Corporate takeover activity, in other words that is the merger and acquisition (M&A) activity that has increased mainly since the mid of-1960s (Ginblatt & Titman, p 692). M&A has been, and likely always will be a main power in the modern financial and economic society. Almost every person in society is indirectly or directly affected by this activity, either by working for a firm that is involved in a M&A transaction, or by purchasing goods or services from a firm that is.
It is not only a beneficial but also a detrimental economic phenomenon. Tax reform, the collapse of the high yield bond market, deregulation in some industries, antitrust regulation, globalization and other change in regulations are the main factors that cause the different in changing M&A activities in US and Australia market since the 1980s until now. Benefits and disadvantages of takeover activities: Merger and Acquisition activities bring a lot of benefit for both targeting and targeted firms.
According to Ginblatt & Titman, the main advantages of corporate takeover activities are Taxes, Operating Synergies, and Financial synergy. Taxes saving that the acquisitions are funded primary with debt and stepping up the basis of the acquired firm's depreciable assets that increasing benefit of tax shield that corporate has gain from takeover activity or merger and acquisition. Operating Synergy which is the increase in performance of the combined firm over what the two firms are already expected or required to accomplish as independent firms.
The firms will be more efficiency and effectiveness in operation and control. A common argument is support of corporate activity is reducing risk of bankruptcy or financial synergy, increase the value of a firm's shares and resources is allocated more efficiently and effectively within corporate group rather than external market. Because it's base on information advantages, information within corporate structure flow more freely and more quickly than outside corporate structure
In addition, takeover activities also Reducing risk through diversify, incentive management working hard overcoming entry barriers, increase market power, lower risk compared to developing new products, the takeover activities believe that the target firms are under valuated relative to its assets because it is badly managed. Moreover, Takeover activities can basically be interpreted as business reactions to adapt in a changing environment. These changes may vary and differ over time, but are mostly related to technology changes.
Takeover activities may induce market entry or exit, may help to improve the cost efficiency of firms, and may reduce competition pressures by establishing or extending a dominant market position. However, there are also many problems related to takeover activities. According to Hitt, Ireland, Hoskisson point out that Perhaps 20 percent of all mergers and acquisitions are successful, approximately 60 percent produce disappointing results and the last 20 percent are clear failures.
Successful acquisition generally involves a well-conceived strategy in selecting the target, avoiding paying too high premium and an effective integration process. ( Hitt, Irland, Hoskisson, 2003, page 222). They also point out that integrating two companies following an acquisition can be quite difficult that involve melding two disparate corporate cultures, linking different financial and control systems, building effective working relationship.
In addition, During the 1980s a lot of firms take on significant debt to takeover other companies. High debt can have several negative effects on the firms such as: Bankruptcy, downgrade in the firm's credit rating, preclude needed investment in activities that contribute to the firm's long term success as R&D, human resource training and Marketing. The inability to achieve Synergy is the most detrimental in takeover activities that will destroy all the value or future profit of takeover activities.