Mergers and Acquisitions Failures Paper
Mergers, Acquisitions, And Corporate Restructuring FIN/444
November 10th, 2008
Though the management of a firm would never willingly go into a merger that they knew would fail it is important to know the reasons why those mergers that fail do so. With knowledge of how and why mergers fail, management can avoid those deals that have a likelihood of failing. Also management must have a working knowledge of what happens to a firm when a merger fails so as to avoid pitfalls and take advantage of opportunities. Finally management must understand the benefits and disadvantages of restructuring and the different methods by which this could be done. The more knowledge management has in this often complicated area of business the more likely that they will make good decisions regarding mergers and restructuring options.
When a merged business fails there can be a number of consequences. One possibility for a failing firm is bankruptcy. Though there are a few different types of bankruptcy the basics are the same, the firm is unable to pay its debts and takes a legal action to get at least a portion of the firms’ debts paid. According to Investopedia.com (2008) bankruptcy is, “A legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors (less common). All of the debtor's assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt.” In a bankruptcy action stockholders can be badly hurt as their interests in the firm are considered to be subordinate to those of debt holders. This can also involve the loss of employment for the firm’s entire workforce and the loss of confidence for investors that hold securities in related firms. Also there will likely be a tremendous loss of goodwill from the community towards the organization if it comes through the bankruptcy and is still doing business when the action is completed. Some recent bankruptcies of note include, WorldCom and Enron. (Mulherin, Mitchell, & Weston, 2004). These bankruptcies had such far reaching negative consequences that legislators have put into place significant regulations in recent years to prevent these debacles from happening in the future. Another type of failure for a merger could be technical insolvency. Technical insolvency occurs when a firm cannot pay its outstanding debt payments with current income. This can lead to a bankruptcy if not quickly and correctly handled. Even if it does not lead to a bankruptcy it can certainly shake investor confidence and goodwill towards the firm in the community. It may also lead to an inability to acquire talented employees, as they may be unwilling to attach their careers to a firm with an uncertain future. Finally, all these combined effects lead to a drop in share price and earnings per share as the firm spends all of its’ profits on paying off its’ debts. One final consequence of a failed merger could be legal insolvency. If a firm becomes technically insolvent it may still be able to pay it’s debt through the sale of more illiquid assets to cover its debt payments. However, if the firm cannot do this then the firm’s debt holders could take legal action which is when the firm becomes legally insolvent. According to Investopedia.com (2008), “Insolvency can lead to insolvency proceedings, in which legal action will be taken against the insolvent entity, and assets may be liquidated to pay off outstanding debts.” The effects on the firm and on the stakeholders are much the same for a legal insolvency as for a bankruptcy. Although the consequences of a failed merger may seem dire there are some methods by which a firm facing these dire prospects can take action to avoid them.
Often when a firm is in trouble there is the possibility to execute a restructuring action to avoid the painful consequences of a bankruptcy or insolvency action. Sometimes these actions can preserve some of the value of the firm for the stockholders.
One such restructuring action is the divestiture. According to Investopedia.com (2008), “For a business, divestiture is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions, and so on.” This type of action can be useful to a firm that needs to get rid of a losing division or to get rid of assets which are no longer useful to operations. “Oftentimes, divestitures may be necessary to undo previous M&A’s that have since become unsuccessful for any of the previously stated reasons.” (Hedges, 2008, para. 5). So this may be a good route for a merged firm that has found out the synergies that it merged to realize, are not there after all. Though a divestiture can be a restructuring option it is not the only one. A firm may also want to consider an equity carve out which can, if successfully implemented, create significant value for shareholders. Weaver & Weston, (2001) stated, “In an equity carve-out, a company sells up to 20 percent of the stock of a segment.” (Chap. 8). In this case the action creates a new separate company that the original company still retains a majority control of. According to Investopedia.com (2008) in an equity carve out, “In most cases the parent company will spin-off the remaining interests to existing shareholders at a later date when the stock price is much higher.” This can help a firm by generating capital and at the same time separate business divisions which have been found to be non-complimentary.” Either of these restructuring methods could be advisable in the right situation.” It is important that managers are aware of these methods of restructuring and the pros and cons of each one, so as to effectively employ these strategies if necessary.
All mergers are undertaken with the original expectation of success. However, if the management of a firm is aware of the ways a merger can fail, the consequences of such failure and the methods to prevent them, prospects will likely be better for all involved. The failure of a merger can have significant effects for all stakeholders. However, savvy management should be able to take advantage of the opportunities presented and avoid the pitfalls inherently involved in these often complicated business transactions.
Hedges, H. R. (2008, October 27). Week Four Read Me First [Course Materials Newsgroup]. Message posted to University of Phoenix class forum, MERGERS, ACQUISITIONS, AND CORPORATE RESTRUCTURING FIN/444 course Web site.
Financial Terms (2008). Investopedia.com. Retrieved November 10, 2008, from http://www.investopedia.com/terms
Mulherin, J. H., Mitchell,, M. L., & Weston,, J. F. (2004). Takeovers, Restructuring, and Corporate Governance, 4e. [University of Phoenix Custom Edition e-Text]. , : Prentice Hall, Inc. A Pearson Education Company . Retrieved November 10, 2008, from University Of Phoenix, MERGERS, ACQUISITIONS, AND CORPORATE RESTRUCTURING FIN/444.
Weaver, S. C., & Weston,, J. F. (2001). Mergers and Acquisitions, 1e. [University of Phoenix Custom Edition e-Text]. , : McGraw-Hill Companies, Inc. . Retrieved November 10, 2008, from University Of Phoenix, MERGERS, ACQUISITIONS, AND CORPORATE RESTRUCTURING FIN/444.
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