and acquisitions: the way forward?
By Ravi Mahendra
It is interesting to note that a number of acquisitions and mergers
are currently taking place in Sri Lanka. SLT acquired Mobitel, JKH
has acquired Asian Hotels and Phoenix and Jewel knit have merged
to form a group of their own by the name of Brandix. A couple of
years back, when HNB attempted to acquire Sampath Bank, a lot of
publicity was given to the fact. The acquisition failed eventually,
because of stiff resistance from the target.
In many cases,
companies resort to mergers or acquisitions because they believe
that it is the easiest and fastest way to growth. Even though this
view is acceptable to a certain extent, many acquisitions do not
produce the expected results. This is because there are problems
of post-acquisition integration and failure to achieve the results
projected. Vanik had bad experiences in integrating some of its
acquisitions. On a global scale the merger between AOL and Time
Warner Group proved to be a flop.
and mergers are also forms of fulfilling managerial egos as they
lead to the creation of large corporate empires. One wonders whether
the building of such empires serve any purpose to the shareholder,
if shareholder value is not enhanced, as a result of these changes.
The impact of an acquisition or merger is ultimately borne by the
shareholders. The concern that the shareholders of JKH are likely
to share today would be as to what the projected earnings of Asian
Hotels for the next quarter will be, and its influence on the earnings
of JKH. If an acquisition increases the earnings of the company
and also boosts confidence, it would be reflected by the PE (Price:Earnings)
This would result
in a positive impact on the share price, which in turn will tend
to rise. Shareholders will also be concerned about the funding of
an acquisition. If it is in the form of debt capital it could lead
to an increase in the financial risk. On the other hand, issue of
new shares or a rights issue can also fund an acquisition. A new
issue will dilute the shareholding whereas a rights issue will not.
However if an increase in market value is not significant, both
can result in a decline in the price per share.
From the shareholders'
point of view, an acquisition would be successful only if the management
team of the acquirer is able to integrate the organisations successfully
and achieve the benefits of synergy.
can be successful without the support of the employees. HNB's attempt
to take over Sampath Bank failed because of opposition from the
employees. On the other hand, the employees of Mobitel were keen
about the take over by SLT since they expected better growth opportunities
under the new parent. The acquirer will have to win the employees
to its side since their support is essential in order to understand
the business as well as to implement new strategies. Any redundancies,
which arise, should be dealt with quickly, and payments should be
generous, if funds permit, since this will boost the morale of the
To uderstand public or regulatory interest it is important to understand
the drawbacks of mergers and acquisitions. These changes could result
in a monopoly or a near monopoly situation, which could be detrimental
to the interests of consumers. Large firms might get the opportunity
to adopt anti-competitive practices, which may prevent the development
of new as well as existing competitors in the market.
A merger or
an acquisition goes against public interest if it is in a position
to control and dominate the market for goods or services. In such
situations, the Fair Trading Commission is empowered to investigate
a merger. For example in Europe, EU regulators prevented GE's proposed
merger to Honeywell, because they feared it would create the world's
largest manufacturer of aircraft engines.
There are also
situations where acquisitions and mergers are opposed on grounds
of nationalism. When Nestle attempted to acquire Rowntree in the
UK, a newspaper published the headline: " Help! The Swiss are
Coming For Our Smartees".
Acquisitions and mergers are a must as they can help to ensure that
firms enjoy economies of scale as well as minimise unnecessary competition.
Mergers such as Brandix can help to build strong Sri Lankan firms,
which can be competitive internationally.
With the development
of the open economy the Sri Lankan mindset may change, and there
will be more openness towards acquisitions and mergers in the future.
There may be a situations arising where foreign organisations might
acquire local companies. An interesting deal to look out for would
be the privatisation of the People's Bank.