Combining the corporate abilities of two or more firms results in brand value which most definitely works to the company’s advantage (Andrade and Stafford, 2004: 31). Smaller companies are usually at an advantage in case of mergers since their status is automatically elevated in the new brand. Andrade and Stafford (2004) note that as a result, these companies could witness higher sales due to their association with a reputable firm. TPG and Silver Lake which are much smaller stand to gain from recognition in the market after their merger with Avaya.
M&As promote growth in a company as long as it is well planned and feasibility studies have been well performed. Armitech merged with SBC (Southwestern Bell Communications) in 1999 with an aim of expanding SBC geographically. Prior to this, SBC had purchased RBOCs Pacific Telesis (Gershon, 2001: 178). In the face of all this, the company not only intended to promote growth but also had other agendas. AT&T, WorldCom and Bell Atlantic were making inroads and positioning themselves to provide full time service in the telecommunications sector (Gershon, 2001: 178).
SBCs moves were therefore reactionary moves meant to preserve the company’s competitive edge. The firm now provides a third of the
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Unused plant capacity, real estates, buildings and excess inventories can be disposed off for cash to obtain more optimal use such as research and development funding (Roller, 2000: 203). Tax Reduction synergies As a single entity, a business is likely to pay less in taxes since income is taxed together for both companies. This Tax reduction synergies could also fall under the cost reduction synergies because they help to eliminate some of the taxes due on the individual firms such that more is saved and higher revenues are recorded.
Real option synergies Bruner and Perella (2004: 330) note that M&A create flexibility for managers and provide them with options during the running of the business. Real option synergies such as exit options, options to defer, switch and alter operations make the management’s decision making processes easier. For example, when two firms get into a coalition, they can easily delay production until the time is suitable rather than rush into projects in a bid to compete with other firms (Bekier, 2001: 2).
This way, better quality can be produced and high indebtedness is avoided Kang, 2000: 22-29). Firms often find themselves in a fix when things do not go as expected as they rush to enter new markets, develop new technologies or undertake other risky actions to improve their competitive edge over other companies in the sector (Very and Shwiger, 2001: 24-25). With the available options, companies in M&A can easily contract, expand, restart or even shut down depending on the prospects in the market.
Merger and Acquisition Failures Ideally, mergers and acquisitions should elevate the companies’ competitive advantage. On the contrary however, several empirical studies are revealing the opposite about M&A. As a matter of fact, some M&A derail business performance or simply have no effect at all. A practical example is AT&T which acquired TCI cable in 1996. Synergism was barely achieved and benefits to AT&T could not be said to be significant (Borland, 1999: 1).
Mergers and acquisitions often convey bad news to customers even though in real sense they should reduce firm costs and consequently ease the burden on consumers. Borland (1999: 1) notes that the AT&T/TCI merger could take a long time before any consumer benefits can be realized if at all they are likely. Merger failures are mostly associated with poor planning and forecasts. Unrealistic expectations on consequent synergies and failure to properly integrate cultures of the firms involved contribute to 53 percent of failure rates (Tobias, 2008: 32).
Zatz (2001: 1) notes that executors of mergers are more likely to base their judgement on market synergies and savings but they usually forget that cultural issues are quite important. Whenever two or more companies come together, a common culture and vision should be identified (Barker, 2002: 135; Cartwright and Cooper, 1996: 97). This is because the different organizations have different cultures which makes the first years challenging before the employees can adapt to the common culture or the culture of the acquiring company (Chartjee, 2009: 153).