Merger is a business term used to describe a process where two companies combine their operations to form a new business entity in form of a new company. The new company formed takes up mixed identity from both of the original companies which dissolves in favor of the new business entity. On the other hand acquisition refers to as a process whereby one company purchases another and there is no formation of a new company. The mergers and acquisitions happen basically because many companies have huge appetite to grow by all means available. Thus merger and acquisition has become an option discussed in several boards and carried out all over the world (McDonald, Coulthard & Lange 2).
There have been cases of successful mergers and acquisition since time immemorial. This concept has grown over time to its current level. The latest example of large scale acquisition was Oracle systems buying Sun Microsystems in a huge financial deal of $ 7.4 billion. The success of any merger or acquisition is measured through its financial emphasis point of view because it gives a clear understanding of benefits of any merger (McDonald, Coulthard & Lange, 8). This term paper will concentrate on the financial aspects of mergers and acquisitions for both companies and the resulting outfit.
The financial a mergers and acquisition of high magnitude such as the Oracle acquisition of Sun Microsystems usually have benefits as well as downsides. The most important aspect in these transactions is that the shareholders from both corporations will have added value on their shareholding. The resulting formation of a merger and acquisition has a high shareholder value which is greater than the sum of shareholder values of the parent companies. Shareholder value is important tool used in the performance analysis because the major aim of a company is to maximize the wealth of company stockholders.
The shareholder value is calculated from the returns that the company is expected to give to shareholders. This value is estimated from the total net value of a company based on its present and expected future cash flows. The overall shareholding value will be high considering the increased expected net value resulting from combined operations and benefits. Thus both oracle and Sun Shareholders will have a definite increase in their share values.
Although both sides of shareholders gained value, Oracle shareholders control higher shareholding as compared to Sun shareholders because Sun was absorbed into Oracle. This implies that their share value is higher. Thus when the acquisition of Sun was completed, Oracle shareholding value was proportionally higher than Sun’s value. The concept of shareholders value utilizes financial parameters which include earnings, equity and so on.
The financial condition of the Oracle Corporation was very strong with a high valued balance sheet. The Oracle was finically strong having had its revenues grow steadily from $ 11 billion in 2005 to $ 23 billion in 2009 (Form 10-K (Oracle) 27). The company’s strong position with its assets valued at $ 47 billion which has enabled it to carry out a lot of acquisitions over time and now culminating with the biggest deal merger with Sun (Form 10-K (Oracle) 27). The shareholders value had been growing steadily over the years and was at a very good position at the time of Sun acquisition.
The oracle financial performance has been successful due to its business strategies most of which have been out of acquisitions of smaller companies. This has enabled Oracle to utilize its growing revenue in expanding its business assets and products. The return to its shareholders has been growing with every acquisition and revenue increase.
The financial condition of Sun is also strong but lower than Oracle’s. Although the revenue of the company by 2009 was $ 11 billion there was a slight increase to $ 13 billion for 2006, 2007 and 2008 but it dipped back to $ 11 billion in 2009 making a resultant net loss of $ 2.2 billion. The asset base was $ 11 billion (Form 10-K, 25& 26). Given the financial condition, we can say that Sun has not underwent the growth compared to that of Oracle and as such the acquisition came at the right time so safeguard Sun’s shareholders value which was diminishing.
The Sun Microsystems have not had major acquisitions in its business process and the growth has stagnated over time culminating at a loss. Due to this fact, shareholder returns was reduced to a negative value. This shareholder value could then be said that it had gone down and the management needed to act immediately and it came in form of the acquisition.
The combined business of Oracle and Sun might be more profitable than they would if they remain independent. This is because of increased economies of scale, improved efficiency, reduced competition and increased investments. There will be benefits accruing from large operations that will drive up the company profits. The efficiency of operations will be achieved because any redundant facility of the company can be utilized with a merger. The resulting effect of efficiency is that the company would meet its objectives which result in profits (Economics (a) 1).
These economies of scale include bulk buying of raw materials leading to discounts. The discounts reduce cost of purchases which translate to higher profits. The financial interest rates can be negotiated to a better rate where a company is very large. This ensures that the company’s debt costs are kept low and saves on its income. There are also technical economies if the firm has fixed costs on which average costs are lowered when another company is introduced and used the existing techniques (Economics (a) 1; Sherman and Hart 68).
The mergers also allow greater investment due to stronger combined financial base. Out of these investments more profits would be generated. These investments may also be in form of quality improvement of existing products which result in better goods for consumers. The quality goods lead to increased revenues which translate to improved profits due to mergers (Economics (a) 1).
The direct competition that was between Oracle and Sun is eliminated and joined effort used to fight huge international competitors. The company can be able to run a combined budget to fight threats at international level giving them a definite advantage of increased sales leading to more profits. There are situations where a merger situation does not turn to be profitable. This may happen out of several situations in a business environment. Firstly, due to less competition there may be complacency which may lead the merger to produce less quality products and reduced investment on new products. A situation like this will discourage customers and will result in reduced revenue translating to reduced profits (Economics (a) 1; Sherman and Hart 70).
Another reason that may lead to reduced profit is diseconomies of scale. This is a negative side of mergers because it might lead to a too big company which becomes difficult to run and manage its operations efficiently. This is where a company does not have systems in place to manage a big company making it so hard for the conglomerate to deliver quality service resulting in reduced revenues (Economics (b) 3).
Moreover, monopolies are likely to be inefficient in production by not producing on their lowest available costs. These means that it may not be possible for monopolies to utilize lowest point on its average cost curve resulting in high cost of production. The high cost of production will eat into the company revenues which results in profit reduction.
The cost of mergers is also another downside which may not be recovered by the acquiring company. This is a scenario where a company gave a lot of importance to a company and paid a huge consideration in cash yet the combined operations do not result in the returns worth the investment. The company may suffer high costs especially where it is servicing the debt of the acquired company and desired objectives are not being achieved Economics (b) 1; Sherman and Hart 72).
The other problem with mergers is that negotiations may take too long and a lot of time input and finally may not become successful. This may cause managers to divert too much of their energies to the project which may not bear results causing their parent companies to suffer I n the progress. This is unforeseen case which might happen leading to reduced profits due to negotiation costs involved.
There have been different opinions on the mergers and acquisitions. The arguments have been forwarded equally to support and other critic its benefits. There are those who believe that mergers bring success to business operations and leads to development of huge conglomerates which solve which can engage in almost any available business opportunity. This has been true to the successful businesses which have come out of mergers in a better financial position than its parent companies.
However, there are people who believe that success of past mergers cannot be generalized to mean that all mergers can be successful. The general perception is that there is no two business situations which are exactly the same in all their operations and as such each merger and acquisition case should be considered separately. For our case study we will wait and see if the acquisition of Sun by Oracle will emerge with more success in their business operations.