Term Paper: Mergers and Acquisitions Organizational Characteristics

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Mergers and Acquisitions (Organizational Characteristics)

The practice of merging and acquiring new firms from different countries has greatly increased over the past fifteen years (Moeller and Schlingemann, 2005 as cited in Martynova and Renneboog, 2008). By this way of expansion, that is through acquisitions and mergers, they are able to take advantage of the difference in tax rates and are able to make a profit from the inconsistencies of the markets, for instance, the government control on resource markets and labor force (Scholes and Wolfson,1990 as cited in Martynova and Renneboog, 2008; Servaes and Zenner' 1994 as cited in Martynova and Renneboog, 2008). In addition, increased benefits from mergers and acquisitions of companies of the neighboring countries are also an outcome of improved governance of the target companies and the bidding firms and due to the spillovers of standards related to corporate governance among the two companies.

In case of a merger of two companies or acquisition of a new company in the domestic U.S. markets, as stated by Xie and Wang (in press), there is an advantage from the combined corporate governance of both i.e. target company and the bidder firm. The investor's rights index highlighted in the study conducted by Gompers et al. (2003 as cited in Martynova and Renneboog, 2008) is exploited and this confirms that there is an augment due to merger and acquisition, through the target firm and the bidder index differences. By this we can derive that the extent of potential growth in management control is increased in merger and acquisitions across the border due to the improvement of financial management. Hence our major concern is to find out the effect of corporate controls on value of acquisition and mergers across the country.

According to the international law, a complete acquisition of a company by a company from a different country results in complete transfer of ownership of that company and empowers the acquirer to have complete control on the newly formed company and apply its rules and regulations on it, and as such the control of corporate sector is replaced. By doing so the applicable corporate governance of the acquired company will be of the country where the acquiring company exists (Bris and Cabolis, 2008 as cited in Martynova and Renneboog, 2008).

When the new rules and regulations applied on the bidding company are also applied on the acquired company, there will be a progress in achieving the goals by corporate governance which will result in an added value to the stakeholder's interest. With the increase in share value due to corporate governance, value of target firm and the bidder company will also record an increase. This theory is known as "the positive spillover by law" hypothesis (Bris and Cabolis, 2008 as cited in Martynova and Renneboog, 2008).

Here the word "Positive" means the improvement underwent by the target firm because of the complete acquisition of the company by the bidding firm or this can also be interpreted to be the increase in returns of the bidder as well as the target company resulting from improved controls of the bidder in the acquisition. Similarly the unconstructive spillover by law theory can be defined as the low standards of controls of the bidding firm that are associated with low share value of the company (Bris and Cabolis, 2008 as cited in Martynova and Renneboog, 2008).

"The negative spillover by law effect" is likely to occur between the bidder of a country that has a low investor security as well as a target firm with strong controls of rules and regulations. As the bidder acquires the target company, the applicable rules and regulations will be more relaxed and lenient than those earlier applied on the target company. This will result in the reduction of quality of the corporate governance, particularly of the acquired company. This can decrease the net worth of the target firm when it's acquired by the bidder company. One possible way out of this dilemma can be that the bidder company also adopts the stricter regulations of the acquired company. This is known as the bootstrapping theory: where the bidders adopt the rules and regulations of a level which is higher (Bris and Cabolis, 2008 as cited in Martynova and Renneboog, 2008).

Companies can contract on their own for the best possible interest of the shareholders. By following the bootstrap strategy of employing controls in the business, the bidder will facilitate in increase in the value of shares at the time of merger owing to better corporate governance. In the case of either a complete merger or acquisition of a company or in part bootstrapping can take place, but increase in value will be greater in partial acquisitions where the bidder possess less than hundred percent of the right to vote and the target firms stay a member of the stock exchange (Starks and Wei, 2005 as cited in Martynova and Renneboog, 2008).

The value thus enhanced by the bootstrap hypothesis is useful in acquisitions with complete equity or partial bidding where some of stakeholders are still in connection with the new company and they might interrupt the new administrative policies which can result in decreased interest of the stakeholders (Starks and Wei, 2005 as cited in Martynova and Renneboog, 2008).

In case of a complete take over, the international law recommends the positive spillover according to the law, which will also result in accepting the change in nationality by the target firm. However, partially acquiring a firm will also result in the same spillover effect that can be termed as the spillover according to the control theory. Even though the target company is not completely taken over by the bidding company in partially acquiring scenario, the bidding firm may try to enforce their own rules and regulations of governance on the target firm on the condition that the rules of the bidding firm are more binding than the target firm. On the contrary, if the rules and regulations of bidder firm are less effective than the rules of the target firm than the bidding company has to follow the law of the target firm (Martynova and Renneboog, 2008).

Thus we can conclude with our study that the positive spill over by law supersedes the negative spill over by law. The value of shares of the bidder firm and the target company are increased when the rule and regulations for corporate governance are stricter on the bidder than the target firm. This shows that if strong rules are enforced on the target company, it will result in an increase of the share value and will also decrease the personal benefits of the controlling managers. On the other hand, if the rules and regulations of the bidding firm are less effective than the rules followed by the target firm, the returns of bidder and target firm might turn out to be low. But this hypothesis acts in contrast to the negative spillover by law hypothesis as it does not negate the bootstrapping theory (Martynova and Renneboog, 2008).

In fact it is revealed that the bidders having poor controls on their organizations have to bootstrap to the target firms rules of good governance which will result in the increase in the value of shares. It is important to note that this hypothesis only applies to partial acquisitions and not complete mergers or is applied in deals which still have shareholders of the target firm and the target firm is still listed on the countries stock exchange (Martynova and Renneboog, 2008).

This theory of spillover by control applies when there is a difference between the governing policies of the bidder and the target firm which impose a positive effect on the expected returns in case of partial acquisitions. In this case the spillover effect where the state protects the rights of the shareholders of the bidder, firm increase in value of share is figured. Here, shareholders of both target firms and the bidding company enjoy the benefits of good governance; the asset value of both the organizations go up (Martynova and Renneboog, 2008).

Therefore we can easily conclude that government control on rules and regulation has a great influence on the course of companies taken over by the bidder companies not necessarily present in the same country. Particularly, it is explained that weak control of firms by corporate governance is the reason they are so easily taken over by the bidder companies in the neighboring countries instead of firms of their own country as confirmed by the studies conducted by Doidge et al. (2007 as cited in Martynova and Renneboog, 2008) as well as an earlier research conducted by Benos and Weisbach (2004 as cited in Martynova and Renneboog, 2008). If the interests of the investors of the target firms are defended they are more likely to yield value by the bidder firm.

An idea presented by Goergen et al. In the year 2005 (as cited in Martynova and Renneboog, 2008) is offered here where… [END OF PREVIEW]

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