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Mergers and Acquisitions Since the 1980's, and even more now in the late nineties, it has become a

growing trend for companies, both large and small, domestic and foreign, to form strategic alliances

within their particular industries. There are many specific goals that companies may be looking to

achieve by dong this, but the main underlying reason is to guarantee the long-term sustained

achievement of fast profitable growth for their business. They have to keep up with a rapidly

increasing diversified global market and increased competition. Nowadays, with the struggle forcompetitive advantage becoming stronger and stronger, it is almost essential to form alliances.

Diversifying and expanding techniques such as mergers and acquisitions are very popular methods

for forming these alliances. Basically stated, a merger is a joining of forces and acquisition is a

purchase of a company, whether it is welcome or hostile. The two terms are often used

interchangeably. Much research and planning is required in the early stages of these processes,

which starts with an acquisition strategy used in trying to find a suitable company to merge with.

Advantages and disadvantages of the merger must be thought out, as well as many other important

aspects, such as risk factors and new organizational structures that must be considered and closely

monitored throughout all of the stages of the merger or acquisition. It is of these competitive

strategies, mergers and acquisitions, as well as a recent case study following the conclusion, that will

be the focus of my paper. Before going further into the merger and acquisition process, a morecomplete explanation is necessary. A merger is the combining of two or more companies into a

single corporation. This is achieved when one company or business purchases the property or some

other form of assets from another company. The result of this action is the formation of one

corporate structure. This new corporate structure retains its original identity. An acquisition is a little

different from a merger in that it involves many problems being dissolved, and an entirely new

company being formed. There are different ways for a merger or acquisition to take place. One

obvious method involves the purchasing business making an absolute payment incash or in

company stock. Other arrangements may be made such as the exchange of bonds. After the

purchase has been made, the purchaser acquires the assets and liabilities of the other firm. There

are two main types of mergers; horizontal and vertical. A horizontal merger or acquisition combines

firms that competed with one another at the same stage of production into a single new firm. These

mergers usually involve basic commodities. A vertical merger, which is more common in producer-

goods industries, takes the entire production process, from raw materials to the end finished

product, and combines them together under single ownership. Throughout history, certain mergers

and acquisitions have influenced modern international finance. In the late 1800's, merger and

acquisition techniques were being abused and monopolies were starting to emerge. This led to the

creation of The Sherman Antitrust Act, which made monopolies illegal. More recently, large mergers

and the birth of new markets around the globe have affected international finance. When two major

corporations merge they form a company with a very large amount of economical and political

power. This has led to issues that deal with ethics and social responsibility (Hirsch 15). Now we

contemplate the first important question: Why merge or acquire? As stated earlier, the overall goalis to ensure future stability and growth in the market. But more specifically, each company has

individual goals that it hopes to achieve. Many times mergers are completed to save a failing

business. Others reasons for mergers include reduced competition and/or product diversification.

These goals are closely related to the possible advantages of mergers and acquisitions, and of

course, in the case of all risks, there are possible disadvantages as well. Many of the advantages

have to do with forming unique research and development skills. One major advantage is that a

merger would give a company the opportunity to expand by establishing their presence in a host

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country. This invites the company to compete in other markets. Another possible goal or advantage

is being able to adopt technology from the other business rather than spending the time and money

to develop it themselves. In the long run, this would cut costs and improve productivity. Economies

of scale and scope can be gained with a larger base and with this increased size come many

competitive advantages (Eiteman 482). A successful merger or acquisition may very well allow a

business to reduce its foreign exchange operating exposure by servicing a market with localmanufacturing rather than through imports (Eiteman 483). Some businesses merge to help alleviate

some or all of their debts (debts that will be taken over by the merging company) in hopes of getting

the chance to start over. Later in my report I will be discussing a cross-cultural merger, therefore, the

disadvantages I am about to discuss relate to cross-border mergers. One major problem that may be

incurred is cultural differences between the two businesses. This may lead to tension, conflict, and

stresses between the organizations, namely its employees, lessening the chances of a smooth

merger. Many times teams are designed to deal with any possible conflicts that may arise as a result

of the differences in customs, values, and norms. In a few cases, there are negative political

reactions from the unfavorable host countries. When the possible disadvantages occur, and these

outweigh the benefits of the merger, it is possible that the merger be classified as a failure. Failures

could be a result of bad planning, lack of leadership, unrealistic expectations, and/or inadequate duediligence. A more recent definition of this describes poor returns to shareholders or a self-

assessment that the company wouldn't repeat the deal (McVinney 11). Failure rates stagger, ranging

between 16% and 80%, depending on the approach used to determine it. So now that a solid

foundation has been laid, the next question that needs to be answered is: So what steps do

businesses actually take when embarking upon a merger? The ten steps, in order, are: 1) Formation

of an acquisition strategy. 2) Defining the Acquisition Criteria 3) Searching for a Target 4) Acquisition

Planning 5) Valuing and Evaluating 6) Negotiating 7) Due Diligence 8) Purchase and Sale Contact 9)

Financing 10) Implementation A closer investigation of the steps is important in obtaining a better

understanding of the actual merger and acquisition process. The first step is putting together an

acquisition strategy and the second step is putting together the acquisition criteria. These two steps

are closely related. When thinking about acquisition criteria, management answers the question,

why buy? Possible answers include to increase market share, broaden their product range, andto

diversify by entering into new markets. The third step is searching for the target. Things that a

corporation considers are particular business areas, products and services desired. The buying

corporation does research to find out all about the target company. This research is done by making

telephone contact, correspondence and by speaking with third parties (notes). If things are looking

good, a meeting between the two corporations will be arranged. Next comes acquisition planning,

the fourth step in the process. In planning, top management must consider location, price range,

profitability, return on capital employee, and image compatibility. A very important factor taken into

consideration at this time is the scope of integration. It is important to examine this factor because it

could lead to failure. Step five is valuing and evaluation. This involves setting a value and evaluatingthe potential company. The value is determined by examining the historical nature of accounts,

assets, and by referring to the Stoy Hayward Quarterly Index. Step 6 is when the negotiating begins.

There are thoughts of sources and methods of funding the business such as internal and external

sources of funds. Step 7, Due Diligence, refers to the management of the acquisition. At this point

there is a space between the two firms while the overall purchase plan is reviewed. The most

important step may very well be step 8, actively managing the acquisition. This involves the

purchase and sale contract, but it also involves the actions plan. Decisions have to be made about

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how the company is to be run. Topics such as authority, responsibilities, and roles must all be

defined. This, along with the implementation of any new ways, will require extensive

communication. A major problem that must be addressed at this point is integrating corporate

systems, structures, and cultures. This is one of the most complex challenges, especially when

dealing with cross-cultural mergers. Problems arise because, not everyone wants to adopt someone

else's way of doing business. And when you start to form a third culture out of the fabric two equallystrong companies, the task is enormous, especially if your trying to maintain high performance in the

marketplace at the same time (Leonard). To deal with any problems, special task-oriented teams are

organized who will specialize in this area. Step 9 deals with financing and finally, the tenth and final

step in the successful acquisition process is the actual implementation of your plan as a company.

When the steps are followed and everything goes as planned, the result is a successful merger.

There will be good operating and market synergy between the buyer and seller, and the newly

merged companies will understand the importance of sharing eachothers capital, markets, and

technology. After researching mergers and acquisitions, I have come to understand the importance

of these two growth strategies. Today's business environment is being dominated by mergers and

fast growth. In order be a player in the highly competitive markets, expansion of firms is necessary.

It is almost impossible to achieve high profitability all alone. This growth is achieved through newproduct development, acquisition of new plants and more machinery, and business development

activities. Firms are merging due to pressures from their competitors. Corporations today must

understand the financial and technological difficulties as well as the complex problems associated

with the actual interaction of peoples and plans when participating in mergers, and they must strive

to execute all of their plans to their maximum potential. CASE STUDY Renault and Nissan join forces

to achieve profitable growth for both companies On Saturday, March 27th, it was announced that

Renault, a French car manufacturer, would be teaming up with Nissan Motor Corporation in a $5.4

billion deal that created the world's fourth largest automaker. This deal gives Renault a 36.8% stake

in Nissan, a company that has been struggling financially for the past few years. The $5.4 billion deal

between Renault and Nissan hands over effective control to the French automaker in exchange for

badly needed cash (Wwodruf). There are other agreements within the contract, but they will not be

discussed in much detail at this time. Both of these corporations plan on benefiting from the merger.

This alliance will resolve Nissans very substantial financial problems. Renault will be given the

opportunity to join the automotive big leagues at a time of global expansion in the auto industry

(Marks). Market expansion will be possible because Nissan is strong in Japan, Taiwan, Thailand and

North America- markets where Renault has no presence. On the other hand, Renault is one of the

top marketers in Europe, while Nissan is just a small player. Nissan is strong in trucks and luxury cars,

and Renault is strong in small, mass-market cars. Even though the deal sounds great, it does not

come risk-free. Many skeptics believe that the teaming up of two struggling automakers will not

result in profitability or flourishing. Renault is taking a risk because it has just recently begun being

profitable, and the company may not yet be stable or strong enough to save Nissan from its greatdebts. Just as any proper merger should have, Renault-Nissan has already disclosed some of their

strategies for achieving a smooth merger. Renault is counting on its expertise in cost-cutting to turn

Nissan around. This expert team is going to be led by Renault executive VP Carlos Ghosn. The rest of

the team consists of 40 Renault managers who will be responsible for helping Nissan improve

efficiency and reduce spending (Marks). The new joint venture will be led by a global alliance

committee of top managers from each company. Since there will be a clash of cultures, Ghosn's task

may not be easy. His techniques of cost cutting are exactly what Japan is against. Many other teams

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have been formed as well. Eleven Cross Company Teams will be assigned the task of promoting all

possible synergies to be implemented by each of the partners (Renault 2). Each team will be in

charge of something different, from product planning and strategy to purchasing and logistics. As a

result of the merger between Renault and Nissan, they estimate they will save $3.3 billion in 3 years.

Sharing purchasing costs and auto platforms will be used to achieve this. Renault-Nissan will now

operate together in hopes of competing in a globally diversifed, competitive automotive market.Works Cited Eiteman, David K. Multinational Business Finance. Addison-Welsey, Co: Reading, MA,

1998. Pp. 480-496. Hirsch, Jared Brett. Mergers and Acquisitions: A Different Perspective. Kimball

Publishing: New City, NY; 1996. Pp. 13-15, 18,19, 31-56. Leonard, Daniel R. Global Markets. Mergers

and Acquisitions. Shermerhorn Johnson Company: New York City, NY; 1997. Marks, B. Global

Automotive Report. Detroit News. 1999. Http://www.detnews.com/1999/autos.htm. (28 Mar.

1999). McVinney, Michaels. A guide to mergers and acquisitions. 1998.

http://www.michelsmcvinney.com (29 Mar. 1999). Renault. The Agreement. 1999.

Http://www.renault.com. (28 Mar 1999). Woodruf, David. Deals. Nissan, Renault in $5.4 B Deal.

CNNFN. 1999. Http://www.cnnfn.com/hotstories. (28 Mar 1999). Word Count: 2291