BSc (Hons) Programmes

Coursework Assignment Brief

Semester:

C15

Module Code:

PM204

Module Title:

Business Organisation and Policy

Programme

BSc (Hons) Programmes

Level:

Level 5

Awarding Body:

University of Plymouth

Module Leader

Christopher Ngwasiri

Format:

Individual Report

Presentation:

Any special requirements:

All work should be submitted on the Student Portal along with an acceptable Turnitin Report

Word Limit:

2000 words (+/- 10%)

Deadline date for submission:

Tuesday 11th August 2015

12:00 p.m.

Learning outcomes to be examined in this assessment

To successfully complete this assessment, students should be able to:

Demonstrate clear understanding of the impact of mergers and acquisitions to the economy and society.
Explain how organisations can give something back to society in the form of CSR.
Describe how organisations can diversify vertically, horizontally and conglomerate.

Percentage of marks awarded for module:

This assignment is worth 50% of the total marks for the module

Assessment criteria

Explanatory comments on the assessment criteria

Maximum marks for each section

Content, style, relevance, originality

Clear demonstration of rigorous research from recognised authoritative sources. Audience focus.

50%

Format, referencing, bibliography

Harvard

10 %

Constructive critical analysis, introduction, conclusion

Demonstration of a clear understanding of the issues. Use of academic models.

40%

Candidates must clearly label their ID Number on additional separate reference, formula or answer sheets.

Assignment Task

Mergers and acquisitions cannot be allowed to take place in the business environment uncontrolled, as they pose serious threats to the economy and society at large. On the other hand, they cannot be stopped outright as they also have some positive attributes.

You are required to analyse the accompanying Case Study and write an analytical business report that covers the following three tasks:

Discuss the benefits and drawbacks of mergers and acquisitions to the business environment. ( 30 marks )
Examine and evaluate the laws governing Mergers and Acquisitions in the UK. ( 30 marks )
Discuss how Shell Plc (the oil company) can practise CSR to improve the quality of life in the society in which they operate and the wider business environment. ( 40 marks )

Your report (which must be written in business report format), should comprise of the following sections:

An executive summary which gives a brief overview of the argument in your report including key findings and conclusions.
An introduction which explains what the report is all about and highlights on what is to be covered in the report.
The body including a brief overview of mergers and acquisition, a critical analysis of mergers and acquisition clearly outlining the benefits and drawbacks of mergers and acquisitions, the laws governing mergers and acquisitions in the UK and how Shell Plc, through CSR can help improve the quality of life in the society in which they operate and the wider business environment.
Conclusion which includes a critical evaluation of mergers, acquisition and CSR.
Recommendations to businesses that intend to merge or acquire other businesses.
Bibliography showing all sources of references.

MARKING GUIDE

Distinction

70%+

The student presents a well-structured report and provides a very high standard of research into the area of mergers and acquisitions.
Very high standard of critical analysis of the benefits and drawbacks of mergers and acquisitions to support their report.
A critical analysis of the impact of mergers and acquisitions on society and the economy. This should be supported by very good evidence of wider reading and independent research, using appropriate Harvard referencing.
Excellent examination and evaluation of the laws governing mergers and acquisitions in the UK.
Very good, detailed knowledge and understanding of the concept of CSR and their application by Shell Plc to improve the quality of life in the society in which they operate and the wider business environment.
Well-structured and logically sequenced arguments throughout.

Merit

69-60%

The student presents a well-structured report and provides a good standard of research into the area of mergers and acquisitions.
Good critical analysis of the benefits and drawbacks of mergers and acquisitions to support their report.
Good analysis of the impact of mergers and acquisitions on society and the economy; supported by good evidence of wider reading and independent research, using appropriate Harvard referencing.
Very good examination and evaluation of the laws governing mergers and acquisitions in the UK.
Very good knowledge and understanding of the concept of CSR and their application by Shell Plc to improve the quality of life in the society in which they operate and the wider business environment.
Structured and logically sequenced arguments throughout.

Pass

59-50%

The student provides a reasonably structured investigation into the area of mergers and acquisitions.
Some reasonable analysis of the benefits and drawbacks of mergers and acquisitions to support their answers.
Broad knowledge and understanding of the impact of mergers and acquisitions on society and the economy; supported by good evidence of reading and independent research, using appropriate Harvard referencing.
Good examination and evaluation of the laws governing mergers and acquisitions in the UK.
Good knowledge and understanding of the concept of CSR and their application by Shell Plc to improve the quality of life in the society in which they operate and the wider business environment.
Reasonably structured and logically sequenced arguments.

Pass

49-40%

The student provides a basic research into the area of mergers and acquisitions.
Limited analysis of the benefits and drawbacks of mergers and acquisitions to support their answers.
Some knowledge and understanding of the impact of mergers and acquisitions on society and the economy; supported by some evidence of reading and research, but with some gaps or weaknesses. Some evidence of Harvard referencing.
Fairly good examination and evaluation of the laws governing mergers and acquisitions in the UK.
Some evidence of the concept of CSR and their application by Shell Plc to improve the quality of life in the society in which they operate and the wider business environment.
Fairly structured and some logically sequenced arguments.

CASE STUDY

MERGERS, ACQUISITIONS AND CSR

Mergers and acquisitions have become the most frequently used methods of growth for companies in the twenty first century. They present a company with a potentially larger market share and open it up to a more diversified market. A merger is considered to be successful, if it increases the acquiring firm’s value. Most mergers have actually been known to benefit both competition and consumers by allowing firms to operate more efficiently. However, it has to be noted that some mergers and acquisitions have the capacity to decrease competition in various ways.

Research shows, that due to increasing advances in technology and banking processes, which make transactions, among other aspects of business, more effective and efficient, mergers and acquisitions have become more frequent today than ever before.

The topic of mergers and acquisitions is extremely complicated, with the numerous types of mergers that are out there today. It is also remarkably interesting, with the controversies and fierce price wars, which surround most mergers and acquisitions.

In the world of growing economy and globalization, major companies on both domestic and international markets struggle to achieve the optimum market share possible. Every day business people from top to lower management work to achieve a common goal – being the best at what you do, and getting there as fast as possible. As companies work hard to beat their competitors they assume various tactics to do so. Some of their tactics may include competing in the market of their core competence, thus, insuring that they have the optimal knowledge and experience to have a fighting chance against their rivals in the same business; hostile takeovers; or the most popular way to achieve growth and dominance – mergers and acquisitions.

Mergers and acquisitions are the most frequently used methods of growth for companies in the twenty first century. They present a company with a potentially larger market share and open it up to a more diversified market. At times, a merger or an acquisition simply makes a company larger, expands its staff and production, and gives it more financial and other resources to be a stronger competitor on the market.

To define this topic more clearly, a corporate merger, as defined by the “Quick MBA” reference website, is the combination of the assets and liabilities of two firms to form a single business entity. In everyday language, the term “acquisition” tends to be used when a larger firm absorbs a smaller firm, and “merger” tends to be used when the combination is portrayed to be between equals. In case of a merger between two firms that are approximately equal, there often is an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a certain ratio. It has been customary that the firm whose shares continue to exist, even if that occurs under an alternate company name, is referred to as the acquiring firm and the firm whose shares are being replaced by the acquiring firm is usually called the target firm. A merger is considered to be successful, if it increases the acquiring firm’s value.

An article which was recently published by the Federal Trade Commission (FTC) noted that the United States is heavily involved in the so called right “merger wave.” The number of mergers reported rose from “1,529 in 1991 to a record 3,702 in 1997 – a 142% jump.” During this period, the FTC spent a great amount of time on distinguishing and at times preventing mergers which were potentially anticompetitive and directed at forming monopolies. This is a great example of the strong controls that the United States government has instituted, in order to prevent companies from forming monopolies, so that financial markets will stay unpolluted and healthy competition can continue to thrive. It also shows that the topic of mergers is extremely controversial at times and involves a great number of legal aspects in order for any merger to become finalised.

Most mergers have actually been known to benefit both competition and consumers by allowing firms to operate more efficiently. However, it has to be noted that some mergers and acquisitions have the capacity to decrease competition.

This is very dangerous for both us, the consumers, and the companies on the market, because declines in competition may cause higher prices, decreased availability of goods or services, products of lower quality, as well as declines in innovation. This is mainly due to some companies merging and creating a more concentrated market, with fewer suppliers, which leads to fewer options for the consumers, and thus gives some companies the advantage of raising prices since the consumers have no other choice of suppliers. This is even more crucial to realize in the case of companies which produce goods that have no or very few substitutes, and for which the demand is highly inelastic.

In a concentrated market, there are very few firms, by definition. The danger of a concentrated market is that in this case, it becomes easier for companies to stall competition by colluding. For example, some companies might agree on the prices they will charge their customers.

Collusion can be of either of the two forms: by tacit agreement or by explicit agreement. As one may have guessed, tacit agreements are hidden and are kept a secret, while explicit ones are less subtle in their form. Obviously, corporations that want to become involved in collusion, use tacit agreements, which are harder to be uncovered by the law enforcement, since explicit agreements are prosecutable by law.

Usually, a merger can be construed as being anti-competitive if it makes the market very saturated after the merger, as opposed to before the merger’s completion, and if the merger in addition makes it impossible or highly difficult for new firms to enter the market and present a challenge to the existing corporations. Companies who do this, want to keep other companies out of the market because the new entrants have the capacity to offer lower prices, forcing the existing firms to lower theirs as well, thus driving all of the prices in that market down.

Going deeper into the subject of mergers, it is important to present and distinguish between three kinds of mergers: horizontal mergers, vertical mergers, and potential competition or conglomerate mergers.

By definition, a horizontal merger is an acquisition of a competitor with an intention to increase the market concentration, and often also to increase the probability of collusions. A vivid example of this in the US was Staples’ attempt to merge with Home Depot. This merger would have created a more condensed market for office and home supplies, because the number of stores nationwide would have decreased, making it possible for Staples to set their own prices.

Research has shown that “Staples would have been able to keep prices up to 13 percent higher after the merger than without the merger.” Fortunately for all of the consumers of both stores nationwide, the Federal Trade Commission prevented the merger from taking place, allegedly, saving consumers “an estimated $1.1 billion over five years.”

In retrospect, a vertical merger is said to take place when companies are in a so called buyer-seller relationship. For example, when a company moves along its value chain and merges with its supplier, or distributor. As would be the case if a pencil making company would merge with the woodcutting company, or with the store that sells pencils. A vertical merger can impair competition by preventing other companies who use the same suppliers or distribution channels to operate normally.

If companies A, B, and C both use supplier Y and no other effective supplier exists, and company A merges with supplier Y, this forces companies B and C out of business, because they have lost their connection with supplier Y. Company A has thus eliminated two of its competitors, companies B and C. A potential competition or conglomerate merger is said to take place when one company merges or buys another company that is anticipated to enter a market and become a potential competitor to the acquiring company. It is said to be a so called elimination technique of a company’s potential competitors. A conglomerate merger can be detrimental in two ways. First of all, this type of a merger deters healthy competition because it involves acquiring companies before they even enter the market. Second of all, it prevents the company that otherwise would have entered the market to make positive contributions to the market, such as promoting healthy competition or offering more diversified products to consumers. The reasoning behind this type of a merger is closely related to the first two types, namely to keep the prices higher, without the threat of new competitors coming in and forcing the prices down, and to keep fierce competitors out.

Most mergers and acquisitions took place in developed countries, due to a larger number of strong corporations and well-functioning economies in countries like United States and European countries like the United Kingdom. Cross-border mergers and acquisitions comprise a major part of the foreign direct investments or FDIs, which have also been developing quicker in the past decade. In fact they went from 37 billion dollars in 1982, to 800 billion dollars in 1999.

The following will serve as an overview of economic factors affecting mergers. As the main enforcer of the European Union’s competition policy, the European Commission has the power to make or break some of the world’s largest companies. The following discussion will outline the reasons and ways in which the European Commission decides on passing or stopping a merger within the European Union. The European Commission investigates the grounds for approving or rejecting a merger between two European companies, such as two airlines merging, or an Italian pharmaceutical company trying to overtake a French drug researcher.

The main economic argument for accepting a merger is the so called static efficiency which represents mergers that result in economies of scale and thus reduce various costs for companies.

Another economic factor which must be taken into account is dynamic efficiency which refers to profit increases that can be used for research and development of new products and for innovation, creating long term dynamic efficiency, which can also provide funds for capital investments.

Mergers and acquisitions can strengthen the competitive position of companies in the European Union with regard to the ones outside the union, by helping European companies within the union earn genuine dominance in the international markets.

The main economic argument for rejecting a merger is that mergers and acquisitions contribute to the risk of monopolies. Consumers then become exploited and resources become misallocated if these mergers create major entry barriers restricting competition, which can potentially lead to market failure and a decline in economic welfare. From experience, there are today and probably will always be barriers to free market entry. With times those barriers might increase with increasing demand for safety in warring nations, or with the growing influence of the Euro in the European countries.

Statistics show that most of the cases and requests by companies for merger approvals referred to the European Union competition authorities are indeed accepted, and that only less than 20% of those cases referred to the European committee in the course of the last fourteen years ended up being rejected due to valid reasons such as anti-conglomerate protection and mergers which may restrict free competition if allowed. Thus, the future for companies which are contemplating mergers is very promising, especially if those reasons are lawful and do not potentially restrict free competition.

It has been reported that in July of 2001 the European Commission blocked a 45 billion deal between US firms General Electric and Honeywell, both of which were American companies. Although competition authorities in the United States gave their approval to this deal, the European Commission expressed concerns that the merger between Honeywell, whose core competency lies in avionics, and General Electric, whose main expertise was at the time in jet engines, would result in their combined dominance of the market. As a result the merger was stopped in its tracks in order to ensure and maintain healthy competition in the market.

No matter how professional, promising and well-crafted a merger may seem on paper, there are laws which are in place to regulate mergers.

An agency applicable under this topic and which is worth mentioning is the Monopolies and Mergers Commission, established in 1948 and later became the Competition Commission, which is an agency in Britain whose responsibilities include investigating and reporting on monopolies and on any intentions to form them by businesses. Most of its present responsibilities and measures are outlined by the Fair Trading Act and the Competition Act.

The Fair Trading and the Competition acts are self-explanatory by their names; both of them are in place to promote healthy competition and lawful trading, free of unfair or excessive tariffs or quotas. This commission is sponsored by the Department of Trade and Industry (DTI), but it is said to be fully independent of the government. Its main purpose is to investigate monopolies, mergers, and potential anti-competitive practices of companies, much like the Bank Merger Act does; it also determines whether possible or existing mergers and acquisitions adversely affect public interest. Thus, to do so, it must consider the interests of the consumers with regard to quality and choice of products offered by companies, efficiency, innovation, as well as whether merging companies will not deter free market entry and effective employment in England.

It must also be noted that the Fair Trading Act interprets a monopoly as a condition in which “at least 25% of a particular good or service is supplied by a single entity or a situation in which 25% of the market is supplied by a non-interconnected group of entities which conduct their affairs in a way that distorts competition.” Under this definition, whenever such danger may exist, the Monopolies and Mergers Commission stops the potential mergers and acquisitions from going through, or intervenes in the activities of existing companies. This agency is a great control put into place to protect the public interest and effective competition.

Going deeper into the subject of mergers, it became clear that there are three main types of mergers: horizontal mergers, vertical mergers, and potential competition or conglomerate mergers.

As was also presented, the United Nations’ “World Investment Report 2000” suggests that the recent increase in cross-border mergers and acquisitions is mainly due to an increase in the globalization of markets.

An intriguing issue in the European parliament is about how much these big corporations give back to society from the huge profits they amass. This debate on Corporate Social Responsibility (CSR) is attracting a lot of attention.

To reiterate on the points, the main economic argument for rejecting mergers and acquisitions is that they contribute to the risk of monopolies because consumers become exploited and resources become misallocated; if these mergers and acquisition create major entry barriers restricting competition, which can potentially lead to market failure and a decline in economic welfare.