How Does the Earnings Change M&A
Behaviors for Dutch Firms?
Faculty Economics and Business Gijs van Wagenberg, 10649972
Supervisor: Tolga Caskurlu January 31, 2018
Abstract
‘Merger and acquisition’ is a broad phrase that explains the process of consolidation of firms or resources. In the case of an acquisition is when one enterprise buys shares in another enterprise and in doing so becomes its new owner. On speaks of a merger, if two companies that are of equal size join hands to form new, larger company.
Human characteristics regarding the existing associations between the managers of the firm affect merger and acquisition. In The Netherlands, for example, during the first half of the year 2010 many deals were recorded, but dealings slowed down due to concerns about the changes in the economies of southern Europe. Investor confidence was then regained after the summer of the year 2010, and it was regarded to be influential in the year that followed as well. The Merger and Acquisition Market (henceforth ‘M&A market’) benefited from stronger balance sheets and agreements.
The current study investigates the extent to which the relationship of firms that determines the impact of the mergers and acquisitions. The research questions were;
What are the challenges faced by Dutch enterprises while merging?
How do earnings determine the decision to M&A by Dutch firms?
Mergers and acquisitions were found to be important since it is the primary method that enables single companies and individuals to grow and to join new markets. The current study applies an econometric model that is referred to as the generalized method of moments. The generalized method of moment found a positive relationship between merger and acquisition and the performance of the enterprise for the last nine years.
Statement of Originality
This document is written by Student Gijs van Wagenberg who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of Contents
Introduction ... 4
1 Survey of the existing literature that pertains to the research questions………...…..7
1.1 Value increasing theory ... 7
1.2 Value destroying theories ... 7
1.3 The importance of mergers and acquisitions ... 8
1.4 Employees related issues in mergers and acquisitions ... 9
1.5 Empirical evidence ... 10
1.6 Classification of Mergers and Acquisition ... 10
2 Data ... 11
2.1 Merger vs. acquisition ... 11
2.2 Mergers and acquisitions data ... 12
2.3 Earnings and debt data ... 12
2.4 Cash flow data ... 12
3 Model ... 13 4 Results ... 13 5 Conclusions ... 19 References ... 22 Table 1 ... 25 Table 2 ... 25
Introduction
‘Merger and acquisition’ (hence forth ‘M&A’) is a broad phrase that describes the process of consolidation of firms or resources. According to Coyle (2000), a merger occurs, if two companies those are of equal size join hands to form another larger company. An acquisition occurs, if one enterprise buys shares in another business and becomes its new owner. Human characteristics regarding the existing associations between the managers of the firm affect merger and acquisition. The most dominant factor in this respect is an understanding of the people, the culture, and the potential buyers. This understanding ensures that negotiation is conducted well. On top of that is the character of the negotiator that determines the attitude of the directors of the firms and thereby possibility of the merger or acquisition.
In The Netherlands, the first half of 2010 showed many deals, but the rate of these deals slowed down due to concerns about the changes in the economies of southern Europe. Investor confidence was then regained after the summer of the year 2010, and was of major importance in the year that followed (Ledenyov, 2014). The M&A market benefited from stronger balance sheets from the participating enterprises and the agreements that were not crossed in the year 2010.
The market of mergers and acquisitions in The Netherlands has gained a substantial value in comparison to the previous years. In the past one year, the league tables indicate a rise in the euro amount and the transaction worth (Agarwal and Kwan, 2017). The merger and acquisition market for the Dutch firms have filed a higher increase in volume and value since the year 2010.
When we look at the value of the transaction, it can be noted that less than ten announced deals that had Dutch firms as the target concerned more than one billion and that only a single contract that exceeded two billion euro. Some of the listed Dutch enterprises like AKZO, ASML, KPN, and Royal Philips lowered their profits predictions due to the change in M&A Market (Alimov and Officer, 2017). The present volatility in the stock market is due to the sovereign loan problem in Southern Europe that has led to uncertainty in the M&A Market of The Netherlands.
The mergers and acquisitions market in The Netherlands have recorded an increase in value and volume of transaction. However, the larger firms are not present in these activities because
the recorded deals are of small value. This reduction in large value deals is due to the financial crisis of Southern Europe that has increased risk and uncertainty in the market.
The Netherlands operates in an open economy, ever since it has been involved in cross-border investment deals. From the year 1995 to 2009, the share value of international investors rose from 37% to 72%. According to an OECD report (2010), the country was the eighth largest international investment destination worldwide. The period that recorded the highest foreign investment that had Dutch firms as its the target is from 2006-2010, in which foreign shares rose from 34% to 70%. Chinese buyers constitute the largest group, but deals involving U.S, U.K, and Germany have been had a major impact. For Dutch firms this exposure to the international market this provided an increase in dominance and competitive advantage.
In recent times, the number of deals from the private sector has risen in comparison to the earlier years. According to the league table for The Netherlands, the numbers of private deals in The Netherlands has more than doubled in the past twelve months. During the period from 2006-2007, the lowest number of private deals involving Dutch firm was observed, which was caused by financial crisis as it was then experienced. The pricing of merger and acquisition is affected by behavioral factors that influence valuation of the merging enterprises. According to Baker, Pan, and Wurgler (2009), behavioral finance has an impact on the price of mergers; the
behavioral factors are the earning of the firm. The earnings of the enterprise determine the cost of the deal and the method of mergers and acquisitions.
Earnings are the excess resources that are obtained by an organization after payment of all the factors of production. The primary motivation for enterprises to merge is to increase profit; this can be achieved by dominating a market. The other factors affect the pricing of a merge that includes optimization of the seller, risk adverse behavior of the seller, fear, and greed. The price of mergers and acquisitions are determined by elements that are considered to increase the earnings of the investors. The enterprise that records a higher profit is likely to attract more investment and acquisition-request. The current study investigates how earnings affect mergers and acquisitions of Dutch firms. It also examines how the relationship of firms determines the impact of the mergers and acquisition and the research questions were;
What are the challenges faced by Dutch enterprises while merging?
To answer the research question the current study evaluated the literature about M&A. It examines both the theoretical and empirical evidence that was available about the M&A Market in The Netherlands.
1 Survey of the existing literature that pertains to the research questions 1.1 Value increasing theory
According to the theory of efficiency (Devos, Kadapakkam, and Krishnamurthy, 2008), mergers and acquisitions happen because they create values for the acquirer and target. Mergers can only occur if there are expected to generate enough synergies to make the deal beneficial for both parties. The symmetric expectation of earning leads to the proposal of a merger. If the gain in the worth of the target is not positive, the firm owner does not sell or accept the acquisition (Devos, Kadapakkam, and Krishnamurthy, 2008). If the gains are negative for the acquirer, he or she will not honor the deal; in the case of a merger deal the theory forecasts the creation of value. The theory indicates that every merger and acquisition is a synergy of a lower cost of capital to the merging firms.
The theory of corporate control states that there is always an organization that is willing to acquire another underperforming organization. The objective of the firm is to remove the managers who do not optimize the synergies of that enterprise and to increase its earnings. The managers who perform well are employed by others who can identify the required synergies are found. The managers who cannot maximize profit do not survive and are replaced by the once who maximize benefit. The theory of corporate control suggests that mergers and takeovers are observed in those firms whose managers have failed to take up opportunities, and the internal structure does not punish them (Mukherjee, Kiymaz and Baker 2004). The values creation theory shows that mergers lead to higher value in the firm this is primarily in the underperforming ones. 1.2 Value destroying theories
In mergers and acquisitions two situations can arise; the M&A are profitable for the merging and acquiring companies or they are not. In this paragraph I discuss theories that explain why.
According to the theory of value destroying the mergers and acquisitions do not affect the performance of the merged and acquired enterprise. On explanations of these failures two
assumptions are generally being assumed. The first is that the bidder is considered to be rational; if he or she makes a poor decision in the process of investment, this is because of lack of
information. The second assumption is that the manager is reasonable and self-servicing who optimize their utility function and this fail to affect the firm positively (Jensen, 2005). The theory of managerial hubris state that the motive of the manager may be to increase the value of the company, but that due to his overconfidence the manager fails make the correct estimations. The
over-confident manager is at a risk of paying beyond the fair market price and he leaves the winning bidder in a lousy situation with respect to the assessment of the possibility of losses. The attitude of the manager is the crucial element in the deal; this shows that the over-confident manager incurs losses.
The theory of managerial discretion shows that it is not overconfidence that leads to loss of value, but rather the availability of excess liquidity. Enterprises that have an excess of the required investment-resources entertain the possibility of making faster strategic decisions. Such a firm is likely to be involved in large-scale measures without studying the market adequately, compared to those firms that have limited capital. Decision-making without sufficiently analyzing the market leads to losses in the enterprise. The theories of value destroying suggest that the attitude of the bidder and the amount of money invested in the firm affect the deal that is made.
1.3 The importance of mergers and acquisitions
Mergers and acquisitions is the primary strategy that enables single companies and individuals to grow and to join new markets. When this occurs, the structure of competition in an entire
industry can change entirely within a small period of time (Bena and Li, 2014). Alliances can be crucial for businesses that are locally based, since they can develop into international
organizations. When two companies mergers, they have the potential to produce a higher output that can be sold on the global market. The new enterprise is then able to compete with foreign-based rivals and increase its efficiency and competitiveness.
Mergers and acquisitions increase the capital value of the merging firms; higher capital volume enhances the ability of the company to purchase better quality equipment and hire the best operators. These help them to increase speed in production and have higher return on the efficient equipment and workers (Schmidt, 2015). Mergers help to improve the performance of the firms and increase their growth; this is due to a better expertise of the staff. The merging
company can increase its efficiency; this leads to higher returns to the original organization. According to Lebedev, Peng, Xie and Steven (2015), merging and acquisition are crucial
for the firm, since it helps them to gain economies of scale. The larger organization that is
formed can buy and carry out its activities in bulk; this leads to purchase of goods and services at a lower cost. Operating in volume is efficient since all the resources are fully utilized, and the
Merging and acquisition help the firm to diversify its products and market since the individual companies operate in separate markets. Merger and acquisition are crucial in reducing the cost of operation and increasing the efficiency of the firms; this leads to higher returns in the organization.
1.4 Employees related issues in mergers and acquisitions
Continuous change is an essential element of environment of current business; each corporation is required to be a dynamic organization that is flexible enough to adapt to new challenges. The companies are structured into systems in which work and processes are arranged to ensure that people and the entire organizational structure are in line with the goals of the firm. The purpose of the process of integration is to integrate people, operations, technological advancements, and the corporate strategy. When incorporating the methods and people, the firm avoids interrupting services, quality or product and the financial situation of the businesses. The employees are the people are considered in the integration of the company; this leads to other issues.
The issues with respect to employees are associated with the human capital integration that concerns culture, leadership, process, design, and committing essential talents. The other crucial factor is proper planning when preparing for the integration, communication to the employees, and the best leaders to manage the company (Marks and Mirvis, 2015). The construction of practices and policies of information sharing, of learning and of a method to transfer information are crucial to the employees. The failure to address these issues concerning merger and acquisition affects the new enterprise, with a negative out-come at a post-merger assessment. The questions concerning the employees need to be considered before the deal is closed to avoid adverse effects.
The negative impacts at the point of post-merger can be at two levels; the first level is that of the reactions of the current employees. The issues of the employees concern insecurity, powerlessness, alienation, and reduction in productivity, loss of energy and increase in
absenteeism. These problems rise of the turnover of employees and reduce the profit margin in the new organization (Rao-Nicholson, Khan and Stokes 2016). The second level is that of corporate level; these effects are long-term in the cultural integration and the structure of the organization. The failure to take care of those issues may lead to negative impacts like high financial cost, incompatible human resource plans, and lack of communication between the
employees. When planning for merger and acquisition, the organization needs to plan how to integrate the workers into the firm.
1.5 Empirical evidence
Zhu (2016) studied mergers and acquisitions by Chinese companies; that research-project had the objective of determining the current state and available insights of Chinese M&A research. The research-project examined use empirical evidence derived from articles about mergers and acquisitions in which research was described and analyzed that employed qualitative methods. It found that firms acquired each other to gain value, which was accomplished by an increase in the market power and efficiency. The characteristic of the company determined the direction of the investment and the benefits that were obtained. Merging and acquisition in China were found to increase the value of the businesses and the expected return on sales, since it led to market dominance.
Agarwal and Kwan (2017) studied the pricing of mergers and acquisitions using agent-based modeling. That study aimed to find out what the determining factor was of the price of the merger and acquisition. The study used qualitative methods to determine the pricing of mergers and acquisitions. The outcome was that the cost of mergers and acquisitions depends on the conduct of the buyer and seller. The most optimistic seller acquires the highest profit, which is usually due to the seller taking more risks. When the business cycle is rising; the gains for the sellers are higher and the return on sales greater. The behavior of the sellers is the determining factor of the profits that he obtains.
1.6 Classification of Mergers and Acquisition
Mergers and acquisition are classified in to three classes: first, portfolio mergers and
acquisitions, secondly, financial mergers, and, thirdly, acquisition and organizational structure. In portfolio merger and acquisition a significant alternation in the asset mix of the enterprise or the line of operation is being made. The change in the operations includes the liquidation divestitures, sale of assets and sign-offs (Mwangi, 2014). The financial mergers and acquisition includes change in the structure of capital. The most common method of financial merger and acquisition is raising the equity by giving new shares. Organizational mergers and acquisitions involves the alternation of the organizational structure of the enterprise. Organizational M&A involve the redrawing of divisional boundaries, the flattening of hierarchical levels and the
reduction in the diversification of the products. Mergers and acquisitions can either be horizontal or vertical.
Horizontal mergers occur, when firms operating within the same industry join hands and use the same product line and market. This type of merger is observed to happen in the industries that have fewer firms. This is because the objective of the firms in this market is to have
competitive advantage due to rise competition. Vertical mergers, on the other hand, occur between two firms producing different products. The vertical mergers happen between two different firms that operate at separate stages of the production cycle. The type of merger that an enterprise is involved in depends on its needs and the structure of the market. Those enterprises that may want to increase dominancy in the market are involved in horizontal mergers. Those enterprises that want to diversify its product base are involved in vertical mergers.
2 Data
In this section the different variables that were used in the generalized method of moment model are presented and explained; the data about the mergers and acquisitions were collected using data streams. Every subsection gives the correct World scope code, and the information that has been used is explained. The firms that were used were chosen randomly; the enterprises were among those that have merged or acquired other companies in The Netherlands. The period that was examined in this study was from 2008 to 2010; the data were a comparison of three years before the event and three years after the merger and acquisition.
2.1 Merger vs. acquisition
The decision for companies to merge is guided by the need to obtain profit and venture into a new market. Two unrelated enterprises join to combine capital and to produce more efficiently at lower cost. The cost is reduced since the firm provides high quantities of goods, which gives them trade discount (Cartwright and Cooper, 2014). The companies can deliver more efficiently, because the new organization utilizes all the resources that include capital and labor. Merging of the businesses enables them to combine capital and venture into a new market and product line. It also leads to an increase in earning and provides them with a competitive advantage for the organization and its shareholders with respect to its competitors in the market
Firms acquire each other to remove the poor managers and to increase production of the firm; this is because the shareholders are interested in getting higher earnings. The firm that does not operate optimally is acquired to improve its output and earnings for the shareholders. Other firms are acquired to enable better utilization of the market and to become more dominant in the market. The sole objective of mergers and acquisitions is to increase the earnings of every enterprise. The enterprises involved in these activities can dominate the market and achieve higher earnings for the shareholders.
2.2 Mergers and acquisitions data
The public market for mergers and acquisitions in The Netherlands was most active in the year 2011. Among the major transactions in that year was the acquisition by Vast Ned offices of the Nieuwe Steen Investment at the cost of €812 million. Cellestis acquired Qiagen's at €266
million, and Schramm Holdings acquired Akzo Nobels at the cost of €168 million (Bena and Li, 2014). The cost of acquisition is determined by the earning of the enterprise and its domination of the market. The firms that have a high market share can attract many investors and at a higher price.
2.3 Earnings and debt data
For the earning variable, the operating profit was normalized to the total assets; profit was an independent factor. The most profitable organization was found to have a higher market dominance and greater penetration of the market. These data indicate that the mergers and acquisitions are controlled by the profits of the enterprise and its dominance of the market (Marks and Mirvis, 2015). The earning of the firm also controls the cost of the acquisition; those firms that have a lower profit are acquired more frequently. This is easily explained by the fact that the cost of acquiring them is lower compared to more profitable organizations.
2.4 Cash flow data
To obtain data about cash flow, the operating profits and investment were combined; the total cash flow was normalized over the total assets. The cash flow was used as an independent variable; this is because it determines the mergers and acquisition.
3 Model
The current study applied an econometric model that is referred to as ‘the generalized method of moments’ was used. This method of estimation is used in both linear and non-linear models. Hanzen formalized the model in 1982 and since then it has become one of the most used models in this area of economic science. Generalized method of moment (henceforth ‘GMM’) was used because, unlike the likelihood estimation (henceforth ‘MLE’), it does not require complete knowledge about the distribution of the information. GMM is also computational very easy to use, making it suitable for the representation of the relationship between the variables. The generalized method of moments was used to determine, whether earning and cash flow of an enterprise determine the decision to merge or to acquire other firms. The generalized method of moments is shown below:
Y = β0 + β1Q+ β2Q*DUMMY + β3C + β4C*DUMMY + εit
The independent variable in the model was Y, which represents the merger and
acquisition activities of the firm. To determine these activities the number of shares bought by the enterprise was used as a measure of merger and acquisition. The constant of the model was BO and the coefficient of earnings was B1, the dummy for profit before the merger was one and
for profit after the merger were two. The coefficient for cash flow was B3 and the dummy was zero for time before merges one for time affects the merger activities.
The generalized method of moments is an econometric procedure that enables economic prediction while avoiding unwanted assumptions. The unnecessary assumptions include
specifying the distribution of errors (Kiviet, Pleus and Poldermans, 2017). This lack of structure in the model leads to application of the GMM; but the model is not suited for the application to very small samples. In the current study the model was used to determine whether the earnings of Dutch firms determine their merger and acquisition behavior. Since the model is unstructured, it forecasted the relationship without making a lot of assumptions.
4 Results
The results of the generalized method of moments are shown in table 2. The model had an R-squared of 0.94 and adjusted R-R-squared of 0.8927. The standard error of the regression was 790400.9 and the sum squared residual was 250*10^12. The log likelihood of the regression was
-131.34 and the F-statistics was -131.34. The results of the regression indicate that the model is suitable for the prediction of the relationship between the exchange rate and bond market. The data are suitable, since they have a value of adjusted R-squared that is greater than 0.7. This shows that more than 89% of the data are within the model.
The value of the constant in the model was -39.35 with and the coefficient for the cash flow was 597. The value for the dummy cash flow was 195.96 and the dummy profit was -3012.97; the value for the profits was 750.02. The model was summarized as shown in the equation below:
Y=-39.35+597 cash flow+195.96 cash flow*dummy-3012.97 profits+750.02 profits*dummy The generalized method of moment found a positive relationship between merger and acquisition and the performance of the enterprise. The performance of the firm was determined using the earning and the cash flow; they were found to increase after a merger. This finding is similar to results of Mirna, Barac, and Jelavic (2014), the firm that was performing poorly before mergers increased profit after the activity. The related alliances were found to have a better performance compared to the unrelated mergers. This is the result of the fact that the new firm can have a higher market share, since it takes up a proportion of each business. The related companies can sell more volume of goods, since it has a larger market share compared to the unrelated enterprises. The current study found that the earnings of the company in The
Netherlands affect mergers and acquisitions positively. Those firms that have a higher profit can merge and acquire other companies easily.
The most productive enterprise is expected to be the one with the least premerger earning. The lower premerger performance impacts the yield of the merger positively. Merging by a Dutch firm is crucial to increase production and dominance in the market. The result of the current research varied with the findings of Leepsa and Mishara (2016). According to Leepsa and Mishara (2016), the owners of the merging enterprise suffer after a merger, since the
earnings are distributed equally to all the new owners. Merger and acquisition lead to an increase in the number of shareholders of an enterprise, which leads to reducing share value and
dividends. Mergers and acquisitions affect the earnings of the shareholder, if the activity reduces the sales of the firm.
Descriptive statistics are applied in describing data in this research; it gives a simple summary of the sample and measures. Descriptive statistics include measure of central tendency and
measures of depression. The measures of central tendency are the mean, median and mode; measures of depression are the standard error and variance. Descriptive statistics were combined with simple graphs to show the necessary information about mergers and acquisitions of Dutch firms. Descriptive statistics were used to describe what is in the data and what the report
indicates. They were used to present qualitative information in a manageable format; it sensibly classified the data.
The total number of shares purchased by Dutch firms in the period of observation was 140,952,024, and the average was 15,661,336. As shown in figure 4.1.1 the lowest number of shares purchased by the Dutch enterprises was during the year 2010. Since the lowest recorded purchase, the number of shares brought has continuously risen. The number of shares purchased indicates that the Dutch companies have merged or acquired other organization during the period of observation. Merger and acquisition were found to be affected by the financial crisis of 2010 that lead to a slowdown in the purchase of shares. During this period the financial market lost value that led to a reduced number of mergers and acquisitions by Dutch firms.
Figure 4.1.1. Number of shares purchased
The total earnings of the Dutch firms that were involved in mergers and acquisitions was 120,834, and the average profit was 13,426. As shown in figure 4.1.2 the lowest recorded yield
0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 2006 2008 2010 2012 2014 2016 2018
Number of shares purchased
was during the year 2011; this can be attributed to the reduced purchase of shares in the year 2010. From the year 2012, the number of shares purchased rose, and the earning of the Dutch enterprises also increased. The higher the profit of an enterprise, the more attractive it is for an investor. The Dutch business buys the firm with the most senior earnings (Cummins,
Klumpesand Weiss, 2015). The earning of the businesses was affected by the reduced purchase of shares; this shows that the yield of an enterprise is influenced by the merger and acquisition market.
Figure 4.1.2. Net Earnings
The total cash flow for the Dutch enterprises was 152,082, and the average cash flow was 16,898. As shown in figure 4.1.3 the lowest cash inflow was during the year 2011, this is due to the reduction in the number of shares purchased. The cash inflow of the Dutch firm was affected by the financial crisis of 2010 that led to reduce aggregate demand (Cooper, Tarba and Sarala, 2016). The reduction in the demand leads to a decrease in the earning of Dutch enterprises; this made them unattractive for investment. Reduction in the demand for the product from Dutch companies lead to a decline in the sales that reduce cash flow.
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net Earnings
Net EarningsFigure 4.1.3. Cash flow
Inferential statistics were used to reach conclusion that extends beyond the current data only. The inferential statistics were used to show from the sample of the Dutch enterprises what the
population of the firm in The Netherlands does. The inferential statistics that were used included regression and correlation; regression analysis fitted a line in the data. Correlation analysis was used to show the association between the variable that was used. Inferential statistics were used to infer conclusions that went beyond the data that were observed about the relationship between the variables. Inferential statistics were also used to show the reliability of the sample and the data that were selected.
The correlation analysis as shown in Table 1 indicated that all the variables were strongly positively correlated and the results are statistically significant at p≤0.001. The Pearson
correlation coefficient between the number of shares purchased and net earnings was 0.95. These facts indicate that the two variables are strongly positively correlated and that the correlation is statistically coefficient (Fleiss, Levin and Paik, 2013). The Pearson correlation coefficient between the number of shares purchased and the cash flow of the Dutch firms was 0.935. The relationship between the variables of strongly positive and the correlation was statistically significant. These facts indicate that a change in the number of shares purchased will lead to a proportional change in the earnings and cash flow.
The main aim of the current study was to determine the effect of earnings on merger and acquisition behavior of Dutch enterprises. The data were obtained from the financial reports of
0 5,000 10,000 15,000 20,000 25,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Cash flow
Cash flowDutch enterprises and the stock exchange data. The reports were obtained from the capital market authority in The Netherlands. It was found that the ratio that shows the profitability of an enterprise improves due to a merger of a firm (Mwangi, 2014). This improvement in the ratios is an indication that the merger and acquisition behavior of Dutch enterprises improves profitability of the firms.
The current study also sought to determine the challenges faced by Dutch enterprises while merging with other firms. The biggest problem that is being faced during mergers was found to be the setting of goals that cannot be achieved. Most of the enterprises fail, because the goals that are set are unrealistic and unachievable. During a merger there is a sense that it involves the transfer of one firm’s assets in to another organization. It has been found that one enterprise loses in terms of workers and stagnation and the other one wins. It has been found that poorly managed mergers can lead to a spend of poor organizational culture that is full of
mistrust, illusion and fear.
Integration after the merger is a gradual and interactive process that involves people of different organizations learning to co-operate and to transfer skills. Human factors are a big factor in the merger cooperation of the enterprises, and involve most importantly the post-merger integration of the employees (Rothaermel, 2015). The corporate culture and other properties of the organization determine whether the behavior of the employees turns the company into a successful enterprise. The other challenge that was found in merger and acquisition is the location of the head office. The headquarters of the merging enterprises are often located in different areas, which makes cooperation an issue. Due to a lack of proper coordination the enterprises are likely to have a problem with the allocation of the resources. The Dutch firms were found to have problems of communication due to merging with firms that have managers who do not speak the local language. The language barrier obstructs coordination in the new organization. Due to improper cooperation the success of the firm is lower compared to compared to those that are not exposed to this problem. Most of the time the human resources are not involved in the development of the M&A strategy, which creates a problem, since there have to catch up. The mergers that face a lot of problems are not able to cooperate well; this reduces the profit of those enterprises.
The current study sought to determine the importance of mergers and acquisition for Dutch enterprises. It was found that they are crucial for international business, when the firm
needs to address issues that are related to economies of scale (Parrult, 2013). In addition to creation of business opportunities those activities were found to ensure the economic stability of the nation. The stability is obtained using foreign investment or getting economic recessions by redistribution of resources. Merger and acquisition lead to a reconfiguration of the industry and they reshape corporate finance. The sole objective of mergers and acquisition is to incomes the economic, social and political value of the firm. For the objectives of the mergers and acquisition to be achieved, two firms ought to be worth more jointly as one, than as two separate enterprises.
Economies of scale are obtained, since the firm has to produce a higher volume and serve a larger geographical area. The other efficiency gain due to mergers is economies of scope; these are economies of scale distributed into any product. Economies of scope are obtained, if the average cost of manufacturing two good separately reduces, if the product is produced
separately. Economies of scope exist, if increasing the production of one product reduces the cost of providing the other (Rottig, Reus and Tarba, 2014). The additional efficiency gain is
economies of vertical integration; it occurs when the value of performing different stages fall, when one enterprise does it. The reduction in the cost is due to the technical association among the various levels of production or the transaction costs of the market. Mergers lead to efficiency gains that include economies of scope and economies of vertical integration.
Merger and acquisitions increase the earning of enterprises in The Netherlands, since it increases their market share. Increases in the market share leads to a rise in the sale volume of the company and to a higher profit for the organization. The impact of the mergers depends on the relationship of the agencies; the merging of related firms leads to an increase in the earning of the new structure, because the merger leads to an increased market share that makes them more competitive in the new environment. The group can gain monopoly power, since it is larger and has a higher market share. The body can sell monopoly prices and compete in the market more efficiently.
5 Conclusions
The profits of the Dutch firms were found to be the main motivation for mergers and acquisitions, since the organizations that have a high-profit margin are most often targeted. Mergers and acquisitions were found to increase the profit level of the enterprises; this is due to the larger market share that is obtained from the process. The firm with the larger market share
can discriminate others, because it has obtained some monopoly power. The new monopoly sells at a price above the normal market price and it is able to earn supernormal profits that are
distributed to shareholders as dividend. Merger and acquisition are beneficial to the Dutch firms, since they increase their performance and their cash flow in the economy. Increases in cash flow raises the aggregate demands that leads to economic growth; the benefit of the mergers is in the entire economy.
The impact of mergers depends on the relationships of the organization; those firms that operate within the same market are affected positively. The alliance of teams that are related leads to an increased market share compared to the unrelated companies. Thus, a merger of related enterprises is more efficient, than a merger of unrelated companies. Increases in profit for the associated groups are higher. Separate enterprises do not become dominant in the market and their market share remains small, which makes them have a lower share value. Related firms in The Netherlands need to merge to increase their presence in the market and to improve their profit. The associated organizations are faced with competition from each other that results in lower profits. To increase profit and dominance in the market, the firms need to cooperate with each other and merger.
Mergers and acquisitions have increased the performance of enterprises in The Netherlands, since it leads to efficiency gains. Efficiency gains include economies of scale, economies of scope and economies of vertical integration. The efficiency gains reduce the cost of production for the enterprises due to production in higher quantities. The firm can have a competitive advantage due to the increased presence in the market. Merger and acquisition are used to reduce the costs of operations by the Dutch enterprises due to efficiency gains. The market can get superior products, since the firm has more capital to carry out research and development of the products. Research and development make the product stand out from rival companies giving them a more significant competitive advantage. The competitive advantage increases the capital of the firm and the profit level of the enterprise.
The earnings of the enterprise affects mergers and acquisitions positively, this is because it increases the competitive advantage of the organization. The new firm can get higher profits, since its market value has been increased, which gives them a competitive advantage. Mergers give companies competitive advantage and efficiency gains that increase the earning of the enterprise. The cash flows of the firms were found to increase due to mergers; the companies
also increased net earnings due to it. The costs that are reduced due to merger and acquisition include taxation cost, storage cost, operation and administrative cost. These are because the structures of the two enterprises are integrated into a single organization that is charged with the management of the entire firm. The earnings of the companies in The Netherlands lead to increased M&A behavior of Dutch companies.
It was found that the M&A Market is influences by the earnings of the participating enterprise. The current study recommends further study to determine how to increase the earnings of Dutch firms by increase M&A.
References
Agarwal, N., & Kwan, P. (2017). Pricing mergers & acquisitions using agent-based modeling. Economics, Management and Financial Markets, 12(1), 55.
Alimov, A., & Officer, M. S. (2017). Intellectual property rights and cross-border mergers and acquisitions. Journal of Corporate Finance.
Baker, M., Pan, X., and Wurgler, J. (2009). “A Reference Point Theory of Mergers and Acquisitions”, Working Paper 15551, National Bureau of Economic Research.
Bena, J., & Li, K. (2014). Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), 1923-1960.
Cartwright, S., & Cooper, C. L. (2014). Mergers and acquisitions: The human factor. Butterworth-Heinemann.
Cooper, C. L., Tarba, S. Y., Sarala, R. M., &Ahammad, M. F. (2016). A state-of-art and future directions. Mergers and Acquisitions in Practice, 2-3.
Coyle, B. (2000). Mergers and acquisitions. Global Professional Publishing. 12.
Cummins, J. D., Klumpes, P., & Weiss, M. A. (2015). Mergers and acquisitions in the global insurance industry: valuation effects. The Geneva Papers on Risk and Insurance-Issues and
Practice, 40(3), 444-473.
Devos, E., P.R. Kadapakkam, and S. Krishnamurthy, S. (2008). How Do Mergers Create Value? A Comparison of Taxes, Market Power, and Efficiency Improvements as Explanations for Synergies, Review of Financial Studies.
Fleiss, J. L., Levin, B., & Paik, M. C. (2013). Statistical methods for rates and proportions. John Wiley & Sons, 5.
Harrell Jr, F. E. (2015). Regression modeling strategies: with applications to linear models, logistic and ordinal regression, and survival analysis. Springer.
Kiviet, J., Pleus, M., & Poldermans, R. (2017). Accuracy and efficiency of various GMM inference techniques in dynamic micro panel data models. Econometrics, 5(1), 14.
Kline, R. B. (2015). Principles and practice of structural equation modeling. Guilford publications. Lebedev, S., Peng, M. W., Xie, E., & Stevens, C. E. (2015). Mergers and acquisitions in and out of
emerging economies. Journal of World Business, 50(4), 651-662.
Ledenyov, D. O., & Ledenyov, V. O. (2014). Mergers and acquisitions transactions strategies in diffusion-type financial systems in highly volatile global capital markets with nonlinearities. Leepsa,N.M.,& Mishara, C. S.(2016). Past Studies On Post M&A Performance: A Review Of
Manufacturing Firms In India. Vitakshan: The XIMB Journal Of Management, 13(1), 115-138. Marks, M. L., & Mirvis, P. H. (2015). Managing the precombination phase of mergers and acquisitions.
In Advances in Mergers and Acquisitions (pp. 1-15). Emerald Group Publishing Limited. Mirna,K., Barac,Z., & Jelavic,I. (2014). Impact Of Related Acquisition Strategy On Bidding Company
Performance. Journal Of Economic & Social Studies (JECOSS), 4(2), 31-51.
Mukherjee, T.K., H. Kiymaz, H., and Baker, H.K. (2004) Merger Motives and Target Valuation: A Survey of Evidence from CFO’s. Journal of Applied Finance 14: 7-24.
Mwangi, S. W. (2014). The effect of mergers and acquisitions on the financial performance of Commercial Banks in Kenya. Unpublished MSC project University of Nairobi.
Parrult, E (2013). Mergers and Acquisitions: Practices, Performance And Perspectives, Hauppuge, New York: Novan Science Publishers
Rao-Nicholson, R., Khan, Z., & Stokes, P. (2016). Making great minds think alike: Emerging market multinational firms’ leadership effects on targets’ employee psychological safety after cross-border mergers and acquisitions. International Business Review, 25(1), 103-113.
Rothaermel, F. T. (2015). Strategic management. McGraw-Hill Education
Schmidt, B. (2015). Costs and benefits of friendly boards during mergers and acquisitions. Journal of Financial Economics, 117(2), 424-447.
Sprent, P., & Smeeton, N. C. (2016). Applied nonparametric statistical methods. CRC Press, 8.
Zhu, H., & Zhu, Q. (2016). Mergers and acquisitions by Chinese firms: A review and comparison with other mergers and acquisitions research in the leading journals. Asia Pacific Journal of
Table 1 Result of correlation between the dependent variables in the model.
Number of shares purchased
Net Earnings Pearson Correlation .950**
Sig. (2-tailed) .000
N 9
Cash flow Pearson Correlation .935**
Sig. (2-tailed) .000
N 9
Table 2 Results for the GMM model
Dependent Variable: Y Method: Least Squares Date: 01/23/18 Time: 11:04 Sample: 2008 2016
Included observations: 9
Variable Coeffici ent
Std. Error t-Statistic Prob. C -3935790 . 4553725. -0.864301 0.436 2 C01 597.020 0 402.0464 1.484953 0.211 7
DC 195.969 1 477.2012 0.410663 0.702 4 DQ -302.968 7 597.3508 -0.507187 0.638 7 Q 750.015 5 350.5058 2.139809 0.099 1 R-squared 0.94633 5
Mean dependent var 1566 1336 Adjusted R-squared 0.89267 0 S.D. dependent var 2412 606. S.E. of regression 790400. 9
Akaike info criterion 30.29 865 Sum squared resid 2.50E+1
2 Schwarz criterion 30.40 822 Log likelihood -131.343 9 Hannan-Quinn criter. 30.06 220 F-statistic 17.6340 7 Durbin-Watson stat 2.689 385 Prob(F-statistic) 0.00833 1
