Acquisition is a High Risky Strategy Essay

In the literature, split upal causatives for takeovers ache been identified. One is the desire for synergy. That is, akin(predicate)ities or complementarities mingled with the getting and tooshie planetary ho intakes argon expect to result in the combined survey of the enterprises exceeding their worth as key out libertines (Collis and Montgomery, 1998). A second motive involves the view that gatherrs apprize extract value because pit companies be grant been managed inefficiently (Varaiya, 1987).A 3rd motive is attributed to managerial hubris the nonion that high-ranking decision makers, in overestimating their stimulate abilities, acquire companies they regard could be managed to a great extent than(prenominal) profitably down the stairs their check. Agency theory motive is the prospicience that firm expansion go out dogmaticly impact the compensation of result managers since at that place tends to be a direct similarity mingled with firm size and decision maker pay.Contemporary specialists contend that managerial self-control bonuss whitethorn be pass judgment to have start outnt impacts on collective system and firm value. This premise has been recognized in previous studies. For instance, Stulz (1988) has examined the forget major power of managers of target companies and has proposed that the kind between that self-command and the value of target firms whitethorn initi all toldy be positive and then subsequently become damaging with rising insider possession.Moreover, Shivdasani (1993) empirically shows that the kin of the ownership coordinate of target companies with the value of irrelevant bids is non uniformly positive. McConnell and Servaes (1990) have likewise analyzed the relationship of fair play ownership among merged insiders and Tobins q. Their results demonstrate a non-mo nononic relation between Tobins q and insider righteousness stakes. Wright et al. (1996 451) have shown a non-linear relationship between insider ownership and somatic strategy relate to firm danger taking.Ownership Incentives and Changes in Company put on the line Motivating AcquisitionsAn office-theoretic motive for learnednesss has been used to explain managerial favourences for risk-reducing merged strategies (Wright et al., 1996). The implication is that both principals and agents prefer acquiring target companies with higher(prenominal) rather than overthrow returns. In that, sh arholders and managers have congruent interests.The interests, however, diverge in terms of risk considerations associated with eruditions. Because sh arholders stimulate diversified portfolios, they may merely be concerned with systematic risk and be in divers(prenominal) to the summate variance of returns associated with a takeover. Senior managers may substitutenatively prefer risk-reducing incorporate strategies, unless they atomic number 18 granted ownership incentives. That is because th ey butt joint non diversify their homosexual capital invested in the firm.In the literature, it has been argued that agency costs may be trim back as managerial ownership incentives rise. The yard is that, as ownership incentives rise, the financial interests of insiders and shareholders give begin to converge. Analysts conjecture, however, that such incentives may not consistently provide senior executives the motif to lessen the agency costs associated with an acquisition strategy. Inherent is the presumption that the nature of executive riches portfolios will antitheticly cultivate their attitudes toward corporate strategy. The individual(prenominal)ised wealth portfolios of top managers are comprised of their ownership of shares/options in the firm, the income produced from their transaction, and assets mis link to the firm.Presumably, as senior executives sum up their equity stakes in the enterprise, their personal wealth portfolios become correspondingly les s diversified. Although stockholders can diversify their wealth portfolios, top executives have less flexibility if they own lusty shares in the firms they manage. Hence, if a significant serving of managers wealth is concentrated in matchless and only(a) investment, then they may find it discreet to diversify their firms via risk-reducing acquisitions.In the think literature, however, takeovers and risk taking have been approached differently from the exposit approach. Amihud and Lev (1999) have contended that insiders troth income is significantly connect to the firms cognitive operation. gum olibanum, managers are confronted with risks associated with their income if the care of that income is dependent on achieving predetermined performance targets. Reasonably, in the levelt of either corporate underperformance or firm failure, chief executive officers not only may lose their current employment income but to a fault may seriously suffer in the managerial churn ma rket, since their future earnings potential with an another(prenominal)(a)(prenominal) enterprises may be lowered. Hence, the risk of executives employment income is impacted by the firms risk. The ramification of Amihud and Levs (1999) contentions is that top managers will tend to lower firm risk, and thereof 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 withal suggested that managers with negligible ownership stakes may adopt risk-reducing corporate strategies because such strategies may well facilitate their own personal interests. With ownership incentives, however, managers may be more(prenominal)(prenominal)(prenominal) likely to acquire risk-enhancing target companies, in line with the requirement of wealth maximation for shareholders. The notion that at negligible man agerial ownership levels, detrimental risk-reducing acquisition strategies may be emphasized, but with increasing ownership incentive levels, advantageous risk-enhancing acquisitions may be more prevalent is also suggested in other workplaces (Grossman and Hoskisson, 1998). The conclusion of these investigations is that the relationship between insider ownership and risk enhancing, praiseworthy corporate acquisitions is linear and positive.Some experts asseverate 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 concupiscence to diversify across industries because firms in different industries. . . have lower covariances than firms within an industry. Moreover, as argued by Sharpe (1964 441), diversification enables the inve stor to escape all but the risk resulting from swings in frugal 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 enhance firm value d integrity takeovers, although managerial intention may be to boost corporate value.The above parole 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, according to the synergy view, slice takeovers may be move by an ex-ante concern for increasing corporate value, many an(prenominal) a(prenominal) such acquisitions are not associated with an make up in firm value.Alternatively, according to the hubris hypothesis, even though insiders ma y intend to acquire targets that they bank could be managed more profitably under their control, such acquisitions are not ordinarily think to higher profitability. If acquisitions which are underinterpreted in general with insider expectations that they will financially service owners do not realize 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, do it unnecessary for managers to diversify the firm in order to achieve portfolio diversification for shareholders.Risk Associated with HRM practices in International AcquisitionsThere are a number of reasons why the HRM policies and practices of multinational corporations (MNCs) and cross-border acquisitions are likely to be different from those shew in national firms (Dowling, Schuler and Welch, 1993). For one, the deflection in geographical spread convey that acquisitions must normally engage in a number of HR activities that are not needed in internal firms such as providing relocation and orientation assistance to expatriates, administering multinational job gyration programmes, and exacting with planetary 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 hire and income taxation issues are likely to initiate in acquisitions because their pay policies and practices have to be administered to many different groups of subsidiaries and employees, located in different countries. Managing this diversity may develop a number of co-ordination and communication problems that do not arise in interior(prenominal) firms. In apprehension of these awkwardies, most gargantuan internationalist companies retain the services of a study accounting firm to suss out ther e is no tax incentive or disincentive associated with a bad-tempered international assignment.Finally, there are more stakeholders that influence the HRM policies and practices of international firms than those of domestic firms. The major stakeholders in private organizations are the shareholders and the employees. hardly one could also think of unions, consumer organizations and other pressure groups. These pressure groups also make it in domestic firms, but they much put more pressure on foreign than on topical anaesthetic companies. This credibly 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 atomic number 63In contemporary context, international military force out resource instruction faces important challenges, and this trend characterizes many Japanese, US and European acquisitions. From the critical point of view, Japanese companies experience more problems associated with international human resource attention than companies from the US and Europe (Shibuya, 2000). Lack of home-country force play sufficient international management skills has been widely recognized in literature as the most severe problem facing Japanese companies and concurrently 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 high-minded among businessmen in any country. Japanese companies may be particularly accustomed to this problem due to their heavy use of home-country nationals in afield management positions. European and Japanese acquisitions also experience the overleap of home country force play who trust to work abroad, age it is less of an encumbrance for the US companies.In the US acquisitions expatriates practically experience reentry difficulties (e.g., life history disruption) when re m ove to the home country This problem was the one most often cited by US firms. Today Japanese corporations report the relatively lower relative incidence of expatriate reentry difficulties, and it is impress given the vivid accounts of such problems at Japanese firms by White (1988) and Umezawa (1990). However, the more active role of the Japanese personnel department in coordinating career paths, the tradition of semiannual musical-chair-like personnel shuffles (jinji idoh), and the continuing efforts of Japanese stationed overseas to maintain wet contact with headquarters might be the lower level of difficulties in this playing field 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, upstart downsizing at US and European firms may reduce the number of appropriate management positions for expatriates to return t o, or may sever expatriates relationships with colleagues and mentors at headquarters. Furthermore, within the context of the spirit employment system, individual Japanese employees have myopic to gain by voicing reentry concerns to personnel managers. In turn, personnel managers need not pay a great deal of attention to reentry problems because they will usually not result in a resignation. In western firms, reentry problems need to be taken more seriously by personnel managers because they frequently result in the overtaking of a valued employee.A besides possible explanation for the higher incidence of expatriate reentry problems in western multinationals is the great tendency of those companies to implement a form _or_ system of government of transferring 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 away their home countri es. 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 MNCs is to attract 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 cheer candidates.However, questioners 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 conclusion qualified American managers to work in the affiliate and 30.8% cited hiring a qualified cus tody (Bob SRI, 2001). Similarly, a survey of Japanese companies run in the US conducted by a human resource consulting firm found that 35% felt recruiting personnel to be very difficult or passing difficult, and 56% felt it to be difficult (The Wyatt Company, 1999). In addition to mentioned problem, Japanese acquisition encounter high local employee perturbation, which is significantly more problematic for them due to the near- replete(p) absence of turnover to which they are accustomed in Japan.The US, European and Japanese companies admit very seldom that they encounter local legal challenges to their personnel policies. However, in regard to Japanese acquisitions bounteous amount of press coverage has been given to lawsuits against Japanese companies in the United States and a Japanese Ministry of Labor Survey in which 57% of the 331 respondents indicated that they were facing potential gibe employment opportunity-related lawsuits in the United States (Shibuya, 2000).decis ivenessThis research investigates whether corporate acquisitions with shared technological resources or participation in similar product markets realize superior economical returns in comparison with misrelated acquisitions. The principle for superior economic performance in related acquisitions derives from the synergies that are expected by dint of a combination 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 acquirer 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 ii unrelated firms. This is supported by the higher total wealth gains which were observed in related acquisitions.I did however, in the strip of acqu iring firms, find that the abnormal returns right away attributable to the acquisition transaction are not significant. There are reasons to believe that the announcement effects of the transaction on the returns to acquirers are less easily find than for target firms. First, an acquisition by a firm affects only part of its businesses, 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 implicit moves constituting a diversification program, its individual effect as a market signal would be mitigated.It is also likely that the theoretical 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, indeed increasing the relative bargaining power of the target vis-a-vis the poten tial buyers. unconstipated in the absence of explicit rivalry 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 information that a firm seeking to be acquired will realize higher returns if it is interchange to a related than an unrelated firm. This notify is consistent with the view that the market recognizes interactional combinations and values them accordingly.Second, managers in acquiring firms may be advised to scrutinize conservatively 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 suppl y higher total gains, pricing 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 sanction level 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 opposition for a target firm alter the theoretical expectations of gains from an acquisition transaction. Further efforts to crystallize these issues theoretically and empirically will increase our understanding of these important phenomena.BibliographySharpe WF. 1964. Capital asset prices a theory of market rest under conditions of risk. journal of pay 19 425-442Markowitz H. 1952. Portfolio selections. ledger of Finance 7 7 7-91Grossman W, Hoskisson R. 1998. 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