Mergers and Acquisitions Analysis

Mergers and acquisitions have become a growing trend for companies to inorganically grow a business within its particular industry. There are many goals that companies may be looking to achieve by doing this, but the main reason is to guarantee long-term and profitable growth for their business. Companies have to keep up with a rapidly increasing global market and increased competition. With the struggle for competitive advantage becoming stronger and stronger, it is almost essential to achieve these mergers. Through research I will attempt to dissect the best practices for achieving merger success.

Mergers. Acquisitions. Mega-mergers. Recent years in healthcare have witnessed some of the biggest companies acquiring one another at alarming rates. However, the Wall Street Journal released an article at the end of October that has everyone talking - one of the largest owners of drugstores in the United States is considering buying one of the largest health insurers in the United States. That is right, CVS Health might be purchasing Aetna for approximately $66 billion.

The rule of thumb in contract remedies is injured party is only entitled to the economic expectation or its equivalent. It is not entitled to the actual performance of the contract. That is why, usually, drafting the provisions regarding the breach of the contract, an attorney will be most focused on the monetary damages as the standard and the most commonly used type of the remedies. Monetary damages are generally awarded as a sum of money equal to the loss in value to the injured party of the other party’s failed or deficient performance, plus any other loss caused by the breach .

The first thing a company needs to do when considering a merger or acquisition is to formulate a new capital expenditure budget to determine how much capital will be spent on acquiring another organization. It is important to create a budget and determine what the new net cash flow will be, so that we can determine how where the money needs to go. “Capital expenditure budget inputs may have to be taken into consideration if the operating budget requires additional capital equipment or space renovations” (Baker, 2014). When merging there are often projects that need to be started to the organization that we have acquired to incorporate our vision into the facility. This could look like clinic expansions or new equipment to update the facilities that you have acquired in the merger.

AT&T has been no stranger to the mergers and acquisitions activity within the telecommunications industry. The company’s most recent purchase has been DIRECTV for about $48.5 billion in both cash and stock. Although the pay-for-television market is moderately developed, this deal enables AT&T to expand and negotiate content agreements with some of the largest media outlets. This transaction also gives the company access to DIRECTV’s 18 million subscribers, which will boost its cash flow potential and generate annual cost savings of $1.5 billion within the next five years. Extra free cash flow is crucial for AT&T at the moment since the company has chosen to heavily invest in its wireless lineup.

The cost of capital is the minimum acceptable rate of return for new investments in the corporation. Estimates of Midland’s cost of capital are used in many analysis within Midland, including asset appraisal for both capital budgeting and financial accounting, performance assessments, M&A proposals, and stock repurchase decisions. These estimates are used at the divison or the business unit level and also on the corporate level. When asses the cost of capital on different levels of business, managers must invest in new ventures that have an expected rate of return higher than

Although there is a high degree of attention on the financial calculations in these strategic decisions, Cartwright & Cooper (1992) show that 50 percent of all acquisitions fail financially. The reason for this is usually that the human factor plays a larger role than what is recognized during the decision process. According to Buono & Bowditch (1989) most of the problems that affect the result occur internally by the dynamics in the new organization. The human factor is therefore an element that should not be ignored during those strategic changes. A merger is not something that happens to an organization, it happens to the people within the

The task by Ms. Mortensen to compute the weighted Cost of Capital (WACC) is vital in attaining four objectives: (1) to support financial accounting and capital budgeting decisions, (2) for performance assessments, (3) to inform merger and acquisition proposals, and (4) to support stock-repurchase proposals. But the cost of capital approximations by Ms. Mortensen appears to misguide these decisions. This is because the inputs and assumptions are misleading as evidenced by criticism by the controllers and division

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2013). Strategic Management: Concepts and cases: Competitiveness and globalization (10th ed.). Mason, OH: South-Western Cengage Learning.

The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt as well. The WACC takes their respective quantitative contributions to the entire amount of funding, serving hence as an allocation base, into account. As there is a direct relationship between the two portions, debt and equity, in order to calculate

Even mergers and acquisitions with high combination potential were more successful with robust organizational integration efforts (Larsson & Finkelstein, 1999). Malhotra and Sharma (2013) mentions that financial gain is often the crux of the matter when merger and/or acquisitions are considered. Corporations hardly consider the impact on the employees and related human resources changes, issues or outcomes. People and indeed their compensation is mostly placed in a marginal position with most of the due diligence done around financial and strategic planning.

Oftentimes, M&As look like an easy way to improve a company’s portfolio and market position. Disney’s acquisition of Pixar is a compelling example of successful M&As. However, the dangers of such M&A agreements tend to be underestimated (Rein, 2009). The merger of AOL & Time Warner was disaster because of the lack in harmony and collaboration (DiMaggio, 2009). One of the biggest mistakes acquiring companies can fall into is taking the cultural differences of the acquired company for granted (Rein, 2009).

This case study focuses on where financial theory ends and practical application of the weighted average cost of capital (WACC) begins. It presents evidence on how some of the most financially complex companies and financial advisors estimated capital costs and focuses on the gaps found between theory and application. The approach taken in the paper differed from their predecessors in several various respects. Prior published information was solely based on written, closed-end surveys sent to a large number of firms, without a focused topic. The study set out to see if financial theory, specifically cost-of-capital, is truly ubiquitous in true business applications.

This past June Forbes magazine announced that 2016 would be the year of the mergers and acquisition. In order for organization’s to continue to compete in the global economy, combining organizations provides a deeper market penetration. Within hours of a merger announcement stocks tend to soar through the roof, serving as proof that Wall Street investors like mergers and acquisition. However, the decision of making investors happy can result in a pitfall for many organizations. A recent study conducted by KPMG revealed that 83% of mergers fail. For instance EBay’s merger with Skype failed because of technical integration, Wendy’s and Arby failed because of Arbys lack of international exposure, and Chrysler failed because of cultural differences. Although the organizations failed for different reasons, the common trend is not having a good integration plan. The integration plan should include a clear strategy that combines the two cultures and uses IT frameworks to facilitate it. My organization (Starwood Hotels & Resorts Worldwide Inc.) is currently going through a merger with Marriott International Inc. I am beginning to see the same trends mentioned above, happening in our organization (pre-merger). During merger and acquisitions high valued information is exchanged and tough decisions are made. Therefore, properly managing information pre and post-merger will add value to the combined organizations overall success. However in order for an organization to

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