ASSIGNMENT ON MERGER & ACQUISITION

Analyze the justifications with regards to regulatory and institutional barriers , there are a few direct obstacles but the biggest obstacle which impacts Merger & Acquisition indirectly is the lack of transparency and weak financial reporting , which make valuation extremely tough.

Abstract

Mergers & Acquisitions are growing day by day nationally and internationally. Globalization and worldwide financial reforms have collectively contributed towards the development mergers and acquisitions. At the same time some obstacles are creating tough its valuation. Such as integration risk, poor strategic fit, weak financial reporting , incomplete due diligence , overly optimistic , lack of transparency , culture of clash etc. Specially the major term lack of transparency & weak financial reporting are the biggest obstacle which impacts mergers & Acquisition.  In national perspective, there is no specific rules & regulation except BSEC regulation 2002. On the other hand BSEC regulation does not cover any clear or mandatory provision. It creates the lacking of accountability which grows lack of transparency. For that reason, some obstacle are raising day by day which impacts merger & Acquisition

Introduction :

Merger and acquisition (M&A) represent a popular strategy used by firms for corporate strategy. M&A plays a significant role in the industrial sector of any economy. It is to build powerful partnership among business organizations.Merger & acquisition (M&A) have become the primary means driven by globalization of competition, technological developments, & economic or strategic [1]barriers to normal growth.  For this reason many companies, regulatory bodies or institutions around the globe are quickly attempting to grow revenues  by the use of lack of transparency and weak financial report. All companies in almost all industries are being increasingly faced by new challenges amid the intensifying competition locally & internationally. It is becoming a daily challenge to keep up with new competitors, technological breakthroughs, & ever-more demanding & sophisticated customers. It is widely documented that mergers & acquisitions are the primary methods of consolidation for quick corporate expansion & growth. Most of the M&A literature has used the two terms [2]interchangeably despite the formal distinction that has been drawn between them which has been widely considered as somewhat vague. Both terms are used to refer to transactions involving the combination of two independent firms to form one or more commonly controlled entities where a change of control takes place through a transfer of ownership.The study is solely based on the regulatory and institutional barriers of merger & acquisition such as lack of transparency and weak financial reporting which make valuation extremely tough.

Definitions of The term:

Mergers and Acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying , selling, dividing sector . It seems M&A is similar but mergers and acquisitions are actually theoretically & conceptually different. A merger is the combination of two firms, in which only one firm survives and assumes all the assets and obligations of the merged firm, which ceases to exist legally . Mergers involve a consolidation process and the creation of a new firm with the [3]dissolution of the original firms . An acquisition relates to the transfer of ownership between two firms, where one firm  buys a part or the totality of another firm and establishes itself as the new owner . Moreover, it is worth clarifying that there are different types of M&As, namely as to the scope involved. classifies M&As as horizontal, vertical and conglomerate. Horizontal M&As are undertaken by firms operating in the same market performing the same activity and producing the same products. Vertical M&As occur between firms that operate in different stages of the value chain.

Objectives of the Study :

The following objects are :

1. To understand Merger &Acquisition .
2. To identify an obstacles which impacts merger &acquisition .
3. To justify the barriers such as lack of transparency and weak financial reporting which make valuation extremely tough .

Significance of the Study :

In the absence of proper guideline as to the method and basis of valuation extremely tough during M&A activities . Companies may opt for higher valuation . As a result propriety of valuation bears the possibility of becoming a highly contested issue before the court in considering an application for approval of a scheme for amalgamation .

During the planning stage , some companies may overlook financial statements . Consequently , where cash out is involved , there might arise [4]irreconcilability between the amounts available on the balance sheet and the amount agreed to be paid against the shares , creating a gridlock during the post- sanction and post – closing stage .

Lacking of valuation , improper financial statement & report that can cause a biggest obstacle in companies or institutions .

Forms of Merger & Acquisition:

There are three legal forms of merger and acquisitions. This are stated followings:

1.Merger and Consolidation:

Merger refers to the absorption of one firm by another where in the acquiring firm retained its identity and the acquired firm seizes to exist. The firm which acquires the assets of other firm is called bidder firm. The firm whose assets are acquired is known as target firm. On the other hand, [5]consolidation refers to the combination of two firms which creates a new firm and both the firm seizes to exist.

2.Acquisition of stocks:

Acquisition of stocks refers that the bidder firm purchases the total assets of the target firm offering the owners of target firm certain number of shares through tender offer which is a public offer by one firm to purchase the share of other firm.

3. Acquisition of assets:

Acquisition of assets refers that the bidder firm [6]purchases the assets of the target firm. There are three categories of acquisition, this are-

i)Horizontal acquisition:

Horizontal acquisition different firms of same line of business merge together to create a new firm like- a commercial bank merges with another commercial bank doing the same line of business or producing the same line of products.

ii)Vertical acquisition:

Vertical acquisition refers to the merger of two firms doing the business of different steps of a line of product. Like – A travel agency may merge with an aviation or airline company, A textile mill may merge with a garments company.

iii)Conglomerate acquisition:

Conglomerate acquisition refers to the combinations of different line of business of different industry. Suppose, a group of industries or companies purchase a dying company.

Regulatory body that govern Merger&Acquisition :

BSEC is the regulatory body of M&A transactions. There is no explicit requirement to consult or seek permission from [7]BSEC for undertaking an M&A transactions unless the proposed transactions or by the rules regulating issue of capital .Consequently a merger involving a cash consideration or paid up capital.it is possible to disregard BSEC.

It is worth nothing that in the present environment of non  enforcement of 2002 rules , BSEC has limited scope in scrutinizing such transactions .

BSEC depending on the sector in which the proposed M&A deal is to take place , particular regulators for instance the Bangladesh Telecommunication Regulatory Commission (BTRC ), Bangladesh power development Board (BPDB) , Bangladesh Bank ( BB) and Insurance Development and Regulatory Authority ( IDRA) , may take up the role of regulating M& A activity .

Benefits of Merger and Acquisitions:

There is a number of reasons why companies merge together or one acquires the other company. Followings are the [8]benefits of merger and acquisition-

1.Synergy:

Synergy is the net benefit of merger and acquisition.Synergy is the incremental value 3+2 = 6 here 1 is the incremental value. Synergy refers to VAB > VA + VB or 3 + 2 = 6.

2. Enhancement of revenue:

If two or more company merge together the revenue of the firm will increase because of the experience of the new firm- marketing gains, strategic benefits, market power etc. if two firm merge together the market share of the new firm will increase as a result the revenue of the firm will increase.

3.Reduction in costs:

Because employee of the firm will be reduced, inefficient employees will be sacked.

4.Lower Taxes:

Tax is the amount of money that government collects from the income of individuals and corporations. Tax can be categorized as personal tax and corporate tax. Tax gains are powerful incentives for some acquisition.

5.Reduction in capital needs:

Because of the revenue enhancement and reduction in cost will increase the profit and this profit will use as internal sources of capital. External sources of capital will be reduced. They can collect and borrow higher amount of debt in future.

Reasons for the failure of Merger &Acquisition:

Such could be the reason :

Integration risk: Integrating the operations of two companies proves to be a much more difficult task in practice than it seemed in theory.Integration is often poorly [9]managed without planning and design. This leads to failure of implementation.

Poor strategic fit: Wide difference in objectives and strategies of the company

Weak Financial Reporting :This  weaken report can lead to failure of M & A.

Incomplete due diligence: Inadequate due [10]diligence can lead to failure of M&A as it is the crux of the entire strategy

Overly optimistic: Too optimistic projections about the target company leads to bad decisions and failure of the M&A

Lack of Transparency :Transparency is often poorly managed . This leads to make valuation extremely tough .

Culture Clash:M&A transactions sometimes fail because the corporate cultures of the [11]potential partners are so dissimilar. This leads to failure of implementation .

Legal & regulatory Analysis of the Study :

The Bangladesh Securities and Exchange Commission is finalizing only the acquisition rules on disclosure basis, putting on hold the merger rules. After a couple of years of assessing the rules, the regulator has now decided to amend existing rules only to settle share acquisitions. The commission has taken a number of steps to make clear rules for merger and acquisition seekers as the country lacks any regulation that specifically applies to public M&A except for the 2002 BSEC Substantial [12]Acquisition of Shares and Takeovers Regulation, which has a very limited scope. The Securities and Exchange Commission Rules 2002 has become obsolescent. The committee was preparing the report only for substantial share acquisition rules about how the listed companies must disclose the procedures of taking over another company’s shares as price sensitive information to the public. The court would remain the sole authority in allowing or refusing any merger or acquisition proposal made by companies and the companies ought to obey the company act for both the issues. According to BSEC official said the commission has no intention to intervene in the merger and acquisition process. Under the coming amended rules, the BSEC will allow the issuer companies to issue shares based on the court approval. What the commission is trying to do is to make the law accessible, time-befitting and transparent. The concept of merger and acquisition deals is relatively new in the Bangladesh context but such deals have been common in other parts of the world for a long time. Lack of transparency and weak financial reporting here impacted Merger & Acquisition the most as it makes valuation extremely tough.

Findings

Corporate culture is relatively new inn Bangladesh and traditionally many of the large businesses are proprietorship or family businesses . In the existing conservative corporate scenario , selling or dissolution of a business is considered a tobacco by many established entrepreneurs . Tax neutral reorganizations, let alone strategic mergers are often overlooked as a viable option for achieving better growth . In the lacking of transparency , weak financial reporting , absence of clear regulatory framework , the practice of merger & Acquisition is viewed as cumbersome by many .

Recommendations:

Considering the limitations and inadequacies of existing regulatory frameworks . BSEC the key regulatory authority for capital markets , formed a committee to revise the existing rules and formulate new rules for regulating Merger & acquisition activity in Bangladesh .

It is expected that If BSEC issues clear guidelines, M&A transactions will have to comply with certain new rules and it will make the process more transparent , formal ad systematic .

Conclusion:

Setting up a clear regulatory framework should be the first step towards addressing the misconceptions about M& A in Bangladesh . In addition to this , creating awareness about the importance of regulatory compliance , transparent financial reporting as well as improving the overall business cultures, would go a long way towards busting various myths surrounding M&A activities in Bangladesh .

Bibliography

Books:

1.Booz& company, International Merger & Acquisitions ( Financier worldwide, first ed, 2008 ) 167

Journals:

1. lebedev Sergey, ‘Mergers and acquisitions in and out of Emerging economies’(2015)50(4)Journal of world business 651-662
2. Pristine Edu, ‘Mergers and Acquisitions’ (2015) 12(2) Empowering professionals 153-159
3. Kissin Warren D. , ‘International Mergers and Acquisitions’ (2013) 11(4) Journal of Business Strategy 51-54
4. Picardo Elvis , ‘How mergers and acquisitions can form a company’( 2017) 5( 1) Investopedia 34-38
5. RahmanMostafizur, ‘BSEC finalising acquisition rules, merger not included’ ( 2018) 11( 2) NEWAGE Business 22-26
6. msshova, ‘Merger, acquisition panacea for badly-performing banks’( 2018 ) 26( 3) The Financial Express 51-54

Articles:

1. Kumar Yatendra, Advantages And Disadvantages Of Mergers And Acquisitions November 2018 Economics https://www.ukessays.com/essays/economics/advantages-and-disadvantages-of-mergers-and-acquisition.
2. Saleh Rami , Title: The Economic & Profitability Impact of Mergers & Acquisitions among Banks 5 march 2013Business Economics https://www.grin.com/document/214230

[1]Sergey lebedev, ‘Mergers and acquisitions in and out of emerging economies’(2015)50(4)Journal of world business 651-662

[2] Booz & company, International Merger & Acquisitions ( Financier worldwide, first ed, 2008 ) 167

[3]EduPristine, ‘Mergers and Acquisitions’ (2015) 12(2) Empowering professionals 153-159

[4] Warren D. Kissin, ‘International Mergers and Acquisitions’ (2013) 11(4) Journal of Business Strategy 51-54

[5] Elvis Picardo, ‘How mergers and acquisitions can form a company’( 2017) 5( 1) Investopedia 34-38

[6] See Above n 5

[7]MostafizurRahman, ‘BSEC finalising acquisition rules, merger not included’ ( 2018) 11( 2) NEWAGE Business 22-26

[8]Yatendra Kumar, Advantages And Disadvantages Of Mergers And Acquisitions November 2018 Economics https://www.ukessays.com/essays/economics/advantages-and-disadvantages-of-mergers-and-acquisition.

[9]msshova, ‘Merger, acquisition panacea for badly-performing banks’( 2018 ) 26( 3) The Financial Express 51-54

[10]  See Above N9

[11]   Rami Saleh, Title: The Economic & Profitability Impact of Mergers & Acquisitions among Banks 5 march 2013 Business Economics https://www.grin.com/document/214230

[12] See Above N7

Submitted by: Mst. RuhaniAktar