One plus one makes three: this equation is the special alchemy of a mergers or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies – at least, that’s the reasoning behind Mergers and Acquisition. This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost – efficient company.
The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous, the terms mergers and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition.
From a legal point of view, the target company ceases to exist; the buyer “swallows” the business and the buyer’s stock continues to be traded. In the pure sense of the term, a mergers happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “mergers of equals. ” Both companies’ stocks are surrendered and new company stock is issued in its place. For example, both Daimler – Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.
In practice, however, actual mergers of equals don’t happen very often. Usually, one company will buy another and, as part of the deal’s terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it’s technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. (Investopedia. com – the resource for investing and personal finance education. http://www. investopedia. com/university/mergers (Page 3 of 15).
A purchase deal will also be called a merger when both Chief Executive Officers agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly – that is, when the target company does not want to be purchased – it is always regarded as an acquisition. Whether a purchase is considered a mergers or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company’s board of directors, employees and shareholders.
Garbage (2007) in his thesis paper on International Mergers & Acquisitions, Cooperation and Networks in the e-business’ defines a mergers as “the combination of two or more companies in which the assets and liabilities of the selling firms are absorbed by the buying firm”. According to Gaughan (2002) “a mergers is a combination of two companies in which only one company survives and the merged company ceases to exist, whereby the acquiring company assumes the assets and liabilities of the merged company”.
An acquisition also known as a takeover? s the buying of a company, the target? by another or the purchase of an asset such as plant or a division of a company. In the case of Vodafone acquisition of GT the acquired company Ghana Telecommunication Company limited still remains the legal name and Vodafone Ghana (VFGH) as the brand name. Rosenbaum and Pearl (2009) describe another form of acquisition known as a consolidation. According to them the terms mergers and consolidation are sometimes used interchangeably. As a general rule of thumb, a merger describes the acquisition of a smaller company by a larger one.
If the union is between two corporations of more or less equal size, then the term consolidation is probably applicable. For the purpose of this study, the definition of Rosenbaum will be adopted as the working definition of a merger. Types of Mergers From the perspective of business structures, there are different kinds of mergers. According to Welch, P. and Welch, G. (2007) Economics: Theory and Practice (8th ed. ), economists generally classify mergers into three types: (1) horizontal, (2) vertical and (3) conglomerate. Horizontal mergers This type of mergers takes place when two firms in the same line of business i. . they are in direct competition or they share the same product lines and markets combine. A typical example is the 1999 Exxon Mobil mergers. The merger between Vodafone and Ghana Telecom which is the focus of our study is also a horizontal merger. Anticompetitive effects The vast majority of significant competition issues associated with mergers arises in horizontal mergers. A horizontal merger is one between parties that are competitors at the same level of production and/or distribution of a good or service, i. e. , in the same relevant market.
There are two types of anticompetitive effects associated with horizontal mergers: unilateral effects and coordinated effects. Unilateral effects, also known as non-coordinated effects, arise where, as a result of the merger, competition between the products of the merging firms is eliminated, allowing the merged entity to unilaterally exercise market power, for instance by profitably raising the price of one or both merging parties’ products, thus harming consumers. In homogeneous markets, unilateral effects can be pronounced when two significant competitors merge to create a large, dominant player with only a few or no other competitors.
In these markets, an important role in the assessment is played by market shares and by the capacity available in the market. In differentiated markets, unilateral effects tend to arise particularly when the two merging companies have highly substitutable goods. Such a price increase does not depend on the merged firm being the dominant player in the market. The likelihood and magnitude of such an increase will instead depend on the substitutability of the products supplied by the two firms – the closer the substitute, the greater the unilateral effects.
Coordinated effects arise where, under certain market conditions (e. g. , market transparency, product homogeneity etc. ), the merger increases the probability that, post merger, merging parties and their competitors will successfully be able to coordinate their behaviour in an anti-competitive way, for example, by raising prices. As in the case of unilateral effects, the most common form of coordinated effects is in the case of horizontal mergers, i. e. mergers between firms active on the same market.
The main question in analysing coordinated effects should be whether the merger materially increases the likelihood that firms in the market will successfully coordinate their behaviour or strengthen existing coordination. The task is to identify what factors are likely to lead to coordination taking place between firms post-merger. This was a controversial area with which competition authorities and courts have struggled to come to terms over the years, but experience has led to the emergence of some agreement on what conditions are most likely to give rise to coordinated effects.
According to the “Airtours criteria”, coordination is more likely to emerge in markets where it is relatively simple to reach a common understanding on the terms of coordination. In addition, three conditions are necessary for coordination to be sustainable. First, the coordinating firms must be able to monitor to a sufficient degree whether the terms of coordination are being adhered to. Second, discipline requires that there is some form of credible deterrent mechanism that can be activated if deviation is detected.
Third, the reactions of outsiders, such as current and future competitors not participating in the coordination, as well as customers, should not be able to jeopardise the results expected from the coordination. Vertical mergers These are mergers between firms that operate at different but complementary levels in the chain of production (e. g. , manufacturing and an upstream market for an input) and/or distribution (e. g. , manufacturing and a downstream market for re-sale to retailers) of the same final product.
Another example is the acquisition of ABC television network by Walt Disney to enable Walt Disney air its recent movies to huge audiences. In purely vertical mergers there is no direct loss in competition as in horizontal mergers because the parties’ products did not compete in the same relevant market. As such, there is no change in the level of concentration in either relevant market. Vertical mergers have significant potential to create efficiencies largely because the upstream and downstream products or services complement each other.
Even so, vertical integration may sometimes give rise to competition concerns. Anticompetitive effects Vertical effects can produce competitive harm in the form of foreclosure. A merger is said to result in foreclosure where actual or potential rivals’ access to supplies or markets is hampered or eliminated as a result of the merger, thereby reducing these companies’ ability and/or incentive to compete. Two forms of foreclosure can be distinguished. The first is where the merger is likely to raise the costs of downstream rivals by restricting their access to an important input (input foreclosure).
The second is where the merger is likely to foreclose upstream rivals by restricting their access to a sufficient customer base (customer foreclosure). However, it should be noted that in general vertical merger concerns are likely to arise only if market power already exists in one or more markets along the supply chain. Conglomerate mergers involve firms that operate in different product markets, without a vertical relationship. They may be product extension mergers, i. e. , mergers between firms that produce different but related products or pure conglomerate mergers, i. e. , mergers between firms operating in entirely different markets.
In practice, the focus is on mergers between companies that are active in related or neighbouring markets, e. g. , mergers involving suppliers of complementary products or of products belonging to a range of products that is generally sold to the same set of customers in a manner that lessens competition. This kind of mergers takes place when two firms in unrelated lines of business combine. A merger between a bank and a media house will be an example of a conglomerate merger. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company (http://www. sk. com/wiki/Conglomerate_merger) Anticompetitive effects Merger review in this area is controversial, as commentators and enforcement agencies disagree on the extent to which one can predict competitive harm resulting from such mergers. Proponents of conglomerate theories of harm argue that in a small number of cases, where the parties to the merger have strong market positions in their respective markets, potential harm may arise when the merging group is likely to foreclose other rivals from the market in a way similar to vertical mergers, particularly by means of tying and bundling their products.
When as a result of foreclosure rival companies become less effective competitors, consumer harm may result. However, it should be stressed that in these cases there is a real risk of foregoing efficiency gains that benefits consumer welfare and thus the theory of competitive harm needs to be supported by substantial evidence. Evaluation of the effectiveness of existing regulations aimed to reduce anticompetitive practices of Mergers and Acquisitions in Ghana.
Mergers and Acquisitions among companies in Ghana are regulated by the Securities and Exchange Commission (SEC) under the Securities Industry Law 1993 (PNDC Law 333) (Ghana Investment Promotion Center, 2008). The law mandates the SEC ‘to review, approve and regulate takeovers, mergers, acquisitions and all forms of business combinations in accordance with any law or code of practice requiring it to do so. Ghanaian law on mergers and acquisitions is an amalgamation of several executive and legislative instruments passed as the corporate finance industry continues to evolve.
The need to generate constructive competition among enterprises has been recognized by the government, and monopolies are actively discouraged as a result. The merger in November 2003 of two prominent international mining companies – Ashanti Goldfields and AngloGold (AngloGold succeeded in outbidding Rand Gold in the highly con-tested race with an offering of $1. 4 billion) promises great value to shareholders and the operations of both companies.
The Companies Code stipulates the manner in which mergers and amalgamations should be effected. It places emphasis on company resolutions that authorize mergers and amalgamations and on the preservation of affected creditors’ rights. Ghanaian courts frown upon the arbitrary treatment of members or shareholders, and ample provision is made for aggrieved persons to apply to the court for redress at different stages of the merger or acquisition process.
Foreign enterprises are guaranteed unconditional transferability of profits and dividends through any bank authorized to deal in freely convertible currency, encouraging and securing foreign investment. The transfer of company shares is exempted from all stamp duties and capital gains resulting from mergers, amalgamations and reorganizations are also tax exempt. Under Ghanaian investment law, preferential treatment is given to foreign and Ghanaian joint ventures by guaranteeing lower minimum capital requirements than those required for wholly foreign-owned enterprises.
On the whole, mergers and acquisitions in Ghana continue to evolve as the government secures an attractive environment through executive, legislative and judicial activism to attract direct foreign investment and thus improve the economy. Consequently, the local corporate finance market has began to see increasingly complex financial transactions taking place as more international companies elect Ghana as the regional centre for their operations and its courts for dispute resolution issues.
Courtney from Study Moose
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