Table of Contents
- Introduction………………………………………………………………………………..3
- Mergers and Acquisitions………………………………………………………………….3
- Effects of Mergers and Acquisitions on the recent Financial Crisis………………………5
- Effects of recent financial Crisis on Mergers and Acquisitions…………………….…….6
- Conclusion…………………………………………………………………………………7
- References…………………………………………………………………………………9
- Introduction
The global financial crisis of 2008 is one of the most detrimental financial problems ever witnessed in the world since the Great Depression of 1930s. The crisis affected government institutions, financial institutions and the stock markets. Large financial institutions collapsed or nearly collapsed, evictions and foreclosures were experienced in housing markets while banks were issued bailouts by their respective governments. The financial crisis also resulted in failure of world businesses and reduction of consumer wealth (Ma, 2010). Unemployment also increased and sovereign debt crisis arose in Europe. World economic depression was also inevitable. During such global crisis, mergers and acquisitions usually play a major role. The purpose of this research is to establish the impact of mergers and acquisitions on major financial crisis with a case study of the 2007/2008 crisis.
- Mergers and Acquisitions
Mergers and acquisitions are common in the current world business organizations. Mergers refer to the situation in which two firms of equal positions come together and undertake a common business activity with the aim of enjoying joint profits. On the other hand, acquisition refers to a situation in which one company (holding company) acquires the ownership of a smaller company which then becomes the subsidiary of the parent firm. The increase of mergers and acquisitions in the current world is attributed to globalization, cost minimization, financial crisis and increased competition (Ma, 2010). Generally, mergers and acquisitions are formed in order to solve a given financial problem. Therefore, the financial crisis of 2008 is related in some ways to the increased mergers and acquisitions experienced within the past decade. This relationship may be in either way.
Mergers and acquisitions in value and number of deals in 2007 and 2008 (Thomson Financial, IMAA, 2009)
From the figures, it is clear that Mergers and acquisitions may be considered to be both a cause and a result of the global financial crisis. Mergers and Acquisitions are used in strategic planning to enable appropriate decisions to be made within organizations (Chakravarty & Chua, 2012). The decrease in the number of mergers and acquisitions can be shown by the figure above. The figure shows that there was a decrease in the number of mergers and acquisitions in many sectors, especially in the financial sector between 2007 and 2008. This indicates that the financial crisis of 2008 led to the decrease in the number of mergers and acquisitions in the world.
- Effects of Mergers and Acquisitions on the recent Financial Crisis
Prior to 2007, mergers and acquisitions had been rising tremendously. As a result of the increased mergers and acquisitions, firms managed to cut on costs, increased their competitive advantage and increased their access of financial resources. The mergers and acquisition rose to a level whereby, alongside other causes, resulted in liquidity problems in the financial markets. As a result, financial institutions were forced to inject financial capital into the financial market. Increase in capital in the financial markets then resulted in the crash of stock markets and the credit crunch. The credit crunch is a situation in which banks are unable to provide loans due to liquidity problems (Hitt, Ireland & Hoskisson, 2011). The liquidity problems which are partly associated with mergers and acquisitions then resulted in the 2008 financial crisis.
Due to the increase of mergers and acquisitions prior to 2008 financial crisis, investors in the world market also got more financial base which enabled them to acquire credit easily. This is because their increased financial and resource base due to mergers and acquisitions led them to have more securities for their debts. The assets acquired by a company from the acquired firm may be used as securities against the credit they acquire. As a result of this increased access to credit by firms which have entered into mergers and acquisition contracts, credit crunch occurred leading to the world financial crisis of 2008.
Mergers and acquisitions also affect the value of firms and the wealth of shareholders. The company being acquired realizes an increased value, thus adding wealth to its exixting shareholders. On the other hand, mergers and acquisitions cause a decline in the value of the acquiring firm, causing a decrease in its shareholders’ wealth. This may make the shareholders of the acquiring firm to lose confidence in the company and as a result withdraw their funds from the company causing financial problems to the company. The financial problems of the company may be severe if the same problems are experienced in other firms in the industry. As a result, a situation of persistent financial problems in the industry may lead to financial crisis in the long run. This is the case for the recent financial crisis which affect the world which has been characterized aeveral mergers and acquisitions.
Another effect of mergers and acquisitions on the 2008 financial crisis is the effect on management and employees occasioned by the cultural differences between the two marging or acquiring companies. The cultural differences may eventually cause differences on how management of the ccompanies should be handled and how employees will operate their tasks. As a result of such differences, the companies may plunge into management crisis which in turn result in financial problems that may end up being worldwide crisis as experienced in 2008. This is especially the case if such companies are substantially large and have a wide financial base.
- Effect of recent financial Crisis on Mergers and Acquisitions
The financial crisis has then affected mergers and acquisitions, leading to the decline in the number of mergers and acquisitions again in 2008. Due to the 2008 global financial crisis, international investors have resorted to strategies that may help them to diversify risk, especially in the financial markets. This is because the financial crisis caused uncertainties in the business environment which made firms to diversify in order to mitigate risks associated with the financial crisis (Shaw & Liu, 2011). However, the financial crisis caused a decline in the amount of available credit needed to make mergers or acquisitions.
As a result of the crunch, private stock firms have collapsed, reducing the values of equity in the stock market drastically. This has led to a decrease in the number of mergers in the developed countries especially in USA and Europe. Due to the financial crisis, banks could not lend to businesses as a result of credit crunch occasioned by the 2008 global financial crisis (Coeurdacier, Santis & Aviat, 2009). Therefore, it became difficult for firms to acquire funds in order to invest in mergers and acquisitions. Investors also lost confidence in the financial markets due to the reduced interest rates. This caused them to opt out of business and as a result mergers and acquisitions reduced. However, there were some mergers and acquisitions that were made as a result of the financial crisis as investors sought to diversify risks.
The few cases of mergers and acquisitions which occurred after the 2008 financial crisis arisen because firms wanted to consolidate their losses by diversifying risks through acquisition of smaller firms. Some of these mergers and acquisitions include the acquisition of Merril Lynch by the Bank of America in a bid of $48.8 million (Grave, Vardiabasis & Yavas, 2012). Another example is the acquisition of Genentech Inc for 43.7 million dollars by Roche Holding Switzerland. These acquisitions were entirely motivated by the financial crisis which posed financial problems to international firms. Such firms as a result cushioned themselves by engaging in diversification strategies including mergers and acquisitions. However, these acquisitions were not feasible for middle level and small firms because they could not acquire funds to acquire other firm and lacked the confidence to merge with other firms.
- Conclusion
From this discussion, it is clearly evident that there is a close relationship between the 2008 global financial crisis and mergers and acquisitions in the world market. Prior to the 2008 global financial crisis, mergers and acquisitions were widespread and increased from year to year because there were better economic conditions for firms to conduct normal business activities and strategies (Coeurdacier, Santis & Aviat, 2009). This increase in mergers and acquisition caused an increased value of equities which brought down interest rates. This led to mortgage firms acquiring loans easily and investing in housing. This triggered liquidity problems, causing the financial crisis. Due to this financial crisis, there was a decline in the level of confidence by investors hence causing a decrease in investments in mergers and acquisitions. The financial crisis also led to a credit crunch, which led to decreased accessibility of funds by firms. Therefore, firms could not afford to invest in mergers and acquisitions as strategic decision of risk diversifications.
References list
Chakravarty, V, & Chua, SG, 2012, Asian Mergers and Acquisitions: Riding the Wave. John Wiley & Sons, Hoboken.
Coeurdacier, N., De Santis, R, & Aviat, A 2009, “Cross-border mergers and acquisitions and European integration”, Economic Policy, pp. 55–106.
Grave, K, Vardiabasis, D & Yavas, B 2012, “the Global Financial Crisis and M&A”, International Journal of Business and Management. Vol. 7, no. 11, pp. 56-66.
Hitt, MA, Ireland, RD & Hoskisson, RE 2011, Strategic management: Competitiveness & globalization, South-Western Cengage Learning, Mason, OH.
Jovanović, MN 2011, International handbook on the economics of integration: Volume III, Edward Elgar, Cheltenham.
Ma, H 2010, “Brief Analysis of the Issue of Cross Border Merger and Acquisition in BRICs”, Research in world Economy, vol. 1, no. 1, pp. 43-45.
Shaw, D & Liu, BJ 2011, the impact of the economic crisis on East Asia: Policy responses from four economies, Edward Elgar Pub, Cheltenham, U.K.
Thomson Financial, IMAA, 2009, GCC M&A during and after the financial crisis. Available at: www.thomsonfinancial.com, Accessed January 17, 2012.
