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MOKSLAS – LIETUVOS ATEITIS
2009, 1 tomas, Nr. 3
SCIENCE – FUTURE OF LITHUANIA
2009, Vol. 1, No 3
Verslas XXI amžiuje
Business in XXI Century
© Vilniaus Gedimino technikos universitetas
ISSN 2029-2341(print)/ISSN 2029-2252 (online)
http://www.mla.vgtu.lt
21
WHY COMPANIES DECIDE TO PARTICIPATE IN MERGERS AND
ACQUISITION TRANSACTIONS
Eglė Duksaitė
1
, Rima Tamošiūnienė
2
Vilnius Gediminas Technical University
E-mail:
1
egle_duksaite@yahoo.com;
2
rimtam@vv.vgtu.lt
Annotation.
The article describes the most common motives for companies’ decision to participate in mergers and ac-
quisitions’ transactions. It underlines the importance of the growth factor, whereas the following factors – namely, syn-
ergy, diversification and so on – just support the growth motive. Since mergers and acquisitions involve two different
parties – the buyer and the seller – the examples of reasons from both perspectives are provided too
Keywords: mergers and acquisitions, reasons, motives.
Introduction
Have you ever heard about Vodafone’s merger with
Mannesman in 1999 (transaction worth 172.2 billion $),
BHP Billiton’s merger with Rio Tinto in 2008 (transac-
tion worth 147.4 billion $), America Online’s merger
with Time Warner in 2000 (transaction worth 112.1 bil-
lion $) (Reuters)? Or PKN Orlen’s acquisition of
Mažeikių Nafta for 5800 million litas in 2006, TeliaSon-
era’s acquisition of Lietuvos Telekomas for 2040 million
litas in 1998 or Mid Europa Partners’ acquisition of Bitė
for 1554 million litas in 2007 (Verslo žinios, Intellinet
database)? These are just a few examples of the biggest
mergers and acquisitions (M&A) transactions worldwide
and in Lithuania. M&A’s are radically changing the cor-
porate landscape not only worldwide, but in Lithuania as
well. Driven by the philosophy of shareholder value, they
form a new economic, social and cultural environment.
But what are the reasons behind them?
Definitions
According to Gaughan (2007), DePamphilis (2003),
Scott (2003), a merger is a combination of two corpora-
tions in which only one corporation survives and the
merged corporation goes out of existence. In a merger,
the acquiring company assumes the assets and liabilities
of the merged company. Moreover, although the buying
firm may be a considerably different organization after
the merger, it retains its original identity.
An acquisition occurs when one company takes a
controlling ownership interest in another firm, a legal
subsidiary of another firm, or selected assets of another
firm such as a manufacturing facility (DePamphilis
2003). In other words, an acquisition is the purchase of an
asset such as a plant, a division, or even an entire com-
pany (Scott 2003).
On the surface, the distinction in meaning of
“merger” and “acquisition” may not really matter, since
the net result is often the same: two companies (or more)
that had separate ownership are now operating under the
same roof, usually to obtain some strategic or financial
objective. Yet the strategic, financial, tax, and even cul-
tural impact of a deal may be very different, depending
on the type of transaction (Sherman, Hart 2006).
Fundamental Question: Buy versus Build
Many years executives and entrepreneurs have been
searching for efficient and profitable ways to increase
revenues and win as big market share as possible. It is
obvious that no matter how big or small the business is,
in order to be in line with shareholders’ expectations it is
crucial to grow.
The growth options are as follows (Sherman, Hart
2006):
− Internal or organic growth (e.g. hiring additional
salespeople, developing new products, expanding
geographically, which, in fact, is a very time and
strength consuming option);
− Inorganic growth (e.g. acquisition of or merger
with another firm, often done to gain access to a
new product line, customer segment, or geogra-
phy) or by external means (e.g. franchising, licen-
sing, joint ventures, strategic alliances, and the
appointment of overseas distributors, which are
22
available to growing companies as an alternative
to mergers and acquisitions as a growth engine).
In response to the good growth prospects, mergers
and acquisitions, just like internal investments, are the
means for companies to increase their capital base, as
concluded by Andrade, Stafford (2004).
It is obvious that companies may grow within their
own industry or they may expand outside their business
category, which means diversification. If a company
seeks to expand within its own industry they may con-
clude that internal growth is not an acceptable alternative.
For example, let’s imagine that a company has a window
of opportunity that will remain open for only a limited
period of time – in this case slow internal growth may not
suffice. If the company grows slowly through internal
expansion, competitors may respond quickly and take the
available market share. Even advantages that a company
may have can dissipate over time by the actions of com-
petitors. The only solution may be to acquire another
company that has the resources, such as established of-
fices and facilities, management, and other resources, in
place. There might be many opportunities that must be
acted on immediately – otherwise they disappear. It could
be that a company has developed a new product or proc-
ess and has a time advantage over competitors. Even if it
is possible to patent the product or process, this does not
prevent competitors from possibly developing a compet-
ing product or process that does not violate the patent.
Another example would be if a company developed a
new merchandising concept. Being first to develop the
concept provides a certain limited time advantage. If not
properly taken advantage of, it may slip by and become
an opportunity for larger competitors with greater re-
sources.
Another example of using M&A to facilitate growth
is when a company wants to expand to another geo-
graphic region. It could be that the company’s market is
in one part of the country but it wants to expand into
other regions. Alternatively, perhaps it is already a na-
tional company but seeks to tap the markets of other na-
tions, such as a U.S. firm wanting to expand into Europe
or contrary. In many instances, it may be quicker and less
risky to expand geographically through acquisitions than
through internal development. This may be particularly
true of international expansion, where many characteris-
tics are needed to be successful in a new geographic mar-
ket. The company needs to know all of the nuances of the
new market and to recruit new personnel and overcome
many other hurdles such as language, culture and similar
barriers. Internal expansion may be much slower and
difficult.
What variables should a growing company consider
in striking the right balance between organic growth
(build) vs. mergers and acquisitions (buy)? These include
(Sherman, Hart 2006):
− The competitiveness, fragmentation and pace of
marketplace and industry;
− The access to and cost of capital;
− The specific capabilities of management and ad-
visory teams;
− The strength and growth potential of current core
competencies;
− The volatility and loyalty of distributions chan-
nels and customer base;
− The degree to which speed to market and scale
are critical in business (including typical custo-
mer acquisition costs and timeframes);
− The degree to which company operates in a regu-
lated industry.
Growth is the most common reason cited as a mo-
tive for M&A transactions. For example, let’s have a look
at Societe Generale Consumer Finance acquisition of
General Financing, a Lithuanian entity specialized in
consumer credit activities (including the brand Kredi-
tas123). Jean-Francois Gautier, Head of Specialized Fi-
nancial Services of Societe Generale Consumer Finance
declared: “The acquisition of General Financing allows
us to set foot on the new fast-growing market while rely-
ing on the local knowledge of one of the leaders of con-
sumer finance in Lithuania”. “This acquisition is a timely
coincidence of Societe Generale strategic entry to Lithua-
nian consumer finance market and of General Financing’s
goal to have a strong, established funding base necessary
for further rapid expansion,” commented Karolis Pocius,
partner of GILD Bankers. “With the coming of Societe
Generale Consumer Finance, UAB „General Financing“
has completed its first stage of development and obtained
one of the strongest possible partners to expand further its
market share. Despite a controversial macroeconomic
outlook, the company is now set for rapid expansion”, -
commented the general manager of General Financing
Raimondas Rapkevičius.
Synergy as a Reason for Mergers and Acquisitions
Gaughan (2007) states that the term “synergy” is of-
ten associated with the physical sciences rather than with
23
economics or finance. It refers to the type of reactions
that occur when two substances or factors combine to
produce a greater effect together than that which the sum
of the two operating independently could account for.
Simply stated, synergy refers to the phenomenon of
2 + 2 = 5. In mergers this translates into the ability of a
corporate combination to be more profitable than the
individual parts of the firms that were combined.
The two main types of synergy are (DePamphilis
2003):
1. Operating synergy, which consists of both:
economies of scale (or the spreading of fixed
costs, such as depreciation of equipment and am-
ortization of capitalized software; normal mainte-
nance spending; obligations such as interest
expense, lease payments, and union, customer,
and vendor contracts; and taxes, of over increas-
ing production levels); and economies of scope
(which refers to using a specific set of skills or an
asset currently employed in producing a specific
product or service to produce related products or
services).
2. Financial synergy, which refers to the impact of
mergers and acquisitions on the cost of capital of
the acquiring firm or the newly formed firm re-
sulting from the merger or acquisition. Theoreti-
cally, the cost of capital could be reduced if the
merged firms have uncorrelated cash flows, real-
ize financial economies of scare, or result in a
better matching of investment opportunities with
internally generated funds.
Access to Intangible Assets
The emergence of the knowledge era since the
1980s has brought significant change in both global and
local markets. Knowledge, as a core organizational re-
source and the basis for the development of organiza-
tional capabilities, is playing a key role in driving
changes in companies. Today the value of knowledge-
based, intangible resources has grown geometrically in
companies. The intangible assets include (Saint-Onge,
Chatzkel 2009):
1. Human capital, which is the sum of all the capa-
bilities of everyone who is currently working in a
company, i.e. the cumulative knowledge, experi-
ence, attributes, competencies, and mindsets of all
employees, managers, and leaders. These individ-
ual capabilities of employees create value for the
customers.
2. Customer capital, which consists of the strategies,
structures, processes, and leadership that translate
into a company’s specific core competencies.
These organizational capabilities leverage em-
ployees’ individual capabilities to create value for
customers. Structural capital also includes the or-
ganizational capacity and physical systems used
to transmit and store intellectual material. Struc-
tural capital is composed in a large part of:
− company’s organization (investment in systems,
operational philosophy, and supplier and distribu-
tion channels),
− innovation (capability to renew a company along
with the outcomes of innovation, which include
the ability to anticipate market needs and lead the
market in responding, the ability to bring new
products to market rapidly, intellectual assets and
intellectual property (which include copyrights,
patents, trademarks, and trade secrets), compa-
ny’s brand and theory of your business. Although
the best-known innovation capital is usually intel-
lectual property, these are even more critical to
company’s well-being),
− processes (comprises all the processes of the
company that enable to create and deliver goods
and services to both internal and external custo-
mers. These can be production, design, and pro-
duct development processes; people development
processes; communication processes; strategy-
making processes, and knowledge development,
capture, and leveraging processes).
3. Structural capital, which is the sum of all cus-
tomer relationships, that can be defined by four
parameters:
− depth – penetration or share of customers’
wallets,
− breadth – coverage or share of the market,
− sustainability – the durability of relationship with
customers,
− the profitability of company’s relationships with
all customers.
Furthermore, human capital interfaces with cus-
tomer capital and structural capital to create knowledge
value capital. These weightless assets now have a greater
value in organizations than physical or financial assets.
This has been coupled with fundamental changes in legal,
competitive, and global requirements. For example, one
such quantum shift is the emergence of the European
24
Union (EU), with its dismantling of boundaries and re-
duction of trade barriers. The emergence of the EU has
also led to a shift in the regulatory environment in
Europe, creating pressures to combine organizational
strengths simply to be able to compete on a larger scale.
A merger or acquisition can open up and recombine
the resource sets of the two companies involved. For
example, the intangible, financial, and tangible assets of
Company A are joined with the clusters of those re-
sources from Company B. In a merger or an acquisition,
there are unprecedented opportunities to bring these re-
sources from the acquiring and the acquired companies
together in novel ways – and in ways that were not previ-
ously possible – to produce significant gains in your
company’s overall performance and wealth. This is the
potential promise of a merger or acquisition. It is not
merely adding the cumulative resources of one company
to those of the other, but a recombining of all resources:
financial, tangible, and all the dimensions of intangibles
(Saint-Onge, Chatzkel 2009).
For example, Symantec’s acquisition of Axent
Technologies in 1999. That “acquisition was also the
catalyst for changing Symantec processes to support an
enterprise business. Axent had systems in place for serv-
ing major corporate customers, and just as important, its
senior executives had an understanding of the service and
support needs of that market. As the former Axent execu-
tives assumed leadership roles at Symantec, they helped
guide the company’s investment in and deployment of
new systems to undergird the new enterprise thrust”
(Fisher 2009).
Another example is the acquisition of Fontes Vil-
nius by MPS Enterprises Ltd., which is an EU-based,
private partnership corporation. Pasis Hartunen, the man-
aging director of MPS for Baltic region, says that “the
purpose of the transaction is to settle down in quickly
developing Lithuanian and Baltic human resource con-
sulting market. We will be looking for opportunities to
provide new services to the current and prospective cli-
ents in Baltics and international markets”. Alternatively,
Regina Laimikienė, the managing partner of Fontes Vil-
nius, says that “now we will be able to learn from the
long-lasting experience of the leading corporation and its
broad spectrum of services, which was formed while
working in international markets. This transaction will
allow us to offer a greater value to the client, but also to
provide with the exceptional human resources decisions.
This way we can become a trustworthy partner not only
in Lithuania, but also abroad.”
So, in today’s knowledge economy intangible as-
sets, which are seen as organization’s most valuable as-
sets, are also the most fragile and difficult to control since
they depend on the goodwill and commitment of people.
Other Reasons for Mergers and Acquisitions
Apart from growth, synergy and access to intangible
assets motives, there are several other reasons that drive
companies to engage in M&A, which are widely reported
in the literature:
− Horizontal and vertical integration (Gaughan
2007). Horizontal integration refers to the increa-
se in market share and market power that results
from acquisitions and mergers of rivals. Vertical
integration refers to the merger or acquisition of
companies that have a buyer-seller relationship.
− Improved management (e.g., belief of better ma-
nagement of target’s resources), research and de-
velopment (e.g. it is critically important for the
future growth of many companies, particularly
pharmaceutical companies) and/or distribution
(e.g., when there is no direct access to ultimate
customers) (Gaughan 2007).
− Tax benefits (certain studies have concluded that
acquisitions may be an effective means to secure
tax benefits) (Ghosh, Jain 2000);
− Changes in markets, e.g. regulatory changes, real-
location of market power (Cassiman, Colombo
2006).
− Changes in technology and industry, e.g. emer-
gence of new businesses and markets, new forms
of communications and cross-border restructuring
(Cassiman, Colombo 2006), reaction to deregula-
tion, increased foreign competition, financial in-
novations, oil price shocks (Andrade, Stafford
2004).
− Cost reduction (Kreitl, Oberndorfer 2004).
− Extension of R&D capacities (Kreitl, Oberndorfer
2004).
− Obtaining a new customer base (Kreitl, Obern-
dorfer 2004).
While all the above mentioned motives fall under
the buyer’s perspective (and this is widely reported in the
literature), we must not forget that any M&A transaction
also includes the other side – the seller. Frankel Hence,
(2007) and Sherman with Hart (2006) provide the mo-
tives for M&A from the two different perspectives. Since
25
the buyer’s perspective has been analyzed above, let’s
have a look at the seller’s motives, which include the
following points:
− Company does not have the resources to grow
further;
− Because a company thinks it has maximized
growth in its own market and does not think it can
expand to new markets;
− It thinks it reached its historical peak of its valua-
tion;
− Lack of viable replacement for the founder of the
company, as the founder approaches to retire-
ment;
− Lack of access to capital (including the restric-
tions of borrowing capacity);
− If the company is owned by investors, they might
want to cash out;
− New competitors emerge.
It is obvious that the choice to sell is one of the most
dramatic – last and big decision that a company will ever
make. It has an influence on everyone, associated with
the company. At the same time, the decision to be a buyer
today is a standard business tool, utilized by many, if not
most, companies.
Conclusions
To sum up, the following conclusions can be made:
1. Mergers and acquisitions are understood as a
general global trend associated with a global cor-
porate restructuring across industries.
2. All the motives for mergers and acquisitions
transactions might be divided into: primary and
secondary drivers.
3. The primary reason for companies to participate
in mergers and acquisitions transaction is growth.
4. The secondary motives – namely, synergy, access
to intangible assets, diversification, horizontal
and vertical integration and so on – arise from the
primary companies’ motive to grow.
5. Most of the motivations for mergers and acquisi-
tions feature serve as means of reshaping com-
petitive advantage within their respective
industries. However, it may be that some of the
motives identified affect some industries more
than others, and in that sense they can be ex-
pected to be associated with a greater intensity of
mergers and acquisitions in certain sectors rather
than others.
Literature
Andrade, G.; Stafford, E. 2004. Investing the economic role of
mergers, Journal of Corporate Finance 10: 1–36.
Cassiman, B.; Colombo, M. G. 2006. Mergers and Acquisi-
tions: the Innovation Impact. Edward Elgar Publising.
DePamphilis, D. 2003. Acquisitions and Other Restructuring
Activities: An Integrated Approach to Process, Tools,
Cases, and Solutions. Butterworth-Heinemann.
Fisher, L. M. Symantec’s Strategy-Based Transformation
[accessed on 1 February, 2009]. Available from Internet:
<http://www.strategy-business.com/press/16635507/8424>.
Frankel, M. E. S. 2007. Mergers and Acquisitions Deal-
Makers:Building a Winning Team. John Willey & Sons.
Gaughan, P. A. 2007. Mergers, Acquisitions, and Corporate
Restructurings. John Wiley & Sons.
Ghosh, A.; Jain, P. C. 2000. Financial leverage changes associ-
ated with corporate merger, Journal of Corporate Finance
6: 377–402.
Intellinet database [accessed on 1st of February, 2009]. Avail-
able through Deloitte intranet.
Kreitl, G.; Oberndorfer, W. J. 2004. Motives for acquisitions
among engineering consulting firms, Construction Man-
agement and Economics 22: 691–700.
Saint-Onge, H.; Chatzkel, J. 2009. Beyond the Deal: Mergers &
Acquisitions that Achieve Breakthrough Performance
Gains. McGraw-Hill.
Scott, D. L. 2003. Wall Street Words: An A to Z Guide to In-
vestment Terms for Today’s Investor.
Sherman, A. J.; Hart, M. A. 2006. Mergers and Acquisitions
from A-Z. Amacom.
Verslo žinios website [accessed on 1
st
of February, 2009].
Available from Internet: <www.vz.lt>.
KAS LEMIA ĮMONIŲ SPRENDIMĄ DALYVAUTI
SUDARANT SUSIJUNGIMŲ BEI ĮSIGIJIMŲ
SANDORIUS
E. Duksaitė, R. Tamošiūnienė
Santrauka
Straipsnyje apibūdinami įmonių susijungimų bei įsigijimo
sandoriai bei analizuojamos pagrindinės priežastys, lemiančios
įmonių sprendimą prisidėti prie tokių sandorių sudarymo. Jame
pateikiamos teorinės perspektyvos kartu su keliais jau įvyku-
siais įmonių susijungimo ir įsigijimo pavyzdžiais, pabrėžiamas
įmonių nepaliaujamas noras plėsti veiklą, t. y. augti, kuris ir yra
pagrindinis veiksnys, lemiantis įmonių susijungimą bei įsigi-
jimą. Kiti veiksniai – sinergija, nematerialus kapitalas, veiklos
diversifikacija ir pan. – yra tik antriniai, gaunami iš pirmojo –
augimo – veiksnio. Kadangi sudarant tokius sandorius daly-
vauja dvi šalys – pardavėjas ir pirkėjas, pateikiami tiek par-
davėjo, tiek pirkėjo argumentai.
Reikšminiai žodžiai: susijungimai, įsigijimai, priežastys, mo-
tyvai.
