A point common to every study is 'limitations' and this dissertation is no exception. Constraints like 'information overload' and reliability issues are always present. The sheer volume of data available on the topic was the first problem. The second major issue was that the majority of literature available in books, journals and electronic resources was found to be based on financial sectors quite different from that of the United Kingdom, in terms of regulations and structure. Implementing the findings on the financial sector under consideration was a challenging task.
The author had to sort through a huge amount of data to find out relevant material for the study. Another limitation the author faced was that the relevant material was outdated and based on mergers and acquisitions that took place in the early 90's. Although the field of M&A is a very dynamic and ever-changing one, lack of relevant updated material posed a problem. The author used recent M&A news and company financial reports to have an updated analysis to tackle this problem. In an effort to have genuine results, only data from credible sources was used in this dissertation.
Mergers and acquisitions are a phenomenon, which quintessentially raised head in the twentieth century, as the twentieth century novelist John Phillips Marquand quotes: "Mergers are a damnably serious business. Hardly a business day passes without reference in the financial press to a merger or takeover". Firms may expand by external as well as internal growth. Firms grow internally by retaining earnings and using their cash flow to replace and expand plant and equipment. Firms expand externally by purchasing or merging with another existing firm.
(Mayo, 1995) M&A activities are periodic in nature and come in waves. Evenett (2003) has identified two waves of consolidation, in the years 1987-90 and 1997-2000. In the first wave, 1987-90, 63% of M&A were in the manufacturing sector, 32% in the tertiary or services sector, and 5% in the primary sector. In the second wave, 1997-2000, 64% of M&A were in services and 35% in manufacturing sector respectively. In both periods, within the services sector, good percentages of M&As were between financial organisations, especially between banks.
(Evenett 2003) The number and size of mergers and acquisitions being completed continue to grow exponentially. Once a phenomenon seen largely in the United States, mergers and acquisitions are now taking place in countries all over the world. (Hitt, Harrison & Ireland, 2001) It is evident from Fig1. 1 that mergers and acquisitions have become one of the most significant corporate-level strategies of the new century. In the late 1990s, mergers and acquisitions in the financial sector started to get bigger and involve even bigger financial institutions.
A study of the 13 largest economies in the world by Organisation for Economic Co-operation and Development (OECD) in 2001 states: "In the 1990s there were more than 7,300 deals in which, a financial firm was taken over by another financial firm from these 13 countries, the values of these acquisitions being in access of $1. 6 trillion. During the same period financial firms from the same 13 countries made 7600 acquisitions with a similar estimated value". (OECD 2001) Figure 2. 2 Bank ratings by assets Source: – "Thinking big" the Economist 18th may 2006
As is evident from fig 2. 1, fig 2. 2 and discussion in the previous paragraphs of this section, mergers and acquisitions have grown in popularity during the last decade. This is partly because a lot of organisations do make a lot of money from M&A. Consolidation activities are further fuelled by the fact that in order to stay one-step ahead of the competition companies are squeezing hard on their resources in order to employ them more efficiently and effectively therefore, to avoid becoming a target themselves.
Nevertheless, the most important reason for engaging in merger and acquisition, particularly in the banking sector, is the underlying desire of management to maximize shareholders wealth in addition to other motivations and reasons that are discussed in subsequent chapters. Mergers and Acquisitions are methods of consolidation in which the ownership is transferred by transferring the control from one owner to another. "Mergers and Acquisitions are tools used by companies for the purpose of expanding their operations and increasing their profits" (www.
wikipedia. org) In most of the western economies, the trend is towards greater consolidation of financial organisations. A merger is an activity in which the assets of two or more independent firms are combined into a new legal entity. Whereas acquisition is an activity where the control of at least one firm is bought by the financial organisation, but their assets are not integrated and neither are they combined into a single unit. (Heffernan, 2005) "Mergers and Acquisitions are primarily viewed as means of corporate expansion and growth.
In the past, companies have been performing 'business combination' in order to make money, survive or to expand" (Sudarsanam, 1995) Before going on to the definition part of mergers and acquisitions it is very important to draw a line between the two activities. Acquisitions happen when the acquiring company takes over the target company and clearly establishes itself as the new owner. Merger happens when two relatively equal companies, agree to go forward as a single new company rather then being separately owned and operated. (Refer appendix 1) Merger:
In a merger, two or more companies of 'comparable size' are brought together and fused to create a new legal entity. Each of the companies, if the law allows, loses its own legal identity in favour of the new merged one. (Gardner, 1996) In business or economics, a merger is a combination of two companies into a larger company. The will to do so is 'commonly voluntary' and may involve a stock swap or cash payment between the two parties. Swapping of stock is the more preferred of the two activities, as swapping stock allows the involved risk (pertaining to the deal) to be shared among the shareholders of the two organisations.
In a merger, the corporations come together to combine and share their resources to achieve common objectives. The ownership is transferred from the two separate groups of shareholders to a joint ownership, of the merged entity. During the course of a merger, a new entity is formed by 'subsuming' the merging firms. (Sudarsanam, 1995) Acquisition: An acquisition is defined as "A union or combination in which one of the enterprises, namely the acquirer, obtains control over the net assets and operations of another enterprise, the acquired, in exchange for the transfer of assets, incurrence of liability or issue of equity.
" (Benston, Hunter & Wall, 1995) In an acquisition, the buyer normally pays full value of the target company plus a premium. In other words, the buyer pays the discounted value of all future cash flows from the business plus 10-50 percent more. The reason why buyers pay premium is that they are in competition with other buyers and often they need to pay a premium to persuade the seller to sell. (Rankin & Howson, 2005)
An acquisition involves the acquiring of the assets and/or share capital (almost invariably of both) of another business. In contrast to a merger in which both parties are normally of equal stature, an acquisition implies that one of the companies involved is a senior party. In an acquisition, at least half of the voting rights are passed on to the acquiring company from the acquired company. The bought company might then disappear as a legal entity (partly depending on local law). (Gardner, 1996)