Module Name: Global Issues for the Financial Professional

[PAM100]

SRN: 190231662

Final Project

Part 1: Topic on Merger & Acquisition

Final Word Count: 4770

 Table of Contents: Part 1

Sl. No. Particulars Page No

1. Introduction 3-3

2. The Concept of Mergers and Acquisitions 4-5

3. The Evolution of M&A waves 5-5

3.1 Wave #1 5-6

3.2 Wave #2 6-6

3.3 Wave #3 6-6

3.4 Wave #4 6-7

3.5 Wave #5 7-7

3.6 Wave #6 7-8

4. The Seventh and Current wave 8-8

5. Analysis and Comparison of the current wave to the previous ones 8-9

6. In-depth analysis of the resumed M&A wave 10-12

7. What makes an M&A activity successful? 12-13

7.1 Operational Factor 13-14

7.2 Strategic Factor 14-15

7.3 Financial Factor 15-16

8. Conclusion 16-18

Reference 18-21

pg. 2
1. Introduction:

This project paper is divided into two parts: Part 1 contributes to the numerous writings

which have analysed market and companies as corporate financial decision with regards to a

phenomenon known as ‘Merger and Acquisitions.’ M&A is outstanding as one of huge

business exercises all around the globe which have pulled in the consideration of each

business administrative in the financial challenge. Section 1 is further extended in to sub-

sections, where sub-section 1 focuses on the identification and critical assessment of the

current wave of activity that Merger and Acquisitions (M&A) are currently in, and its

comparison and contrast it to previous waves. Also moving to sub-section 2 where the

analysis is deep into the current position in the phase cycle of the current wave of activity.

These discussions are illustrated with various examples showcasing the cyclical nature of the

M&A activity and the different characteristics of the M&A wave. Sub-section 3 of the paper

identifies what it is meant to be a successful M&A and also focuses on the various factors

that make an M&A activity successful. These mainly comprise of operational, strategic and

financial factors. The estimation of mergers and acquisitions stay a topical issue inside the

contemporary business world. Regardless of whether these exercises are gainful to the

economy or are just intended to smother rivalry is available to discuss. Further to the written

literacy already available to us, this project covers a review on mergers and acquisitions and

its value creation. This is finished by assessing the writing on the impacts of mergers and

acquisitions for both the target and acquirer's shareholders. After the critical analysis of the

mentioned topics, the paper puts forward a justifiable conclusion for the developed arguments

that will be presented.

Immediately, let us make a plunge profound into the theme.

pg. 3
2. The concept of Merger and Acquisitions:

The field of M&A is one in which research is plenteous and in this manner there has been a

ton of research as for the event of merger and acquisition waves and their different attributes.

Before breaking down these outcomes we should initially accustom ourselves to the concept

of mergers and acquisition.

A merger can be characterized as a combination of two entities in which the assets and

liabilities are shared by both of them. In spite of the fact that both the firm might be a

significantly extraordinary association after the merger, they still hold their unique character.

The merger of Facebook and Instagram is an example. In the meantime, an acquisition can be

comprehended as the business action in which one entity acquires another entity of part of it,

for example, a plant or a division. For instance, Walt Disney Co. in 2006 made a significant

acquisition when it bought Pixar for $7.4 billion, so as to expand its compass in the

entertainment industry.

Mergers and acquisitions have been predominant in the midst of organizations in many

countries especially the United States for quite a long time. Many researches literate that

merger and acquisition activities played a basic role in the redecoration of organizations

locally three to four decades prior and still are a viable part in the economy as of today. The

historical backdrop of mergers and acquisitions can be traced way back to trade itself, and it

is hard to decide a date for the very first instance of a merger or acquisition between

organizations ever. In any case, we can distinguish a couple "waves" of mergers and

acquisitions that have happened since the late nineteenth century. But what are these waves,

these rushes of mergers and acquisitions activities which are normally brought about by a

blend of financial, managerial or innovative changes, are designated as "shocks". These

pg. 4
shocks happen when there is a development in the economy that pushes organizations to

expand production to meet the quick development of rising demand.

3. The Evolution of M&A waves

Mergers and acquisition waves and the components that offer ascent to them have been the

subject of extreme enthusiasm for over a century. Financial analysts allude to seven waves of

merger beginning during the 1890s. As stated, we are now currently in the 7th wave. The

beginning date and span of every one of these waves are not explicit, despite the fact that the

closure dates for these finished in financial debacles, for example the 2008 Global Financial

Crisis. Moreover, the first and second wave was mainly applicable for the US geographically,

while different waves had increasingly topographical scattering. Particularly starting from

wave five, where other than US, UK, Europe, Asia additionally had a fundamentally

expanded M&A activity. The accessible points of view about the event of M&A waves will

be talked about in the following section, this segment will recognize attributes of each wave

so that the readers can have a better understanding of the characteristics of the waves such

that a clear analysis is done between the current merger wave in comparison to the others.

3.1 Wave #1: 1890-1905

The recorded arrival of mergers and acquisitions happened in the period between the 1890s

and mid 1900s when U.S. organizations attempted to build monopoly business models in

specific industries, forming alleged "Trusts", an outrageous type of level incorporation (for

the sole purpose of eliminating rival competition). For example the making of Standard Oil

Company of New Jersey, in 1899, United States Steel Corporation in 1901, and International

Harvester Corporation in 1902. This wave of mergers resulted in the creation of the Sherman

Antitrust Law or the Sherman Act in 1890, this was done to safeguard the interests of

pg. 5
consumers by battling monopolies and to prevent prices from being controlled by specific

individuals or companies.

3.2 Wave #2: 1926-1929

With the stern antitrust condition, the design of monopoly business models was thwarted by

the U.S. government, and what was seen during the second wave of mergers was the

production of oligopolies and vertical merger between various organizations. The principle

factors that prompted this new wave was a huge accessibility of capital for lower interest in

the United States, with the improvement in economy after the events of World War I

financial blast, and advancement in modern mechanics, for example, in transportation, with

the transformation of motor vehicles into commodities and the development of passenger

airlines.

3.3 Wave #3: 1965-1969

After the Great Depression and the Second World War, the movement in the M&A activity

backed off altogether. The new wave began distinctly during the 1950s and harmonized with

further limitations which expected to anticipate anticompetitive mergers and acquisitions.

This resulted in the wave to develop pattern towards diversification among organizations.

Additionally brought about by a financial boom, which indeed overwhelmed the market with

modest capital, this wave of M&A got known as the Conglomerate Merger Period. Example

of a conglomerate is General Electric, which has enthusiasm for an immense number of

organizations including social insurance, transportation and energy.

3.4 Wave #4: 1981-1989

The fourth merger wave began during the 80s, and was very unique then its past predecessor.

Evidently, the deals were typically hostile which implied that the bids didn't have the target's

pg. 6
board approval. Second, the size of the objective in addition was essentially bigger than in the

past wave. Moreover, the prevailing source of financing moved from equity to debt. Debt

finance increased extraordinary significance in the market at the time, particularly when the

reserve Kohlberg Kravis Roberts, which acquired RJR Nabisco organizations (processes food

and tobacco co.) and Beatrice (process food co.), which are esteemed as two of the biggest

proceedings in that period.

3.5 Wave #5: 1993-2000

The fifth wave of M&A was really the first genuine global wave. There was huge business

volume in Europe (basically from 1998), Asia and, to a lesser degree, South America; and in

noticeable areas were banking and broadcast communications thrived. This in return created

some ''mega'' deals that were unfathomable before this wave. Some significant mergers were:

Citibank and Travellers, Chrysler and Daimler Benz and Exxon and Mobil. The idea of the

merger was predominant well disposed, and equity was the prevailing source of finance. But

the fifth wave of mergers too finished with the eruption of the financial exchange bubble in

2000.

3.6 Wave #6: 2001-2008

The sixth wave of M&A began after the 2001 economic recession, and after the economic

development remerged there was a surge of dollars into the market, on account of the boost

from the U.S. Central bank, which kept interest rates low to encourage the economy. Low

interest rates likewise supported the ascent of Private Equity assets, as turned acquisitions got

less expensive and, what's more, the securities exchange was thriving, which prompted a lot

of accessible capital and a very positive condition for the multiple M&A transactions. With

multiple M&A transactions in a highly liquid market and readily available cheap capital, yet

this additionally created mutilations, particularly in the prices of target organizations, which

pg. 7
wound up being exaggerated because of colossal theory and absence of perceived risks,

coordinating a huge volume of assets at "spoiled" resources. The outcome was the flare-up of

the Global Financial Crisis in 2007, which evaporated credit and drove the world into

recession, additionally finishing the sixth wave.

4. The Seventh and Current wave:

Similar to the previous M&A waves the seventh wave too took off after the market recovered

from the Global Financial crisis of 2007-2008. In 2014, market optimism had returned, and

the estimation of mergers and acquisitions internationally arrived at 1.75 trillion U.S. dollars

in the initial a half year of the year, an expansion of 75% over a similar period a year ago and

bigger volume of transactions since 2007. The current wave still seems to attract more and

more M&A activities. In the first three quarter of 2018 itself, organizations around the globe

declared M&A deals worth a sum of $3.3 trillion, making it record breaker. A lot of this

worth originated from the United States. The energy and power industry represented the

biggest portion of transaction volume, trailed by innovation, and healthcare. The largest deals

of 2018 include the acquisition of Sprint Corp by T-Mobile US Inc., Express Scripts Holding

Co by Cigna Group.

5. Analysis and Comparison of the current wave to the previous ones:

In spite of the fact that the M&A waves share certain perspectives for all intents and purpose,

they additionally shift as far as their nature, intensity and duration. The basic components that

drive merger waves seem to happen in a reoccurring cycle, in most cases: recovery from an

economic crisis, thriving capital market, and adaptive regulatory changes, industrial and

technological advancement and as always the need for the organizations to adapt to the

changes in the financial environment. Unfortunately, another common element of the M&A

pg. 8
waves for the most parts is that they finish upon a downturn in the financial markets with the

most recent being global financial crisis in 2008 that brought the last wave to its end.

In spite of the fact that certainty has returned to capital market on account of offbeat

estimates utilized by the national banks, but it was still lacking the organization’s manager’s

urge to invest in capital expenditure or M&A activity. However 2013 was seen as a tipping

point of the start of the seventh wave. With the first indications of economic recovery in quite

a while, organizations were taking their M&A designs back to the highest point of the plan.

With the M&A activity reaching $895 billion in the US market alone and rising each year

since then. Apart from the identical volume growth the present wave also has two striking

features that predominantly have featured in previous cycles:

 The return of “Mega” deals: similar to wave 5, “mega” deals have returned with the

current wave with examples including Pfizer (the American pharmaceutical giant) and

Allergan (an Irish-domiciled pharmaceutical company) merger worth $191 billion,

Shell acquisition of British Energy (BG) group worth $81 billion, AT&T deal with

Time Warner of $86 billion. Also a note worth example is of the failed hostile bid for

AstraZeneca by Pfizer worth over $120 billion.

 Also the return of bidding wars and price improvement and its noteworthy impact on

shareholders.

But how did M&A activities get bigger when compared to the previous one? The recovery of

the economy in addition to the acquirer’s eagerness to go big pushed the M&A activity to

reach greater heights.

pg. 9
6. In-depth analysis of the resumed M&A wave:

The globalization of cross-border trades that occurred in the mid-1990s had in particular

affected the M&A movement of the last two cycles, making the comparison between the first

and latest wave irrational. The paper focused on the on-going time of 1990 to the present day

to analyse, constitute the similarities and the contrast between the current and previous

waves.

In examining M&A waves, it can be seen that cycles frequently harmonize with rising capital

markets and an upswing in financial movement. In this way, we tried the connection of M&A

movement with a progression of components identified with equity and bond markets. The

seventh wave of merger and acquisition similar to the previous two waves use equity and

debt as the source of finance unlike wave four which heavily comprised of debt financing.

Based on the studies by Andrade, G. and E. Stafford (2004), Asquith, P (1983), Attract

Capital, LLC (2019) and others reflects that M&A activity is easier when the cost of

borrowing is cheaper. This can be seen in almost all the wave especially in wave 4 where the

source of finance was practically 100% debt. In the current wave it is a conglomerate of both

equity and debt finance.

As stated above the year 2018 got off to a solid start; however the M&A activity began to fall

through the span of the year. The inconsistency in the equity market and the political

uncertainty affected the valuation for many dealmakers. This disturbance even continued to

the first half of 2019 influencing many M&A deals all over the globe. Even though M&A

value had stabilised since then but the volume has come down in a noteworthy manner.

Apart from the above mentioned similarities, each wave appear to happen in four distinctive

phase which happens in a reoccurring basis. With the first phase is usually when the economy

pg. 10
is in a poor place but is recovering and few deals only take place. In the second phase, with

improving economy finance tends to be easily available but deals still tend to be risky. It is in

the third phase where the M&A activity hits the gas and goes on full throttle as stated by Mr

Clark “merger boom is legitimised; chief executives feel it is safe to do a deal, that no one is

going to criticise them for it,” We are currently in the third phase of the wave cycle, with

“mega” deals taking place. This is when premium paid by the acquirer rises significantly

which in turn results in the share price to rise rapidly. For example, Europe and North

America drove the worldwide rise in M&A value with a growth rate of 7% and 5%

respectively. Cross-border M&A value grew by 45% globally in 2018 while the overall

volume had a downward growth of 6%. The up rise in value of M&A was mainly due to the

“mega” deals that had occurred in North America. Here are few examples of these deals:

 Occidental Petroleum (OXY) bid for Anadarko Petroleum (APC) ($54.4 billion)

 Saudi Aramco bid for Saudi Basic Industries Corporation ($70.4 billion)

 Bristol-Myers Squibb acquisition of Celgene: its rival company in pharmaceuticals

($89.5 billion)

In comparison to this Europe and Asia had seen a fall in deal value by 60% and 45%

respectively. With most industries seeing a downfall in value (all regions), only two

industries stood out at top to show an increase: Energy and power (OXY, APC) and industrial

companies (Saudi Aramco). According to the data from Mergermarket M&A activities

acquired a value of $2.9 trillion across the globe within the first three quarters of 2019. The

volume of deals may be lower but the value has not come any near to its end. "Whether they

are motivated by the desire to get more growth, or a way to secure future survival, deals are

getting larger," as stated by global editorial analytics director Beranger Guille in his report.

pg. 11
With the discussion of the M&A waves and the comparison of the current wave to the

previous ones, this paper additionally discusses on the different success factors and drivers

that are considered when moving forward with an M&A activity. In terms of corporate

finance M&A activities can be coined as one of the critical activity and helps in a faster

corporate growth compared to the traditional organic growth of a company. But not all M&A

activity end in success, when in fact in reality about two-thirds of all M&A fail (Clark and

Mills, 2013) so why do organizations still pursue M&A activity? M&As have numerous

benefits that maximise profit and implications of various strategies that in turn increase the

value of shareholders. These strategies are economies of scale achieved by gaining more

market share (horizontal merger and acquisition for example), diversification of products and

reducing market risks (for example a restaurant business merging with a coffee shop), and

capitalization of expansion of resources after the merger and acquisition and the sky is the

limit from there (Tamosiuniene, 2009). The benefits tend to outweigh the cost and thus we

are amidst yet another merger and acquisition wave.

7. What makes an M&A activity successful?

There are many factors that need to be considered for an M&A activity to be considered

successful, but before we do so, it would be better to understand what it meant by a

successful M&A. The definition of merger success is based on perspective: for example for

the shareholders of the acquiring company would be the premium-versus-synergy

relationship, where they are willing to go the extra mile only if the estimated synergy values

are achieved. While for transaction advisors have a different perspective as for them a closure

of a deal is what it is meant to be a merger success. With mega deals having a success,

organizations are allured to the M&A activity, but there also exists deals that have been major

disaster. For example, Time Warner and AOL attempted a merger at a certain point. Among

the merger and acquisitions disappointments that happened, this is one of the many that

pg. 12
stands out. During the times of the dot-com bubble, a $164 billion merger of AOL and Time

Warner occurred and both old and new media organizations associated into a potential

powerhouse. As extraordinary as it sounded, it transformed into a goliath flop. At the point

when the website bubble blasted, the super organization detailed a $45 billion record in 2003

and afterward a $100 billion yearly misfortune. Furthermore, around 2009, Time Warner

totally pulled back itself from the web and returned to its previous entity. Exactly when

things were going incredible, the blast needed to blast.

This shows that many factors need to be analysed before considering any M&A activity. The

paper has segmented the factors that lead to a successful M&A, mainly in three essential

sections: Operational, Strategic and Financial.

7.1 Operational: with regards to this operation synergies like economies of scale and

economies of scope are factors that need to be considered as a part for organizations after

merger.

o Economies of scale: This can be characterized as the spreading of the fixed

costs that any firm has over the operational level. For example fixed cost does

not depend on the production level. For example fixed cost is $10 for 1000

units for each month, the cost will be diminished to $5, half as it was in earlier

month, if the firm starts delivering 2000 units for every month in a month, etc.

(Donald 2008).

o Economies of scope: This cooperative energy is alludes as by utilizing specific

set of aptitudes or resources that are as of now there for production specific

services. For example Toyota as of now has framework to deliver motors, so

they are utilizing those foundation to create things like lawn mowers, snow

blowers separated from making motors for automobiles (Donald 2008).

pg. 13
Badrtalei and Bates (2007) propose that another significant explanation behind M&A failure

is not taking into account the data related cultural issues, during the pre-merger and

acquisition phase, where organizations are more concerned in the financial factors. This issue

is more relevant in a cross-border deal where the absence of intercultural due diligence can

prompt serious misunderstandings. For example the acquisition of Chrysler (US) by Daimler

(Germany) in 1998, the strict and disciplinary working style of Daimler did not match with

the casual going nature of Chrysler. Together with miscommunication and dictator approach,

the working morale took a hit, which clearly negatively affected profitability. At last, two

organizations landed at the crumbling and were not ready to achieve to desired synergies

(Watkins, 2007).

The significance of employees oftentimes gets dismissed in the midst of deal-making. From

operations perspective their dynamic inclusion into M&A process is vital to achieve the core

synergies. Their responsibilities are the premise of accomplishment of any association, which

makes them similarly significant for the success of M&A.

7.2 Strategic: In today’s economic world, managers are required to have clear set of strategic

objectives for M&A. Different strategies need to be considered to stay ahead of the curve and

make an M&A successful. One strategy to take into consideration is the timing of the deal, as

stated above in the paper waves has four particular phases, which Bishop (2015) depicts as

the impression of changing business certainty. As indicated by observational examinations

(Moeller et al., 2005; Rhodes-Kropf and Viswananthan, 2004), M&A, which happen at later

phases of a wave, produce lower value to the acquirer than those that happen toward the start.

Accordingly, the planning of a takeover in the wave is a key factor to be represented when

considering a potential M&A. For example the current merger took off after the global

financial crisis of 2007-08, and after 2 years of its dawn, there was the arrival of “Merger

Monday” with declaration of deals worth $90 billion. By then, it turned out to be evident that

pg. 14
the market was booming. The get up to speed action can be clarified by crowding conduct,

managerial hubris, and personal circumstance, all expanding in takeover waves and in return

leading to overpayment of premium due to the high competition.

Another strategic factor is the understanding of the business model. One of the regular

business methodology outline work is called as Ansoff's Growth Matrix. This grid is created

by H. Igor Ansoff (a strategic management master). With the help of this matrix, product and

market are taken against the X and Y axis. This helps organizations to comprehend the factor

as to how they would want to grow i.e. by either entering the current market with a new

product or entering a new market altogether. For example, Procter and Gamble's acquisition

of Gillette was planned to improve their aggregate speed to market.

Organizations should also strategize with regards to the type of M&A they would be

compatible to enter into: Vertical, Horizontal, Conglomerate, Concentric mergers etc. For the

reasons of relatedness horizontal mergers are more successful in comparison to vertical ones.

Apples acquisition of Siri serves as a relevant example.

7.3 Financial: This is core element for the success of any M&A activity. M&A activity is

intended to enhance the value of the organization, but what about the finance needed to

process the M&A. There are numerous ways that a target co. can be repaid concerning a

M&A. The instalment ordinarily incorporates cash, shares, a payable note, or a blend of each

of the three. The source of fund is usually equity or debt. A company having abundant cash

reserve will not think of the finance much but what if it is not there. M&A activity flourishes

with low interest rates, but what happen when it rises. Along with it will raise the cost of

capital required to finance the M&A activity. Therefore financing should be sorted out

specifically or else the post-merger phase would be catastrophic.

pg. 15
In the line of managerial hubris, managers tend to be over-optimistic and over-estimate

potential corporate synergies that can be achieved and under-estimate the cost with the M&A

process. This optimism is often flawed and results in the acquirer overpaying for the

takeover. Like the takeover of Skype by eBay Inc. for a bid of $2.6 billion, this price tag was

high as Skype had about just $7 million in income. The CEO justified the price by reasoning

that it would give its client a better platform for communication to improve the auctions. But

nonetheless eBay’s customers rejected this innovation thinking of it as pointless for the

auction process. Two years later, eBay had to record Skype’s value at $900 million, but was

blessed to locate a higher bidder in the later period: selling it to Microsoft for $1.4 billion.

This shows how over-estimating the financial factor can be hazardous for a co.

With relation to finance organizations should also consider the tax treatment during the sale

of asset and stocks, it is important to seek advice from professional tax consultant. During the

sale of shares and controlling interests are generally transferred to the acquirer and any gain

commonly has a lower-taxed long term capital gain. Therefore it is preferable to opt for a

share sale as opposed to selling business assets. Organizations should also keep in mind of

the other issues such as employee provident fund which can cause unforeseen tax treatment

during an M&A activity.

8. Conclusion:

The global market has already experienced six waves of M&A with the seventh one running.

Many historians and analysts have spent studying the events of these waves and on the

general activity of M&A all in all. Each wave is not the same as each other; however there

additionally appear to be similar characteristics. Like the waves usually commence in time of

financial well-being or recovery while its end predominantly occurs due to economic

pg. 16
downturns, for example the global financial crisis of 2007-2008 that brought the last (sixth)

wave to its end.

As far as market development is concerned we are living in a progressively unpredictable

period, however all things considered the current wave of M&A seems to be far from over.

The examples and analysis presented above shows that the transaction volume has degraded

over time but the value is still on the rise with “mega” deals happening. And with cross

border deals, it is evident that organizations are moving to enter new markets.

Subsequent to analysing the seven merger waves, it appears as though the initial three merger

waves were caused because of macroeconomic stuns, while the last three waves were driven

by managers' reactions to high market valuations. For the fourth wave, it shows up it was a

consequence of managerial interest, reflected in forceful corporate culture and hostile

takeovers during the period.

Additionally, the paper will also conclude on the different factors: operational, strategic and

financial that should be considered for a successful M&A. From the above we can summarise

is that the key to a successful M&A is to have a clear business model and to consider the

different issues related to the cultural fit, employees, taking advantage of the economies of

scale and scope and having the vision and strategic goals as to why to acquire another entity.

But the core factor to consider will be the financial factor: as most M&A activity fail due to

the over-payment of purchase premium. Avoiding these basic traps along the way of M&A

requires thorough planning. The planning of the arrangement inside a merger wave influences

the premium paid, and in this manner, it ought to be considered all together not to fall into the

snare of winner's curse'. At that point, the utilization of a tenable valuation technique

dependent on APP-versus-NRS relationship should be guaranteed. Over optimism in

achieving desired synergies ought to be adjusted by a base up evaluation performed by

pg. 17
experienced and knowledgeable managers. Here are a few proposals that the acquirer can

fundamentally build its odds to wind up among the best M&A deals as far as value is

considered.

All in all the paper concludes on the fact that M&A has progressively become an

indispensable manner by which organizations develop, growing their establishment into new

markets and with new clients, combining with rivals and including new abilities and

opportunities.

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Steger, Ulrich & Kummer, Christopher. (2007). Why Merger and Acquisition (M&A) Waves

Reoccur: The Vicious Circle from Pressure to Failure. 2.

UKEssays (November 2018) Waves of Mergers and Acquisitions. [Online]. Available from:

https://www.ukessays.com/essays/business/merger-and-acquisition-business.php?vref=1

[Accessed 29 November 2019].

UKEssays (November 2018) Factors to Consider Before Merger and Acquisition. [Online].

Available from: https://www.ukessays.com/dissertation/examples/business-

examples/systematic-investigation.php?vref=1 [Accessed 30 November 2019].

Vera Cherepanova (December 2017) ‘M&A proposal geared to success: Matters, Aspects and

theories to be considered by Acquirer’ Journal of Accounting, Finance & Management

Strategy. 12 (2). pp41-64

pg. 20
Watts, W. (December 4, 2015) ‘Record pace of M&A may be too hot for market’s own

good’, MarketWatch.

Willers, Y-P., D. Lee, Y. Luo, S. Yuan and V. Yang (24 September 2015) ‘Gearing up for the

new era of China’s outbound M&A’, The Boston Consulting Group.

pg. 21
Part 2: Reflective Statement

Final Word Count: 1830

pg. 22
Table of Contents: Part 2

Sl. No. Particulars Page No

1. Introduction 24-24

2. Tax Avoidance

2.1 What I expected to learn 24-24

2.2 What I learned 24-25

2.3 Analysis 25-26

2.4 Conclusion (What I will do differently) 26-26

2.5 Action Plan 26-27

3. Introduction to Global Mergers and Acquisitions

3.1 What I expected to learn 27-27

3.2 What I learned 27-28

3.3 Analysis 28-28

3.4 Conclusion (What I will do differently) 28-29

3.5 Action Plan 29-29

4. Conclusion 29-29

Reference 30-30

pg. 23
1. Introduction:

This reflective statement is part 2 of the project and this statement is a reflection on my

experience on studying the GIFP module. Among the six different themes to enhance our

knowledge, I have chosen two topics upon which I will base my reflective statement. The

statement will reflect the analysis, evaluation, conclusion and an action plan for the future to

go with it. From the different themes, I have chosen two topics that focus on Tax Avoidance

from theme 1 and Introduction to Global Merger and Acquisitions from theme 5. The

reflective statement is divided into two sections for discussing the two individual topics

separately.

2. Tax Avoidance

2.1 What I expected to learn:

To enlighten myself with the context and issues of tax avoidance, the driving factors that

push towards corporate tax avoidance and ability to evaluate the arguments for and against

corporate tax avoidance.

2.2 What I learned:

Tax assessment is the most recent issue to rise as a feature of an increasingly careful survey

of the financial effects that organizations have. It has become the subject of more prominent

consideration with an assortment of stakeholders effectively assessing the methodology that

organizations take to their duty of tax planning and policies as a corporate responsibility.

Globally, governments lose a lot of money in terms of the different tax avoidance/evasion

schemes. For example Her Majesty’s Revenue and Customs (HMRC) publish their estimates

of the tax gap (the amount that is lost due to the different avoidance, evasion or errors) each

year. Currently the estimates stand at £35 billion, the highest it has been since the initial

publishing of financial figures in 2008. Worryingly these appraisals have been expanding
pg. 24
pointedly as of late. The duty hole has expanded by 17 per cent since 2016 when the figure

was £30 billion. Even though the UK corporate tax from 30% in 1999 to 28% in 2008 and

currently at 19% but tax avoidance are still upright. During the course of my study, my

knowledge was also expanded on the relationship between tax avoidance and corporate social

responsibility. The hypocrisy that corporate organizations portray while conducting activities

to show their social responsibility, they also undertake schemes to avoid tax (even though it

may not be illegal, it still contradicts with the concept of corporate social responsibility).

2.3 Analysis:

For further understanding of the topic, I have analysed through various research and literacy

and also inquired from my own firm (Accountancy firm) that I currently work in.

Accountancy firm by nature are also profit making organizations, and thus in a systematic

manner work on advancement of new tax avoidance schemes for existing and prospective

clients to strengthen their profit maximization.

In accordance to Sikka (2003), in relation to tax avoidance, government accrue costs due to it.

These costs mainly contribute to cost of implementing new regulations and amendments to

the existing tax laws due to organizations coming up with new strategies to avoid corporate

tax. The main significant cost is the loss in revenue because of avoiding tax as stated above,

which could have been spent in other important sector such as health and education. On my

analysis of the topic I understand the good and the bad perspective of tax avoidance. From

the shareholder perspective of an organization this is allowable as it reduces the cost as tax is

a liability which in return would enhance the profits. And as tax avoidance is legal in nature,

managers should put their effort in minimising the amount the organization is required to pay

(in a legalised manner). However, there begs the question whether organizations are using

legal loopholes and using bad earning management techniques to avoid tax. For example

pg. 25
organizations using corporate social responsibility as a tool to avoid taxes (as many countries

give rebate on CSR activities). This is morally wrong, further more if the bad earning

management techniques like window dressing of accounts is used to reduce taxes it no longer

is tax avoidance rather it becomes tax evasion which is effectively illegal.

2.4 Conclusion (What will I do differently):

First of all gaining further knowledge on the difference between tax avoidance and tax

evasion and the key learning from this is that payment of tax is a social responsibility of

organizations but it is not a crime if that can reduced within the legal framework. After my

analysis I believe that scope of tax avoidance should go beyond that of the compliance with

the legal system but also set its scope further with ethics and moral. A sense of ‘justice’

should prevail in the perspective of tax avoidance. As a professional it is my responsibility to

build a case for the government stating the currents issues in our country’s tax regulation. For

example, tax regulations mainly fall upon the urban areas and seem to avoid the rural ones. I

will conduct a study on the rural areas and select a sample to investigate the revenue earned

and tax paid per capita.

2.5 Action Plan:

As a professional accountant I have considered the following as my action plan:

 Enhance my knowledge with my country’s taxation laws (especially with regards to

corporate taxation).

 Check with my firm with regards to the different taxation services that we are

providing to our clients and analyse the tax and VAT payment done by the clients.

 As a manager I will introduce team meetings to reinforce on the justice perspective of

tax avoidance and the thin line that divides it from tax evasion.

pg. 26
  Making sure we have clear morale and advice the clients in reducing their tax

liability within the regulatory framework. Also advising them on avoiding use of bad

earning management techniques for tax avoidance and its impact on the country’s

economy as a whole.

3. Introduction to Global Mergers and Acquisitions:

3.1 What I expected to learn:

To expand my knowledge in the understanding of the merger and acquisition and why it has a

reoccurring phase in the form of waves. Also to fathom the knowledge of the merger

activities and their valuation which has been learnt in each M&A waves.

3.2 What I learned:

With the knowledge gained in my financial management module of ACCA, I accumulated

the understanding of the different methods use to value a merger or acquisition but was

unaware of the different wave s of M&A activity. But this lack of information was eliminated

with the help of this topic. How these waves start with the recovery of the economy and how

M&A activities succeed and fail between the wave, and the demise of the wave due to a

financial recession. The key learning factor was the failure and the various factors that

contribute to the success of an M&A activity. The primary reason for any M&A failure in the

excessive bid price (better known as premium) and not being able to cash in the expected

synergies, some deals may be closed on the basis of high bid but eventually the deal itself

becomes a burden on the acquirer. Only when the post-acquisition valuation is done then it is

realised that payment of the excessive premium was a loss, this can be referred as the

winner’s remorse. But M&A activity do succeed, and mega deals such as T-Mobile’s

acquisition of Sprint, Facebook’s merger with Instagram are a proof of it. This successes are

pg. 27
due to various factors such as operational (economies of scale and scope), strategy (tactical

execution of the plan) and financial (determining the shareholder value).

3.3 Analysis:

My analysis on the topic further was on the characteristics of the different waves that have

occurred. Each wave has its own characteristics but also has similar elements to it. For

example the start and end seems to be same for each wave, i.e., starts after the economy is

slowly recovering and ends with a financial crisis like the Great Financial Crisis of 2007-08.

A definitive goal of M&A is to boost shareholder's wealth and it has been a key technique for

most association to fortify their market position and enter new ones. To my understanding,

failure of M&A also arises due to the agency conflict i.e. managers’ self-motivation to pursue

their personal benefit rather than the shareholders’ benefits often lead to failed acquisitions.

On further analysis of the current wave i.e. the seventh wave, I have observed that technology

companies are currently getting involved in the M&A activity. And more deals seem to be

happening in the developing countries as organizations tend to enter new market to do

business. Even though M&A deals are decreasing in volume, they seem to be far from over.

3.4 Conclusion (What will I do differently):

The key learning point in this topic was the cyclical nature of mergers and acquisitions and

how the waves have different characteristics in comparison to each other. Making an

acquisition should not be the final destination as there is a lot of work to do. With a as many

M&A failures, organizations should be able to achieve the desired synergies from the M&A

activity because at the end of the day the real success of M&A is going to be determined by

ability to enhance the value of the shareholders. As a professional, I will keep on updating my

knowledge on the M&A activities and investigate the trends so that I can better advise my

pg. 28
clients. My investigation will be stretched out to more parts dependent on the accessibility of

information later on.

3.5 Action Plan:

As I expect to move to a job as a corporate researcher, with the help of my understanding

from this topic I have come up with an action plan that will help me progress ahead:

 Advise clients on the key factors that lead to a successful merger or acquisition.

 Studying the phase of a M&A wave as timing is crucial for a deal to be successful.

 Sharing my acquired knowledge with my future team, so that we can help our clients

better understand the process involved in an M&A.

 As a professional I would make a M&A project integration plan for my clients which

will outline how and when resources will be used and the process of acquiring a

potential target. As M&A activities are gearing up in developing countries (like my

country – Bangladesh), this will help me move forward with my plan.

 Develop post-merger integration plan to help clients with what to do after closing the

deal.

4. Conclusion:

Looking back in the six months of studying the GIFP module, I consider myself lucky to

have gathered knowledge which has and will help me more in the future in relation to my

career. With better understanding of tax avoidance and its related issues, I am able to build a

better team for my taxation department. The present is good but I choose to make the future

better when I will be corporate researcher and help my clients to get better deal which in turn

will also benefit my country’s economy.

pg. 29
Reference

Dowling, G.R. (2014) ‘The curious case of corporate tax avoidance: is it socially

irresponsible?’, Journal of Business Ethics 124(1). pp.173–84.

Sikka, P. (2010) ‘Smoke and mirrors: corporate social responsibility and tax avoidance’,

Accounting Forum 34(3). pp.153–68.

George Turner (21 June 2019) Billions are being lost due to tax avoidance – yet a weak

HMRC is trying to pretend everything’s fine [Online] Available from:

https://www.independent.co.uk/voices/hmrc-tax-gap-avoidance-billions-pounds-

a8968591.html [Accessed 2nd December 2019].

Bishop, M. (2013) ‘Riding the wave; Schumpeter’, The Economist 409(8856), p.71.

Watts, W. (December 4, 2015) ‘Record pace of M&A may be too hot for market’s own

good’, MarketWatch.

UKEssays (November 2018) Waves of Mergers and Acquisitions. [Online]. Available from:

https://www.ukessays.com/essays/business/merger-and-acquisition-business.php?vref=1

[Accessed 29th November 2019].

pg. 30