A merger include a decision taken by two organisations to integrate their operations on a relatively equal basis.

A merger is negotiated directly between the management of an acquiring company and the management of a target company, and the proposals are approved by the separate boards of directors before shareholders vote on them.

If the target company directors resist the merger, then the acquiring firm would make a public tender offer directly to the acquirer' shareholders. If this takeover is for part or all of the equity, then a hostile takeover bid is launched, which if accepted by the target company shareholders, results in an acquisition. We have seen Microsoft wanted to launch a hostile takeover bid on Yahoo in February-March 2008.

An acquisition, on the other hand involves one organisation bying and controlling interest in another organisation. The acquired company often becomes a subsidiary of the acquiring firm operating within its portfolio of other business units. During this kind of acquisition, no hostile takeover bid is launched.

Mergers activities happen much more often in the Anglo-Saxon countries and this is refected in their respectives stock markets' activities. This is because of their corporate governance mechanisms.

In Continental Europe (UK non-included), M&A is not as developped as it is in the UK and the US, although cross-merger activities are in the rise because of rapid privatisation programmes foster by the EU. Another reason is that Europe sees mergers as a way to compete against vast American conglomerates and institutional shareholders are encouraging top managers to adopt M&A as a strategy of rapid growth.

M&A are important for growth strategies for the following reasons:

Market power

Transaction costs

Resources and capabilities

Diversifications

Others

1-M&A can increase an organisation market power through horizontal integration. If the firm is not dominant enough, M&A could help in achievng market share that was not otherwise possible.

Merging firms can either increase prices (i.e. during monopoly or oligopoly), or decrease prices by increasing productions. Also, merger firms could achieve scale economies from operating multiple plants.

An organisation may achieve entry into a new market, either because it possesses excess resources it cannot profitably use in its own market, or because its existing market is declining and revenue growth

is slowing.

However, regulatory concerns will restrict M&A unless it benefits consumers. Therefore Market power has its own limitations.

2-Transaction costs

M&A may spread an organisation's exposure to risk accross a variety of industries. We have witness the approach of Microsoft to merge with Yahoo in order to take advantage of online advertising.

Merger would create value by reducing transaction costs concerned with setting up contracts, management structure costs, market exchange, etc. M&A could help minimise these transaction costs from an organisation point of view-when entering new foreign markets by these form of strategies will help an organisation bypass the inefficiencies of intermediate markets with respect for example to providing raw materials and components, loan capital, distribution systems.

3-Resources and capabilities

M&A may help secure resources and capabilities not currently possessed by the acquiring firm. M&A can be source of competitive advantage by providing two organisations with complementary resources and expertise. This will help the acquiring firm achieve and sustain a competitive advantage over its competitors by reconfiguring its tangible and intangible assets in the way that is difficult to imitate, and by having resources and skills that are durable and not appropriable or replicable (see Rumelt, 1984).

4-Diversifications

Relying on one or two activities is risky. Merging companies tend to diversify in order to reduce their dependence on some activities, hence reducing the organisations cost of capital.

5-Other reasons: Globalisation and regionalisation issues-the turbulence and uncertainty of international markets-the need for vast financial resources to cope with fast technological and the shortening of product life cycles

From shareholders point of view a merger is a good thing, for a merger allows them to exert control over managers and only firms who maximise value will survive (Friedman 1953). The treath of takeover hanging over they heads, will push managers to use resources at their diposals efficiently.

Limitations of M&A

However, one should know that M&A as a strategy for rapid growth can be risky and uncertain. Shareholders of acquired firms are likely to earn above-average returns, while shareholders of acquiring firms shares fall as soon as an intention to acquire is annouced (see Jensen 1988). This is indicative that investors do not see M&A as a vehicle for achieving any added value to the acquiring firm.

Over the years we have experienced the failure of major M&A. Some manages are rather concerned with empire-building strategies rather than maximising shareholder value. The bigger the firm, the bigger their payckecks.

AOL Time Warner is an example of a US multimedia giant created in 2000 by the merger of AOL and Time Warner, a new and old media industries. The merger was intended to exploit cross-promotional opportunities following the decline of AOL after the dot.com crash. However, the marriage failed to produce any intended sysnergy.

Aventis and Sanofi two large French pharmaceutical companies merge their actvities in 2004, however, they have experienced the same problems since then.

Some of the reasons with M&A failures:

-Integration difficulties

when two large organisations try to integrate their activities, this can be time-consuming and difficult- The existing organisational cultures within each firm is a major barrier to merger. Companies really never integrate their activities some decades later.

However, some organisations like Cisco have managed to achieve effective post-merger integration. Cisco, an American company has developed strong capabilities in this area. The firm always allocate substantial resources to its M&A activities and make great effort in integrating financial, technical and human resources.

-Inadequate evaluation of target company

Acquiring firms do not take sufficient time to evaluating the target company. Lack of a strong due dilligence has been cited as the reason of the poor choice of take-over target.

-Large or extraordinary debt

The revenue-generating activity of the acquired company can be over-estimated, pushing the acquiring firm to take on too much debt to pay for it. In the end, there is not sufficient revenue to service the debt.

-Inability to achieve synergy

Lack of synergy could be cause for concern. Many companies have failed to achieve the intended outcomes because managers are too focus on their own interests and fail to identify problems within target firm operations during due dilligence. Balance sheets of acquired firms could show bad debts that are not mentioned prior to the bid.

Hypovereinsbank, the German bank created by the merger of Bayerische Vereinsbank and B. Hypothekeun in July 1997 is an example. The acquiring bank failed to identify bad debts at Hypo accumulated during the housing downturn of the 1990s, that force many of its clients (i.e. property developers) to face bankrupcy.

-Too much diversification and too large

Successful managers are too often distracted by M&A and end up destroying what they have already achieved organically, by, losing sight of the core business activities and, investing in activities that fail to maximise sharehoder value. In the end the organisation become so large that managers struggle to control.