Acquisition is a High Risky Strategy Essay Example for Free

Acquisition is a High happeny Strategy EssayIn the literature, several motives for takeovers bemuse been identified. One is the desire for synergy. That is, comparableities or complementarities amid the acquiring and stub unshakables argon judge to exit in the combined value of the enterprises exceeding their worth as separate firms (Collis and Montgomery, 1998). A morsel motive involves the expectation that acquirers can extract value because target companies have been managed inefficiently (Varaiya, 1987).A one-third motive is attributed to managerial hubris the nonion that senior executives, in overestimating their own abilities, acquire companies they believe could be managed to a greater extent than(prenominal)(prenominal) profitably under their control. Agency theory motive is the anticipation that firm expansion ordain substantiatively impact the compensation of top managers since there tends to be a direct relation between firm size and executive ges tate.Contemporary specialists contend that managerial self-control incentives may be judge to have divergent impacts on in incarnated scheme and firm value. This premise has been recognized in previous studies. For instance, Stulz (1988) has examined the will power of managers of target companies and has proposed that the relationship between that willpower and the value of target firms may initially be positive and then subsequently become negative with rising insider possession.Moreover, Shivdasani (1993) empirically shows that the relationship of the ownership structure of target companies with the value of hostile bids is not uniformly positive. McConnell and Servaes (1990) have likewise analyzed the relationship of equity ownership among corporate insiders and Tobins q. Their results demonstrate a non-monotonic relation between Tobins q and insider equity stakes. Wright et al. (1996 451) have shown a non-linear relationship between insider ownership and corporate strate gy cerebrate to firm risk taking.Ownership Incentives and Changes in Company Risk Motivating AcquisitionsAn role-theoretic motive for learnednesss has been used to explain managerial preferences for risk-reducing corporate strategies (Wright et al., 1996). The implication is that both principals and agents prefer acquiring target companies with richlyer rather than disappoint egests. In that, shareholders and managers have congruent interests.The interests, however, diverge in terms of risk considerations associated with acquisitions. Because shareholders possess diversified portfolios, they may only be concerned with systematic risk and be indifferent to the total variance of returns associated with a takeover. Senior managers may alternatively prefer risk-reducing corporate strategies, unless they are granted ownership incentives. That is because they can not exchange their human capital invested in the firm.In the literature, it has been argued that agency costs may be re duced as managerial ownership incentives rise. The reason is that, as ownership incentives rise, the financial interests of insiders and shareholders will begin to converge. Analysts conjecture, however, that much(prenominal) incentives may not consistently provide senior executives the motivation to lessen the agency costs associated with an acquisition strategy. Inherent is the presumption that the nature of executive wealth portfolios will differently influence their attitudes toward corporate strategy. The private wealth portfolios of top managers are comprised of their ownership of shares/options in the firm, the income produced from their employment, and pluss mis related to to the firm.Presumably, as senior executives increase their equity stakes in the enterprise, their personal wealth portfolios become correspondingly less diversified. Although stockholders can diversify their wealth portfolios, top executives have less flexibility if they own comforting shares in the firms they manage. Hence, if a significant portion of managers wealth is concentrated in one investment, then they may find it prudent to diversify their firms via risk-reducing acquisitions.In the related literature, however, takeovers and risk taking have been approached differently from the set forth approach. Amihud and Lev (1999) have contended that insiders employment income is significantly related to the firms functioning. Thus, managers are confronted with risks associated with their income if the maintenance of that income is dependent on achieving predetermined performance targets. Reasonably, in the even sot of either corporate underperformance or firm failure, CEOs not only may sustain their current employment income but also may seriously suffer in the managerial campaign market, since their future earnings potential with other enterprises may be lowered. Hence, the risk of executives employment income is impacted by the firms risk. The ramification of Amihud and Levs (1999) contentions is that top managers will tend to lower firm risk, and therefore their own employment risk, by acquiring companies that contribute to stabilizing of the firms income, even if shareholder wealth is adversely affected.Consistent with the implications of Amihud and Levs arguments, Agrawal and Mandelker (1987) have withal suggested that managers with negligible ownership stakes may adopt risk-reducing corporate strategies because such(prenominal) strategies may well pay heed their own personal interests. With ownership incentives, however, managers may be more likely to acquire risk-enhancing target companies, in line with the requirement of wealth maximization for shareholders. The notion that at negligible managerial ownership levels, perverting risk-reducing acquisition strategies may be emphasized, but with change magnitude ownership incentive levels, beneficial risk-enhancing acquisitions may be more prevalent is also suggested in other domesticates (G rossman and Hoskisson, 1998). The conclusion of these investigations is that the relationship between insider ownership and risk enhancing, worthy corporate acquisitions is linear and positive.Some experts assert that CEOs personal wealth concentration will induce senior managers to undertake risk-reducing firm strategies. Portfolio theorys expectation suggests that investors or owner-managers may desire to diversify their personal wealth portfolios. For instance, Markowitz (1952 89) has asserted that investors may wish to diversify across industries because firms in different industries. . . have lower covariances than firms within an industry. Moreover, as argued by Sharpe (1964 441), diversification enables the investor to escape all but the risk resulting from swings in stinting activity. Consequently, managers with substantial equity investments in the firm may diversify the firm via risk-reducing acquisitions in order to diversify their own personal wealth portfolios. Becaus e they may be especially concerned with risk-reducing acquisitions, however, their corporate strategies may not enhance firm value through takeovers, although managerial intention may be to boost corporate value.The above discussion is compatible with complementary arguments that suggest that insiders may acquire non-value-maximizing target companies although their intentions may be to enhance returns to shareholders. For instance, according to the synergy view, charm takeovers may be motivated by an ex-ante concern for increasing corporate value, many such acquisitions are not associated with an increase in firm value.Alternatively, according to the hubris hypothesis, even though insiders may intend to acquire targets that they believe could be managed more profitably under their control, such acquisitions are not ordinarily related to higher profitability. If acquisitions which are undertaken primarily with insider expectations that they will financially utility owners do not re alize higher performance, then those acquisitions which are primarily motivated by a risk-reducing desire may likewise not be associated with beneficial outcomes for owners. Additionally, it can be argued that shareholders can more efficiently diversify their own portfolios, making it unnecessary for managers to diversify the firm in order to deliver the goods portfolio diversification for shareholders.Risk Associated with HRM practices in International AcquisitionsThere are a number of reasons why the HRM policies and practices of multinational corporations (MNCs) and cross-border acquisitions are likely to be different from those found in municipal firms (Dowling, Schuler and Welch, 1993). For one, the difference in geographical spread means that acquisitions must normally engage in a number of HR activities that are not needed in domestic firms such as providing relocation and orientation assistance to expatriates, administering world(prenominal) job rotation programmes, an d dealing with multinational union activity.Second, as Dowling (1988) points out, the personnel policies and practices of MNCs are likely to be more complex and diverse. For instance, complex salary and income taxation issues are likely to arise in acquisitions because their pay policies and practices have to be administered to many different groups of subsidiaries and employees, located in different countries. Managing this diversity may come a number of co-ordination and communication problems that do not arise in domestic firms. In science of these difficulties, most large internationalist companies retain the services of a major accounting firm to take in there is no tax incentive or disincentive associated with a particular international assignment.Finally, there are more stakeholders that influence the HRM policies and practices of international firms than those of domestic firms. The major stakeholders in private organizations are the shareholders and the employees. pla inly one could also think of unions, consumer organizations and other pressure groups. These pressure groups also exist in domestic firms, but they often put more pressure on foreign than on local companies. This in all probability means that international companies need to be more risk averse and concerned with the social and semipolitical environment than domestic firms.Acquisitions and HRM Practices Evidence from Japan, the US, and EuropeIn contemporary context, international human imagination steering faces important challenges, and this trend characterizes many Nipponese, US and European acquisitions. From the critical point of view, Japanese companies experience more problems associated with international human imaging management than companies from the US and Europe (Shibuya, 2000). Lack of home-country personnel sufficient international management skills has been widely recognized in literature as the most difficult problem liner Japanese companies and simultaneously o ne of the most significant of US and European acquisitions as well.The statement implies that cultivating such skills is difficult and that they are relatively rare among businessmen in any country. Japanese companies may be particularly prone to this problem due to their heavy use of home-country nationals in overseas management positions. European and Japanese acquisitions also experience the inadequacy of home country personnel who want to work abroad, while it is less of an impediment for the US companies.In the US acquisitions expatriates often experience reentry difficulties (e.g., career disruption) when re turn to the home country This problem was the one most often cited by US firms. Today Japanese corporations report the relatively lower relative incidence of expatriate reentry difficulties, and it is surprising given the vivid accounts of such problems at Japanese firms by White (1988) and Umezawa (1990). However, the more active role of the Japanese personnel departmen t in coordinating career paths, the tradition of semiannual musical-chair-like personnel shuffles (jinji idoh), and the continuing efforts of Japanese stationed overseas to maintain impede contact with provide might underlie the lower level of difficulties in this area for Japanese firms (Inohara, 2001).In contrast, the decentralized structures of many US and European firms may serve to isolate expatriates from their home-country headquarters, making reentry more problematic. Also, late downsizing at US and European firms may reduce the number of appropriate management positions for expatriates to return to, or may sever expatriates relationships with colleagues and mentors at headquarters. Furthermore, within the context of the lifetime employment system, individual Japanese employees have particular to gain by voicing reentry concerns to personnel managers. In turn, personnel managers need not pay a great deal of attention to reentry problems because they will usually not resu lt in a resignation. In western firms, reentry problems need to be taken more seriously by personnel managers because they frequently result in the loss of a valued employee.A further possible explanation for the higher incidence of expatriate reentry problems in western multinationals is the greater tendency of those companies to implement a policy of transferring local nationals to headquarters or other international operations. Under such a policy, the definition of expatriate expands beyond home-country nationals to encompass local nationals who transfer outside their home countries. It may even be that local nationals who return to a local operation after working at headquarters or other international operations may have their own special varieties of reentry problems.Literature on international human resource practices in Japan, the US and Europe suggest that the major strategic difficulty for the MNCs is to attract high-caliber local nationals to work for the company. In gene ral, acquisitions may face greater challenges in hiring high-caliber local employees than do domestic firms due to lack of name recognition and fewer relationships with educators or others who might recommend candidates.However, researchers suggest that this issue is significantly more difficult for Japanese than for US and European multinationals. When asked to describe problems encountered in establishing their US affiliates, 39.5% of the respondents to a Japan monastic order survey cited finding qualified American managers to work in the affiliate and 30.8% cited hiring a qualified workforce (Bob SRI, 2001). Similarly, a survey of Japanese companies operating in the US conducted by a human resource consulting firm found that 35% felt recruiting personnel to be very difficult or passing difficult, and 56% felt it to be difficult (The Wyatt Company, 1999). In addition to mentioned problem, Japanese acquisition encounter high local employee turnover, which is significantly more problematic for them due to the near-total absence of turnover to which they are accustomed in Japan.The US, European and Japanese companies admit very rarely that they encounter local legal challenges to their personnel policies. However, in pretend to Japanese acquisitions large amount of press coverage has been given to lawsuits against Japanese companies in the United States and a Japanese Ministry of Labor Survey in which 57% of the 331 respondents indicated that they were facing potential equal employment opportunity-related lawsuits in the United States (Shibuya, 2000).ConclusionThis research investigates whether corporate acquisitions with shared technological resources or participation in similar product markets realize superior economic returns in comparison with orthogonal acquisitions. The rationale for superior economic performance in related acquisitions derives from the synergies that are expected through a combination of supplementary or complementary resources.It is clear from the results of this research that acquired firms in related acquisitions have higher returns than acquired firms in unrelated acquisitions. This implies that the related acquired firm benefits more from the acquirer than the unrelated acquired firm. The higher returns for the related acquired firms suggest that the combination with the acquirers resources has higher value implications than the combination of two unrelated firms. This is supported by the higher total wealth gains which were observed in related acquisitions.I did however, in the case of acquiring firms, find that the abnormal returns right off attributable to the acquisition transaction are not significant. There are reasons to believe that the announcement set up of the transaction on the returns to acquirers are less easily detected than for target firms. First, an acquisition by a firm affects only part of its businesses, while affecting all the assets (in control-oriented acquisitions) of the targe t firm. Thus the measurability of effectuate on acquirers is attenuated. Second, if an acquisition is one event in a series of implicit moves constituting a diversification program, its individual effect as a market signal would be mitigated.It is also likely that the a priori argument which postulates that related acquisitions create wealth for acquirers may be underspecified. Relatedness is often multifaceted, suggesting that the resources of the target firm may be of value to many firms, thus increasing the relative bargaining power of the target twin the potential buyers. Even in the absence of explicit competition for the target (multiple bidding), the premiums paid for control are a substantial fraction of the total gains available from the transaction.For managers, some implications from the research can be offered. First, it seems preferably clear from the data that a firm seeking to be acquired will realize higher returns if it is interchange to a related than an unrel ated firm. This counsel is consistent with the view that the market recognizes synergistic combinations and values them accordingly.Second, managers in acquiring firms may be advised to scrutinize carefully the expected gains in related and unrelated acquisitions. For managers the issue of concern is not whether or not a given kind of acquisition creates a significant total amount of wealth, but what percentage of that wealth they can expect to accrue to their firms. Thus, although acquisitions involving related technologies or product market yield higher total gains, pricing mechanisms in the market for corporate acquisitions reflect the gains primarily on the target company. Interpreting these results conservatively, one may offer the argument that expected gains for acquiring firms are competed away in the bidding process, with stockholders of target firms obtaining high proportions of the gains.On a practical level this research underscores the need to combine what may be calle d the theoretical with the practical. In the case of acquisitions, hardheaded issues like implicit and explicit competition for a target firm alter the theoretical expectations of gains from an acquisition transaction. Further efforts to clarify these issues theoretically and empirically will increase our understanding of these important phenomena.BibliographySharpe WF. 1964. Capital asset prices a theory of market equilibrium under conditions of risk. diary of pay 19 425-442Markowitz H. 1952. Portfolio selections. Journal of finance 7 77-91Grossman W, Hoskisson R. 1998. 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