Book Report: Corporate M&ampa Takeover of Two UK Engineering

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Corporate M&a Takeover of two UK engineering firms

Mergers & Acquisitions (M&a) over the past 25 years has encompassed a great deal of activity and has drastically shaped the business environment for engineering firms. There is a difference between a merger and an acquisition. According to Healthcare Financial Management (2011), "A determination must be made at the outset as to whether a transaction is a merger, an acquisition, or something else. The sole criterion for identifying a merger is that the combining entities cede control to a new entity. Conversely, in an acquisition, one entity cedes control to another entity." (Healthcare Financial Management, 2011)

The effects of mergers and acquisitions involve empirical economic theory and a positive return on the equity price of the acquired stock (Pautler, 2003). However, the motives to engage in M&a activity ostensibly have not changed.

According to Pautler (2003), "The most general motive is simply that the purchasing firm considers the acquisition to be a profitable investment. The most common theme found in the work of economists who have written about merger activity is that mergers are often thought of as an alternative form of investment. Firms will undertake acquisitions when it is the most profitable means of enhancing capacity, obtaining new knowledge or skills, entering new product or geographic areas, or reallocating assets into the control of the most effective managers/owners." (Pautler, 2003)

The commencement of the last 25 years of M&a activity is in alignment with the start of the Fourth Wave (Rudolph, 2001) of merger and acquisition activity. The fourth wave is labeled by Rudolph as the decade of the 'raiders' an adjective describing a type of aggressive acquisition style. The mid 1980s saw a precipitous rise in the number of M&a to more than 22,000 (Rudolph, 2001), "driven by the new tides of strategic purchasing, privatization, and foreign investment. Another trend, although not new, reemerged during this decade -- the hostile takeover." (Rudolph, 2001)

The next wave or fifth wave (Rudolph, 2001) occurred in the 1990s. This decade involved "consolidation and diversification" (Rudolph, 2001). However, the forces of governmental regulation were more prominent than in the past. According to Rudolph, "The underlying forces of regulation, technology, financial markets, leadership, and the balance between scale and focus drove organizations to seek strategic alliance." (Rudolph, 2001) Additionally, the 1990s realized an increase in the number of syndicates, or strategic alliances that were forged to increase the number of mergers and acquisitions throughout industry.

Mergers in the 1990s were characterized by abnormal returns and the desire to consolidate. Market positioning was the strategic wild card in deciding whether a company pursued a merger or acquisition on a competing or non-competing firm. According to Farinella (1996), "Mergers continue to play an important role for companies positioning themselves in their markets. Companies that merge create greater financial strength, a wider selection of products and greater efficiency than either insurer has alone. Typical candidates include companies that provide similar books of business and can gain economies of scale through a merger. Future revenues and earnings for the surviving company are expected to result in continued surplus growth." (Farinella, 1996)

According to Rudolph, "The nature of the deal value changed from the 1980s to the 1990s. Not only were there more deals, the magnitude of the deals became larger, individually and in the aggregate. The average size for the top 10 deals in the 1980s was $12.3 billion, $300 million less than the tenth place finisher for the 1990s." (Rudolph, 2001) Certainly, the financing behind these deals had increased significantly over the course of the decade. The increase in the value of firms in growing markets made the M&a in engineering ever more attractive.

The underlying rationale (Rudolph, 2001) has also shifted over the past four decades. The rationale has transitioned from "a belief in growth through extension of core activities to and expansion of core operations to the current belief that innovation and creation of synergy is preferred over building from the ground-up. The unsettling feature of this evolution may be that eventually organizations will remove all excess expenses from their operations through traditional strategies but the bottom line will remain unacceptable to investors." (Rudolph, 2001)

The contemporary merger and acquisition activity is more complex and integrative than at any time prior in history. However, the activity is highly specific and carefully crafted to guarantee a profitable integration between two organizations. According to Huang & Kleiner (2004), "Several studies have showed that the cultural incompatibility is consistently rated as the greatest barrier to successful integration. For instance, a 1992 Coopers and Lybrand study reported that in one hundred failed or troubled mergers, 85 per cent of executives who were surveyed said that the major problem was differences in management style and practices." (Huang, Kleiner, 2004)

The literature also supports the notion that current M&a activity can be costly of a mistake when undertaken inappropriately. According to Huang & Kleiner, (2004), "Shortly after a merger and acquisition, many organizations experience lower sales, as well as increased complaints about customer service. When sales and service suffer, people in these groups tend to blame the merger or acquisition. Therefore, managers must ensure to maintain the standards of sales and services that their customers expect. Actions to boost sales and service must be overtly planned and quickly executed (Galpin and Herndon, 2000:49) (Huang, Kleiner, 2004)

According to Sikora (1995), "The lesson from that feast-to-famine experience is that the M&a foundation of 30 years ago was slender as a reed, that once the conglomerates dropped from the buy side no replacements filled the gap. Most businesses had yet to be convinced that M&a was more than a gamble for impatient corporate cowboys. That attitude changed in the 1980s in line with the new realities of the late 20th century that have challenged businesses across the globe. Acquisitions came in from the cold as well-crafted strategic ploys to quickly infuse companies with the size, skills, technology, and other prized assets needed to vigorously compete and survive. The emergence of well-heeled financial buyers added to the momentum. History also teaches us that M&a is highly dynamic, that the future may generate deals as unthinkable by concurrent standards as today's deals would have been unthinkable 30 years ago." (Sikora, 1995)

Acquisition of Stadium

The acquisition of Stadium Electronics should be well steeped in academic justification prior to financing a deal. Business takeover strategies are now ever more complex and require changes in tactics and strategy (Smith, 1985) Acquisitions may be encouraged by financiers looking to capture a quick profit in a risk arbitrage situation.

According to Smith (1985), "Third parties are joining the merger activity more frequently. Often, these third parties are seeking quick profits. Some firms that have some familiarity with mergers and acquisitions attempt to use that knowledge for their own benefit by engaging in risk arbitrage." (Smith, 1985) Such activity is not a justification for the acquisition of Stadium by XP Power. Financing is made available by private equity firms to enable merger and acquisition activity. The relative ease of obtaining financing provides an irrational reason to engage in non-optimal M&a activity.

The justification to engage in a takeover is a function of the value-creation potential of a deal (Rappaport, 1998). Using the shareholder value approach (Rappaport, 1998), a firm can gauge whether a merger or acquisition will contribute to the overall profit margin of the firm. According to Rappaport, "The basic objective of making acquisitions is identical to any other investment associated with a company's overall strategy, namely to add value. The shareholder value approach enables management to evaluate all investments, whether they be dedicated to internal growth or to external growth, such as mergers and acquisitions, with economically sound and consistent measurement system. Indeed, mergers and acquisitions may be seen as a special case of a strategy or, perhaps more realistically, as an important component of a company's corporate and business strategies." (Rappaport, 1998)

Additionally, Rappaport continues to comment on the nature of competitive analysis and the ability of its implementation to reveal industry attractiveness, "to evaluate the business's competitive position within the industry, and to identify sources of competitive advantage -- are equally relevant for evaluating presently owned businesses and businesses that are candidates for purchase. After all, immediately following the acquisition, the target company becomes part of the "presently owned businesses" of the buyer. Therefore, the basic calculations for valuing acquisitions closely parallel those for valuing strategies." (Rappaport, 1998)

Acquisition Firm

The target firm is Stadium; with manufacturing facilities and business operations in the U.K. And China, is a top provider of fabricated equipment that covers security, medical and care, transport, infrastructure, instrumentation, communications and green technologies (www.stadium-electronics.com). The attractiveness of Stadium is to obtain market share as the company has a successful history of having acquired a number of U.K. engineering firms up-to-date.

In 2000, Stadium acquired Arlec Power International Ltd. including the company's manufacturing units in DonGuan, China; Arlec thus renamed these units as, Stadium Asia.… [END OF PREVIEW]

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