Mergers and acquisitions process Essay Example | Topics and Well Written Essays - 1000 words

Mergers and acquisitions process - Essay Example Despite these findings, companies continue to adopt an M&A strategy for several reasons. One reason is that M&A meets the desire of firms to survive by growing. Another is that the bidding firm either has free cash flow (and cash is king!) or wants to get the free cash flow of the target firm. A third reason points to so-called agency problems between the managers of the bidding firm and the owners of the firm, where managers want to get a larger share of the rewards for taking risks and managing the firm. Another reason is that managers of the bidding firm are overconfident and proud. The fifth reason is the bidding firm might gain some benefits by implementing the M&A strategy that, by putting two firms together, may result in valuable, rare, and costly to imitate advantages. It can also happen that a bidding firm sees some hidden sources of competitive advantage in the target that competitors do not see or that the managers of a target firm either do not realize or could not turn into a source of competitive advantage. This is where a bidder can be justified for merg ing with or buying a target firm because the two firms would create an added advantage (synergy) over other competitors through economies of scope or scale. Implementing M&A is difficult and demands very good managers because the cultures of both firms may be very different. In the case of international M&A, this strategy may be costly because of differences in country cultures (like when Renault of France bought Nissan of Japan) and would need good managers to succeed. An ideal cross-country M&A is one where economies of scope can be gained without having to integrate the different firm and country cultures. Case 3-1: eBay eBay is a pioneer online auction firm that had to decide how to create more value from a new strategy of going into on-line auction drop-off selling to increase sales. Drop-off selling refers to selling items online for other people, with a seller or consignee collecting items for sale from the client or consignor. The consignee handles the whole listing and selling process and then pays the proceeds of the sale to the client, less the commission. This would capture sellers who have items to sell but who neither have the time nor the patience to advertise these items on-line. The company's initial success, built on a first-mover advantage as an on-line auction site, became the foundation for a cost leadership growth strategy achieved by offering low listing fees. In the process of accelerated growth in numbers of customers and sales volume, eBay developed into an on-line community that offered unmatched speed, safety, and security through an effective member feedback mechanism where users rated each other for every transaction made. eBay's profits grew by attracting more buyers and building the infrastructure needed to support both buyers and sellers. However, like brick-and-mortar shops, eBay's sales were seasonal, spiking during the holiday season but remaining flat the rest of the year. The drop-off selling strategy, a form of diversification into a related business that would add value to the core business of on-line auctions, was designed to increase customer traffic to its sites by making it easier for sellers to list their goods and for buyers to enjoy a wider variety of products to choose from. It also allowed eBay to transact high value-added items and compete with the more established