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The previous chapter had given us an insight of the research that would be conducted providing an introduction to it. A brief discussion was done by the researcher regarding the research and the possible outcomes of the research. In this chapter we would be discussing the relevant literature that would be used by the researcher to conduct this study. It would also give us few insights about the real world scenarios with regard to Mergers and Acquisitions. The key factors that would give success in case of a Merger/Acquisition are discussed. Finally, this chapter concludes with a summary of the key points made throughout the chapter. To reiterate the research title is; What are the repercussions of mergers and acquisitions: do they offer competitive advantage; is the advantage sustainable? A review on GE from 2005 to 2010. The Aim of this research is to critically evaluate the consequences of mergers and acquisitions on the extent to which it can prove to be beneficial for an organization and how well can an organization get accustomed to the competitive advantages from mergers and acquisitions? based on a review of General Electronics from 20052010. In meeting this aim, the following Objectives were set: To critically observe the methods and procedures followed by organizations for mergers or acquisition to happen To critically examine if the motivating methods employed by General Electric Company help to yield more output in a merger and acquisition, 2005 to 2010 To assess the scope, these mergers and acquisitions contributed towards increasing both the top line and bottom line growth in General Electric Company, 2005 to 2010 To critically observe the methods and strategies that General Electric Company followed to sustain their growth and development obtained from the merger or acquisition, 2005 to 2010 To identify the areas of integration in an organization that most need improvement and to resolve the problems
the General Electric Company (GE) takeover of Lineage Power Holdings, Inc., from the Gores Group, LLC. This takeover which happened in March 2011 resulted in the growth of Lineage Power Holdings Inc., in the field of telecommunications and data communication. Though the company was taken over by GE the company still stuck to its culture and none of its staff have been asked to leave by GE. This showed GEs attitude towards its employees even if it meant that it was a company that they had taken over. This attitude of GE shows how a company should handle such acquisitions in a smooth manner without affecting the employees. Though the current scenario gives us a different picture about Mergers & Acquisitions it is very important that companies do not take decisions based on the current scenario alone. That is where it becomes important for an organization to do ample research before proceeding for an Acquisition or a Merger. There are number of theories that suggest different kinds of approaches to be taken with regard to a M&A. The reviews of the literature on these theories are discussed by the researcher further in this chapter.
The classifications based on the transactions can be done as Horizontal, Vertical or Conglomerate (Gaughan, 2002, Chunlai Chen and Findlay, 2003). As stated by Chunlai Chen and Findlay (2003), horizontal M&A is where the target and the acquiring company are in the same industry. The example for such a merger was discussed earlier when the researcher spoke about Kraft Foods takeover of Cadbury. This is largely due to the fact that there has been substantial change in the technology and liberalization of industries. M&A are said to be classified as vertical when there is a combination of firms which were already in a client & supplier or a buyer & seller relationship. The organizations that are involved in such transactions normally look at downsizing the costs in the value chain and eventually benefit the economics of scope (Chunlai Chen and Findlay, 2003). As stated by Gaughan (2002), a transaction that involves two companies which operate completely unrelated business is called Conglomerate. In addition to the above M&A can also be classified as either Friendly or Hostile (Chunlai Chen and Findlay, 2003). A transaction is considered as Friendly if the target companys board agrees to the takeover amount and the M&A is carried out. If the takeover
happens with the target companys board just needing to surrender to the acquiring company just for the money, it is considered as Hostile. Chunlai Chen and Findlay (2003) also stated that the M&A could be Domestic or Cross-Border for the companies that are involved. This is normally done in order to create a presence or to look at having better opportunities for success in the Industry. The classification of M&A could then be summarized in the table below:
Classification transactions
of
merger
&
acquisition
M&A classification in terms of Value chain Relationship Economic area Horizontal M&A Vertical M&A Conglomerate M&A Friendly M&A Hostile M&A Domestic M&A Cross-border M&A Taking into account the different classifications in terms of Value Chain, Relationship and Economic Scope the researcher would be considering the different M&As that have been executed by General Electric Company (GE) and look at the effect that such M&As have had upon the employees of the target organization. The researcher further looks at the various theories that would have been considered for different M&As executed by GE.
not refer monopoly power in any of the benefits that the acquiring organization might be deriving out of the deal. Trautwein (1990) also states that the process and the raider theories have very little evidence on the motives implied by them both in the form of research or in practice. The disturbance theory is also discussed by him as being considered at the macro-economic level than the micro-economic level which is more related to the present research and hence the researcher has not considered the same. Interestingly, Gaughan (2002) gives a more realistic way of viewing the M&A motives with numerous empirical case studies which has reference to the theories with more details. There are four main motives for a firm to execute M&A according to him, they are: (1) Quick growth comes through M&A; (2) Economics of scope or scale may be gained through M&A; (3) Having a larger firm due to a M&A means more access to capital market, which would in the future lead to a lesser cost of capital, i.e., benefits of more financial options; and (4) A firm with superior management skill might also look at M&A with an anticipation of higher gains through the target organizations business. One the whole, the researcher quite clearly shows how all the three authors noted above have concurred on the fact that any M&A is driven by not one but many complex motives. And all these are not at all similar in any form and would always vary from deal to deal which can never be justified with a single theory/approach.
Merger & acquisition motives (adapted from Trautwein, 1990 and Cox, 2006) Motives Theory Description
Rational Choice - M&A M&A Benefitting Acquirers Shareholders Gaining Based on synergy Efficiency Theory The three major synergies Financial, Managerial and Operational are achieved when M&A is executed. Transfer of Wealth from customers
Monopoly theory Market power is seized by planning and executing M&A. Horizontal & Conglomerate M&A types wherein the acquiring firm takes control of the industry on the whole. Transfer of Wealth from target's shareholders Raider theory A person who oversees and initiates wealth transfers from the stockholders of the companies he bids for exchange of excessive compensation after a successful takeover is called a Raider. Gaining based on private information Valuation Theory/ Investment Theory This kind of M&A is normally planned and executed by managers who have in-depth knowledge about the market of the target company. M&A Benefitting Managers Empire- building theory/ Agency theory Instead of increasing the shareholders value, M&A is planned and executed to maximize the Managers own utility. Process Outcome - M&A Process theory M&As are executed as an outcome of another process as per this theory. These processes can be internal or external to the organization. Macro-Economic Phenomenon - M&A Disturbance theory The M&A which is triggered by virtue of an economic disturbance forms the Disturbance theory. These are normally those M&As which are not that successful when it comes to long term as they are a result of an economic imbalance.
Fortune: The Pathfinder model of GE capital. The whole cycle of the integration of both companies as a single entity involves a lot of involvement from both the sides. The most discussed acquisition-integration process is that of the GE Capital Services Wheel of Fortune model coded as the Pathfinder Model. This model is now well established and has been successfully implemented by GE in all its acquisitions. This model consists of four main stages called Action Stages viz. Pre-Acquisition, Foundation Building, Rapid Integration and Assimilation. It starts from when the deal is initiated to the stage where the integration is completed. The four stages are further divided into two or three more processes within each stage. The PreAcquisition stage has processes like Due Diligence, Negotiation and Announcement, Closing and Signing off of Deal. The Foundation Building stage consists of the launch of the integration, the acquisition integration workout and the strategy formulation. The Rapid Integration consists of two processes - Implementation of strategy and Course Assessment and Adjustment. The last and final stage is Assimilation wherein you have the long-term evaluation and Adjustment and then the Capitalization of the success of the integration of both organizations. Also in each action stage several best practises which are more specific and practical to help the managers to support the integration process. WOF-GE.jpg
This model clearly shows that the acquisition integration is in itself an art which can be also a science when it comes to principles followed by this model. A particular sequence of actions which are leveraged according to the requirement of the acquisitionintegration process is clearly defined in the Pathfinder model, most of which are more unique in nature. The model is shown with such representation that it does not eliminate the need for managers to improvise for the integration process but it however prevents this improvisation to become a centre point in the integration process. This is the model that has been successfully implemented by GE time and again and has always paid them rich dividends when it comes to both organization and staff integration, which is very important for the integrated organization to thrive in the current market situation.
Conclusion:
In the above chapter the researcher has given the insights on the current scenario with regard to the Mergers & Acquisitions. The researcher also ventures into the different theories with regard to Mergers and Acquisitions and explains with the help of necessary literature the concepts surrounding these theories. Also the researcher identifies the various scenarios in which these theories are to be used in a merger or acquisition. The researcher further gives information about the reason why GE has been chosen for this research as a case study by emphasising the fact that most of the acquisitions that have been executed by GE have been successful. The Pathfinder model being followed by GE is explained by the researcher, giving a summary of the acquisition-integration process which has helped GE in smoothening of all acquisitions handled by GE. On the whole this chapter deals with various literatures that detailing the M&A processes and gives the researcher a strong idea about the Research Methodology to be followed for conducting this research successfully.