Literature Review about Merger and Acquisition Performance Finance Essay

The literature has mostly studied the effects on employment after mergers and acquisitions (M&As) in Finland. M&As is a main point to enlarge a purchasing firm in all developed countries. Mostly restructuring involved in ownership changes. Although M&A could use to restructure the economy but it seems to be a threat to employment. After the removal of restrictions over foreign ownership during the early 1990s, cross-border M&As have greatly increased in number in this country and cause a public debate. In comparing to other firms, nonmanufacturing firm got the lesser effect on employment after cross-border M&As. Internal restructurings have substantial negative employment effects in trade but the most important is that almost all changes in ownership will leads to employment losses. M&As bring along the motives of to obtain genuine synergy gains, utilize scales economies in various forms, then, strengthen the market power in pricing, after that, revise the implicit agreements related to the firm's personnel and other stakeholders, lastly, promote the managers' own deviating interests. The effect of on M&As employment may be contingent on the type of M&As. The factors that matter are the distance between the target and acquiring firm (domestic or foreign in our study), the nationality of the acquiring firm (domestic or foreign), and the institutional nature of an acquirer (another firm or another form of M&A). M&As makes effect on employment in manufacturing, construction and other services, and trade (including hotels and restaurants) industry. Crossborder M&As or domestic M&As in which the purchasing firm is foreign-owned always leads to greater employment losses than other domestic M&As and internal restructurings. While during the late of the 1990s, there has been a substantial increase in the number of cross-border M&As. Mostly, which is around 60 percent of Cross-border M&A activity has been concentrated in transport, the wholesale trade, and real estate, renting and business activities. Domestic M&As were most widely spread in the Finnish Savings Banks Group. Foreign companies tend to take over certain Finnish companies with particular observable characteristics. Based on the results from Finnish data (Lehto), foreign companies have a tendency to take over firms whose workers' education level is high, whose size is large, and who are exporters. There are substantial negative (and statistically significant) employment effects for all sectors. This is consistent with our hypothesis that in the service industries a domestic purchaser, being located in the same relevant market as the target firm, may have a greater interest than a foreign one to buy another firm to limit competition We can sum up that almost all changes in ownership lead to employment losses and crossborder M&As have a negative impact only in manufacturing firm. A well-known explanation for employment losses is that the change in control through M&As offers an opportunity for a new management team to go back on on implicit labour contracts that have constituted obstacles for layoffs.

Cross border and acquisition

This journal state that the majority of crossborder M&As are not successful. Understanding the problems and opportunities of cross-border mergers and acquisitions is an essential element in understanding most M&As, and indeed in understanding the nature of global strategy. The acquisition of Columbia Pictures by Sony Corp in 1989. Sony was forced to take an unprecedented $3.2 billion write-down in 1994. This merger is now a classic case study of what not to do in cross-border deals. legal problems stemming from their recruitment of senior management who were under contract at Time Warner, lack of internal controls over budgeting, weak understanding of the fundamentals of the acquired business, and an overly optimistic belief in "synergies" arising from vertical integration and from applying Sony's technological competencies to the movie and television business. The two companies must reach agreement on which products and services will be offered, which facility or group will have primary responsibility for making this happen, who will be in charge of each of these facilities or groups, where will the expected cost savings come from, what will the division of labor look like in the executive suite, what timetable to follow that will best generate the potential synergies of the deal, and myriad other issues that are complex, detailed, and immediate .this merging companies must continue to compete and serve their customers in a competitive marketplace. The keys to establishing an effective strategic logic lie in answering questions such as: How will this merger create value, and when will this value be realized? Why are we a better parent for this company than someone else? Can this merger pass the "better-off" test - will we be able to create more value (by being more competitive, having a stronger cost structure, gaining additional competencies that we can leverage in new ways, etc.) after the deal? These are difficult questions that require careful, objective, preacquisition analysis. Overstate the real strategic benefits of a deal is a definite problem that must be guarded against. Pressures that arise from the desire to close a deal quickly before rival bidders appear, cultural and sometimes language barriers that create uncertainty, and the often emotionally charged atmosphere surrounding negotiations, work against this requirement of objectivity. The highest potential crossborder M&As tend to be between firms that share similar or complementary operations in such key areas as production and marketing. When two companies share similar core businesses there are often opportunities for economies of scale at various stages of the value chain Employee stress and uncertainty can be particularly troublesome in crossborder deals. Mergers create uncertainty, and people often experience considerable stress during this time. There is a real danger that some of the best people in a company will leave as a result of the merger - after all, it is usually the best people that have the most attractive outside opportunities - and inattention to their personal concerns may be costly. Studies indicate that the root cause of employee problems are feelings of mistrust and stress, perceived restrictions in career plans, and attacks on established cultural traditions within the acquired company, Differences among management and workers can sometimes spiral into broader community and political problems. Given the importance of integration to acquisition success, how can companies best manage this process? There are several important considerations. Understand that most of the value creation in an acquisition occurs after the deal is done. For all the synergies and benefits that are projected to accrue from an acquisition, none can be realized without substantial effort during the integration process. Plan for integration before doing the deal. There are many reasons why companies do not do this - such as time constraints, insufficient information, lack of awareness of how critical integration really is - but the alternative is to essentially guess at the sources of value creation. Develop a checklist of key integration issues, assign personal responsibility and a timetable for dealing with these issues, and set targets that will enable the value creation needed to make the deal work. Although integration is a process that cannot be completed in a few days, this analysis should yield a blueprint for how to create value from the acquisition. Work the details. Some of the confusion and complexity of cross-border mergers can be mitigated by ensuring that executives in an acquiring company learn about differences in accounting standards, labor laws, environmental regulations, and norms and regulations governing how business is conducted in the country of the acquired firm early in the process. Develop a clear communication plan throughout the entire process. The prospective melding of different country cultures in a cross-border deal can easily compound the uncertainty employees experience in any merger, and must be addressed in a proactive manner. In sum, there are two fundamental imperatives that must be underscored in any discussion of cross-border mergers and acquisitions. First, companies engage in a merger or acquisition to create value, and that value creation comes about through a combination of synergy realization to cut costs and competitive strategy repositioning to increase revenues and growth. And second, both the synergy realization and competitive strategy goals cannot be achieved without significant attention to the challenge of acquisition integration. If cross-border M&A strategies are to fulfill their potential, and justify the premium companies typically pay to engage in them, managers will need to fully understand, and embrace, these two imperatives.

M&A performance

This journal is an Empirical Evidence from Taiwan. The financial sector was transformed and opened to local conglomerates and foreigners in late 1980s and early 1990s. It made up more competition the domestic financial markets. The resulting rapid growth of financial institutions has increased market competition, forcing decision makers to adopt appropriate pricing strategies to maintain or increase market share. During the financial crisis of 1997, nonperforming loan (NPL) problems occur. To reduce the NPLs, two new regulations announced to encourage financial institutions to merge with others as financial holding corporations (FHCs). The overall NPL ratio of financial institutions which once peaked at 8.16 percent in 2001 was reduced under this new policy. Rhoades (1998) studies the M&A performances of nine European banks and finds that M&A can improve banks' operating performance. On the other hand, Stiroh (2000) finds that M&A is not capable of reducing costs or improving efficiency. Fields et al. (2007), who examine the M&A cases of banks and insurance corporations in the United States and other countries from 1997 to 2002, find that positive abnormal returns existed for bidders, in addition to significant improvements with respect to economies of scale and locations. Campa and Hernando (2006), who study the M&A performance of financial industries in Europe, report that shareholder returns of target corporations are positive around the date of announcement, while returns to the shareholders of the acquiring firms are essentially zero around the date of announcement. the increased size, complexity, and market share, after M&A, financial institutions might be "too big to fail and unwind," or, more accurately, "too big to discipline adequately." This viewpoint suggests that, even though M&A can increase the size and market power of financial institutions rapidly, it does not guarantee improved performance. In this section, we first categorize M&A activities into business, finance, and investment. For each category, according to the objectives that FHCs aim to accomplish, we next develop some empirical hypotheses in order to test FHC performance. Table 1 summarizes the objectives of FHCs. Finally, we discuss our empirical methodology This paper has investigated the performance of M&A activities for 14 FHCs in Taiwan. The results suggest that while the profitability of FHCs increases on a yearly basis, the operating performance deteriorates. In addition, this paper has tested the performance differences in a five-year period before and after the establishment of FHCs, and has found no evidence for the improved performance of FHCs after they began their operations. Overall, there is not much strong evidence that the performance of M&A activities for 14 FHCs increased over time. Taiwan's experience can provide lessons for other emerging East Asian and developing countries that share a similar economic structure and financial environment, especially with regard to the political ramifications introduced by the reallocation of interests among authorities, managers, and shareholders during the reform process.

Company Background

For the company our group chosen is the CIMB GROUP. CIMB GROUP is also known as Commerce International Merchant Bankers Berhad. CIMB GROUP is a commercial bank and is the second largest financial services provider in Malaysia. It is also one of the most leading banking group's in Southeast Asia. They own the motto of "To Be South East Asia's Most Valued Universal Bank" (CIMB Group, 2010). While their vision is classified below: We are in the business of creating value for our customers The main significance here is value. The value provided is mainly for the customers in terms of services company provided. The more value created, the more customers will turn to them. We believe the best way to create the most value is by enabling our peopleA The keyword here is "enabling". The way the company enable the employees is to actively and effectively engage them in placing, motivating and supporting, unleashing their true potential to produce more values for the customers. In order to protect our reputation and business, we speak and act with integrity Integrity is the main variable here. It refers to the approaches of how the employees treat the customers' needs and interests. It is based on how the way employees speak, and act honestly and sincerely towads customers (CIMB Group, 2010). Behind this merging company, the background is complicated but chronogically, there are two main company whom plays an important role in forming CIMB GROUP. They are Bumiputra-Commerce Holding Berhad(BCHB) and Southern Bank Berhad(SBB). The main historical event are shown below:

1965

Southern Bank Berhad (SBB) is founded as Southern Banking Ltd.A It started its business in Penang and continue to expand into other states. In the same time, the Bank Bumiputra Malaysia Berhad(BBMB) also incorporated (CIMB Group, 2010). It develop prominently with banking facilities and services throughout from urban areas to rural areas untill 1979. It was also the first to introduce the MEPS/ATM system throughout Malaysia today.

1970 - 2000

Around the 30 years, there are several different merging banks and other highlighted activities occur. In 1972, Indian Overseas Bank Ltd, Indian Bank Ltd and United Commercial Bank Ltd merge and form United Asian Bank Berhad(UAB). Then, Pertanian Baring Sanwa Multinational Berhad(PBS) was incorporated in 1974. While in 1986, Bank of Commerce Berhad(formerly known as Ban Chiang Bank) replaced Bank Pertanian as the controlling shareholder of PBS, following which its name was changed to Commerce International Merchant Bankers Berhad (CIMB) (CIMB Group, 2010). In November 1991, Bank of Commerce merge with UAB and form Commerce-Asset Holdings Berhad(CAHB). Due to Asian Financial Crisis in 1997 hits Malaysia critically, and subsequently in October 1999, BBMB and Bank of Commerce merge to form Bumiputra-Commerce Bank(BCB) which is under CAHB control. The merge between them is the biggest merger in Malaysia's banking history that ever recorded (CIMB Group, 2010).

2000 - 2005

From year 2000 onwards, CIMB began to actively involved in banking industry. In January 2003, CIMB Berhad had successfully listed on the Bursa Saham Kuala Lumpur(BSKL) and also launch CIMB Islamic (CIMB Group, 2010). Furthermore in 2004, CIMB acquire 70% of CTB and CAFM from BCHB. Then they were merged and become CIMB-Principal Asset Management Berhad(CPAM). In June 2005, CIMB also acquire G. K. Goh Securities Pte Ltd and Bumiputra-Commerce Group from CAHB. As a result of that, CAHB was renamed as Bumiputra-Commerce Holdings Berhad(BCHB) (CIMB Group, 2010).

2006 - 2008

After the acquisition of several banks and being listed in BSKL, CIMB Group had stabilizes its business and complete restructuring the exercise under BCHB. In March 2006, the Southern Bank Berhad Board of Directors agree to be purchase by BCHB which is under CIMB Group. Encapsulating investment banking, consumer banking, Islamic banking, expertise of BCB and agility of SBB, CIMB Group is able to mark itself on the Malaysian financial landscape (CIMB Group, 2010). Now, it is recognize as a universal bank. In accordance with the motto "To Be South East Asia's Most Valued Universal Bank", CIMB Group are able to embark its business and putting themselves on a higher platform. In the year 2008, CIMB are able to make strategic investment in the Bank of Yingkou, China and alos launch the CIMB-Principal Islamic Asset Management. Other than that, CIMB Group also acquire BankThai (CIMB Group, 2010).

2009 - Present

From 2009 onwards, CIMB Group is one of the most prestigous company whom actively involve in Malaysia's banking industry. With the three mian sub-brands of CIMB Group which is CIMB, CIMB BANK and CIMB ISLAMIC, CIMB Group can fulfill different needs of customers. Still, CIMB Group continue to thrive and engage their business not only in Malaysia but also in foreign country.

Example/Case Study

Based on the Microsoft Customer Solution Case Study, it focuses on the weaknesses of human resource department in CIMB Group. The case study disscuss about the problem face and provide a solution for the company. The main problem CIMB Group face is the failure of tracking the status of staff request and applications; lack of amalgamation between departments, missing forms and need require more space to store hardcopy forms ("Microsoft", 2005). Later on, CIMB Group realize that they need a system which is able to empower the human resource staff making them more capable. Before choosing, CIMB Group evaluated several human resource systems such as SAP and Peoplesoft. In the end, the company adopted a customized system from Mesiniaga, their Microsoft-based eHR. It was implemented as it meets CIMB Group requirements in terms of cost effective system and user friendly. It solve much of the problem and even add in new features. The system improved the company performance in terms of performance appraisal, remuneration package, traning module and online employee handbook. All of that had been electronicalized and it save a lot of unnecessary paperwork plus reduce the potential errors in data entry. Ultimately, it improve the efficiency of work in the company ("Microsoft", 2005). As adopted CIMB case study " From mortar and bricks to cards and clicks" it describe about a project development for CIMB Group and John Ryan was the project manager. It comprises four phase of the project. The first phase is to establish the retailing concept throughout the branches. For instance, researches such as network analysis, increased migration to self-service, generation of customer enquiries, consultation and elevated sales rates is carry out (Vilasini Krishnan, 2008). Entering the second phase, the concept is develop. Environmental design and retailing upgrades were included. On the third phase, suggestion were made to correct the deviation of the concept. Follow by phase four, all the plans were implemented and was launch at CIMB Bank's The Curve Branch (Vilasini Krishnan, 2008).

Reasons for Merging and Acquisition

In this current competitive world, the competition between rival are getting more aggressive. Obvoiusly, when an opponent change the strategy, the market in the same industry will not be the same again. Merging or acquisition with another firm is very common thing. First of all, we need to know that merge here means two or more different companies combine and form a new one. While acquisition is a firm purchase another firm in terms of buildings, shares and businesses. Thus, our study include the reasons why company would enter into an agreement for merge or acquisition.

Why merge?

Reduce competition and for growth Whenever a company merge, this means that the market power will gain in the industry. A company(CIMB) increase the market power will have more dominance which will make them more robust in the industry. Hence, this will provide more rooms for growth as merging will covers more section(banking, investment, securities). Growth here will increase the profitability, size and productivity of a company. According to Perry-Porter model, it explain that there is a factor of production whose total supply is fixed in the industry(Tore Nilssen, n.d.). Furthermore, if a company(CIMB) want to expand, then it will need to access to more of this factor and gain from other firm in the industry(Tore Nilssen, n.d.). For instance, they include human capital and knowledge. Diversification Diversification here explain as diversify of revenues and funding (Focarelli, Panetta, Salleo, 2002). As mergers are provoked by aiming to extend the customer base for services, they must provide the best for them. Because it possess different revenue and funding, mergers like CIMB are able to lend money to large firm as it own higher stability and that is why a bank can persist. Geographic diversification is also a reason to merge. This will help to reduce the exposure to any region (Brad Myers, 2006). Necessity In a compelling situation, sometimes firms are being force to merge. Economy plays an important role in it. For example, when economic downturn, small company had no choice and unable to sustain, eventually, stronger firms will gain advantage by merging with them. Unless the niche company has a defensive strategy or alternative way otherwise this is one of the way for the survival of the company.

Why acquisition?

Expansion The main reasons for acquisition is for the expansion of a firm. For example, CIMB had purchase BankThai in 2008. This prove that it helps CIMB to move rapidly into an international area because BankThai is already operating there. Another example can be seen is the acquisition of Anheuser-Busch by Belgium InBev. Both are beer company and Inbev has a strong market in Europe and Latin America. After overtaking Anheuser-Busch, Inbev was a ble to achieve a robust position in the U.S (Wheele & Hunger, 2010). It usually engage a horizontal integration within the firms. Gain advantage of acquired company In acquisition, the motive is to gain advantage of the other firm. For instance, from the example of CIMB and BankThai, CIMB can learn the culture, how the perform the transaction in Thailand. This provide a competitive advantage over the competitors.

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