Acquisition is a High Risky Strategy Essay

In the literature, several motives for takeovers possess been identified. One is the passion for synergy. That is, similarities or complementarities between the getting and luff pisseds be expected to result in the combined value of the enterprises exceeding their price as separate solids (Collis and capital of Alabama, 1998). A second motive involves the expectation that perplexrs scarcetocks extract value because take aim companies have been managed inefficiently (Varaiya, 1987).A trine motive is attributed to managerial hubris the nonion that senior executives, in overestimating their receive abilities, acquire companies they believe could be managed much than(prenominal) than profitably under their control. Agency system motive is the anticipation that steady expansion result positively extend to the compensation of top managers since there tends to be a direct sexual intercourse between firm size and executive pay.Contemporary specialists contend that ma nagerial self- pass on incentives whitethorn be expected to have divergent impacts on incarnate strategy and firm value. This premise has been recognized in previous(prenominal) studies. For instance, Stulz (1988) has examined the possession of managers of bespeak companies and has proposed that the race between that possession and the value of hind end firms whitethorn initially be positive and then subsequently manufacture negative with rising insider ownership.Moreover, Shivdasani (1993) empirically shows that the relationship of the ownership structure of target companies with the value of offensive bids is not uniformly positive. McConnell and Servaes (1990) have likewise study the relationship of lawfulness ownership among corporate insiders and Tobins q. Their results demonstrate a non-monotonic relation between Tobins q and insider equity stakes. Wright et al. (1996 451) have shown a non-linear relationship between insider ownership and corporate strategy cerebr ate to firm riskiness taking.Ownership Incentives and Changes in Company bump Motivating AcquisitionsAn agency-theoretic motive for acquisitions has been utilise to explain managerial cullences for risk-reducing corporate strategies (Wright et al., 1996). The implication is that both principals and agents prefer acquiring target companies with high rather than get off tops. In that, sh arholders and managers have congruous interests.The interests, however, diverge in terms of risk considerations associated with acquisitions. Because shargonholders possess diversified portfolios, they whitethorn precisely be tutelageed with systematic risk and be list slight(prenominal) to the aggregate variance of returns associated with a takeover. Senior managers may alternatively prefer risk-reducing corporate strategies, unless they atomic number 18 granted ownership incentives. That is because they can not turn their human capital invested in the firm.In the literature, it ha s been argued that agency cost may be reduced as managerial ownership incentives rise. The reason is that, as ownership incentives rise, the financial interests of insiders and shareholders bequeath begin to converge. Analysts conjecture, however, that such(prenominal) incentives may not unchangingly provide senior executives the motivation to lessen the agency costs associated with an acquisition strategy. Inherent is the presumption that the nature of executive wealthiness portfolios will another(prenominal)wise influence their attitudes toward corporate strategy. The ad hominem wealth portfolios of top managers are comprised of their ownership of shares/options in the firm, the income produced from their employment, and assets un related to to the firm.Presumably, as senior executives adjoin their equity stakes in the enterprise, their personal wealth portfolios become correspondingly less diversified. Although stockholders can extend their wealth portfolios, top executiv es have less flexibility if they own substantial shares in the firms they manage. Hence, if a significant portion of managers wealth is concentrated in one investment, then they may find it judicious to diversify their firms via risk-reducing acquisitions.In the related literature, however, takeovers and risk taking have been approached differently from the described approach. Amihud and Lev (1999) have contended that insiders employment income is significantly related to the firms deed. thusly, managers are confronted with risks associated with their income if the maintenance of that income is dependent on achieving predetermined performance targets. Reasonably, in the event of either corporate underperformance or firm failure, CEOs not only may lose their current employment income but withal may seriously suffer in the managerial labor merchandise, since their future meshing potential with other enterprises may be lowered. Hence, the risk of executives employment income is wedge by the firms risk. The ramification of Amihud and Levs (1999) contentions is that top managers will tend to lower firm risk, and therefore their own employment risk, by acquiring companies that contribute to stabilizing of the firms income, even if shareholder wealth is adversely affected.Consistent with the implications of Amihud and Levs arguments, Agrawal and Mandelker (1987) have similarly provokeed that managers with measly ownership stakes may adopt risk-reducing corporate strategies because such strategies may well serve their own personal interests. With ownership incentives, however, managers may be more liable(predicate) to acquire risk-enhancing target companies, in line with the emergency of wealth maximization for shareholders. The notion that at negligible managerial ownership levels, detrimental risk-reducing acquisition strategies may be emphasized, but with increasing ownership incentive levels, beneficial risk-enhancing acquisitions may be more prevale nt is too suggested in other meets (Grossman and Hoskisson, 1998). The conclusion of these investigations is that the relationship between insider ownership and risk enhancing, worthy corporate acquisitions is linear and positive.Some experts assert that CEOs personal wealth concentration will induce senior managers to undertake risk-reducing firm strategies. Portfolio theorys expectation suggests that investors or owner-managers may desire to diversify their personal wealth portfolios. For instance, Markowitz (1952 89) has asserted that investors may wish to diversify crosswise industries because firms in different industries. . . have lower covariances than firms within an industry. Moreover, as argued by Sharpe (1964 441), variegation enables the investor to escape all but the risk resulting from swings in economic activity. Consequently, managers with substantial equity investments in the firm may diversify the firm via risk-reducing acquisitions in order to diversify their own personal wealth portfolios. Because they may be especially concerned with risk-reducing acquisitions, however, their corporate strategies may not set up firm value through takeovers, although managerial intention may be to boost corporate value.The above discussion is compatible with complementary arguments that suggest that insiders may acquire non-value-maximizing target companies although their intentions may be to enhance returns to shareholders. For instance, gibe to the synergy view, while takeovers may be motivated by an ex-ante concern for increasing corporate value, legion(predicate) such acquisitions are not associated with an adjoin in firm value.Alternatively, according to the hubris hypothesis, even though insiders may believe to acquire targets that they believe could be managed more profitably under their control, such acquisitions are not ordinarily related to higher profitability. If acquisitions which are undertaken generally with insider expectations tha t they will financially benefit owners do not fool higher performance, then those acquisitions which are primarily motivated by a risk-reducing desire may likewise not be associated with beneficial outcomes for owners. Additionally, it can be argued that shareholders can more efficiently diversify their own portfolios, making it unessential for managers to diversify the firm in order to achieve portfolio diversification for shareholders.Risk Associated with HRM practices in International AcquisitionsThere are a get along of reasons wherefore the HRM policies and practices of multinational corporations (MNCs) and cross-border acquisitions are likely to be different from those found in home(prenominal) firms (Dowling, Schuler and Welch, 1993). For one, the difference in geographical spread means that acquisitions moldiness normally engage in a topic of HR activities that are not regarded in domestic firms such as providing movement and orientation assistance to expatriates, a dministering planetary job rotation programmes, and dealing with international union activity.Second, as Dowling (1988) points out, the staff office policies and practices of MNCs are likely to be more complex and diverse. For instance, complex salary and income valueation issues are likely to tog out in acquisitions because their pay policies and practices have to be administered to umpteen different groups of subsidiaries and employees, situated in different countries. Managing this diversity may generate a number of co-ordination and communication difficultys that do not arise in domestic firms. In information of these stickyies, more or less large international companies retain the services of a major accounting firm to ensure there is no tax incentive or disincentive associated with a particular international assignment.Finally, there are more stakeholders that influence the HRM policies and practices of international firms than those of domestic firms. The major sta keholders in private organizations are the shareholders and the employees. But one could also think of unions, consumer organizations and other pressure groups. These pressure groups also exist in domestic firms, but they frequently put more pressure on foreign than on topical anaesthetic companies. This probably means that international companies need to be more risk averse and concerned with the social and political environment than domestic firms.Acquisitions and HRM Practices Evidence from Japan, the US, and EuropeIn contemporary context, international human pickfulness management faces important challenges, and this trend characterizes many Nipponese, US and European acquisitions. From the particular point of view, Nipponese companies experience more problems associated with international human resource management than companies from the US and Europe (Shibuya, 2000). Lack of home-country personnel sufficient international management skills has been widely recognized in literature as the around difficult problem facing Japanese companies and simultaneously one of the most significant of US and European acquisitions as well.The statement implies that cultivating such skills is difficult and that they are relatively rare among businessmen in any country. Japanese companies may be particularly prone to this problem due to their backbreaking use of home-country nationals in overseas management positions. European and Japanese acquisitions also experience the lack of home country personnel who want to work abroad, while it is less of an impediment for the US companies.In the US acquisitions expatriates often experience reentry difficulties (e.g., career disruption) when returning to the home country This problem was the one most often cited by US firms. Today Japanese corporations report the relatively lower incidence of expatriate reentry difficulties, and it is surprising give the vivid accounts of such problems at Japanese firms by White (1988) a nd Umezawa (1990). However, the more active role of the Japanese personnel department in set up career paths, the tradition of semiannual musical-chair-like personnel shuffles (jinji idoh), and the continuing efforts of Japanese stationed overseas to maintain close contact with home base might underlie the lower level of difficulties in this area for Japanese firms (Inohara, 2001).In contrast, the decentralized structures of many US and European firms may serve to isolate expatriates from their home-country headquarters, making reentry more problematic. Also, recent downsizing at US and European firms may reduce the number of appropriate management positions for expatriates to return to, or may sever expatriates relationships with colleagues and mentors at headquarters. Furthermore, within the context of the lifetime employment system, individual Japanese employees have dinky to gain by voicing reentry concerns to personnel managers. In turn, personnel managers need not pay a gre at deal of attention to reentry problems because they will usually not result in a resignation. In westerly firms, reentry problems need to be taken more seriously by personnel managers because they frequently result in the loss of a valued employee.A further possible explanation for the higher incidence of expatriate reentry problems in western multinationals is the greater tendency of those companies to implement a policy of designatering local nationals to headquarters or other international operations. Under such a policy, the definition of expatriate expands beyond home-country nationals to encompass local nationals who transfer outside their home countries. It may even be that local nationals who return to a local operation after working at headquarters or other international operations may have their own special varieties of reentry problems.Literature on international human resource practices in Japan, the US and Europe suggest that the major strategic difficulty for the M NCs is to suck high-caliber local nationals to work for the company. In general, acquisitions may face greater challenges in hiring high-caliber local employees than do domestic firms due to lack of name recognition and fewer relationships with educators or others who might recommend candidates.However, researchers suggest that this issue is significantly more difficult for Japanese than for US and European multinationals. When asked to describe problems encountered in establishing their US affiliates, 39.5% of the respondents to a Japan Society survey cited finding serve American managers to work in the affiliate and 30.8% cited hiring a qualified work force (Bob SRI, 2001). Similarly, a survey of Japanese companies operating in the US conducted by a human resource consulting firm found that 35% entangle recruiting personnel to be very difficult or extremely difficult, and 56% felt it to be difficult (The Wyatt Company, 1999). In addition to mentioned problem, Japanese acquisit ion encounter high local employee turnover, which is significantly more problematic for them due to the near-total absence of turnover to which they are accustomed in Japan.The US, European and Japanese companies carry very rarely that they encounter local legal challenges to their personnel policies. However, in regard to Japanese acquisitions large heart and soul of press coverage has been minded(p) to lawsuits against Japanese companies in the United States and a Japanese Ministry of Labor canvas in which 57% of the 331 respondents indicated that they were facing potential equal employment opportunity-related lawsuits in the United States (Shibuya, 2000).ConclusionThis research investigates whether corporate acquisitions with shared technological resources or participation in similar product markets realize superior economic returns in comparison with unrelated acquisitions. The rationale for superior economic performance in related acquisitions derives from the synergies th at are expected through a gang of supplementary or complementary resources.It is clear from the results of this research that acquired firms in related acquisitions have higher returns than acquired firms in unrelated acquisitions. This implies that the related acquired firm benefits more from the merchant bank than the unrelated acquired firm. The higher returns for the related acquired firms suggest that the combination with the acquirers resources has higher value implications than the combination of two unrelated firms. This is support by the higher total wealth gains which were observed in related acquisitions.I did however, in the case of acquiring firms, find that the abnormal returns immediately attributable to the acquisition transaction are not significant. There are reasons to believe that the announcement gear ups of the transaction on the returns to acquirers are less easily detected than for target firms. First, an acquisition by a firm affects only part of its busi nesses, while affecting all the assets (in control-oriented acquisitions) of the target firm. Thus the measurability of effects on acquirers is attenuated. Second, if an acquisition is one event in a series of inherent moves constituting a diversification program, its individual effect as a market signal would be mitigated.It is also likely that the notional argument which postulates that related acquisitions create wealth for acquirers may be underspecified. Relatedness is often multifaceted, suggesting that the resources of the target firm may be of value to many firms, thus increasing the relative bargaining power of the target twin the potential buyers. Even in the absence of explicit competition for the target (multiple bidding), the premiums paid for control are a substantial fraction of the total gains available from the transaction.For managers, some implications from the research can be offered. First, it seems quite clear from the data that a firm seeking to be acquired will realize higher returns if it is sold to a related than an unrelated firm. This counsel is consistent with the view that the market recognizes synergistic combinations and values them accordingly.Second, managers in acquiring firms may be advised to scrutinize carefully the expected gains in related and unrelated acquisitions. For managers the issue of concern is not whether or not a given kind of acquisition creates a significant total amount of wealth, but what percentage of that wealth they can expect to accrue to their firms. Thus, although acquisitions involving related technologies or product market yield higher total gains, set mechanisms in the market for corporate acquisitions reflect the gains primarily on the target company. Interpreting these results conservatively, one may offer the argument that expected gains for acquiring firms are competed away in the bidding process, with stockholders of target firms obtaining high proportions of the gains.On a pragmatic leve l this research underscores the need to combine what may be called the theoretical with the practical. In the case of acquisitions, pragmatic issues like implicit and explicit competition for a target firm alter the theoretical expectations of gains from an acquisition transaction. Further efforts to clarify these issues theoretically and empirically will increase our understanding of these important phenomena.BibliographySharpe WF. 1964. Capital asset prices a theory of market equilibrium under conditions of risk. diary of finance 19 425-442Markowitz H. 1952. Portfolio selections. Journal of Finance 7 77-91Grossman W, Hoskisson R. 1998. CEO pay at the crossroads of Wall route and Main toward the strategic design of executive compensation. 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