Mergers

Running Head: MERGERS

Mergers

Keith R. Jacobsen

Strayer University

It seems to me that business mergers have become a common practice in today’s market. It is common nowadays to pick up the newspaper and here of one-time bitter rival companies joining forces in their respective market. I can remember back three years ago when it was announced that my cell phone provider, Cingular Wireless, was buying AT&T Wireless. It didn’t mean much to me at the time. Sure, I had hoped for better service or cheaper rates, but I didn’t notice much change at all. I did notice the amount of advertising and communication of how AT&T Wireless is now Cingular. I even noticed how the Cingular logos incorporated the AT&T blue color into its signature orange themed branding. Now the news in today’s headlines is about AT&T buying Cingular Wireless. Wow! How does this happen? Couldn’t they have just done that three years ago and saved their marketing and PR departments from all this labor?

The reality is that while these mergers that take place seem to take place on a whim, there is actually a lot of hard work and financial analysis going into the decision. It may mean little change for the company’s customers, but big issues arise during these types of acquisitions. The companies must analyze whether or not the merger makes sense financially, logistically, and strategically. The decision must be made to benefit operations and financials for the company, but it cannot have damaging results for the public. That can occur when the merger leads to a monopoly within their respective market.

After the decision is made to pursue a merge, the company must execute the merge and take the necessary steps to consolidate operations. Executing the merge takes winning approval from shareholders and business executives from both companies. Not to mention approval from state and federal lawmakers.

Mergers ultimately come about because the companies have determined that it would be best for business. The term synergy is described as when the whole is greater than the sum of the parts (Brigham & Ehrhardt, 2005). When relating to mergers, this means that the value of the two companies merged is greater than the individual unmerged company values. This is the main reason for merging because it is a natural step towards growth in value for the two companies. In the case of Cambridge Silicon Radio, a UK vendor wireless chip solutions, they were eager to spread their market to mobile software so they acquire a software company also based in the UK, UbiNetics (Prophet, 2005). This shows how mergers are used to spread a company’s expertise; simply by buying a player in the market they are interested in exploring.

This extra edge gained by combining the two companies comes from the consolidation of operations while at the same time increasing the customer base. Take for instance two rival companies that could have retail outlets right across the street from one another. If the rival merge together and close operations at one store, they would be able to serve the same amount of customers but at a reduced cost. Savings would come from reduced utility costs, labor costs, and rent costs.

The combining of financial portfolios would allow the firms to lower their transaction costs and provide better coverage by security analysts (Brigham & Ehrhardt, 2005). Tax benefits are also considered because of the effect of how the merger can keep the company in the same tax bracket. Also, one of the company’s tax situations could offset the others’. If the acquired company has suffered losses, those losses can become a tax savings to the acquiring company by reducing the total profit.

The relationship between the two merged companies can vary. They can be competitors in the same line of business, like Coke and Pepsi. They could be from complementary lines of business, like a lumber supplier and a furniture maker. It could involve related markets, but different services. Or they could be from two totally different activities.

After one firm decides that is worth it to acquire another firm, it will make an offering to the acquired firm. This offer is based on the acquired firm’s value in the market. Occasionally, a smaller company is actually looking to be purchased by a larger company because of financial anguish (Brigham & Ehrhardt, 2005).

To give you an idea on how the merger bid process works, on November 18, 2005, US Airways CEO Doug Parker made an offer of $8 billion to acquire bankrupt Delta Airlines (Palmeri, Foust, & Woellert, 2006). The deal