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The Problems with Mergers & Acquisitions

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As history shows in most cases, more than 50% according to many studies and research indicates M&A usually have negative implications for the acquirer rather than the acquired in terms of financial expectations versus reality. Additionally, there are many internal issues that will affect the overall performance of the acquiring company.

In a case of a startup, being acquired may be profitable and desirable for them in general. From an entrepreneur’s perspective, it is highly beneficial as they will essentially cash out or consider a stake buyout. Aside from that, there are many reasons on why an acquisition decision is chosen instead of internal growth, which may include elimination of competitors, gaining competences and resources as well as growth objectives.

However, I will highlight some of the notable immediate problems that may occur after acquiring another company which in most cases, majority of companies face..

Difference in Work Culture

This is especially true as both companies will collide in their work culture after acquisition. This can be an issue internally if one company practices a more organic culture in comparison to a mechanical one. Employees from the acquired company will then have to adapt to the new working environment which may lead to them being dissatisfied and unmotivated in terms of their intrinsic rewards.

Communication Issues

This can happen whereby there will be asymmetric information between the two companies. An absence of clear communication may lead to issues in terms of operations and executions. Thus making both companies inefficient in their deliverables and this may affect certain value chains within the company. Key stakeholders and managers must ensure that communication be clear and well received in all departments.

Clash of Authority

Existing managers or higher level executives in the company being acquired are in a conflict due to the clash in management and work structure as the acquiring company may assign new managerial roles. Organization charts are restructured and this may upset some of the existing employees as their career projections are diverted. Delegation of roles and management styles will be a key factor in keeping employees happy in the company.

Optimistic Bias

The acquirers may have an optimistic bias towards their acquisition. The thought of acquiring another company may sound like a good idea during the early stages and potentially may aid in increasing profitability as well as market share. This can lead to improper judgement on the market forces. Also known as the Winner’s Curse, in which acquirers may have overestimated its valuation and future prospects based on their overly-optimistic views. Unfortunately, there is a high level degree of uncertainty considering its an asset.

These are just some of the immediate factors that comes to mind when discussing on the issues acquirers face.

In likes of the recent Grab’s acquisition on Uber’s South East Asia’s market, are they experiencing some of the factors mentioned above? The acquisition opens up the market for more competitors or alternatives to enter where price would be major determinator on capturing certain market shares. Grab will essentially have to consider the factors mentioned to ensure smooth transitioning and effective operational procedures. Only time will tell if Grab’s acquisition is a success in really achieving its targets or goals.

With that being said, of course, some acquisitions are successful with great leadership and foresight. However, one must first consider the factors mentioned to really grasp the implications of acquiring a company then only one is able to overcome and strive towards its organization’s objectives such as profitability or market share.

 

Entrepreneurship

Follow Your Dream and Start a Business

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A regular 9 to 5 job is a tiring and monotonous activity. Just after few years, this not only becomes boring for most of the people but it also creates the feeling among persons that they can’t achieve their dreams with just an ordinary job. On the other hand, they see their entrepreneur friend who is making good money and enjoying his life just after few years of successful business experience. This certainly creates the passion among the employees to do something big and they seriously consider starting a business to fulfill their dreams.

But starting a business is not always easy and one may face several risks that create hurdles for him becoming a successful entrepreneur. It is especially true for newcomers as they are usually short of capital and unaware about the severe competition that they may face in the market.

Limited resources and tough competition are the two main hurdles that are faced by new entrepreneurs and it is the main reason that many stick with their ordinary job where they are getting low but sure salary after doing an unexciting but rather simple work. But getting your dream business is not such an impossible task. There are many who have proved that determination and few tested points that can easily bring success to any new business.

Following this simple but effective strategy will greatly assist you in fulfilling your dream of becoming a successful entrepreneur.

Right down a Complete Business Plan:

The initial thing required for any successful business venture is a highly thought out plan. You must be aware about the type of business that suits you according to your financial resources. Your plan must contain the products and services you are going to offer, your target audience, the type of employees you need etc. After preparing the whole list of necessary items, just combine them accordingly and your initial step will complete. Now, you will be required to practically implement the plan of your new business.

Choose the Right Location:

Selecting the right location for physical presence of your company has extreme importance. A lot of research is required to select the right type of location for your intended business. Many factors have to be examined before choosing the most appropriate place for the type of business you are willing to start.

The things you must consider is that there should not be much competition in the area you are choosing, the comfort of people to reach that site and the safety record of the location. All these factors are extremely important especially for new businesses as they can’t afford undue disruption in the start of their process.

Complete Legal Process:

A business can’t take any legal risk whether it is a Dubai business setup or a company in Paris. All the legal documents must be completed before the formal start of your business. Choosing a unique name, acquiring proper license(s) from related authorities and getting tax number are important and unavoidable conditions for any business.

There are possibilities that you may face legal issues in the beginning and also later stages of your business. You can easily avoid this problem by either hiring a full time lawyer or get attached to a reputable law firm. Spending money for this purpose is mandatory and you can’t save money by avoiding solution of legal issues.

Spend Wisely:

Most of the small businesses can’t afford to waste their precious money in cosmetic steps. But even if there is no shortage of money, ruining your assets is against the norms of business and you can’t expect to get better results without saving some extra money. You can’t predict about the future of any business and it is always advisable to save something for the time when things are not going well.

If you have spare resources, then you can wait for return of favorable time for your business. It will help you stick with your desired business and may result in achieving your dreams with the same type of business after some time.

Always ready for change in Circumstances:

Always keep an eye on various circumstances related to your business. Government rules can change at any time while economic conditions on local and international level can bring lot of changes to different types of businesses. Unless you are aware about the changes and take immediate steps to counter the alter situation, it is not possible for any new business to flourish. You must be proactive and take important steps before your competitors.

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About the Author

Brenda Cagara is a part of the business consultant team RIZ & MONA in Dubai. Her work is to assist the formation of companies in different states of UAE. Other services she takes a part in are visa processing, trade license, trade mark, bank account opening, product registration and local sponsors. Along with this, she vigilantly manages to pursue her writing career. Since the past five years, she has been writing on different niches. The top ones are business, taxation and finance.

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Entrepreneurship

Will Financial Liberalisation Trigger a Crisis in China?

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The People’s Republic of China (PRC) has been liberalizing its financial system for nearly 4 decades. While it now has a comprehensive financial system with a large number of financial institutions and large financial assets, its financial policies are still highly repressive. These repressive financial policies are now a major hindrance to the PRC’s economic growth.

The PRC is at the beginning of a new wave of financial liberalization that is necessary for supporting the country’s strong economic growth. The country’s leaders have already unveiled a comprehensive program of financial reform, which includes 11 specific reform measures in three broad areas: creating a level-playing field (such as allowing private banks and developing inclusive finance), freeing the market mechanism (such as reforming interest rate and exchange rate regimes and achieving capital account convertibility), and improving regulation.

But could financial liberalization lead to a major financial crisis in the PRC? What would be the consequences for financial stability as the PRC moves to further liberalize its financial system? If the PRC repeats the painful experiences of Mexico, Indonesia, and Thailand, then it might not be able to achieve its original goal of overcoming the middle-income trap.

International experiences of financial liberalization, especially those of middle-income economies, should offer important lessons for the PRC. In our new research, based on cross-country data analysis, we find that financial liberalization, in general, reduces, not increases, financial instability. This powerful conclusion is valid whether financial instability is measured by crisis occurrence or by fragility indicators, such as impaired loans and net charge-offs. The only exception is that financial liberalization does not appear to significantly lower the probability of systemic banking crises, although it does lower the risk indicators for banks. These results have higher statistical significance and are greater in magnitude for the middle-income group than for the entire sample.

The insignificant impact on banking crises, however, should be interpreted with caution. One of the possible explanations is that under the repressed financial regime, the government supports banks with an implicit or explicit blanket guarantee. This reduces the probability of an explicit banking crisis, although the banking risks may be even greater because of the moral hazard problem. In fact, government protection of banks could also increase the probability of a sovereign debt crisis or even a currency crisis before financial liberalization.

If financial liberalization significantly reduces the likelihood of financial crises, especially in middle-income economies, then why did some middle-income economies experience financial crises following liberalization? We further investigate whether the pace of liberalization, the supervisory structure, and the institutional environment matter for outcomes of financial liberalization.

We obtain three main findings. First, an excessively rapid pace of financial liberalization may increase financial risks. The net impact on financial instability depends on the relative importance of the “liberalization effect” and the “pace effect.” In essence, what the “pace effect” captures could simply be the prerequisite conditions and reform sequencing that are well discussed in the literature. Second, the quality of institutions, such as investor protection and law and order, also matter. International experiences indicate that investor protection can significantly reduce the probability of financial crises. Third, the central bank’s participation in financial regulation is helpful for reducing financial risks during financial liberalization. This is probably because central banks always play central roles in financial liberalization, especially in the liberalization of interest rates, exchange rates, and the capital account. If a central bank is responsible for financial regulation, its liberalization policies might be more cautious and prudent.

Our research findings offer important policy implications for the PRC. (1) Further financial liberalization is necessary not only for sustaining strong economic growth but also for containing or reducing financial risks. (2) Gradual reform may still work better than the “big bang” approach, and sequencing is very important for avoiding the painful financial volatilities that many other middle-income countries have seen. (3) The government should also focus more on improving the quality of other institutions, especially market discipline, to contain financial risks. (4) It is better for the central bank to participate in financial regulation. The new regulatory system should focus exclusively on financial stability and shift from regulating institutions toward regulating functions. It should also become relatively independent to increase accountability.

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About the Author 

This submitted article was written by  and  of Asia Pathways, the blog of The Asian Development Bank Institute was established in 1997 in Tokyo, Japan, to help build capacity, skills, and knowledge related to poverty reduction and other areas that support long-term growth and competitiveness in developing economies in the Asia-Pacific region.

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