Chapter I. MARKET CONTEXT OF MOTIVES FOR MERGERS
1. Motives of mergers and acquisitions
Various factors influence amalgamation of organisations, in this work those factors have been divided into objective (causes, reasons) and subjective (motives and goals).
Most authors identify motives with goals of mergers and acquisitions. In some cases, the objective factors of enterprise functioning, both internal and external, force a specific strategy. In others, the subjective motives of individual groups of actuaries (managers, shareholders, intermediaries, employees) influence the setting of goals, which are not always consistent with objective needs of the company involved in merger or acquisition. From the point of view of knowledge transfer, the first of them is usually of greater importance.
A significant number of authors indicate situations in which a company needs to grow in a certain direction. „In modern organizations, the knowledge and competences of human capital are becoming more and more crucial [...]”9.
According to H. Johnson, such situations include:
• Globalization, which „by reducing labour costs and opening up markets to greater number of producers is important for competitiveness of industry;
• Operation of financial markets which „have become more integrated, allowing for easier conduct of merger transactions [...]”;
• Privatization of state-owned enterprises, which has enabled the merger of companies from different sectors, including some so far closed to private capital;
• The threat of a recession that „draws more attention to the issues of competitiveness, the result of which is striving to eliminate some of the costs of consolidation”10.
9 H. Dźwigoł, Business Management, Alpha Science International Ltd., Oxford 2015, p. 1.3.
10 H. Johnson, Fuzje i przejęcia. Narzędzie podejmowania decyzji strategicznych, Liber, Warszawa 2000.
The above-mentioned reasons for amalgamation of enterprises are mainly of external character but there are also internal causes. These are primarily premises arising from the analysis of the company’s situation.
Internal reasons are associated by H. Johnson with the company strategy.
In case of portfolio strategy, it points to the possibility of diversifying activities that will ensure the stability of the company. „This means that two entities with monetary flows that are not related with each other can give the entity a more stable income”11.
However, in case of a non-financial portfolio strategy, the merger will concern key players and their economies.
Various causes of mergers and acquisitions, depending on the horizontal, vertical and concentric strategies, or the creation of conglomerates, in particular in relation to the key (in the discussed case) horizontal and vertical strategy, have been presented in the further part. It is the horizontal strategy that is the subject of discussion in the paper, with reference to the problem of knowledge transfer between amalgamated metallurgical processing companies.
More specifically, the internal causes of the mergers are identified by A. Herdan and they are:
• Limited opportunities for independent development,
• Fear of hostile takeover,
• Improvement of competitive position12.
Among technical and organizational reasons, the same author gives:
• Increased management efficiency,
• Gaining more effective leadership,
• Operational synergies (economies of scale, complementarity of resources and location, reduction of transaction costs, benefits of technical integration).
The market and marketing reasons overlap (to some extent) with the above-mentioned reasons, which are timeless. The other reasons are:
• Increase in added value,
• Elimination of competition,
• Complementarity of products,
• Risk diversification13.
Regarding financial reasons – they occur, i.a. when the acquiring enterprise is experiencing a lack of liquidity and has difficulty in obtaining credit:
• Use of surplus funds,
11 Ibidem.
12 A. Herdan (red.), Fuzje, przejęcia..., Wybrane aspekty integracji, Uniwersytet Jagielloński, Kraków 2008, p. 15.
13 Ibidem.
• Increase in debt capacity,
• Reorganization of the investment portfolio,
• Takeover of cash,
• Decrease of the cost of capital,
• Tax benefits,
• Underestimation of the acquired company value,
• Stock market value increase14.
Hooke classifies reasons for amalgamation of companies slightly differently15. He does not deal directly with showing the causes, but indicates the candidates to take over, who will be able to generate certain benefits for the companies. He recommends taking over companies that constitute competitors for the purchaser, which indicates buyer’s insufficient market share.
Further he proposes to purchase companies with the same distribution channels, which is a base for the assumption that the purchaser is looking for cost savings.
The pursuit to increase productivity induces the search for a candidate with more advanced production lines.
On the other hand, the search for liquidated companies, seized by court or taken over by their own management leads to the view that the reason for merger or acquisition is an „opportunity search,” which proves the excessive cash resources in the period of company maturity.
By P.J. Szczepankowski16 we find three types of reasons that he not very precisely calls motives of a merger or acquisition:
• market,
• related to profit and cost,
• regarding securing raw materials and energy.
So far, the above mentioned authors did not directly point to the last of these reasons. It is, however, very important in the iron and steel industry in Poland.
Mergers and acquisitions were often made precisely for these reasons.
Acquisition of a raw steel steelworks secured the needs of steelworks without their own bases or with inadequate production of crude iron. Also, by taking over steelworks with an expanded rolling mill, pipe or wire-drawing machine, the acquiring enterprise, in this case e.g. Polish Steel Works or the ArcelorMittal holding, were able to obtain a more complete production cycle and additional profits from processing of raw materials and semi-finished products. Therefore reasons for mergers and acquisitions are different according to different authors. They place particular emphasis on the reasons resulting from internal and offensive business
14 Ibidem.
15 J.C. Hooke, Fuzje i przejęcia, Liber, Warszawa 1998, p. 8–9.
16 P.J. Szczepankowski, Fuzje i przejęcia, PWN, Warszawa 2000, p. 53.
strategies. In the conditions of Polish steel industry, however, internal factors dominate – seeking to acquire new capital and synergies in production, technology, logistics and distribution, as well as liquidity.
„New technologies have led to development of a knowledge-based economy, where enterprises are increasingly taking steps towards building an intelligent organization”17.
The above-mentioned reasons for mergers and acquisitions are mainly objective, and result from situation of the merged companies.
Motives for mergers or acquisitions, which are rather subjective, may be considered, although they are usually presented as proposals resulting from an objective analysis of the entity’s business. This does not mean that such motivation is not due to the needs of the enterprise, but may be modified by the interests of actuaries, i.e. groups having their own interests in the enterprise (managers, shareholders, intermediaries, employees).
Lewandowski mentions the following motives18:
• increase in management remuneration,
• increase in prestige and power,
• reduction of the management risk,
• increase in freedom of action.
Such list points to the decisive voice of the managers. Since they know the company very well, both the shareholders, represented by the Supervisory Board and the employees have to take their opinions into account. In many cases, the Supervisory Board shares views of the management on the proposed merger, as they are no strangers to the motives driving the managers. Under Polish conditions, the employees’ representatives also favour opinion of the management, as the first ones gain a great deal, for example when the acquisition or merger is at the same time associated with the privatization of the state-owned company. Employees then receive 15% of the company’s shares and numerous social and employment guarantees.
Motivation for mergers and acquisitions is more generally captured by S.
Sudarsanam19. Although as a primary aim he lists to an increase in the value of assets, but conditionally recognizes it as indirect, stating that „the primary objective may be to increase of shareholder wealth”, stating however that the objective of maximizing shareholder wealth may be distorted by managers’ pursue to gain their own benefits.
In conclusion, it must be stated that in view of the fact that bulk of the mergers in the metallurgical industry has a horizontal character, further research performed in
17 H. Dźwigoł, Business…, op. cit., p. 27.
18 M. Lewandowski, N. Kulpa, Integracja przedsiębiorstw, in: W. Frąckowiak (ed.), Fuzje i przejęcia przedsiębiorstw, PWE, Warszawa 1998, s. 23.
19 S. Sudarsanam, Fuzje i przejęcia…, op. cit., p. 5.
the paper concentrates on this type of merger of metallurgical organizations, taking into account primarily objective reasons. The above-mentioned considerations, concerning the types of business mergers and their relation to the motives that govern the decision makers have made it possible to determine the types of amalgamations that are bound to particular motivation that arise both from the objective situation and the interests of the decision-makers. However, in the literature we cannot find a wider study on the motivation of business amalgamations resulting from the desire to acquire new knowledge.
B. Mierzejewska20 states that „knowledge is certainly not always the main motive for amalgamation of businesses.” The above-quoted views of various authors confirm this view.