Reasons for Failure of Takeovers - Essay Example

Course : xxxxxxxxxxx Title : Failure of Takeovers Tutor : xxxxxxxxxxx @ 2011 Introduction In the corporate market trends, management teams vie to have a right to acquire and manage a given corporate asset. A takeover takes place when the right to acquire, manage and control a given target corporation is owned by ma management that is outside of the target management. Consequently there is the gaining of the assets and or the shares of the target firm. Take over has numerous advantages such as enjoying the benefits of economies of scale like diversified risk (Jarrell 2002). Takeover takes place in two forms. There is a friendly takeover and a hostile take over. A friendly takeover occurs when the board of directors of the target firm is willing for the acquisition to take place. This leads to complementing of skills and resources. Contrary, a hostile takeover is when the board of directors is opposed to the acquisition (Weston 1998). In the case of a hostile takeover, it calls for a tender offer or a proxy fight for the acquisition process which are both expensive for the acquisition firm. In the light of a tender offer it means that the share price is bid up from the target shareholders or by use of a secondary market. As for the proxy fight, this calls for the acquirer to plead for the shareholders of the target firm in order to allow for the right to control the firm. This is a tacky and expensive route since the board of directors in the target firm may use the target firm’s finances to pay all the expenses of tabling down their case as well as obtaining votes. Thus from the beginning, there is always an underlying fiscal threat for acquisition strategy in business diversification (Jarrell 2002). Entry into new business can take acquisition or takeover which is the most popular means of diversifying into another industry. It has the advantage of a much quicker entry into the target market. At the same time it helps a diversifier overcome such entry barriers as technological in experience establishing supplier relationship, being big enough to match rivals efficiency and unit costs. Despite the benefits, having to spend large sums of money on introductions, advertisement and promotion to gain market visibility, brand recognition and getting adequate distribution is a foremost a challenge in any takeover firm. In many industries, going internal stand up route and trying to develop the knowledge, resources, scale of promotion, and market reputation necessary to become an effective competitor can take years and entails all the problems of getting a brand new company to acquire sometimes presents a monetary technical hitch (World Bank Report 2005). The big dilemma an acquisition minded firm faces is whether to buy a successful company at higher price or a struggling company at a ‘bargain ‘ price if the buying firm had little knowledge of the industry but ample capital. It is often better off purchasing a capable, strongly positioned firm unless the acquisition price is unreasonably high. On the other hand when the acquirer sees promising ways to transform a weak firm into a strong one and has the money, a struggling firm can be the better long term investment (Coffee 1998). There are quite a number of benefits of business takeover. An example is there is excess capacity/ financial distress which is reduced through merge. Established firms help the teething ones. Again, there is the scrapping off of lines of production that are not profit making or coming together of equals so as to share ideas and key responsibilities like overhead costs and management (Allen 2000). Nevertheless there are other very intrinsic issues that need careful evaluation and analysis before an entrepreneur engages into takeovers. For instance one has to consider the internal operations of the previous firm and how to incorporate them into the new system. These include administrational procedures, staffing operations. When for example staffs are used to being paid for work done on over time then they are likely to resent a manager who does not put these elements into place. Still there is also how different managers have been running the company for such as the mechanisms they have been employing in the motivation of the staff. This includes provision of lunch, house and medical allowances, leaves and offs motivate workers since they feel that the company has them at heart and are concerned about the welfare of its workers. Accordingly, if there is no well calculated planning and evaluation, it would make the staff take offense if such provisions are not offered. Alternatively, they should not just be executed into the takeover system without careful analysis of the total expense to be incurred in relation to the capital, overhead expenses and the profit being made (Hagendorff 2007). According to management theory, before takeover films establish themselves, they should ensure that they assess on matters pertaining power and authority. These firms that are being engaged into takeover should consider how to distribute and share power. In case where there are disparities in power one the executive feel demoralized. At the same time if employees from both sides feel not recognized, unappreciated or side lined then their out put becomes tampered since they are not motivated. In addition to this, lack of planning may mean that the takeover firm does not take time to harmonize different policies. This may be the benefits accrued to retirees, policies guiding decision making (whether centralized or decentralized) in both the target and the acquiring firm. Consequently the staff may end up being demotivated (Weston 1998) Again, the takeover firms should plan on how to synchronize communication, information and technology systems. technological advances have realized a globalization that have made firms to streamline their operations since any loophole can adversely mess them up within a very short time lapse due to availability of internet that enables clients to compare services provided by various firms so as to make informed decisions. ATMs and advanced computation machines have cut down operational costs and make it possible to tackle complex and enormous data. All this leads to greater market liquidity expenses. Basically, if this are of ICT is left unattended, then a risk poses of mismatch of the operations carried out by the target as well as the acquiring firm especially if they are multinationals. Consequently, there is huge confusion that can lead to a lot of time wastage, shoddy operations as well as loss of lump some amount of money due to integration of varying computer systems. (Hagendorff 2007). As an investor one should evaluate the investment climate of the business takeover. Investment climate refers to the institutional, political, social, geographical, infrastructural economic environment that shapes investors operations and expectations. For example an acquirer will go for takeovers that have their potentials underutilized in the market. In the light of the above, evaluation of investment climate acts as an indicator towards the right path that the investor in takeover should take. In case there is no evaluation of the investment climate of any takeover then it is doomed to fail even after excessive outlay through borrowing of finances which it would later not be in a position to service the loans (Weston 1998). There is also dire need to carry out a survey in order to determine how well the target and acquiring firms are connected before any takeover execution. This means that there should be some commonality in the midst of the differences. They help reduce overhead costs. Also their weaknesses should complement so that in the face of adversity then the other can be the anchor for the takeover (Cole 1995). Additionally, an investor should consider the geographical scope of the turnover. He should be in a position to evaluate his market to ensure that the targeted clients are aware of the merge and they as well being satisfied with the commodities that the takeover might be offering. There should be an evaluation system put in place to assess how suitable and convenient the turnover is in meeting the needs of its clienteles. There should be regular feedback on the prevailing market conditions. Failure to evaluate the trends in the market leads to unsatisfied customers hence low purchases like in the case of Citigroup in USA (United Nations 2004). As seen above the, the turnovers invest a lot of money in the acquiring of the target firms. This may lead to a lot of difficulties later if the shares in the market go on low cost due to the effect of leveling. Again there might be a lot of time wastage and further financial constraints due to regulatory burden. This is where there are costly procedures to be followed especially in the face of hostile takeovers which might sometimes require government or state involvement. The dear time consumed could rather be utilized in positive growth of the firm like training of its staff. The cost incurred in the statutory procedures, time factor coupled with procedural delays make the whole deal complex. At the same time some of these protocols may be outdated and yet the whole process may be rendered unyielding (Weston 1998). Another expense incurred is the cost of executed integration. This is when the acquiring firm has to maintain some of the key personalities who are unwilling to condescend though they might not be necessary for the firm yet they have a major influence. These include executive managers who are well paid and have other expensive incentives. At this juncture, the takeover firm ends up incurring a lot of pointless expenses. All these expenses are carried out by the acquiring firm and they might be a major blow unless a critical evaluation has been carried out to assess on the predictability of a future takeover (Hagendorff 2007). In addition the takeovers may have inadequate of leadership and planning capacities to assess impact of globalization on income and social indicators. This is when there are selfish motives among the board of directors who are not ready to step down for the competent persons to take the lead. They might be incompetent in knowing or also suffer from inadequate understanding about the policy tools to influence the takeover market decisions that they have committed themselves in. This confusion about revolving around the fulcrum of the takeover entails diluted for strategic planning, weak coordination and hindered cooperation in form of decision making. This is because every party views his decision as superior to that of the other in the takeover. At the same time there is deterred information sharing among the top officials in the takeover unless there is an ultimate lying down of individual differences. All these hiccups restrain the takeover from appropriating the process of globalization. Besides this there is little involvement of the stakeholders in the planning process. This is as a familiar scenario in some takeovers. As a result there is corruption through embezzlement of funds (Cole 1995). Similarly, another reason for the failure of the takeover is poor evaluation as a result of political or government interference. This whereby evaluation credentials are rated in terms of political affiliations This ends up discouraging talented and highly expertise staff who would have otherwise been fundamental for the takeover. As a result there is hindrance of optimal use of the human resource. An example is in Bangladesh where such scenarios are experienced in government and semi government corporations. This can also lead to unnecessary leveraged recapitalization and poison pills of the acquisition firm (Weston 1998). In addition, takeovers are affected by imbalance in the competency of the staffs which is as a result of executed integration. This is whereby some staffs are not up to the level of knowhow that is needed to sustain the takeover firms. To curb this shortcoming, the staffs need to be trained. If the takeover does not invest in these staffs then some of their operations are mediocre which leads to poor returns. Still, if the executed integration is not well analyzed from both sides that is the target firm as well as the acquiring firm; it might lead to the fall of the takeover firm. This is because there would be integration of unhealthy cultural system that would affect the entire organization. An example is where the employees have a custom of reporting to work late, leave the work place before the due time, or even in cases of excessive centralization of decision making. These practices can be emulated due to lack of ample time to evaluate every aspect of the firms (World Bank Report 2005). Poor planning and strategizing leads to rigid operations that leave no room for interaction and mingling of staff. Thus the takeover firm does not get some of the challenges experienced and learn how to go around them from the baseline. As a result some of the mistakes might be cascaded from the target firm to the acquiring firm. In the breath, if there is poor planning there will be duplication of operational processes like advertisement of a product in a given geographical coverage, training of staff in a given department. This occurs due to poor coordination which leads to wastage of resources that would have otherwise been utilized elsewhere (Hagendorff 2007). Conclusion Takeovers have both advantages and disadvantages. However its glitches revolve around poor motivation and evaluation, excessive outlays (often with borrowed capital), poorly planned and executed integration which are all intertwined. Bibliography Coffee, John C., Jr., Louis Lowenstein, and Susan Rose-Ackerman, 1998, Knights, Raiders, and Targets: The Impact of the Hostile Takeover. New York: Oxford University Press. Cole G. A., 1995, Organizational Behavior. Theory and Practice. University of Sussex Institute of Education, South- Western Cengage Learning. Department of Economic and Social Affairs, Division for Public Administration and Development Management Globalization and the State, New Yolk. Hagendorff J., Collins Michael and Keasey Kevin, 2007, Bank deregulation and acquisition activity: the cases of the US, Italy and Germany, Leeds University Business School, The University of Leeds, Leeds, UK. Jarrell A. Gregg, 2002, Takeovers and Leveraged Buyouts, Liberty Fund, Inc. United Nations, 2004, Challenges for Economic Growth and Human Development, Weston, J. Fred, Kwang S. Chung, and Juan A. Sui, 1998, Takeovers, Restructuring, and Corporate Governance. 2nd ed. New York: Prentice Hall. World Bank Report, 2005, Bihar: Towards a Development Strategy. Read More