INTRODUCTION:
Owing to increasing competition and technological advancements, organizations are looking for different innovative ideas and strategies to create sustainable competitive advantage. The purpose of these strategies and tactics is to improve the overall performance of the company. This eventually leads to the creation of wealth for the shareholders. The main goal or aim of an organization is to create wealth for the shareholders. All strategies and decisions of the organizations are directly associated with this aim and hence are evaluated on the yardstick of wealth creation for the shareholders.
In today’s highly competitive environment organizations are engaging in corporate mergers and acquisitions in order to facilitate the process of organizational growth and development. Mergers and acquisitions result in changing the overall structure and outlook of the market. The organizations enter into mergers and acquisitions agreement in order to leverage the process of growth by more assets and capital and as a result try to capture large market share. This strategy of mergers and acquisitions is adopted by the organizations in order to improve the overall profits and performance and ultimately maximizing the wealth of the shareholders. However, there have been ongoing debates regarding the actual impact of corporate mergers and acquisitions on the wealth of the shareholders. In this paper an attempt has been made to analyze and explore the impact of the corporate mergers and acquisitions on the creation of wealth for the shareholders of the acquiring company. Along with this, the paper will explore the mergers and acquisitions activities in the pharmaceutical companies and impact of these activities on the performance and wealth creation of the pharmaceutical companies. For this purpose an analysis of the GlaxoSmithKline’s (GSK) acquisition of Human Genome Science and AstraZeneca’s acquisition of Ardea has been done. This in turn will contribute in assessing the impact of the corporate mergers and acquisitions on the creation of wealth of shareholders in reference to the pharmaceuticals companies.
CORPORATE MERGERS AND ACQUISITIONS:
Merger is known as the combination of two or more organizations, usually, by providing the shareholders of the acquired organization financial securities or shares in the acquiring organization. There are different motives behind the merger and acquisition activities of the organizations. However, the main aim is to enhance the growth and performance of the organization. There are different views regarding the advantages and disadvantages of the mergers and acquisitions. However, almost all researchers are of the idea that organizations need to develop and implement sustainable management and integration strategy in order to reap the long term benefits of the mergers and acquisitions. The merger and acquisition results in integrating two different entities on all levels, and hence the management of the acquiring organization should come up with effective and efficient integration plan or strategy (Datta, Pinches, & Narayanan, 1992).
Apart from the management of the integration process it is important for the organizations to evaluate and analyze the overall profitability of the mergers and acquisitions. The basic purpose behind the merger and acquisition, as discussed above, is the enhancement of the profits and performance of the organization. Hence, for this reason it is essential for the organizations to conduct profitability analysis before indulging in any such activity (Dilshad, 2013).
Despite of the risk involved in the corporate mergers and acquisitions many organizations undertake this strategy for the growth and development of the organization. Some of the major mergers and acquisitions deals of the past 10 years are shown in the image below:
(Chowdhury, 2012)
According to a recent survey the year 2012 reported increase mergers and acquisitions activities as shown in the image below:
(AdMedia, 2013)
It is being perceived that the volume of international mergers and acquisitions activities will continue to grow in the year 2013, as shown in the image below:
(RR Donnelley, 2012)
However, at the same time it is important to acknowledge the fact that although the number of mergers and acquisitions transactions has increased but there is decline in the overall invested equity as shown in the image below:
(GMB, 2013)
This reflects that the worsening economic and financial conditions have resulted in negatively impact the value of the mergers and acquisitions and the equity invested. However, at the same time organizations are increasingly opting for the mergers and acquisitions in order to respond to the increasing pressure of the economic recession.
One of the important in this regard is the measurement and analysis of the profitability of mergers and acquisitions (Dilshad, 2013). Several research studies have been conducted in order to determine that whether the corporate mergers and acquisitions are profitable for the organizations or these activities result in reducing the wealth of the shareholders (Billett, King, & Mauer, 2004; Sudarsanam, Holl, & Salami, 1996). There have been mixed reviews in this regard; according to different empirical research studies mergers and acquisitions result in providing mixed performance results to the shareholders of the organizations which are involved in the transaction (Dilshad, 2013). Hence, it is important for the organizations to carefully conduct profitability analysis of the corporate mergers and acquisitions and evaluate the impact on the creation of wealth for the shareholders.
CORPORATE MERGERS AND ACQUISITIONS AND CREATION OF SHAREHOLDERS’ WEALTH:
The corporate mergers and acquisitions are being questions for their ability to create wealth for the shareholders. As mentioned above, the wealth creation for shareholders is the ultimate goal for any organization and for this reason all corporate strategies and tactics are aimed towards this goal. Researchers argue that the mergers and acquisition are economically viable if the merged entity has high value then the separate parts. Mergers and acquisitions can create wealth for shareholders on the basis of the principle of value creation theories. For instance, the mergers and acquisitions can create wealth for shareholders by achieved economies of scale in production, opportunity to approach new markets, reducing costs by removing incompetent management, more financial opportunities, and increasing capital and assets (Frederikslust, Wal, and Westdijk, 2005). However, for achieving all these value creation elements, it is important for the organizations to understand the different factors affecting the overall process of mergers and acquisition and manage these factors accordingly (Chowdhury, 2012).
CRITICAL LITERATURE REVIEW OF THE FACTORS WHICH INFLUENCE THE SUCCESS OR FAILURE OF CORPORATE MERGERS AND ACQUISITIONS:
According to Conn et al. (2005), mergers and acquisitions are not able to facilitate the process of wealth creation for the shareholders. Despite of this claim of the research, organizations are actively being getting involved in different mergers and acquisitions activities. The main reason behind this is the different opportunists of growth and development associated with these activities. The organizations are looking for different elements and factors which will contribute towards the success of the mergers and acquisitions in creating wealth for the shareholders.
There are several factors and elements which directly influence the success or failure of the corporate mergers and acquisitions. For this reason, it is important for the organizations to analyze and understand these factors and come up with effective and efficient strategies to manage these factors and elements. The profitability analysis of the corporate mergers and acquisitions should incorporate the effect of all these factors and elements on the overall business. For this purpose it is firstly important to identify the factors and understand their dynamics.
Factors Responsible for the Failure of Corporate Mergers and Acquisitions:
Several research studies have identified different factors and elements which are held accountable for the failure of corporate mergers and acquisitions (Zollo & Singh, 2004; Marks & Mirvis, 2001). One main element in this regard is believed to be the high payment on part of the bidder or acquiring company (Calipha, Tarba, & Brock, 2010). However, it is important to acknowledge here that if this would have been the only reason behind the failure of the mergers and acquisition, then the financial experts would have worked out the system for overcoming this issue. According to Duncan (2006) there are three main reasons behind the failure of the mergers and acquisitions. The first reason in this regard is the inability of the managers and executives to understand the importance of the fact that there should be certain level of commonality or harmony in the systems and procedures of the both companies. Second factor in this regard is that the management or leaders of the organizations are not aware of the process they should undertake in order to achieve commonality or harmony (Duncan, 2006). Finally, the third reason behind the failure of the acquisitions to achieve the required performance level is that the staff and managers of the acquiring company are not able to manage the complexities and difficulties involved in the post merger and acquisition consolidation (Duncan, 2006). Several other research studies also highlighted the fact that the one of the major reasons of the failure of the mergers and acquisitions is the inability of the management of the acquiring company to assess and handle the process of cultural integration after the merger or acquisition (Bijlsma-Frankema, 2001; Papadakis, 2005). Siegenthaler (2010) highlighted ten factors which contribute towards the failure of the mergers and acquisitions. These ten factors are: ignorance, lack of common vision, poor due diligence, resourcing of team, lack of proper governance, lack of proper communication, lack of effective and efficient management, weak leadership, lack of courage, not able to integrate the culture. Several other factors responsible for the failure of the merger and acquisition are as follow (Dilshad, 2013):
- Lack of proper strategy
- Lack of pre and post integration planning
- Cultural differences
- Lack of overall knowledge and experience
- Over optimism
- External environment
Along with all these factors, another factor which results in negatively impacting the process of mergers and acquisitions is the ignorance of the main goal of the company i.e. wealth creation for the shareholders (Zollo & Singh, 2004; Marks & Mirvis, 2001). The management gives more focus to growth and infrastructural goals and thus ignores the process of generating considerable return on investment and hence leading to the increasing possibility of a failed acquisition or merger (Zollo & Singh, 2004; Marks & Mirvis, 2001).
Factors Responsible for the Success of Corporate Mergers and Acquisitions:
According to Cartwright (2012) the success of the mergers and acquisition is depended on the fact that to what extent the management is able to control the process of integration and integrate or combine the culture and employees of the acquired and acquiring companies (Bijlsma-Frankema, 2001; Papadakis, 2005). Different research studies have highlighted the impact of the integration of human resources of both companies on the success of the merger and acquisition (Bijlsma-Frankema, 2001; Papadakis, 2005). Another important factor which can lead to the success of the mergers and acquisitions is the set up of a post merger or acquisition integration team (Bijlsma-Frankema, 2001; Papadakis, 2005). This team will make sure that the post merger or acquisition integration process is completed effectively and efficiently. According to Schraeder & Self, (2003) the short sightedness of the organizations also results in negatively affecting the success of corporate mergers and acquisitions. The management should come up with long term growth and development plan in order to manage the mergers and acquisitions in effective an efficient manner. All these factors contribute towards the success of the mergers and acquisitions; Along with these internal factors, a thorough and detailed analysis of the external environment before the merger and acquisition also contribute towards making sure that the merger or acquisition is able to achieve the goal of creating wealth for the shareholders and thus is successful (Bijlsma-Frankema, 2001; Papadakis, 2005).
MERGERS AND ACQUISITIONS IN PHARMACEUTICAL COMPANIES:
Many organizations have been recently involved in the mergers and acquisition; however, some of the industries have been reporting high volume of mergers and acquisitions transactions. Pharmaceutical industry is one of the industries which have been reporting high mergers and acquisitions activities. According to a recent research study, pharmaceutical industry is the second most active industry after the software and telecommunication industry as shown in the image below:
(KPMG, 2013)
The image below shows the merger and acquisitions activities in the pharmaceutical industry for the time period 1995 – 2000.
(IMAA, 2011a)
It is evident from the image above that the merger and acquisitions activities in the pharmaceutical industry have been witnessing growth. The same trend is being expected to follow in the coming years. The image below shows that the pharmaceutical industry witnessed considerable mergers and acquisitions deals and activities in the year 2012 and the same trend is being continues in the year 2013.
(WorldPharma, 2013)
Comparing the mergers and acquisitions activities of pharmaceutical industry with the all other industries, it can be concluded that despite of the decline in the number of transactions in the year 2011 the value of the transactions of mergers and acquisitions in pharmaceutical industry witnessed increase. The same is reflected in the image below:
(IMAA, 2013b)
Some of the major mergers and acquisitions deals in the pharmaceutical industry for the year 2010 are shown in the image below:
(IMAA, 2011a)
Along with this in the year 2012, the top mergers and acquisitions deals were made by GSK, Bristol-Myers Squibb and AstraZeneca (Betz, 2012). With the help of the these mergers and acquisitions deals, these pharmaceuticals companies have been able to diversify and expand their portfolio and cove up the losses due to expired patents and economic recession. Hence, it can be concluded that the mergers and acquisitions in the pharmaceutical industry has been beneficial in the overall growth and development of the organizations. For this reason, many big names in the industry like GlaxoSmithKline, Pfizer, Bristol-Myers Squibb and AstraZeneca have been involved in mergers and acquisitions activities. All these companies have been able to conduct the profitability analysis and manage the interaction process in order to reap maximum benefits from corporate mergers and acquisitions.
ANALYSIS OF GLAXOSMITHKLINE AND ASTRAZENECA ACQUISITIONS:
Acquisition of Human Genome Sciences by GlaxoSmithKline:
GlaxoSmithKline acquired Human Genome Sciences in the year 2012 for around US $3.6 billion (Reuters, 2012; GSK, 2012). The company entered into this acquisition in order to facilitate the corporate strategy of continuous growth and development. This acquisition on part of GSK has been a good move on the basis of the integration of the culture and processes. HGS and GSK had been into partnership and collaboration for around 20 years and hence were good fit for acquisition (IncomeHunter, 2012; Baum, 2012). The acquisition deal also allowed GSK to acquire the rights to the medicines which were being penetrated in the market as a result of the collaboration of both companies (Baum, 2012). All these decision were taken to enhance the overall profits and performance of the organization and enhance creating more wealth for the shareholders. The acquisition deal is more feasible for being a success because of the high compatibility and commonality in the systems and processes of the both companies.
Acquisition of Ardea Biosciences by AstraZeneca:
AstraZeneca acquired Ardea Biosciences and paid $32 for each outstanding share of Ardea Biosciences (AstraZeneca, 2012; Yahoo Finance, 2012). The corporate strategy of AstraZeneca has been shifting from large mergers and acquisitions to smaller deals in order to facilitate the process of growth and development of the organization (FWP, 2012). The acquisition was inspired by the aim of the increasing the market share and profit and hence create more wealth for the shareholders. The main medicines and compounds of Ardea Biosciences are in harmony with the overall infrastructure, system, and current products portfolio of AstraZeneca and hence provides the acquiring company with opportunity to diversify its portfolio (FWP, 2012; Bigelow, 2012). This in turn makes this acquisition deal feasible and beneficial for the acquiring company on the basis of high commonality and compatibility among the both companies, as this will result in less post acquisition issues and complexities.
Analyzing Success of GlaxoSmithKline and AstraZeneca Acquisitions:
The researchers can analyze the success of GlaxoSmithKline and AstraZeneca acquisitions by exploring and analyzing the immediate financial revenues and expenses incurred by both companies after the acquisition. However, this method will only result in short term reflections of the both acquisition deals. Only one year is not enough to clearly analyze and evaluate the success of the acquisitions. The researchers can look for other factors and elements associated with the deal. For instance, the researchers can analyze the post acquisition management abilities of both companies. The companies can create value and wealth for the shareholder by managing the process of cultural and system integration of the acquired and acquiring company.
CONCLUSION:
Hence, it can be concluded that the reasons behind the increasing mergers and corporations, despite of being risky growth strategy, are the motives of diversifying, growing, and increasing the profits of the acquiring company. However, it is important for the organizations to understand the dynamics of different factors and elements which influence the overall process of mergers and acquisitions in order to make sure that the mergers and acquisitions are successful in the process of wealth creation for stakeholders. Same is demonstrated by the mergers and acquisitions in the pharmaceutical companies as witnessed in the cases of GlaxoSmithKline and AstraZeneca acquisitions deal.
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