week9 some ideas about mergers or M&A

Mergers are a form of investment and should theoretically at least, be evaluated on essentially the same criteria as other investment decisions, for example using NPV to evaluate the Present Value of that target company. In general, the overall definitions about those activities we could consider as the combination of two business entities under common ownership. Meanwhile, it is difficult for many practical purpose to draw a distinction between merger, acquisition and takeover.

According to extended reading about M&A cases, policies and other operational process, I understand that the first thing we need to complete is to evaluate the present value of the target company accurately. In this part, we can use a great amount of financial indicators to help us analyze that company’s current conditions much better. According to the correlation between the industry, we can classify the acquisitions into three types: vertical, horizontal and conglomerate. As for the reason why the bidding company decide to take over another company, the acquisitions also can be divided into two different motives: Well-Meaning M&A and Hostile Takeover.

With the development of contemporary economy, there is an increasing number of the companies which want to take the M&A strategies to expand their business. Because I come from China, I get used to some M&A case in China. China as “a tiger economy”, it is suggested that the market has supplied plenty of opportunities to develop and a sizeable part of various companies begin to strengthen their business or increase their market shares by establishing powerful combination with those companies whose level is similar to theirs. For example, in 2004, the biggest computer marker Lenovo came to an agreement with IBM which is the famous PC maker in U.S.A. and the IBM would hold 18.5% shares after acquisition. The Lenovo purchased the IBM’s control of the PC relevant business with 12.5 billion US dollars, consisting of 6.5 billion for cash and 6 billion for shares. By the way of cash and stock shares as a mixed form of mergers and acquisitions, using a $6 billion shares from Lenovo to reduce the pressure of cash payments in mergers and acquisitions, and even the Lenovo don't have to worry about controlling dilution (the $6 billion in shares is the shares without voting rights). To be honest, the mode of Lenovo’s M&A was very successful.

But at the same time, I think the high price of $12.5 billion has brought the unknowns burdens for Lenovo's development in the future. As is known to all people, in an increasingly competitive market, the former big profits of the PC product is being thinned by the fierce competition, the cost control has become the focus of the development of the industry. regarding Lenovo as the acquirer after the merger, they should consider how long they would take to recover their investment costs, despite whether the integration between Lenovo and IBM succeeds after the merger.

After acquisition, what we need to take into consideration is that the integration result between two companies’ culture adjustments, operational structure and industry conformities and more core values in the companies. The results of running-in effect will be more directly influence the benefits from reorganization of the enterprise assets and the whole managerial benefits of enterprises. For Lenovo, He bears with more risk such as the customer churn, the loss risk of IBM employees, the brand risk and so on. If you don't deal with these risks in time, it will make Lenovo hard to face tomorrow’s business development.