A merger refers to a situation where two or more companies unite to form a single company and this kind of bonding is found among medium sized and small companies. Acquisition occurs when one company is bought by another one. These two aspects are meant to promote growth of the companies involved. This paper addresses the various mergers that took place in United States and their effects.
Let us take a look at the merger that took place in the banking industry in the year 2004 between the Bank of America corp. and FleetBoston Financial corp. In this merger the bank of America corp. acquired the ownership of FleetBoston financial corp. This means that the company that was bought existed under new ownership and as a result its identity was changed to resemble that of the bank of America corp. (Straub, 2007)
A cross check on the history of FleetBoston suggests that the bank had successfully merged with another financial institution known as BankBoston and its previous identity was fleet financial group. The history of FleetBoston indicates that this is not the last merger that’s happening involving FleetBoston.
This shows that the management of this organization is determined and will do anything just to make sure they remain operational with a wider customer base. The bank of America had also entered into a merger which had seen it grow tremendously and since it was ranked third in US it had the required base to buy the FleetBoston bank.
The bank of America also had a failed merger with a stock brokerage institution known as Merrill Lynch in 2008.The merger seemed attractive on paper but on the ground it was very tough.
According to Depamphilis (2008), the bank of America lost many customers after acquiring the ownership of the stocks brokerage firm because the existing customers had personal relationships with the employees of the outgoing owners; people can not trust people who are not known to them. This loss of clients happened because the bank of America could not retain the organization culture of the outgoing Merrill.
Before an acquisition takes place there are a few things that the new owner to be should consider and they are namely (1) asset assessment, (2) historical earnings, (3) future maintainable earnings assessment, (4) comparable company and comparable transactions and (5) discounted cash flow assessment.
These factors are used to determine the cost of acquisition (Depamphilis, 2008). In this case the cost of buying FleetBoston was 47 billion. The above stated factors were important and remain like so because by acquiring the ownership of FleetBoston the bank of America was going to bear all the losses that were being incurred by the bought company and besides it had to take the unknown risks. In the final end the FleetBoston was no more because its shares were now owned by the bank of America.
Straub (2007) argues that there are various reasons for mergers and acquisitions. First, merging companies reduces the cost of operations as opposed to when the companies are being run as independent entities. This results in rise in company proceeds because there are several sellers of goods and services hence the union causes the group of companies to have an upper hand in business.
When a smaller company buys a bigger company it stands to raise its proceeds and also improve its market share. This is because the acquired company could have managed to gather many customers and hence the new owners do not need to look for new customers.
Acquisition promotes cross trading because the incoming company can sell its products and services to the existing customers of the outgoing owners. For instance if a company that deals with insurance brokerage was bought by a company that sells automobiles the customers of the insurance company can buy automobiles from the new owner of the company.
An example in Information Technology industry involves the case of Google when it purchased Like.com in August 2010 for almost $100 million with an aim of improving the IT infrastructure of Boutiques.com. Google integrates managers, websites, employees, network, and data in driving its IS strategy. With its newly implemented e-commerce site, Boutiques.com, Google seeks to widen its market base by offering customers new ways of searching and purchasing clothes and accessories (Efrati & Morrison, 2010).
According to Harwood (2006) companies that make huge proceeds can buy companies that make less or no profits in order to capitalize on their taxation which is normally subsidized. This trend was very common in the US until recently when the government implemented a policy that prohibited large companies from buying companies that are operating at a loss.
Company mergers and acquisitions usually have negative impacts on the management. This is because when a company acquires ownership it lays of some of the employees of the previous owner.
This could affect the performance of the company and thus reduce its productivity because the new management team may not follow the legacy of the previous management team. Since the remaining employees were used to the leadership strategies of the previous managers they would take much time to get used to the new leadership strategies.
When a deal involving a merger and acquisition is being closed the parties have to agree about which brand name should be used. There are several suggested options. First, the weaker brand name can be done away with and it can be replaced by the popular brand. Secondly the parties can do away with their respective brand names and develop a new brand. In some mergers the parties may opt to retain their identities and thus use them simultaneously.
Therefore, instead of relying on creating mergers, companies should find new strategies of penetrating into upcoming markets because success in business comes after a business have held on to its position after others have left. In business world the ups and downs are part of life.
Depamphilis, D. (2008).Mergers, Acquisitions, and other Restructuring Activities. New York: Elsevier, Academic Press.
Efrati, A. & Morrison, S. (2010). “Google Jumps Into Fashion E-Commerce.” The Wall Street Journal. 18 November 2010. Retrieved from http://online.wsj.com/article/SB10001424052748703688704575620840174153292.html?mod=WSJ_Tech_Europe_LeftTopNew
Harwood, I.A. (2006).”Confidentiality constraints within mergers and acquisitions: gaining insights through a ‘bubble’ metaphor”. British Journal of Management 17(4):347-359.
Straub, T. (2007). Reasons for frequent failure in mergers acquisitions: A comprehensive analysis. Wiesbaden: Deutscher Universitasverlag.