Paper Example on International Financial And Banking

Introduction

Generally, mergers and acquisitions refer to the alliance between companies or their assets following different financial transactions. Some of the significant operations involved in M&A include but not limited to additions, consolidations, mergers, purchasing a company's assets, tender offers, and management of acquisitions among others. Two companies must be involved in these transactions for M&A to be a success and the board of directors for both must seek approval from the principal shareholders of the company for the combination. After a merger deal, the acquired company becomes part of the acquiring company, and it ceases from existing on its own. For example, early in 2018, a merger deal occurred between the 21st Century Fox Inc and Disney, whereby Fox was willing to sell off all its entertainment assets, a decision that astonished all the financial markets in very early 2018. By early May 2018, a $52bn all-share (or $66bn including assumed debt) deal to purchase the entertainment assets of Fox was put together by Disney. This would be taken to a vote on July 10th, 2018. Had this deal pushed through, Fox would have ceased to exist on its own and became part of Disney. However, Comcast invaded the agreement offering Fox's shareholders 65 billion dollars bid for all its assets. This was a higher amount than the one initially proposed by Disney. In this paper, I will critically evaluate the academic literature regarding the success or failure of merger and acquisition activity and conclude with an informed judgment whether the evidence from the research would suggest that shareholders of 21st Century Fox should welcome or be wary of the two competing bids for their company.

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Mergers and acquisition are one of the most sought topics in finance, and therefore there is abundance research by different researchers from all walks of life on the same (Hassan, Ghauri & Mayrhofer, 2018). Most companies merge to attain specific strategic goals, and some of them are horizontal while others are vertical. The case in question here is a horizontal merger because it involves companies competing in the same industry. A corporate M &A can have intense effects on the growth anticipations of a company as well as its long-term objectives (Hassan, Ghauri & Mayrhofer, 2018). This is because a mergers and acquisition affect various stakeholders besides the bidding shareholders and the target. For instance, a company's creditors, as well as employees, are affected by the process. Besides, other shareholders such as tax authorities, customers, suppliers and the community at large are also affected by the changes in both companies involved. However, this does not mean that it is a bad move altogether because it can transform the acquiring company indisputably overnight, but the degree of the risks involved cannot be ignored. This is because transactions of mergers and acquisitions have a success chance of only 50% (Hassan, Ghauri & Mayrhofer, 2018). To understand whether it is worth it for Fox to welcome the two competing bids for the company, the next section of the paper will discuss reasons why most companies consider engaging in mergers and acquisition and reasons for their failures.

There is a tone of explanations as to why mergers and acquisitions occur, and understanding the motives behind it is essential to understand their success and failure. The main reason why most companies engage in an M&A is to gain synergy, which means cooperation of two or more organizations, to produce more significant results than what they would achieve separately (Hassan, Ghauri & Mayrhofer, 2018). For this reason, most companies consider mergers and acquisition to gain enough synergy to rise against their rivals because it can take decades for one company to double the size of its competitors through consistent and organic growth. Moreover, most companies enter into mergers and acquisition to beat the massive competition in today's markets. This is perhaps the key reason why most companies engage in M&A activities. In the highly competitive business environment, most companies get the urge to sell an attractive asset portfolio before an antagonist does so leading to a frenzy in the concentrated markets (Hassan, Ghauri & Mayrhofer, 2018). Mergers and acquisition are linked to a competitive strategy that allows a business to adopt new products or promote market segmentation as well as changing the dimension of market competition. These anticipated competitive advantages give companies a motive to engage in M&A to enlarge their product lines or the base of the acquiring company's products and services, to increase their market power as well as their market share.

Additionally, companies enter into mergers and acquisitions to create economies of scale providing cost savings through vertical integration (Hassan, Ghauri & Mayrhofer, 2018). For instance, it is anticipated that when two companies merge, they automatically gain economies of scale due to combined efforts without any duplicated efforts. For example, in this case, Disney is offering Fox a merger deal that does not entirely kick it off the market as Fox shareholders get to share into the company's future prosperity, which will include enjoying synergies and economies of scale. The consolidation of these two companies will eliminate duplicate resources such as regional offices, the numerous branches of both companies, research projects, manufacturing offices and facilities and well as agents among others, and this will improve the effectiveness of the new company (Hassan, Ghauri & Mayrhofer, 2018). The reason behind this is because the resources saved from eliminating these resources go straight to the critical goal of the company which is to boost its earnings per share and to makes the mergers and acquisition deal a success. Also, synergy comes with a tone of other advantages including sharing ideas and knowledge, sharing physical resources, increased power to negotiate through combined purchases, coordinated strategies and vertical integration among others.

Consequently, companies engage in mergers and acquisition to dominate their business sector as it is the case with Comcast, which wants to completely buy off Fox to become the best company in the industry regarding shares and asset value. However, a deal with Disney could lead to a possible monopoly although such a transaction would have to endure a series of scrutiny from anti-competitors and regulatory bodies such as the government. Finally, most companies adopt mergers and acquisition as part of a corporate strategic plan to enter in a pattern of relationships with business units that are part of a larger group of businesses (Hassan, Ghauri & Mayrhofer, 2018). In a line of this, some companies seek to remain in the same industry while others try to diversify into other sectors. This is where the concept of vertical and horizontal growth, as mentioned earlier applies.

Existing literature about mergers and acquisitions show that there is substantial dispersion in the outcomes of the activity. For instance, according to Wang, Shih & Lin (2014), the success of an M&A depends on how one chooses to evaluate the outcome, which could be based on assessing the target company and its shareholders or based on the short-term and long-term success of the acquiring company. The measure of success also depends on the method of research applied. Wang, Shih & Lin (2014) suggest various approaches to measure the success of mergers and acquisition including conducting surveys on the executives of the involved companies, conducting accounting studies, as well as event studies among others.

Event studies usually focus on finding superior returns following a mergers and acquisition announcement for the target shareholders or the bidding. On the other hand, accounting studies focus on the financial statements of the acquiring firms to determine their net income, their earnings per share as well as their return on equity to determine the success (Moctar & Xiaofang, 2014). Event studies have been the most utilized approach in M&A research. A researcher using this method begins by defining the specific period over which the event's impact will be measured, and it is classified as either short term or long term and, they both gauge the success or failure of M&A. For example, following an events study on companies considering M&A, a short-term event study holds an assumption that in the event of an M&A announcement, the new information is accessible to the entire market, which shifts its expectations towards adjusted share prices. In this case, the difference between expected return and abnormal return is measured to determine the success of an M&A.

On the other hand, Moctar & Xiaofang, (2014) also proposes a long-term event study to assess the success of a M&A, which relies on the efficiency of the market to be able to accommodate and integrate the new information released about the changes in share prices expected due to M&A (Wang, Shih & Lin, 2014). The numerous researches conducted to determine the short-term success regarding wealth effect shows that both the bidder and the target company are anticipated to create value through merger and acquisition. Also, similar research conducted by Sharma (2016) on the US market between 1915 and 1930 shows that mergers and acquisition have a first positive return for target shareholders. Another research by Asquith (1983) conducted on the US market between 1962 and 1976 shows that both the target and the bidder get an abnormal positive return in the event of M&A.

Similarly, abnormal returns are used to measure the long-term performance of both the bidder and the target in the event of M&A. Sharma (2016) suggest that benchmarks and abnormal returns are the best techniques to measure the long-term effect of M&A. They suggested using market models as well as the capital asset pricing model (CAPM) model. The market model predicts the expected returns following the market risks that these companies are exposed to due to mergers and acquisition while CAPM model determines the rate of return required for specific assets of a firm, and the back is based on the market risk exposure. Between 1969 and 2016, Sharma (2016) researched the mergers and acquisitions' long-term performance in the US market using the market model and the results were such that there is a significant negative return for the bidder who acquires another company during a merger and acquisition. (Moctar & Xiaofang 2014) also showed similar results on his research in 1982.

Therefore, from the analysis of the above literature, one has to be careful before suggesting that mergers and acquisitions either creates or destroys value. Research shows that there is a significant difference between the performance of the bidding shareholders and the target shareholders depending on several factors such as synergies and economies of scale, market relationships, and payment sources to mention but a few. Therefore, when considering an acquisition, managers must be extra careful when selecting their target firms and they have to know that a mergers and acquisition strategy will most likely not create value on its own, which means it has to be backed up by several other approaches and techniques. Mergers and acquisition are a project, and therefore it should focus on gaining the return on opportunity cost.

Additionally, Collier (2016), carried a total of 88 empirical analysis firm from 1976 to 2006 whereby they came up with a total of 12 approaches for assessing the performance of M&A. Like Collier (2016), they found that there are several ways to determine it including short term and lo...