Mergers, Acquisitions and Spin Offs

By David Gass

Mergers, acquisitions and spin-offs are part of the corporate restructuring strategy in which big and small companies indulge in today’s corporate world. These are also called consolidation activities. Companies pursue consolidation activities to strengthen their strategic and competitive positioning.

Merger happens when a new company is formed by the combination of two separate legal entities. The stocks of both the companies are surrendered and a new company issues fresh shares in the market. An acquisition is a purchase of one company by another where the target company ceases to exist and the acquiring company holds the stock of the target company.

In today’s world, top managers try to name an acquisition also as a merger, because it gives a negative impression in the minds of the stockholders that their company has been acquired. An equal merger is very seldom seen and most of the times it is an acquisition given the name of a merger. A merger can be both hostile as well as friendly. A spin off is a divestiture wherein a new company is formed by selling or distributing the shares of an existing company. Companies pursue spin-off in order to streamline their main businesses. Companies sell their businesses which have lower productivity.

Impact of Mergers and Acquisitions on the Shareholders and Employees

Mergers and acquisitions are not always welcomed by the members of the company be it the shareholders or the employees. The reason is that a merger normally leads to more job cuts and reduction of workforce. Job cuts are what the employees are afraid of and something that is inevitable. As far as the shareholders are concerned, mergers and acquisitions can lead to creation of large and small groups of shareholders. The minority shareholders are always at a risk of losing their interest to the larger groups. No doubt, that the companies achieve economies of scale and an improved infrastructure for the staff.

Causes of Failure of Mergers and Acquisitions

Most of the companies have made it big time after a merger or an acquisition. But things might not work that effectively if the corporate cultures are very different. Reduced efficiency and shrinking productivity can hamper the success of the new company if the employees do not enjoy the same privileges they used to have in the target company. These are some aspects, which are ignored by the top management while entering into a contract, but later on they realize the mistake. Due to these flaws the day-to-day business is hampered to the extent that the company may suffer huge losses in a short span of time. Experts suggest that the board of directors need to be more realistic while making a deal so that the future integration is for the betterment of one and all. The value of the company which is pursuing an acquisition or merger would decline, to price in the integration risks and cash exhaustion associated with the transaction.

Several softwares are available in the market to help companies to create documents associated with these transactions. Since the approval of the Stock Exchange Commission (SEC) is required to complete the transaction, lot of documentation works has to be done. These softwares help companies to reduce their paper work.

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