Assignment on Literature Review of Firm’s Performance in Association with Merger Decision (Case study of Barclay’s merger of Standard Charter)

A corporate acquisition or merger is capable of profoundly affecting the long-term outlook and growth prospects of an organization. However, while a merger can transform the firm, a significant risk level is also involved as transactions associated with acquisitions and mergers are measured to have only a fifty percent chance of effectiveness and success. In simple words, even though mergers can benefit firms, there is a significant chance of failure as well. With strategic planning, the decision of acquisition can be effective, as well. However, if some mistakes are made, then it can risk the whole process and adversely affect the firm as well (Voesenek, 2012).

In general, some of the most important and common reasons why organizations engage in acquisitions and mergers include:

• For becoming bigger: Acquisitions and mergers are utilized by organizations for growing in their size and leaving their competitors behind. Meanwhile, decades or years can be consumed by firms in going through organic expansion.
• For winning a competition: It can be said that this motivation is the main reason why the activity of acquisition and merger occurs in different cycles. The urge to increase the organization with an effective asset portfolio before a competitor achieves it makes an organization make the merger decision. In order to ensure that no other organization gains a competitive advantage in the market, an organization tends to acquire another firm as it not only increases the size but also the potential of the firm (Coffey, Garrow, & Holbeche, 2012).
• For creating economies of scale and synergies: Organizations also combine with each other for taking advantage of economies of scale and synergies. In general, synergies take place when two organizations with similar operations combine with each other as they can eliminate or consolidate resources that are similar such as regional and branch offices, research projects, and research facilities etc. This way, a firm can ensure that it is effective in the market and conducting every operation in a successful manner.
• For achieving domination: Organizations tend to engage in acquisition and merger decisions for dominating a specific sector in which they are working. However, a potential monopoly is resulted by the combination of two large firms, and it will have a significant impact on the market as there will be no competitor, and the products would have no substitutes. Therefore, it would be able to work in the market without having to worry about the potential competition that it might face (Blonigen, 2016).
• For different tax purposes: Acquisitions and merger decisions are made by organizations for different tax purposes even though it may be an implicit action instead of an explicit action. For example, the USA had the highest rate of tax in the world from a corporate perspective; corporate inversions have been utilized by some organizations. This method includes an organization purchasing a smaller competitor and moving the tax home of the merged entity to a jurisdiction with a lower tax for reducing its taxes.

Although there are some benefits to making acquisition and merger decisions, it also has some risks, and the following are the main risks:

• Risk of Integration: In most of the cases, integrating the functions and operations of two organizations proves to be quite difficult in practice compared to how it appeared in theory. This might even result in failure because the organization wouldn’t be capable of reaching its targets and objectives in a specific amount of time and in a limited budget. There is a risk that an accretive transaction can transform into a dilutive transaction (Banal‐Estañol & Seldeslachts, 2011).
• Overpayment: In general, if an organization is not serious about the prospects of the other firm ad wishes to sell the assets, there is a high chance that it might prove the organization with an advantage in the market. Sometimes, firms acquire other smaller firms just to sale their assets and possess the infrastructure. In such a situation, it is important to make a careful decision because the assets can prove to be quite beneficial to the organization as well. The process of acquisition is very sensitive, and it involves careful planning. Without it, there is a significant chance that the acquisition might fail.
• Clash of Culture: The transactions of acquisition and merger decisions sometimes are inefficient because the potential partners’ corporate culture is different from each other. Due to it, they cannot cooperate or work with each other. This serves to be a potential barrier to their operations.

Following are some of the benefits of merger decision:

Effective businesses have actually determined the need or necessity in the market, and they need to fulfill it. In such a situation, a similar organization that wishes to create its market share would benefit from a merger. The penetration of a new market involves obtaining a sector or geographical area in the industry. For instance, an effective organization of technology might be merged with a firm that exists in Asia to gain an entrance to the new market and work to achieve success in that market. It is important for business leaders to consider the experience of consumers with the organization, its services, and its products. A merger has to perform in such a way to serve consumers in a better manner. Several banks have actually merged with organizations providing investment services for broadening the financial services which are available to consumers (Kuo, 2006).

An example of such a case is the American Bank, which merged with Merrill Lynch. It generally involves organizations targeting the same customer base but with different services that don't compete with each other. The development of products is quite risky and expensive. In the scenario of the merger, it is important for the larger organization to have a higher value and must be positioned better for developing new products. It is quite common in the medical industry where a researcher is not funded by small organizations. By merging with another firm, the smaller one is benefitted from finances and researcher of the larger organization for developing new products and increasing sales (Crane, 2011).

It is possible that two organizations are merging for obtaining the advantage of the leadership of significant or critical people in the firm. A company that develops smartphone games may find it effective, and it might not be prepared enough to continue its development in the market. Since it cannot serve such a large market, merging with a firm enables it to understand to use resources, and it also enables it to deliver products in the required time without facing many issues. 

Some mergers, including Time-Warner and AOL, must obtain insights about the industry from critical people within the organizations for developing a larger organization that can prove to be successful in the marketplace. In fact, when organizations grow, they become capable of benefitting from the economies of scale, which means that the cost of producing and distributing the same item is reduced, and the market share is increased. In addition, as firms merge, there is an increase in the revenue which makes the end organization stronger in terms of finance for obtaining strategic alliances, investors, and credit.

The major purpose in the performance declination within the sector of the corporation is to recognize by Gupta in the year 2012. A positive impact has been played by the merger on the functions of profit as well as on cost. After the acquisition, as well as the merger in the banking sector of Pakistan, it is enhanced by the cost efficiency from the ranges of 93.83% to 94.15%. To prove the importance of the study, it used the analysis of the stochastic frontier. Any significant impact has not been produced by the risk-based ratio on the spread of the banks. The perceived risk has been reduced by the manager mentioned in this study for merging as well as improving the performance of the banks after the merger. To investigate the effects of the profitability, solvency on the merger, investment as well as the liquidity, hypothesis were created with the help of a sample of two banks which are mentioned. The positive impact is remained by the only ratio of liquidity as well as the negative impact is produced by the rest of the ration on the merger. If they are compared on similar levels, the impact is played only by the financial ratios. Furthermore, if there is no kind of effect then they have to be analyzed along with the multivariate or univariate kind of comparison will be conducted. The research suggests which some organizations may cope with the distance as well as the impact is owned by the geographic expansion on the bankruptcy as well as the profit efficiency while there is not any kind of the optimal scope of the expansion of the geography. Moreover, the bankruptcy judge is based on the estimated profits as well as sales, such as an impact that is produced by them on the indirect cost of the bankruptcy. Therefore, it was also determined that the bankruptcy is affected by the direct cost with greater effects than the indirect cost (Tariq, 2015).

An important requirement for loans is actually the higher revenue, which results from the merger, and it serves to develop positive cash flows for the organization. This enables the firm to grow at a rapid rate. It also grows when two firms are combined because the larger firm is able to utilize the resources of a smaller one in order to operate efficiently in the market. It is tough, however, because stability is required (Kansal & Chandani, 2014).

Variables of Firm’s Performance in Association with Merger Decision (Case study of Barclay’s merger of Standard Charter)

            In this section, the variables utilized in this study will be explained. There are four variables on the basis of which this study is conducted. There are 3 self-governing as well as one dependent variable. The independent variables comprise corporate governance, growth of the firm, and financial performance of the firm. Meanwhile, a firm's performance is the dependent variable. In order to measure financial performance, overall positive returns and the liability of organization for loans will be utilized. The parameters for evaluating the growth of the firm include an increase in market share and the amount of dividend paid to shareholders on a daily basis. For evaluating corporate performance, the parameters include processes, practices, and rules for internal controls of the organization along with the well-balanced interests of the organizational stakeholders.

Research Methodology of Firm’s Performance in Association with Merger Decision (Case study of Barclay’s merger of Standard Charter)