Motives for Merger & Acquisition.

Strategic motives are often related to the reasons for diversification in general
Strategic motives can be categorized in three main ways:
Extensions
An organization would like to extend in terms of geography,
products and markets. Acquisitions can be speedy ways of
extending international reach. It can also be an effective mode of
extending into new markets, as in diversification.
Consolidation
M&A can applied by consolidating the competitors for increasing
scale, efficiency and market power by reducing competition. It has
some advantages:o Consolidation increases market power by reducing
competition. For example company can increase their
product prices for the customer.
o Consolidation increases their efficiency by sharing resources.
For example- using office or distribution channel.
Capabilities:
M&A can be formed to increased companys capabilities. Some
ability which is absence can be achieved by M&A. For examples
Microsoft acquired NOKIA mobile manufacturing unit for enhancing
their capabilities to be a manufacturer of Mobile phone. In-place of
re-searching and establishing a new technological unit.

Financial motives
M&A often created with the aim of using optimal financial resources than
improving direct real business. There are three main financial motives:
Financial efficiency
A Company with a strong balance sheet (that means, have more
cash flow from sales /cash rich) may acquire/merge with other
company who have weak balance sheet. For example high debt.
What is the motive for it?

The company who has high debt can save their interest payment
by using cash assets of stronger company. To pay off its debt.

And for the stronger company- it enables them to be a good

bargaining power for acquiring the weaker company in a good
price.

Tax efficiency Sometimes there may be tax advantages. (M&A may be formed also for
reducing the combined tax burden.)
For example, Company can get Tax benefit from different tax rule
between industry or country by transferring profit within the company.
Asset stripping or unbundling
Sometime company acquired other company with the aim of assets
stripping.
It is a process in which a company takes-over other company, whose
underlying /fundamental assets are worth more than the price of the
company as a whole. Than rapidly sale off the acquired assets to various
buyers for a total price in excess of original price as a whole.
This method often used to repay the debt of the company which may
have been increased due to the acquisition to increasing their net worth.

Managerial motives for M&A

M&A often created by managerial interests rather than shareholders interests.
(It may also called self-serving rather than efficiency-driven). It has two
reasons:
Personal ambition
Manager personal financial incentives can be received, if he achieved
short-term growth or share-price targets; and this is easily achieved by
acquisitions rather than the lower-profile organic growth.
Also large acquisitions attract media attention and boosting personal
reputations; giving friends and colleagues greater responsibility or better
jobs.
Bandwagon effects
Managers may be recognized as conservative, if he doesnt follow the M&A
trend; Also pressure comes from shareholder for M&A; And the company may
itself become a takeover target. So this is also reason for M&A.

Strategic Alliances
In M&A, ownership is completely changes but on the other side, Companies
also may work together in strategic alliances with partial changes in ownership
or with-out changing ownership.
So Strategic Alliances is where two or more organizations share resources
and activities to follow a common strategy. (to achieve common set of
objectives.)

(Strategic alliances are partnerships in which two or more companies work

together to achieve objectives that are mutually beneficial. Companies may
share resources, information, capabilities and risks to achieve this.)

Examples of successful strategic alliances

Ford and Chrysler have reduced operational costs dramatically
by using alliances
Mobil, Chevron and Amoco have decreased their operational
cost by 10 to 20 percent with some of their suppliers
Wal-Mart has reduced their costs by working with suppliers, (they
have increased productivity and they have decreased their costs as
well their prices.)
Microsoft is successful for its Xbox games console. They
developing a stronger network of games developers than its
competitors such as Sony Play Station
There are two main types of ownership in strategic alliances:
Equity alliances involve the creation of a new business unit that is
owned separately by the partners. The most common form of equity
alliance is joint venture.
o For example, IBM, Hewlett Packard, Toshiba and Samsung are
partners in research for semiconductor technologies.
Non-equity alliance is formed without the commitment implied by
ownership. This alliance is often based on contracts.
o For example, the Canadian subcontractor Magna has contracts to
assemble the bodies and frames for Ford, Honda and Mercedes.

Motives for Alliances can be categories into four

1. Scale Alliances
2. Access Alliances
4. Collusive Alliances

3. Complementary Alliances

Scale Alliances
In Scale Alliances Company can be combine for their target objectives
such as lower cost of product or service, more bargaining power to the
suppliers and spreading the risk.

Here in the figure, ability of A & B company may be same, but when
they work together they can get more advantage rather than alone.

For example, when the two companies are united, there will be no
more competition of purchasing of raw materials. So as an input of
production, companies can purchase their raw materials at lowers cost.
Similarly as an output, companies can sale their products or service at
a better price.

In Bangladesh there are several ship breaking companies, who are the
major supplier of row steel. To purchase a big old ship, big amount of
money is needed. So companies can able to purchase it by jointly but
they cannot do it by alone.

Access Alliances

In Access Alliance form, companies can get full access to their partner
capabilities in production and sale. In Access Alliances Figure, Here A is
western Company need a local distributor is B, to enter the market.
For example In Bangladesh Local trading or retailing company Named
Abedin Equipment Ltd. This company has goods marketing and selling
ability of selling BOSCH (German) power tools product to local market.
So Company B (ABEL) has taken licensing alliances in order to access
inputs from BOSCH.

Complementary Alliances

These also similar, to access alliances but the combine two company,
bring together Complementary strength, in order to overcome their
individual weaknesses. Here each company can overcome their
weakness by partners strength.
Here in Figure- Darker shading indicate Organization As strength. So
B can overcome its weakness by As Strength.
For Examples SONY & Ericson. Ericson had lack of Brand image
but they have Strength of Mobile phone manufacturing technology.
Similarly SONY had weakness of Mobile phone manufacturing technology
but SONY has good Brand image all over the world.
So by joint venture, Sony and Ericson have overcome their weakness. By
2007 they had reached to world 4th mobile phone company.

Collusive Alliance:

Occasionally Company can work together with-out any public contract or

work together in a secret way, without showing any visual appearance. It
is called Cartels.

When the number of compotator is small and the market/sales are big,
these Collusive alliances are formed.
By combining together into cartels, they reduce competition in the
marketplace. Its enabling them to set higher prices for customers and
they can also purchase raw materials at lower prices from their suppliers.
Making cartels only for-profit are generally illegal, so there is no public
agreement between them. So here in Figure-- there is no joining singe.
For example, mobile phone operators are often blaming of collusive
behavior.

Strategic alliance processes

Two elements are very important for success of alliances: one is Co-evolution,
In co-evolutionary point of view companies need to emphasis on flexibility
and changes of environment, competition and strategies for their success.
And other element is Trust Mutual Trust is highly important for the success of
alliances overtime.
So at different stages in the life span of a strategic alliance, these two
elements are vital factor for the Strategic alliance processes.
Here in figure there are several stages of Strategic alliance processes. First
Stage is
Courtship
So in the initial process of alliances, potential partners need to emphasis
on organizational fit. And both parties interest is required to make
alliances. So partners need to be careful and take time to build strong
foundation of their alliances.
Negotiation
In the foundation process, Negotiation is very important. The partner
should be very careful to set the proportion of ownership, profit & Loss
sharing and managerial responsibilities.
And they should be very careful of making clear & correct contract.
The next stage is Start-up
At these stage companies are likely to invest material, human resources
based on their contract. And mutual trust is very important at this stage.
In start-up stage, without mutual trust, making adjustments and
handling misunderstandings has become very hard. So if, it is not do
perfectly alliances me be break up.
Maintenance

In the maintenance process the companies should be more active, to

manage to allow for changing external situation. They need to be more
co-operative in tuning day-to-day work.
Here Trust & Co-operative work is extremely important because,
in this stage, when partners are working closely, they can begin to learn
each others ability, strength and weakness.
So this learning can enable them to be more powerful in competition. So
if they want to maintain their strategic alliance they have to trust each
other.

The final stage is Termination.

After the life span of alliances, when the primary purpose or objectives
is accomplished as from the contract, termination is a matter of
completion rather than failure.
If the alliances will successful, partners can extend or create new
alliances. Sometimes one partner more successful than other.
So termination should be managed carefully because if needed
partners may come together again for new projects in the future.