MERGERS & ACQUISITIONS

SHAMSUL GHANI
(feedback@pgeconomist.com)
Aug 23 - 29, 20
10

Mergers and acquisitions are normally used as interchangeable terms. The circumstances under which any one of these takes place may, however, highlight the fine distinction between the two terms. As a corporate strategy, mergers and acquisitions have been used to expand size and to accelerate growth of business groups. Acquisition may also take the name of a takeover or a buyout. The acquirer company may takeover another company, known as 'target' company, against considerations that may take several forms - cash, stocks etc. A takeover could be 'agreed' or 'hostile' depending on wills to buy and sell, and not-to-sell. A hostile takeover comes into question when the target company strongly resists acquiring company's attempt to grab the targeted business through hostile means which may include purchase of target company's floating stock of shares through stock market. Dawood group's failed attempt to take over Engro Chemicals in 1998 is an example. Normally, a larger and stronger company bids to acquire a smaller business entity.

On the contrary, when a smaller firm attempts to buy a larger company, the process is known as reverse takeover. A reverse merger takes place when a private company attempts to buy a listed company in order to attain the status of a listed entity.

The complexity of acquisition process restricts its successful completion. Several factors including legal and tax implications become a drag on its success rate which, according to an estimate, has not been more than 50 per cent. According to a study, the following basic questions need to be answered before a decision on a certain acquisition is reached:

* Are the IT systems of the two companies compatible?

* Will the acquisition result in top line growth or simply improve the current operational efficiency?

* Does the acquirer have adequate resources to handle regulatory, legal, tax and accounting requirements?

The obvious objective of mergers and acquisitions is the enhancement of market share and improvement of financial performance of the acquirer. The objective of improved financial performance may be guided by a number of motives, both genuine and sinister. These motives may include: economy of scale, economy of scope, increased revenue, synergy, taxation, geographical diversification, expansion or retrenchment, resource reallocation, diversification, cross-selling, and last but not least, empire building. The free market idol Alan Greenspan writes in his book The Age of Turbulence: "Mergers, acquisitions and spinoffs are a vital part of competition and creative destruction."

The idea of creative destruction articulated by the Harvard economist Joseph Schumpeter in 1942, as expressed in the words of Alan Greenspan, holds: "A market economy will incessantly revitalise itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones." In Pakistan, replacement of typewriters by word processors, overshadowing of landline phone business by modern cellular communication, and websites replacing libraries as source of information are few examples of this ongoing process of creative destruction. The process in itself would not appear to be unethical or inhuman and could easily be digested as the dictate of forward-moving time. The motive behind a takeover and the circumstances under which it takes place determine the genuineness or otherwise of a particular transaction. The motive of empire building can never be justified under the pretext of creative destruction as the former takes place, most of the times, in consequence of a series of hostile takeovers. The hostility, unfortunately, is not directed just against the shareholders or the entrenched management of the target company, it is also directed against the very structure of business ethics and, may be, against the entire global community. In this context the following words of Alan Greenspan would certainly appear to demean corporate democracy he is known to advocate so feverishly: "Market forces are also driving mergers and acquisitions, processes in which managements rarely survive unscathed. So-called hostile takeovers may be seen as pure corporate democracy once we recognise that the only hostility is between a set of new shareholders and the company's entrenched management."

Mergers and acquisitions essentially result in the concentration of economic and market power. The idea of corporate democracy is in direct conflict with these strategic corporate moves. Corporate democracy demands fair competition, which can only be ensured under a broadened and diversified corporate base. Mergers and acquisitions, unless undertaken for some genuine reasons, create monopolies and monopolies kill competition.

The newly-emerged corporatocracy culture warrants concentration of resources in as fewer hands as possible. The globalisation myth, in fact, is a cover to achieve this sinister objective. The corporate greed knows no bounds. It doesn't differentiate between nations and countries. A big corporate fish is ever ready to swallow the smaller ones of the same national and geographic origin. The corporate world carries the stigma of attaining acquisitions by the use of coercive force and even persecution.

The well-known US economist and writer John Perkins, who served as a US economic hit-man during his early carrier formed his own alternative energy company under the name Independent Power Services after quitting his job as an EHM. He was forced by one of his native oil companies to a sell off. He writes in his book Confessions of an Economic Hit Man: "In a strange turn of events, I succumbed to the corporatocracy when I sold IPS in November 1990. It was a lucrative deal for my partners and me, but we sold out mainly because Ashland Oil Company put tremendous pressure on us. I knew from my experience that fighting them would be extremely costly in many ways, while selling would make us wealthy. However, it did strike me as ironic that an oil company would become the new owners of my alternative energy company; part of me felt like a traitor."

The two recent merger/acquisition deals surfacing on Pakistan's news horizon appear to be benign in every respect. Merger of Askari Leasing with Askari Bank, which is technically an amalgamation, was necessitated by a sharp downturn in leasing business for liquidity and cost of funds reasons. The $50 million takeover deal between Faysal Bank as acquirer and Royal Bank of Scotland (RBS) as target company is a geographical resource reallocation move necessitated by the changed global financial environment. In the Asian region, RBS still has presence in 11 countries.