Problems of managing the value of companies in the process of mergers and acquisitions: foreign and Russian experience

Lyan Yunxiao Graduate Student, Lomonosov Moscow State University 121357, Russia, Moscow region, Moscow, Kremenchugskaya str., 11 yliyananan@yandex.ru Other publications by this author

Introduction

In modern conditions of active development of technologies and globalization of markets, companies no longer work in isolation or in a static form, but are constantly changing and enlarging to gain competitive advantages. Such a change can take various forms, starting with joint ventures and strategic alliances, ending with mergers and acquisitions, including hostile ones. The growing popularity of mergers and acquisitions is due to their proven effectiveness in practice, which is expressed not only in improving economic indicators, but also in the possibility of combining resources, knowledge and experience, increasing competitiveness, increasing innovation, reducing risks and other scale effects. However, during mergers and acquisitions, companies participating in such transactions face cost management problems, which often reduces their effectiveness and negatively affects the performance of further activities of participating companies up to record losses. 

The research is based on the works of Russian and foreign economists devoted to evaluating the effectiveness of mergers and acquisitions and the problems arising in the process of their implementation. Research methods: retrospective analysis, content analysis, comparison, description, systematization, evaluation, analysis and classification.

The main part

At the present stage, business reorganization is increasingly recognized as a decisive factor in the growth of the modern economy ^{[9, p. 11]}.

Mergers and acquisitions (M&A transactions from the English Mergers & Acquisitions – mergers and acquisitions) have become a very common type of business reorganization. Merger and acquisition strategies can be different:

- takeover of a competitor;

- absorption of the chain of your business;

- portfolio strategy (creating a portfolio of companies).

M&A deals have both advantages and disadvantages for participating companies (Fig. 1).

Figure 1 - Advantages and disadvantages of M&A transactions for participating companies

Source: compiled by the author according to ^{[3, 5, 6, 10]}.

By combining resources, experience and market coverage, companies can achieve economies of scale, reduce costs and gain access to new markets and technologies ^{[8, p. 105]}. Mergers and acquisitions can also contribute to the development of new products and services, accelerate innovation and stimulate the growth of the economy as a whole. In addition, they can help companies overcome such problems as regulatory restrictions and market saturation, allowing them to grow and expand more efficiently ^{[12, p. 8]}.

However, despite the many potential benefits of M&A transactions, there are also significant risks associated with such forms of reorganization. Companies should carefully consider the potential costs, cultural differences, and management issues that may arise when partnering with other organizations. In addition, there is always the possibility of disputes and disagreements between the participating companies, which can lead to expensive and time-consuming litigation ^{[3, 9, 12]}.

Mergers and acquisitions can be complex in terms of the time and effort required to build the right business relationship. First of all, the attention of the participants in such transactions is directed to the problems of managing the value of the company in the process of mergers and acquisitions.

The advantages considered allow us to conclude that M&A transactions are a fairly effective management tool for the company. Foreign ^{[10, 11]} and Russian ^{[3, 5, 6]} researchers emphasize that synergy is manifested as a result of M&A transactions. Synergy itself is the added value resulting from the merger of two companies, creating opportunities that would otherwise be unavailable to these firms operating separately.

The assessment of synergy in mergers and acquisitions is based on measuring the value of the benefits that a transaction will bring. This is, first of all, an increase in the value of the buyer, that is, an increase in its market value. In order for synergy to affect value, it must affect the company in at least one of the following ways:

1. Lengthen the growth period.

2. Reduce the cost of capital of the company.

3.                 Increase cash flows from existing assets.

4.                 Increase the expected growth rates of the company ^[10].

It should be noted that one of the disadvantages acquired by companies as a result of M&A transactions is a large proportion of the risk of incorrect valuation of the company.  Consequently, M&A transactions can be accompanied by many problems in the field of managing the value of participating companies. The main problem of managing the value of companies as a result of M&A transactions is the problem of managing the value of the company as a result of the transaction.

To solve problems and improve the efficiency of M&A transactions, it is very important to study the positive and negative experiences of different countries in this area.

The US experience in M&A transactions is very indicative, where this method of increasing business efficiency has been used since the end of the 19th century. In recent years, the United States has become a leader in M&A transactions, if we consider this issue from the point of view of the value of participating companies. For example, in 2015, US activity in M&A transactions reached a record level for the entire period - $988 billion ^[5].

As a negative experience of M&A transactions in the United States, one can cite an example of a deal worth $ 186 billion, in which America Online absorbed a competitor company Time Warner. The effectiveness of the transaction was supposed to be the transfer of the modern experience of America Online to Time Warner, which would entail an increase in profits of up to 30% in the first year after the takeover. However, the M&A deal led to the fact that the combined company became unprofitable in the first year (a record loss of $ 99 billion in the history of the United States). The problems that arose as a result of the merger of enterprises of the old and new economic format led to a drop in the value of the combined company over the next 1.5 years by more than $ 100 billion. In the future, the value of the merged company decreased by 7 times compared to the total value of these companies before the merger ^{[3, p. 426]}. This M&A transaction is considered the worst in the history of transactions of this format.

The US experience has allowed us to identify a number of new risks in M&A transactions. Thus, the researchers note that a takeover with low efficiency very quickly leads to the collapse or restructuring of the company. It is also noted that the significant role and interference of government agencies in M&A transactions, as a rule, negatively affects the entire economy. In addition, the US experience has shown that a sufficiently large percentage of completed M&A transactions subsequently negatively affects the efficiency of the combined company. It should also be noted that in conditions of imperfect legislation, companies spend large sums to protect their interests when there is a risk of hostile takeovers from strong competitors. This negatively affects their competitiveness and the economy of the country as a whole ^{[2, p. 67]}.

It is also worth noting that in the United States, an enterprise absorbed in the process of M&A transactions is treated as the exclusive property of new shareholders. At the same time, the experience of European countries in M&A transactions is characterized by an attitude towards the enterprise as a kind of social institution, where it is necessary to take responsibility for contacts with employees, contractors, society. In this regard, in M&A transactions carried out in European countries, we can note increased attention to the issues of employment of employees, their remuneration, as well as pension provision, their adaptation to ongoing structural changes. This is due to the fact that the labor legislation of European countries better protects employees by setting companies sufficiently high payments to dismissed employees, including as a result of M&A transactions.

In modern conditions, the greatest activity of M&A transactions is observed among Chinese companies expanding their activities towards Europe (most often transactions are implemented with companies from Germany and the UK). China has a relatively recent period in the experience of M& A transactions, the first transactions were carried out in the late 80s of the twentieth century.

There are a number of features of M&A transactions in China. The bulk of M&A transactions were carried out in the domestic market among national companies. The objectives of the transactions were the search for new markets for products, the search for certain resources, including financial ones, as well as the expected entry into the world arena. Some observed negative dynamics of transactions and problems form insufficiently perfect Chinese legislation in matters of M&A transactions involving foreign capital: it sets some restrictions, which entails delays in obtaining permits, an increase in the cost of M&A transactions, etc. ^{[4, p. 18]}.

Cross-border transactions are very important for China, as they allow us to acquire operational experience from foreign companies when combining enterprises that are valuable for the Chinese domestic market. A positive example of Chinese M&A deals is the acquisition by ChemChina Corporation of about 95% of Syngenta's shares in Switzerland in the amount of $43 billion in 2016. This transaction is considered the largest takeover transaction among the M&A transactions of China and European companies. As a result of this transaction, a combined company worth more than $ 100 billion was created, developing the world's largest business in the field of agrochemistry ^{[7, p. 85]}.

China has a significant share of cross-border M&A transactions, despite the predominance of domestic transactions. Among them, we can single out M&A transactions in industry related to innovations and the latest technologies. EU countries are a priority for Chinese investments abroad. In recent years, the dependence of many European countries on investments from Chinese companies, which have a large share in the investment structure, including in the most efficient and profitable sectors of the economy, has increased significantly. Thus, among German companies, the automotive industry and alternative energy sources attract the attention of Chinese investors. For example, a deal was implemented to acquire shares of Daimler.

In the UK, investments by companies from China predominate in the financial and real estate sectors, for example, the acquisition of shares in HSBC Bank and Logicor. In France, the focus of Chinese investment is on the tourism industry. In addition, in all of these countries, Chinese companies are investing in the development of high technologies. For example, a deal to acquire a controlling stake in Kuka, a company that manufactures robots in Germany; a deal to acquire 75% of the shares of Global Switch, a database developer in the UK; a deal to take over Linxens, a manufacturer of chips and microprocessors in France ^{[1, p. 25]}. In the future, the predominance of Chinese companies and investments in the market of European countries is predicted.

Thus, China's experience in M&A transactions is characterized by significant government influence and regulation, as well as active investments in European companies in recent years.

In Russia, the experience of M&A transactions that began in the 90s of the twentieth century is often associated with a number of problems and negative outcomes, which is primarily due to the imperfection of legislation in the field of M&A transactions.

As an example of the negative Russian experience, we can point to the takeover deal by Severgroup of the retail chain of Lenta stores in 2019. Under this transaction, Severgroup bought 78% of the shares of Lenta, leaving 22% of the shares in free circulation instead of 57%. However, the effectiveness of this transaction is low, since within two years the value of the shares has fallen in price by 5%. This transaction shows that a change in the composition of directors, in the absence of changes in business, can already have a significant impact on the value of companies ^{[5, 7]}. 

However, another transaction can serve as a positive example in the Russian experience of M&A transactions. So, the company "M.Video" in 2018, absorbed the competitor company "Eldorado", buying 100% of its shares in the amount of 45.5 billion rubles. At the same time, for the company "Eldorado", this merger went unnoticed, since the brands remained unchanged, but under the management of the company "M.Video" (more than 800 stores of household appliances and electronics in Russia). As a result of the transaction, positive dynamics was noted in all indicators of the combined company's activities, and the share price increased by 15%, which was due to competent and effective management.

It is also possible to cite as an example of Russian M&A transactions the sale by Sberbank PJSC under sanctions of its subsidiary Denizbank in Turkey for 170 billion rubles, which was almost completely (99%) bought by Emirates NBD from the UAE. At the same time, the sale of the subsidiary "Denizbank" did not affect the value of PJSC "Sberbank" and made it possible to pay dividends to shareholders. For the company, this transaction in the first year affected the decline in the value of shares, but later the situation stabilized ^[5].

The conducted research of foreign and Russian experience in managing the value of a company as a result of an M&A transaction allowed us to identify several positive and negative factors that affect the value of companies as a result of mergers and acquisitions (Fig. 2).

Figure 2 - Factors forming the problems of managing the value of companies as a result of the implementation of mergers and acquisitions

Source: compiled by the author.

Conclusion

Thus, mergers and acquisitions as a form of reorganization of companies are a key factor of growth and innovation in the modern economy. By combining resources, knowledge and experience through mergers and acquisitions, companies can create new products and services, solve common business problems and innovate.  The most important problem of managing mergers and acquisitions is the problem of managing the value of the company as a result of the transaction. Assessing the achievement of high efficiency of an M&A transaction is a difficult task. To do this, it is necessary to understand the strategy of the companies involved in the transaction, the specifics of their industry and other parameters that affect the outcome of the M&A transaction. Such an analysis requires a professional approach, as well as time-consuming. Therefore, experience shows that only a small percentage of transactions are approved. Many M&A transactions do not lead to the desired results and goals, or may not pay off. However, with a positive outcome, M&A transactions are able to bring the company to a new level of business. A well-chosen strategy makes it possible to achieve the main goal of companies involved in M&A transactions, which is to increase their profits and value. Therefore, in positive cases, an M&A transaction may become a chance for the company to withstand competition in the market.