed over to the shareholders of the company acquiring it. The company pays in cash or is given the shares on credit. The acquiring company, therefore, has the capability of controlling the assets and liabilities of the other company.
Acquisition takes place when a company buys a substantial amount of assets from another company as it is the case with a full takeover or purchases part of the shares of the other company as it is the case with a partial takeover.
Types of mergers and acquisitions
There are various methods involved in the formation of mergers and acquisitions. The methods vary depending on the goals that a company aims to achieve. There are two broad categories of mergers. They are horizontal and vertical.
In the case of a horizontal merger, the process involves multiple companies working in the same industry. The resultant company expands into new markets by using the distribution channels available in the companies. The administrative skills are also used to expand the company at a reduced cost.
Vertical merger takes place when companies that produce complementary products unite to form a single company. Vertical mergers can either be forward integration or backward integration. An example of forward integration is the case of a textile producer seeking to access new markets for his products through mergers and acquisitions with companies that sell such products. An example of backward integration is the case of a manufacturer looking for ways of creating a steady supply of inputs used in the manufacturing process through mergers and acquisitions. An example of such a venture is the acquisition of vast plantations of rubber growing in Africa by Goodyear Tire Company. This would help in ensuring that there is a constant supply or raw materials required in the manufacturing process.
It is also possible to have a mixed merger. This is a situation whereby a vertical and a horizontal merger take place at a go.
Reasons for mergers and acquisitions
The main objective of such deals is purely for economic gains. The aim of most companies that join together is to reach certain objectives that may be hard to meet independently as well as deal with any problems that they may be facing presently or which may arise in future.
Companies also merge to increase their competitive advantage over other players in the same field of operation. Merging also leads to an increase in profit and improvement in the company’s performance.
To try and explain the concept of M&A, various theories have been advanced. The differential efficiency theory is one of these theories. The theory views M&A as attempts to improve the performance and the efficiency of the companies involved. Therefore, a company whose performance is not satisfactory would aim at having a merger in order to boost its performance and increase efficiency. The level of performance and efficiency would then rise to the level of the firm that it is merging with. This theory has some flaws. This is because it implies that the target firm does not contribute to the efficiency and improved performance of the other company, which is not true. However, improved performance and increased efficiency still remain as the primary objectives of the companies involved in M&A.
Tax saving theory is the other theory that is used to explain M&A. The theory stipulates that M&A leads to saving of taxes for the resultant firm. In addition to tax reduction, M&A lead to low costs of operation.
Inefficient management theory also attempts to explain the concept of M&A. this theory has some similarities with the differential efficiency theory. The difference between the two is that the inefficient management theory only deals with the efficiency of management and the performance of the company. The theory suggests that lack of efficiency in the management of a company inevitably leads to a takeover by another company that is more efficient in its management. On the other hand, the efficiency management theory covers a large scope.
Managerial aspirations theory suggests that the main reason for M&A is managerial aspirations to succeed.
Undervaluation theory suggests that the market does not value the company accurately. Consequently, when the information about undervaluation is released to the buyer, they may have to pay more for the acquisition of the company.
After-Merger Market Value Theory
The theory argues that the value of the merged companies increases significantly after the merger than the value of the two companies combined prior to the merger. A merger gives companies an opportunity to make use of economies of scale and enjoy the benefits accrued to them. However, economies of scale do not necessarily lead to an increase in the company’s market value. Karl Max is one of the opponents of this theory.
Market Control Theory
In trying to explain M&A, the theory suggests that M&A increase in size and they also acquire a good reputation. Consequently, the company is able to exercise control over other companies. In addition, it influences major economic decisions and is involved in the policy making processes. Large organizations are able to exercise control in many areas, particularly in the political arena. They are also involved in the making of policies that govern foreign and local investors’ business activities within the country of operation.
Strategic planning theory
According to the proponents of this theory, mergers are formed after the strategic plan of introducing major structural changes in firms involved is done carefully. The introduction of major structural adjustments is aimed at helping firms to compete effectively with the rest in the business field both locally and internationally.
All these theories attempting to explain M&A achieve this purpose to some extent. The first cases of M&A were witnessed in the west in 1898. This happened when over 100 companies were assimilated by others as a result of M&A. most of the horizontal mergers that took place then happened in the natural resources industry. It is these mergers that led to the formation of large companies that dealt with iron, steel and oil, among other products.
The impact of financial crises on M&A operations
Volatile and uncertain environment
According to Woods (2009), the working environment of merged entities is always favorable. This is particularly so because of the global economic crisis that has affected individuals, businesses and governments globally. According to Johnson (1968), the environment is not friendly now that the public does not have money to purchase the products that companies are investing heavily to bring into the market. This has led to massive losses because the products that companies are producing have no ready market. Therefore, companies are stagnating in their operations as they are not able to continue investing into the production of more goods and services. When products take longer than usual to be sold, companies experience slow rates of growth. Merging companies aim at maximizing their profits and having competitive advantage over the rest in the same market. In doing this companies seek the help of legal experts who come with legal implications and are at the same time costly (Mckelvey, 1894). The laid down objectives are at a snag due to bad economic implications of the public. The target outcome is not realized thus breakdown of contracts which to be biding. In this view merger and acquisition are not the best move lest the whole entities which are coming together stop operating. The notion of focusing on the paper work should be eliminated. Companies cannot tell when the market is viable for there are many companies providing the same services with even reduced costs having increased operation cost and reduced profits. Accumulation, as Karl Max puts it, reduces profit thus the ability to repay debts in the present financial crisis is vital and wanting.
Vicious cycle in the market environment
According to Peltfor (2008), the current trends in the markets are changing day in day out with much implications resting on the side of the public. The market is not static, hence changing and the same ought to be with the companies. The companies should be changing as per the demands of the market. This has financial implications and companies may need to make serious sacrifices that are going to be costly in the long run. It cannot be predicted when to act and when to do what thus guess work rules making it difficult to reverse when the target turns out negative. It is with great concern that care must be taken in order to tell when companies are running away from the market which is demanding and demanding competition in the present financial crisis thus having the option of selling off the only priority. It is in this era where stable ways of doing thing are welcome, much is needed in diversifying for the market is not known nor will it be determined with the company. The output aiming at having this realized ought to have much planning and putting in to mind what will happen in future. Need for the experts who will be responsible for this work and thus increasing the cost of production. This also needs people on the ground to update on what is the ground. Much will be needed and on area where this is taken to be the way do away with employees from the merged company thus bringing the work log making it impossible in meeting the cost. This makes it a question of debate before the merging and acquisition.
According to Peter (2008), the cost of living is going high day in day out and thus with the cost of production. The public have felt the financial crisis and mechanisms aiming at increasing profits will not have the general public as the resting point. Prices need to be reduced to attract the public to a given service thus making it difficult to repay the debts and even clear the bank loans. It is with this notion that calls are made for pure and clear guidelines that are aimed at reducing the operation cost which ought not to be of the case with the aim of making wonders out of the financial crippled economy. Accumulation leads to reduced profits that merger and acquisition are minimal and their implications are serious in the present economy (Evans & Steve, 2010). The general public is to pay for the services and they also have felt it thus looking for cheap though low quality to push the life forward waiting for the government is agenda in reviving the economy. The implication of this makes difficult to comprehend well successful way of realizing broken dreams of becoming economic giants in the present economy (Harman, 2009). The question that underlines this is; of what importance will merger and acquisition prevail when there is financial turmoil in place, where will the retrenched employees go and will they manage enjoying the services. This leaves the rule of business which is profit making with more questions than answers. The dilemma of it all makes it impossible for merger and acquisition because the outcome for the same to face more or less negative implication on both sides. Those who will go forward to enact the same fear being declared bankrupt thus retrieval of the operating license. The notion is wide spread making it outcry for small companies which are crying foul of the financial crisis.
According to Daniel (2009), the investors who come up with the idea of forming up an entity have something in mind and that is; making profits. When this hits a snag with fear of disappearing completely they take note of the much wasted time and uphold the virtue of tolerance in the line of duty. The idea of being sub-merged in another’s with no voice of controls tells more about business ego. The investor fear of the future with escalating cost of living forcing the citizens or a given country to live on trying employment is the of investment. The public are the target of any investment thus the merger and acquisition issue does not go well with the present line of finance. These who are taken to have are also crying with little answers more than questions (Meir, 2005). The aspect brings with it into the market elements of doubt thus all ought to be done are known in the pieces of papers and not the practical field. Much awaited for are as a result of the said redemption in the line of duty. The mergers and acquisitions are conjointly intertwined thus have no ground or fear disintegration with immediate cancelation of operating license if they are given priority. The combination has a number of implications with much of them coming with who joins who in order to achieve the desired goal of interest. Many bring with them their failing operating mechanisms making it impossible for achieved targets to be realized. It is with this redemption that merger and acquisition cannot move well with the financial crisis seen lately.
Collapse of mortgage
In the present people who are living in mortgage houses have realized that they are paying more than the said mortgage due to financial crisis. The same is prevalent with companies having their mortgage collapse leading to of securities that make them stand a chance of getting a loan. When this happens, that which stood for as security collapses the trend is sell of certain assets less more thus reducing the asset capital. This also leads to most companies’ liquid capital face threat of solidification in the long land. Minimal liquid capital denies most operations a chance thus in the present economy the merger and acquisition are not in the rise unless with those managing to carry out the same with state agencies. The aspect of collapse of mortgage is prevalent when the interest rate is high due to financial constrains making it impossible to repay, thus banks repossessing them with immediate effect and reselling them the present prices benefiting the bank. This tends to make it impossible for raising capital achieve certain targets reduced to banks as the only financial institutions the only option. The same will happen because with set goals, the profits though minimal will not be enough to settle the debts thus repossession again in a given time limits (Allen, 2009). The deal is good when the accomplishers are both aware of the interest of that time rather than making it private and more calculated to the side of the banks. This has made investors fear going for loans and instead sell their assets. There is the aspect of prime mortgages that lenders some people unable to do anything straining even to earn a living. This may lead to cancellation thus collapse of mortgage.
Drop of major indexes
According to Joseph (2012), the cost of living in the present economy is low with people who strived much to own houses having paid more than it will cost at the present and even continue paying. Priority as been on certain things with education and those attached to it on the rise. It is clear now the consumer index low owes the fact that many people are straining to afford things which are even basic. The basic is becoming secondary reducing the number of those who can afford certain commodities. It is with this consumer index that has led to a decline in consumer price index. When this happens, profits also decline thus the companies’ plan of clearing debts hits a snag with little to do but reduce the size of asset capital. This makes it impossible in acquiring new entities for they carry capital with them and when the same will happen the amount of debt will go high and with time interest rates supersede the capital. Consequently, the entity is declared bankrupt. It is with value that companies should find it valuable operating the way they are than strain and lose completely at the end (Holmes & Oliver, 1897). Much consideration is the way to success and business apathy will lead to step moved. The present trend of economic frustrations leads to minimal merger and acquisition.
Spread of credit
Credit co-owned are spread to even with the change of names, the enhancement of technology leaves no stone unturned when it comes with tracing the fraudsters. This leaves behind what is ought to be owned shared off in times of crisis. It is with this aspect that much of the valuables owned can be used to clear mortgages thus the risk is increased. The aspect of credit transfer to transverse solid capital makes it impossible for entities to run for this aspect of merger and acquisition. It is with the conceit of the two or many deciding to see the amount to be spread and to what period of time now that the interest rates are escalating as per the present economy both locally and globally. Financial crisis is not a country issue but a global one. Banks operating internationally have been denied license of operation leading to great depression of banks with some companies’ deposits being written off. This makes the financial base of some which are entitled with ground of buying other small companies unable to do the same. In settling debts some companies have a tendency of using unforeseen entities thus when time of claiming back the said utility anomalies are realized time beyond reversing the said agreement.
With the spread of financial crisis to all actors, everybody is running to the bank to a get a loan. The companies also want to be accorded the same help. It is with this that many people are going to use the same asset as collateral not putting the implication attached to this offence (Wingfield, 2010). This has been marked and declared a national and even international disaster. This has called for more personnel to look on the issue, thus adapting more strained conditions to address the vice (Morrison, 1996). For one to qualify for a loan, which used to be easier, it now has more than it takes to be guaranteed with much emphasis on the assets used as collateral side. With the increasing interest rates being governed by central bank, it is with great care that before taking a step of taking a loan much should be given consideration or one will suffer paying more than borrowed. The move to make it happen is a question of now or never with companies ready to take risks standing a better a chance of success because at times, the central bank can decide to waiver interests. According to Garne & Bryan (2001), when this is happening the people as well as the companies are not spared. Therefore, nobody is smiling all the way to the bank. Some of the strained conditions may be agitated by the government to help it run its operations. This leads to the failure of financial institutions to support companies thus dragging the medium or large astray. It’s the mandate of banks to offer loans to companies to help them offset certain financial implications thus sparing them being declared bankrupt. When this is going to happen, the government will bail them or buy their assets or guarantee them bank deposits. It is with great concern that the offer of bank deposits stands as the best option but the government prefers bailing the companies which are found bankrupt. The government does this because it is also trying to eradicate the no-competitive in this competitive economy characterized by financial crisis. The move cuts down the entities which do not have well versed vision.
Element of Inflation
According to Andrew (2008), the inflation rate is high with companies standing a chance to liquefy assets in their operation. The liquid capital does not appreciate in value but the solid one does. With this, the companies are going to face constraints in dealing with situations at hand ranging from escalating interest to dealing with credit. Moreover the aspect of inflation has made the cost of operation increase with little made from the sales now that also the public have felt it. It is with great care that the aspect of inflation has led to inequality among companies. Those with huge operation capital are managing the situation and those with small operating capital filling it, making them continue billing debts to normalize the graph. The aspect of competition finds its way in making the smaller ones to fear the road of operation now that they have to decrease the cost and maximize profits (Polleit, 2007). With this, business rivalry finds its way in and the ego of the owners denies both a chance of reaching amicable agreement. It is with this that the leading continue leading thus the element of capitalism.
Research Questions and Hypotheses
The paper will involve answering the following questions. The general objective that the paper seeks to answer is the impact of financial crisis on merger and acquisition operation. The specific questions that will be answered to achieve this objective are as follows:
- Is there a relationship between the financial crises and merger and acquisition operations?
- What is the impact of financial crises on M&A operations?
The hypotheses being tested are as follows:
Null hypotheses (H0)
- There is no significant relationship between financial crisis and M&A operations
- Financial crisis has no impact of merger operations
- Financial crisis has no impact on acquisition operations
Alternative Hypothesis (H1)
- There is a significant relationship between financial crisis and M&A operations.
- Financial crisis has a significant impact on merger operation
- Financial crisis has a significant impact on acquisition operations.
Research and Methodology
The mode of enquiry used in this research is case study. The case study used was that of takeover of ABN Amro by Royal Bank of Scotland RBS in 2007. The case study was found appropriate for this research because it occurred during the period when the world experienced the worst financial crisis in history. The question being investigated regards the impact of financial crises on mergers and acquisition. The case study will be analyzed and used to answer the questions. The extent to which the case study could help answer the research question will be analyzed. The research will first investigate the relationship between financial crisis between mergers and acquisition. The relationship in this case will not depend on the areas of business that are affected by the financial crises and are also likely to affect the success or failure of M&A. The data will be collected from the case study and literature review and the information analyzed and discussed. The extent to which they answer the research questions will be the major concern.
The data will be analyzed qualitatively by reviewing the case study and the information that is collected from the literature. The hypothesis stated above will be tested by reviewing the information gathered. The empirical evidence will be obtained from the same literature and will be used to test of the null or alternative hypothesis will be accepted or rejected.
Case Study: The Story of a failed takeover in 2007 – Royal Bank of Scotland RBS & ABN Amro
The takeover of ABN Amro by RBS was initiated in 2007. The activity was carried out by RBS, Santander and Fortis acquired jointly and they shared the assets on pro rata basis. According to RBS-ABN-ARAMCO (2007), [The consortium’s plan was to break up ABN AMRO with each member taking specific ABN AMRO businesses, RBS was the largest member of the consortium, contributing 38.3% of the offer price, equivalent to approximately 61% of RBS’s reported Tier 1 capital at 31 December 2006] (P. 1). These parties were very hopeful that they will yield a lot of returns but that did not come forth. There was a great failure and most of the parties were found in financial trouble. The following section explains the whole story of the takeover.
ABN Amro is a bank owned by Dutch and has its headquarters in Amsterdam, and has been in operation for a long time. The bank was formed due through merger and acquisition that were undertaken in 1765. The original ABN AMRO was formed when Algemene bank of Nederland and AMRO bank combined to for one big bank, an even that took place in 1991. ABN AMRO was among the largest banks in Netherlands and in Europe in 2007. The bank was later in the same year acquired by the Royal Bank of Scotland (RBS) and some other parties. This was termed as the largest acquisition in the history of mergers. The process was undertaken by a group of financial institutions in a consortium that consisted of RBS, Banco and Fortis, which would later land them into serious crisis. The amount that the parties paid for the takeover was too large that it only made them run bankrupt. RBS and Fortis spent their reserves to fund the takeover and they suffered severe liquidity shortages. The takeover took place in 2007, the same period that the second largest and most severe global financial crisis began. The situation was worsened by the financial crisis and the Dutch government had to intervene and bail out Fortis. The government also, in the same year 2008, was forced to split the assets of ABN AMRO that were taken by Fortis following the merger, and were separated from this that were allocated to RBS. The assets were taken over by the government of United Kingdom. The assets that were owned by Santander were also sold out or completely shut down. The government of Dutch also made more efforts to salvage Fortis and RSB from the predicament. The Dutch finance minister was appointed the CEO of the bank in 2010 in order to help restructure it. The assets that Fortis owned were separated legally from those of RBS as one of the steps in the restructuring process. This move resulted to formation of two separate organizations. The first one was ABN AMRO Bank N.V. that was formed when ABN AMRO Private Banking, Fortis Bank Nederland, the private bank MeesPierson and the diamond bank International Diamond & Jewelry Group were combined together and their assets merged to form one big organization. The name of Fortis was not taken into account in this process. The second organization was The Royal Bank of Scotland N.V, which was formed when the assets it held for ABN AMRO were delinked and sold out. The acquisition and break up of ABN AMRO could be summarized as follows:
In the year 2007, in the month of July, ABN AMRO declined the offer that Barclays bank had given for its acquisition. The reason for the decline was because another interested party, Royal Bank of Scotland, offered a better deal than Barclays. The offer that Barclays has was in keeping with the strategic vision of ABN AMRO but was rejected on financial point of view because it was 9.8% lower than that of RBS. RBS, Fortis, and Banco Santander has a better deal of US$98.3bnwhich was far higher than that of Barclays. The same year on October, Barclays bank dropped its offer and withdrew its interest in ABN AMRO. This created a way for the other interested parties led by RBS to push forward their bid. ABN AMRO was to be demerged following the approval of RBS led consortium bid. In this case, Fortis was to be allocated Dutch and Belgium branches of ABN AMRO. Banco was to gain control and ownership of ABN AMRO operations located in Brazil and Italy, while all the other operations and wholesale divisions were allocated to RBS, the consortium leader. The whole deal was declared complete in October 9th the year 2007. The Chairman of the ABN AMRO managing board was not for the idea and instead was supporting the offer given by Barclays. He stepped down following successful acquisition of ABN AMRO by the RBWS led consortium.
The acquisition occurred around the same period the global financial crisis began. The crisis reached its climax in 2008, a few months after the acquisition deal was completed. This crisis had a very big impact of the just concluded takeover. At this point, the effects of financial crisis of 2008 on the takeover of ABN AMRO by RBS and other parties in the consortium will be analyzed. For RBS, ON April 2008, they were in crises and needed money to offset the loan they had taken to finance the takeover. They launched a right issue in order to raise 12 billion pounds in form of capital to salvage what they called as bad investment. The money was also meant to boost the reserves of the bank because they had used a big part of it during the takeover of ABN AMRO. The UK government had to come in and bail out the financial system. The announcement was made by the British Prime Minister, stating that $ 64 billion will be released by the treasury to bail out the financial system. The money was to be distributed to a number of financial institutions that were affected by the financial crisis following the takeover. Among the ones that were bailed out are RBS, HBOS, and Lioyds TSB which were believed to salvage the collapse of the financial system if bailed out. As a result of the bailout, the government acquired 58% of the assets of RBS, meaning that it gained full control of the company. The CEO of the bank resigned around the same period. The company suffered huge losses between 2008 and 2009. In 2009, after the serious crises of 2008, RBS suffered a loss of 28 billion pounds and almost 50% of this loss was attributed to the takeover that just happened in 2007. The preference shares that the company owned in RBS were made ordinary shares, increasing the government ownership to 70%. This was a big loss to the shareholders of the bank. The takeover was a total loss. The government bailout is not a gain to the shareholders of the bank but real loss of ownership to the government. The financial crisis deteriorated the performance of the bank to an extent that they could not raise enough capital to salvage the satiation. They could only yield to government bailout. RBS became an asset of the state after the bail out.
According to Johnny Cameron, head of the investment banking division, of the ABN Amro, as quoted by The Guardian (2011), explains the reason for the failure of the takeover in the following quote:
[One of the things that went wrong for RBS was that, and I say this to many people, we bought NatWest as a hostile acquisition. We did no due diligence. We couldn’t because it was hostile. After we bought NatWest, we had lots of surprises, but almost all of them were pleasant. And I think that lulled us into a sense of complacency around that. The fact is that the acquisition of ABN was also hostile. We got bits and pieces of information but fundamentally it was hostile. There’s this issue of did we do sufficient due diligence. Absolutely not. We were not able to do due diligence that was part of doing a hostile acquisition] (p. 1).
This shows there was complete failure by the relevant parties to do through investigation and consultation. The takeover should not have been undertaken at the time of financial crisis if due diligence was conducted as expected. They expected high returns like the other takeovers but failed to discuss on what could go wrong.
Fortis, one of the parties in the consortium that participated in the ABN AMRO takeover was also adversely affected by the financial crisis. The CEO stepped down in mid-2008 following the aftermath of the takeover. The takeover of ABN AMRO depleted the company’s capital and its worth declined by about two thirds of what it was before the acquisition of ABN AMRO. A large amount of money had been spent in the process of takeover. The company in 2008 decided to sell its shares in RFS Holdings and only retain the section of asset management. The process was completed the same year.
The acquisition was a total failure. The companies should have assessed the financial system and realize the likelihood of a financial crisis. The financial crisis for 2007-2008 started in 2005-2006 and the bank financial advisors should have advised the banks of the risk that might arise. Analysts argue that Financial Service authority should have stopped the move for the takeover. The takeover costed the tax payers about £45bn bailout of RBS in 2008 after it took over ABN AMRO. The takeover exposed the bank to troubled loans to meet the emerging expenses. The board of RBS was enthusiastic about the £48bn deal to acquire ABN Amro but they did not assess the environment in the financial system. RBS should also not have placed such a high bid which may not have been worth the takeover. The offer that Barclays bank was giving was in tune with the strategic vision of the company and may have been better off. The companies used their reserved to pay for the highly priced takeover and later they were unable to shore up the reserved. The resultant situation was for the right issues and selling out the subsidiaries that the members of the consortium held elsewhere. There was also loss of jobs by the employees including the CEOs. The Chairman of the managing board of ABN AMRO should have been listened to because he did not support the move. Instead, he supported the offer that Barclays bank was willing to offer.
The collapse takeover of ABN AMRO by RBS collapsed following a number of events. According to The Guardian, “Royal Bank of Scotland reported an annual loss of £24.1bn for 2008, the biggest ever in UK corporate history” (2011, p. 1). The year 2008 was the one seriously hit by the financial crisis that began in 2007. The company could hardly perform due to difficulties caused by the crisis. According to Wilson (2011), “In October 2008, the bank, at the time one of the world’s largest financial institutions, had reached the point where it was on the verge of running out of the money it needed to fund itself ” (p. 1) and RBS and the whole of its consortium were not exceptional. He also stated that the RBS had, in the previous year, undertaken largest takeover in European history which later led to its collapse. RBS takeover of ABN AMRO was valued at £61bn which was taken from reserves. A number of issues led to the failure of this merger. According to FSA (2011), [From the outset the RBS Board accepted that it was likely that they would only receive limited information from ABN AMRO. Notwithstanding the limitations, RBS concluded that nothing emerged from its due diligence which undermined the commercial rationale of the bid and decided to proceed with the acquisition] (P. 1). The company should have sourced serious information in order to make the right decision. Such decision should have not been taken during the financial crisis period. Wilson (2011) stated that “It seems extraordinary now that RBS should have been permitted to undertake a transaction to buy large parts of ABN Amro given it acknowledged it would seriously weaken its loss buffer in the midst of a worsening financial crisis” (p. 1). The move became very costly to even the tax payers. The companies that participated in the takeover could not survive the crisis. According to BBC News (2011), “Taxpayers had to rescue the bank by injecting £45.5bn into the bank – and are currently sitting on a loss of more than £25bn on this investment”. This was a great mess to the economy.
Considering this case study, besides the financial crisis that occurred in the same period of takeover, there are other factors that lead to the collapse of the takeover. Firstly, there was no clear plan on the side of RBS on the way forward after the bid was accepted. The takeover plan was unrealistic and unplanned for. The company was hit by the financial crisis when it had already spent its reserves in the takeover. When it was too late, the company started looking for alternatives like issuing the right issues in order to the capital enough to salvage the mess they had caused. There was also the impact of dominant leader, the company CEO Fred Goodwin, who made the move for the takeover. The challenge was that the takeover was moved by the managerial motive, while instead it should have been the strategic motives. The shareholders seem to have over trusted the management of the company and took the decision of the CEO without much consideration. According to Riley (2012), the problem regarding due diligence was also a major cause of failure. The executives of the company did not take close investigation of the targeted business to know if the takeover was worth undertaking. There was also the problem of winner’s curse. RBS paid a lot of money in a competitive auction that what was worth the deal. They should have assessed the true value of the deal before they increase their bid to almost 9% of what Barclays bank had offered. There was failure by the financial regulatory authorities in Europe and UK. They should have advised or reject the takeover move. The RBS also failed to reject the move by the dominant CEO regarding the takeover. The financial authorities and the RBS executives failed to resist the move by the dominant CEO. This was a big mistake and it caused a lot of damages. The governments had to come in to bail out the financial institutions that were collapsing as a result. This laid a big burden on the tax payers. This case study, however, is very important in analyzing the impacts of financial crisis on the Merger and Acquisition activities. It took place when the global financial crisis was beginning. It also collapsed in the course of the financial crisis. The impacts of the financial crisis were, therefore, clear on this particular scenario.
Many studies have attempted to explore the relationship between the economic performances in general and M&A in order to establish which one causes the other. The results of most of the studies, as stated by Herman (2011), reveals that there is strong relationship between the two. Herman (2011) further stated that [the onset of recessions and other economic declines have historically been followed by similar fall offs in M&A activity, and the economic crisis of 2008-2009 was no different (with dramatically reduced overall M&A volumes, in spite of significant restructuring and crisis-driven activity] (p. 3). This reveals that there is a strong relationship between economic crisis and M&A. the volume of M&A transactions decreases during the financial crisis. To validate his points, Herman (2011) looks at some economic conditions that are key factors in M&A. He looked at investor confidence, bank lending, the market environments of equity capital, company financial position statement, increasing regulations by the governments, and confidence of decision makers in undertaking some activities among others. These factors influence the way M&A operations are carried out. The first objective or research question is already answered by evidence that cannot be doubted. The relationship is strong between M&A and financial crisis. The confidence of investors is also low during the period of financial crisis. They will not be willing to take over firms because the performance of those firms is not assured to be robust. This makes M&A operations or volumes to go down when there is financial crisis. The equity capital markets are also adversely affected by the financial crisis. The other factors like financial position of the company and stability in the equity capital markets are also strong determinants of M&A decisions. No company will be will to acquire another company whose performance is too low. There are a lot uncertainties in the M&A market during the financial crises period. For instance, it is not determinable the period that financial crisis will last before it ends. Acquiring a poorly performing company is risky and might need a lot of resources to boost. The case is worse when there are economic crises because it may take long for the acquired company to start performing. Our case study of the acquisition of ABN AMRO by RBS also revealed that financial crisis is highly correlated with the acquisition. The takeover in this case became very worse when the financial crisis erupted. There was a great failure but prior to the takeover; the whole issue was pleasing to the stakeholders. They failed to predict what could go wrong should a financial crisis become very harsh.
The second objective regarding the impact of financial crisis on M&A operations is also clearly answered through the literature and the case study that has been reviewed above. The acquisition of ABN AMRO by RBS and other consortium occurred when the financial crises of 2007 was on the onset. The deal was concluded successfully but it later failed to work out. The financial crisis deteriorated the performance of the acquired company and destabilized the economy until the deal became completely worthless. The acquiring companies were not able to recoup the money that they spent in acquiring the company. They tried all means like right issues in order to raise capital to recoup the investment but to no avail. The company, ABN AMRO, was acquired at the highest bid, which may have been higher than its value. All the parties that participated in this acquisition were all affected. The financial crisis, thus, has a great impact on the M&A operations. Whether the deal is for merger or acquisition, the impact of the financial crisis will be the same. Based on the explanation given by Herman (2011) above, financial crisis has a significant impact on M&A operations whether they are carried out before, during or after the financial crisis. The impact during the financial crisis is that the volume of transactions is low. The investors will fear to undertake M&A because of poor performance of firms. If transactions are carried out before the financial crisis arises, then it happens that a financial crisis is experienced almost immediately, the damage will be more. The firms that spend a lot of finances in acquisition may not recoup them as projected. The performance of firms will be terrible. During financial crisis, the stock prices of firms fluctuates and this raises an alarm to the investors. It is normally an indication f poor performance.
Another major effect of the financial crisis on M&A is the lack of money stock that would be needed to accomplish the process. Engagement of crediting is also complicated during such times. The companies, especially those with stocks in the stock exchange, opt to finance these operations through their liquid securities. They take this direction because of inability to obtain loans during financial crisis.
The financial crisis that started during the acquisition of ABN AMRO spilled over to 2008 and 2009. The two years 2008 and 2009 were the most affected. The overall M&A volumes declined in 2008. This happened despite many attempts by firms to undertake restructuring and other crisis-driven activities meant to salvage the situation. When the crisis started subsiding in 2010, the M&A deals started resuming. Globally, the value of M&A increased by 25% in 2010 compared to the values that were experienced in 2009.
The financial crisis created a volatile and uncertain environment that made it hard for the investors to develop trust with the market. This issue made it hard for many mergers to take place. The companies that undertook the takeover were unable to sell their assets in subsequent mergers. This created a very uncertain situation. The uncertain environment makes the prices of takeovers too low such that it makes no sense to undertake them. The demand is too low during the financial crisis and therefore the value of any transaction that may be taken will be too low.
The research conducted, based on case study and literature review, showed that financial crisis has a great impact on the M&A operations. Financial crisis was found to cause poor performance of the firms, reductions in the stock prices, increased borrowing rates, and increased cases of loan defaults, low investor and decision maker’s confidence, and general failure of M&A operations undertaken when it is prevalent. The practitioners of M&A, therefore, need to consider all these factors before they make decisions. They should also consider the speed with which the transaction will be carried out, the value and the certainty of the whole deal and process. They should have a proper plan on how to execute the transaction without delay or any form of error. The parties involved in the transactions should also be willing to share the risks that are involved in order to make the whole process fruitful. The decision should be well deliberated and the financial authorities should be willing to take part in the whole process. The decision should not be left to the CEO’s like in the case of RBS. The whole process was entrusted to the CEO who messed up the whole process by bidding a higher value than what the deal was worth. The period when the transaction is carried out is one of the major factors. It should be carried out when the economic conditions are favorable so as to avoid huge losses. The source of funding should also be considered. The acquirers of ABN AMRO used the reserves to finance the deal. This is a risky situation because the company shoulders the whole burden or risks and losses. The source of finance should be the one that guarantees sharing of risks. If the risk was well shared in the financial market, the companies could not have been in that condition. The research revealed that M&A operations during the financial crisis have negative effects that spill over to other sectors. When the deal fails, the companies try all means to stay alive but sometimes it does not work at all. The stated intervenes to bail out the financial system and this leads to unnecessary use of tax payers money. The government sometimes is compelled by the situation to acquire ownership of some collapsing company which will cost taxpayers more resources to sustain. The effect all spills over to the financiers of the transaction if not the acquiring company. If the transaction was financed through loans, the financiers will suffer losses and defaults. Financial crisis also causes the investors to opt for stepwise M&A operations. They become more risk averse. They want to do the transaction stepwise so that they do not lose all the investment should the worst happen. This, however, gives them a chance to observe the operations and performance of the company they are acquiring and decide whether it is worthless or worth taking. This may sometimes be worse because the process takes a long time and may eventually fail. In this case, the investor may lose but only a part of investment. There are various factors that cause failure in mergers and acquisitions. They include lack of experience by managers, lack of an in-depth due diligence analysis, incompatibility of the systems of the merging companies, failure to communicate with the employees about the mergers and cultural differences between the companies. In order for mergers and acquisitions to be successful, it is important for an analysis of the company’s due diligence to take place. It is through this process that a company is able to determine the health of the target company to ensure that there is no exposure to any risks that may lead to their failure.
Consultation among a team of specialists is also vital for the success of mergers and acquisitions. Managers should seek to harmonize the different cultures that merging companies bring into the mergers.
Although a lot of literatures use the terms mergers and acquisitions interchangeably, the two are different. Mergers have to do with complete fusion of two companies whereas in the case of acquisition, the company being acquired is not completely assimilated into the other one. Different companies use different methods when going through these processes. One of the things that differentiate mergers from acquisitions is the position of shareholders after the merger or acquisition. The process of acquisition entails either a full or partial takeover.
The method that a company chooses to form mergers depends on the aims that the company wants to achieve. Mergers can either be horizontal or vertical.
The process of M&A is usually not an easy one. There are various risks associated with it. The risks can be dealt with prior the mergers if certain factors are taken into consideration. A disciplined approach should be given to ensure that the venture is successful.
There are various factors that lead to the failure of a merger. They include a shortage in experienced managers, the absence of an in-depth due diligence analysis, differences in cultural practices, failure to involve experts such as internal auditors in the process, lack of timely communication with the employees about the mergers and failure to carry out an analysis of the target company to identify vital information such as the assets and liabilities of the company. Due diligence analysis is a very important stage in the process of mergers and acquisitions. This process brings together a team of experts comprised of accountants, lawyers, internal and external auditors, and other specialists. These people have different roles that are very important in the merging process. These experts should be independent people to avoid cases of bias in the information gathered. This process examines issues such as the financial statement of a company, the management of the company, and the level of conformity with the necessary legislation to determine if there are any cases of failure to conform to the set laws which may have serious implications on the company. A tax review is also carried out in this process.
Lack of experience among managing directors is a common cause of failure in deals involving mergers and acquisitions. This is because most of them have not handled such cases before and they are expected to carry out the process successfully. If managers fail to consult widely and use a team of experts to carry out the operation, they may experience a lot of setbacks and inevitably failure.
The companies should also look into the manufacturing process of the target company. Marketing issues should not be ignored because they play a major role in the success of the organization. Marketing issues deal with important issues such as advertising strategies, product design, and issues related with employees satisfaction and manner of working to bring in profit to the company.
The issue of differences in organization culture should also be addressed. This is because the merging companies may have different cultures that require harmonization to operate smoothly. Any attempt to impose a foreign culture on employees is usually resisted by the employees. Therefore, there should be a better way to ensure integration of the various cultures without forcing any single culture on the employees.
To avoid duplication of roles, managers should ensure that they have a clear chain of command in place. The new roles and responsibilities should be communicated to the employees to avoid any conflicts that may arise as a result of delayed communication.
There are various reasons why companies opt for mergers and acquisitions. However, the major reason is for economic gains. A merger results into a single company that has more assets and benefits from economies of scale. This reduces the cost of operation significantly and increases the profits of a company.
There are various theories that have been advanced to try and explain the concept of mergers and acquisitions. They include the differential efficiency theory, Market Control Theory, inefficient management theory, tax saving theory and after-merger market value theory.
The global financial crisis has had a significant impact in M&A. There are analysts who believe that this should lead to an increase in mergers while others are of the opinion that this hinders companies from considering mergers and acquisitions.
Limitations of the research
The research was limited by the fact that obtaining the actual data related to the case study reviewed was challenging. The parties who were involved in this M&A operation were many and it was hard to obtain data related to each one of them. There is also too little work documented regarding the research topic.
Before deciding to form mergers and acquisitions, companies should conduct the necessary feasibility study concerning the legal and economic implications of the M&A. planning and having the right structural adjustments should be done before any company ventures into M&A. This is because committing resources to this process without the necessary planning can lead to failure of the M&A.
The global financial crisis has affected the operations of many institutions in the world. The financial institutions in various countries have not been spared either.
The major question that is raised when it comes to the relationship between M&A and the global financial crisis is whether it leads to an increase or a decrease in M&A. M&A has become increasingly common in the world of business. The impacts of the global financial crisis have been spread across all sectors. Deals involving M&A declined significantly in the year 2008 due to lack of resources and the rising global financial crisis. Financial services are the most important when dealing with M&A. When the global financial crisis began, private and public institutions suffered from the consequences.
There are various factors that companies should consider before engaging in M&A deals. One of them is engaging internal and external auditors in all stages of the M&A process. This will help in the evaluation of the possible risks involved in the venture. It will also help in determining the value of the assets owned by the target company.
There are various warning signs that companies should look out for to avoid failure in M&A. They include employees leaving the organization, which could be an indicator of instability of the organization. In addition to this, another warning sign is that of inability of a company to pay back its debtors. Any violations in taxation and other legal requirements may also be an indicator of a company that is unstable. Therefore, any company considering M&A with such a company should be very careful as such a deal would inevitably fail.
When undertaking any form of business restructuring, or specifically M&A operations, one should consider the following recommendations:
- Ensure that the activities involved are well scheduled. Sometimes there may be a need to conduct M&A step-by-step. Especially in difficult economic times, the decision makers should first look at activities which are compulsory under the law. The investments should be made stepwise when financial conditions are not favorable. This stepwise process has one disadvantage that it may take long and eventually fail to be completed. This may be due to failure to provide finances when needed. However, this process is preferred by most investors during hard economic times because it will give them time to observe the performance of the company they are aspiring to buy. They can drop the deal in case they find that it is worthless, in which case they will lose only a part of investment instead of losing all at once.
- The parties involved should also develop the mechanism that will be used in the takeover to ensure that both parties are satisfied and their interests are taken care of. The parties should negotiate of risk sharing, especially during financial or economic crisis so that none of the parties gains all and the other loses all. The parties should agree on the guarantees based on what might happen if the financial crisis becomes very worse.
- There should be team of experts selected specifically to advice the parties on the way to carry out the transaction, forecast on what is likely to happen if the financial crisis prolongs, and provide any other relevant information.
- The parties with the greatest responsibility in the financial crisis should act as soon as possible in order to mitigate the effects of the crisis. The longer the crisis, the greater the impact on merger and acquisition market and other sectors of the economy. According to Kindleberger (1973), there was negligence of some parties that refused to do their part to control the crisis. He states that [depression was so wide, so deep and so long because the international economic system was rendered unstable by British inability and United States unwillingness to assume responsibility for stabilizing it in three particulars: (a) maintaining a relatively open market for distress goods; (b) providing counter-cyclical long-term lending; and (c) discounting in crisis] (p. 1). According to Stiglitz (2011), to end the crisis, there is need to have a concerted international response and financial institutions need to have experts to offer the right financial advice. The experts should be sourced from any place to salvage the situation before it makes the situation in the merger and acquisition market worse.
The authorities in the financial market should be watchful because financial crises have become very many in the world today. For instance, debt related crises are the most common. The mortgage sectors in almost all parts of the world are the beginning point of crises. The M&A market should be watched carefully to ensure that the players carry out the transactions at the right time to avoid incurring huge losses. The institutions taking part in this market should not only pursue their own interests but should also consider that of the market in general. If the market does not fare well in these transactions, the individual institutions will as well be affected. Institutions should invest enough resources in the research and development to ensure that the market and individual players in the market have up-to-date information regarding the dynamics in the market. This will enable them to take actions when needed to do so. The impact of financial crisis will be mitigated when action is taken considering the most current market information in M&A operations.
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