Mergers and Acquisitions in Australia - Example

Running Head: MERGERS AND ACQUISITIONS IN AUSTRALIA (Your Name) (Institution’s Name) Introduction Mergers and acquisitions in Australia have continued to increase since 1990s. The wave of mega deals has hit Australia with high numbers of huge M&A’s being witnessed. The largest deals are mainly horizontal in nature, although diversifying mergers have also been carried out in the Australia’s financial industry where insurance companies and banks have been merged. Globalization has been one of the driving forces behind the recent rush in M&As. whilst domestic deals continue to dominate the M&A market, cross-border deals has tripled in the past ten years. The Australian oil industry has been embracing mergers and acquisitions since 1990.Various companies under this industry have merged in the last one decade, for example, Ampol/Caltex merger. The mergers and acquisitions have been as a result of the need to cut down on expenditure, enjoy economies of scale, geographical diversification, resource transfer, increased market share, tax reduction and general economic development. Hostile acquisition has been used as a method of accomplishing change where the incumbent management has been unable to adapt. Before the merger there were no economies of scale to be enjoyed in the Australian oil industry, the acquirer did not realize increased market share/ revenue. There was no better use of the complementary resources in the two companies prior to the merger. acquisition gains were not felt before the Ampol/Caltex merger, this gains includes; reduced taxes, a lower cost of capital, enhancement on revenue, cost reductions and changing capital requirements. After the Ampol/Caltex merger, merged companies have been able to achieve reduced taxes as well as lower the cost of capital. Increased revenues arising from strategic benefits, market power and marketing gains has been achieved. Marketing gains has occurred as a result of economies of distribution, better mix of products and more effective advertising. Finally, a merger between Ampoll and Caltex has resulted into a reduction in competition thus increasing the market power. Motives for Mergers and Acquisitions According to Alan (2000), improvement in the economic performance has been the dominant mergers and acquisition motive as far as finance and economic literature is concerned. As the economic performance motive suggests, mergers and acquisitions occur as a result of economic gains prospects by the two merging companies. Thus, the sum value of separate companies (VA, VB) is assumed to be lower than the value of a merged company (VAB). (VA, + VB) < VAB Mergers and acquisitions will results into reduced fixed and variable costs. The two companies merged so as to achieve some savings in terms of costs. Improved financial performance has been realized through the elimination of intersecting costs, for example, IT expenditure and administration costs. Due to the nature of fixed costs, the potential of cost reduction is not restricted on the horizontal mergers, it also incorporates other types of mergers. Vertical integration provides unique sources for cost reduction, for example, cost reduction can be gained through avoiding the bargaining and communication costs. Where production processes requires integrated production chain, vertical integration ensures that lower production costs are achieved. The bigger size has emerged to be the source of cost reductions as a result of the large economies of scale enjoyed. Through merging, these companies have achieved a financial synergy. Most companies enjoy large investment opportunities but are short of funds while some organizations have an excess in their cash flow, combining the two firms will definitely bring some benefits. Firms will also merge as a result of tax advantages attributed to the merger i.e. two companies will pay less tax while merged but more tax when separate. (Alan, 2000) After merging the companies have acquired more market power. For large mergers and acquisitions, firms have been enjoying monopoly-like positions. The large mergers have been causing a barrier of market entry to the potential competitors. Where large economies of scale exists bigger companies has been setting their prices below the entry level but above the marginal cost. Through acquisition, companies have managed to acquire the control of target company resources. This puts the company at a good position of increasing its production capacity. Compared to Greenfield investment, acquisition has been offering a superior way as far as increased capacity is concerned. In vertical mergers, the acquirer can manage supply of vital input and curtail external uncertainty. Along with raw materials, distribution channels and intermediate products, resource-seeking motive covers acquisition of know-how such as managerial, geographical and technological knowledge. Instead of developing technology through R&D only, firms has been using acquisition as a source of new technology. Cross-border acquisition has been a very attractive means in achieving a country’s specific know how for those countries with limited international experience. (www.atse.org.au,) Managers will always compete for the right in managing the company’s resources. Thus, those managers who perform poorly in their line of duty are at a threat of being victims of take over. The take over will then replace the incumbent by value maximizing managers. Therefore, the acquirer will achieve economic gains through replacing the incumbent non performers with a more efficient team of managers. Apart from long term benefits, mergers & acquisitions are motivated by speculative motives. Periods with huge economic fluctuations may produce significant differences in the present value expectations between shareholders interested to purchase the firm and the incumbent shareholders. Managerial motives have resulted to mergers and acquisitions between companies. Corporate managers are agents who act on behalf of the principal owners. When firm management and ownership are separated agency problems are bound to arise. This is due to the fact that, managers and owners will possess varied interests while no perfect contracts between managers and owners can be written. Agency view assumes that managers will maximize their own wealth instead of the shareholders wealth. These management incentives can make the firm to grow into a more favourable size. Procedures to Merging In Australia Australian Competition and Consumer Commission (ACCC) is the relevant merger authority in Australia. As an independent Federal authority, ACCC was established to administer and implement the Trade Practices Act (TPA) 1974 throughout Australia. The Australian government does not involve itself in the ACCC decision making process. Where the merger entails an acquisition by a foreign person or occurs beyond Australian borders, it becomes necessary to inform the Foreign Investment Review Board (FIRB) in respect to the Foreign Acquisitions and Takeovers Act (FATA) of 1975. It’s the role of the Federal Treasurer to approve such acquisitions. (www.accc.gov.au,) Merger control provisions are contained in section 50 of the Trade Practices Act. It disallows a company from indirectly or directly acquiring assets or shares in a company if the move would have consequences, or be likely to have consequences, of significantly reducing competition in a market. Mergers taking place outside Australia can receive clearance through two procedures i.e. informal and authorization for the purposes of section 50 of the TPA. Currently ACCC administers an informal clearance procedure under which, after considering the consequence of a proposed acquisition, it is prepared to point out whether it intends to take any action if the acquisition were to continue. Should ACCC advise that it does not plan to take any action, it reserves the right to re-open the subject should it get new information, or realize that information already supplied is incomplete or incorrect. Although the informal clearance procedure does not grant statutory immunity on the applicant, it is commonly used and relied on by both foreign and Australian investors. Authorization is a formal procedure is a formal procedure contained under section 88(9) of the TPA. An individual may apply to the ACCC for an authorisation of a proposed merger which could considerably reduce competition in a market. The ACCC may issue an authorisation if satisfied that the planned merger would most likely yield some benefits to the public. If an authorisation is issued, the merger becomes immune from proceedings for breaching of the TPA. Federal Parliament is currently considering an amendment to the TPA’s merger clearance procedures. The amendments are contained in the Trade Practices Legislation Amendment (TPA) Bill (No. 1) 2005.TPA Bill will not amend the ‘extensive lessening of competition’ test contained in section 50 of the TPA, but would instead form a new and voluntary formal merger clearance system that will function alongside the existing authorisation and informal merger clearance regimes. The determinant for formal clearance will be whether ACCC is contented that the transaction will not be likely to largely lessen competition. Therefore, the test will be purely competition such that if merging parties wish to affirm public benefit arguments, they should follow an application for authorisation rather than clearance. (www.accc.gov.au,) As opposed to an informal clearance, a formal clearance would offer legal protection to a successful applicant from any trials claiming a contravention of section 50, and will offer a right of review to the Australian Competition Tribunal. Australian Competition and Consumer Commission will have 40 business days to make a determination but this can be extended with the consent of the applicant. Failing to make a concrete decision within 40 business days will be taken to be a refusal. ACCC does not require to be notified about mergers. Nevertheless, if parties wish to lessen the risk of the ACCC consequently taking enforcement action concerning a merger, they should consider including documents in the relevant transaction a condition precedent with the obtaining and applying for the authorisation and informal clearance prior to financial close. A decision of informing ACCC on informal basis can be made since notification of mergers is not compulsory. It becomes possible to seek clearance of a considered transaction even before the start of any formal sale process. The gravity and complexity of the competition issues will be pegged to how much time should be allowed to complete an application for informal clearance. Firm A will merge with firm B so as to help in reducing the overall tax payment, this will in turn reduce the production costs thus increasing profitability. Through the merger company A will manage to the control of target company resources. Through merging, company A will achieve a financial synergy. Company A could be enjoying large investment opportunities but short of funds while company B could be having an excess in its cash flow, combining the two firms will certainly bring some mutual benefits. After merging the two companies (A&B) will acquire more market power. The two firms A & B will enjoy monopoly-like positions thus causing a barrier of market entry to the potential competitors. (Jensen, 1998) A firm with management problems can merger with an efficiently managed firm so as to improve on the management field. The merger will be mostly beneficial to the poorly managed firm since its management practices will be boosted. Two firms that experiences problems in meeting their production costs can comfortably merge, the merger will largely help the companies since it will result to a decline in expenses and most importantly the expenses will be shared. (Gaughan, 2004) Although mergers are expensive undertakings, the large expense will only occur in the short run. Immediately after the merger the firms profits will decline due to the high cost associated with the merger. The trend is however expected to change in the long run and the profits will increase considerably. A de-merger can occur if the merger goes against the merger control provisions as contained in section 50 of the Trade Practices Act i.e. if the move will drastically reduce competition in the market. If the Australian Competition and Consumer Commission is not satisfied that the merger will yield some benefit to the public then it will disallow the merger hence a de-merger will occur. Merger benefits the company owner, managers and the general public. Profitability arising from mergers will most importantly benefit the owner who will pocket more money in terms of return. Since merger lowers down direct and indirect costs, the effects will be reflected in the prices of products. The reduced prices in merged companies will benefit the general public leaving them with a more disposable income. Those managers with managerial problems will benefit since the merger will help them improve in their weak areas. (Gaughan, 2004) References Alan, J. (2000), Corporate Takeovers: Causes and Consequences. Chicago: University of Chicago Press Gaughan, P. (2004): Mergers and Acquisitions. New York, Harper Collins Ingham, H. and Lovestam, A. (2001): Mergers and Profitability, Chicago, University of Chicago Press Jensen, M. (1998): The Agency cost of Free Cash flow, corporate finance and Takeover, New York, Prentice hall. Jensen, M. (1998): Takeovers; cause and consequences, Journal of Economic Perspective, 2, 20-58 McGarvey, R. (2003). "Merge Ahead: Before You Go Full-Speed into a Merger, London, McGraw-Hill Palepu, K. and Ruback, L. (1998): Does corporate performance improve after mergers? Journal of Financial Economics, 31(2), 123-138 Porter, M. (1999): Competitive Strategy, New York, Free Press Ampol/Caltex merger, Retrieved October 24, 2007, from www.atse.org.au, Merger procedures, Retrieved October 24, 2007, from www.accc.gov.au, Read More