Corporate Performance In Context To Indian Banking Industry Finance EssayIn today’s globalized economy, competitiveness and competitive advantage have become the buzzwords for corporates around the world. Corporate are aggressively trying to build new competencies and capabilities, to remain competitive and to grow profitably. Merger and Acquisitions are being increasingly used by companies for entering new markets, asset growth, garnering greater market share/additional manufacturing capacities and gaining complimentary strength and competencies, to become more competitive in the market place. In the USA, since the early 1900s, there have been six distinct waves of mergers and acquisitions, each with its distinct characteristics and outcomes, as per a BCG report released in July 2007 (based on a detailed analysis of more than 4,000 completed deals between 1992 and 2006 in USA). As per the report, “at the beginning of the twentieth century, there was a drive for market share, followed three decades later by a longer and more ambitious wave as companies connected together different elements of the value chain, from raw materials and production through to distribution. The most recent wave, which started in 2004, after the internet bubble at the turn of the century and the subsequent downturn, is driven by consolidation motives”.

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INDIAN BANKING INDUSTRY

Banking in India originated in the first decade of 18th century with the General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are at present defunct. The oldest bank in continuation in India is the State Bank of India being recognized as “The Bank of Bengal” in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the on the whole active trading port, primarily due to the trade of the British Empire, and due to which banking activity took roots there and flourished. The first wholly Indian owned bank was the Allahabad Bank, which was established in 1865.

By the 1900s, the market extended with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai – together they were originated under private ownership. The Reserve Bank of India officially took on the responsibility of regulating the Indian banking sector from 1935. After India’s independence in 1947, the Reserve Bank was nationalized and given broader powers.

The Indian banking industry is governed by the Banking Regulation Act of India, 1949. It can be classified into two major categories, non-scheduled banks and scheduled banks. Schedule banks comprise commercial banks and the co-operative banks. Commercial banks can be further grouped into nationalised banks, the State Bank of India and its group banks, regional rural

banks and private sector banks. These banks have over 67,000 branches spread across the country.

MERGERS AND ACQUISITIONS

Merger is defined as combination of two or more companies into a single company where one survives and the other lose their corporate existence. The survivor acquires all the assets as well as liabilities of the merged company or companies. The surviving company is the buyer, which retain its identity and the extinguished company is the seller. In India, mergers are called as Amalgamations, in legal parlance. The acquiring company (also referred to as the amalgamated company or the merged company) acquires the assets and liabilities of the target company (or amalgamating company).

Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of the controlling interest in the share capital of another existing company.

TYPES OF MERGERS

Horizontal merger takes place where the two merging companies produce similar products in the same industry.

Vertical merger occurs when two firms, each working at different stages in the production of the same good, combines together.

Conglomerate merger take place when the two firms operate in different industries merge with each other.

Market extension mergers exist when two companies that sell the same product in different market merge with each other.

Product extension mergers exist when two companies selling different but related products in the same market come together.

Accretive mergers are those in which an acquiring company’s earnings per share increase. And the way of calculating this is, if a company with a high price to earnings ratio (P/E) acquires one with a low P/E ratio.

Dilutive mergers are the opposite of the above, whereby a company’s EPS decreases. The company will be one with the low P/E acquiring one with the high P/E ratio.

Mergers and acquisitions in India are on the mount. Volume of mergers and acquisitions in India in 2007 was grown-up to two fold from 2006 and four times compared to 2005. India has materialized as one of the top countries with respect to merger and acquisitions deals. In 2007, the first two months single-handedly accounted for merger and acquisitions deals worth $40 billion in India. The estimated figures for the entire year projected a total of more than $100

billion worth of mergers and acquisitions in India. This was the two fold growth from 2006 and a growth of almost four times from 2005.

In the banking sector, imperative mergers and acquisitions in recent years embrace the merger between IDBI (Industrial Development Bank of India) and its subsidiary IDBI Bank. The deal was worth $174.6 million (Rs. 7.6 billion in Indian currency). Another imperative merger was that among Centurion Bank and Bank of Punjab, worth $82.1 million (Rs. 3.6 billion in Indian currency), the merger led the formation of the Centurion Bank of Punjab with 235 branches in different regions of India.

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LITERATURE REVIEW

Kuriakose, S. & Kumar, G. (2010) have defined that the principal cause behind the voluntary amalgamations in the Indian banking sector take place from increased efficiency, cost savings, economies of scale etc. They analysed that mergers are the foundation of inorganic growth and the foremost way to adhere to the regulatory requirements and the merging partner’s strategically similarities and relatedness are extremely significant in the synergy creation because the relatedness of the strategic variables have a significant impact on the bank performance. They used the specific data of the firm to study the strategic similarities of bidder and target banks in the voluntary amalgamations in the Indian banking sector. All pertinent strategic and financial variables of respective banks are considered to assess their relatedness and it was alleged that balance sheet resource allocation was the symptomatic of the strategic focus of the banks.

Ismail, T. & Magdy, R. (2010) analyzed prior literature of mergers and acquisitions and its effects on the financial performance effort to determine the factors that persuade post mergers and acquisitions performance. From their research they concluded that, there are indecisive results among studies on the literature, where in some cases corporate performance was improved but in some cases it wasn’t. They also talked about previous studies in which varieties of measures were used to examine the impact of M & A on corporate performance and states that managers should be conscious about the impact of various factors on post merger corporate performance to accurately evaluate the proposed offers of M & A and then take crucial actions.

Bhan, A. (2009) provided proper insight into the motives and benefits which arises due to mergers and acquisition in Indian banking sector. He did this by examining the eight merger deals of the banks in India during the period reforms from 1996 to 2006 and states the use of empirical methods T-test to study the short term change in the returns of the banks due to mergers and EVA (Economic Value Added) method, to study the efficiencies or benefits achieved due to mergers. The conclusion from the sample taken for analysis was that the mergers in the banking sector in the post reform period possessed considerable gains which were justified by the EVA of the banks in the post merger period.

Fraser, D. & Zhang, H. (2009) describes the indication on operating performance changes at a sample of U.S. banks acquired by non-U.S. banking organizations over the 1980-2001 periods. He denotes the direct comparison between pre acquisitions performance of targets with their post acquisitions performance. And the result signifies that the cross-border acquisitions produce improved target performance, increased cash flow profitability, and improved labour utilization.

Kumar, R. (2009) examine the post-merger operating performance of acquiring companies involved in merger activities during the period 1999-2002 in India. He identifies the synergy by means of the operating performance approach, which compares the pre-merger and post-merger performance of companies using accounting data to inspect merger related gains to the acquiring firms. He also states that the merger usually do not lead to improve the acquirer’s financial performance i.e. profitability, assets turnover and solvency of the acquiring companies. The result shows that the mergers are not aimed at maximizing wealth of owners, so the managers need to focus on post merger integration issues in order to create merger induced synergies, rather than simply acquiring bigger size and achieve hidden objectives.

Tauseef, S. & Nishat, M. (2008) explored the short term market response that are associated with the announcement of seven mergers & acquisitions in the banking sector of Pakistan for the period of 5 years i.e. 2003 to 2008 using the event study methodology. From the study they specifies the statistically significant investor reactions about the merger announcements which were either positive or negative and for the individual target and bidder banks; they were the cumulative abnormal returns range commencing significant positive to significant negative. And he also concluded that the mean of cumulative abnormal returns for the collective banks in the domestic mergers were also positive.

Kumar, S. & Bansal, L. (2008) explored that mergers and acquisitions can be done by identifying the financial synergy in diverse ways. He found out that while going for M & A’s, the claims made by the corporate sector to generate synergy are achieved or not. His study was based on secondary financial data to know the synergy effect in long run and enlightens us by indicating that the management cannot take guarantee that M & A will generate profits and high growth or that synergy can be generated or not.

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Mantravadi, P. & Reddy, V. (2008) surveyed the globalised economy with context to M & A in the world, for recuperating competitiveness of companies through gaining superior market share, lengthening the portfolio to reduce business risk, for entering new markets and geographic, and capitalising on economy of scale. Their main focus was to study the blow of mergers on the operating performance of acquiring corporate in diverse industries by probing pre and post merger financial ratios. The study illustrate that in banking and finance industry, the mergers showed the positive impact on profitability of the firms as compare to other industries.

Beccalli, E. & Frantz, P. (2008) investigates whether M & A operations sway the performance of banks, via a sample of 714 deals involving EU acquirers and targets located right through the

world over the period 1991-2005. They analysed whether M & A operations reflected in enhanced performance taking into consideration standard accounting ratios, cost and alternative profit efficiency or not. And the results of their study explain that despite the extensive and ongoing consolidation process in the banking industry, M & A operations are allied to a slender deterioration in equity, cash flow return, and profit efficiency and contemporaneously to a manifest improvement in cost efficiency which relocate to bank clients. Thus, the alteration in cost and profit efficiency exhibit a particularly negative trend for cross-border deals to testify the consequence of geographical relatedness in instruct to achieve healthier post M & A performance.

Jayadev, M. & Sensarma, R. (2007) analyzed the critical issues related with mergers and acquisitions, that in case of forced mergers neither the bidder nor the target bank’s shareholders benefitted from it, though in the case of voluntary mergers, the bidder’s bank shareholders have gained more than that of target banks. They proposed that in spite of absence of gains, they totally favours mergers and signifies the success of mergers as the valuation of portfolio, integration of IT platforms and the issue of human resource management. They also signifies the need of large banks by posing full convertibility, Basel-II environment, financial inclusion, and the need of large investment banks, were the primary factors for driving further consolidation in the banking sector in India and other Asian economies.

Kumar, R. & Mehta, J. (2006) probed into assorted motivations following a bank’s merger and acquisitions. According to the report on banking sector in 2006, India is slowly but surely moving from a regime of large number of small banks to small number of large banks. Consequently, they describes the escalating task of the economic power in the turf war of nations and the substantial role of the state and the central bank in shielding customer’s interests vis-a-vis creating players of international size. They also glanced at the large inference for the nation, while gazing at the M & A in the Indian Banking Sector equally from an opportunity and as crucial perspectives.

Pamarty, M. (2006) analysed the financial & strategic management facet of merger through several outlook and estimated the financial proposition before and after mergers in the banking sector. His study enlightens us about the retort of security prices to proclamation of M & A decisions and predominant aspects which create target & source banks for the M & A.

Santos, M., Errunza, V. & Miller, D. (2003) inspect the valuation possessions of corporate international diversification by probing cross-border mergers and acquisitions in U.S. acquirers over the period 1990-1999. Their results demonstrate that on an average, acquisitions of fairly valued foreign business units do not escort to value discounts. Consistent with the industrial diversification markdown literature, unrelated cross-border acquisitions; result in a noteworthy diversification concession of about 24 % after accounting for the evaluation of foreign targets, besides considerable wealth gains collection to foreign target shareholders in spite of the type of acquisition. And thus generally result of their study signifies that the international diversification does not demolish value while industrial diversification direct to discounts yet after controlling for the pre acquisitions worth of the target.

Bhaumik, S. & Selarka, E. (2003) examined the impact of M & A on profitability of firms in India and draw the conclusions about impact of concentrated ownership and entrenchment of owner managers on firm performance. Their result indicates that during year 1995-2002 period, M & A in India led to deterioration in firm’s performance. Neither the investors in the equity market nor the debts holders can rely upon to discipline errant management. In other words, on balance, negative effect of entrenchment of owner managers trumps the positive effects of reduction in owner vs. Manager Agency problems.

Schenk, H. (2003) illustrated the use of ex-ante and ex-post methodologies to examine the performance of mergers in banking sector. He concluded that mergers among large banks, or the take-overs of small banks by the large banks are able to create economic wealth but do not create positive shareholder returns. The generality of his finding was demonstrated by a discussion of findings on non financial mergers. Since the iniquitousness of ill performing mergers was at odds with both conventional wisdom and economic theory, he discussed then why such mergers and take –over’s take place at all. The consequence showed a wider effect on economic efficiency and comes up with several policy implications. He argued that competition policies should address issues of productive efficiency along with issues of allocative efficiency and that industrial policies should improve the access of retail clients to investment funds.

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Analysis Of Economic Performance In Mergers And Acquisitions Marketing EssayIn today's global business environment, companies are eager to grow, and one of the best ways to grow is by merging with another company or acquiring other companies.

For such a transaction, the two firms involved must be worth more together than they were apart. The advantages of mergers and acquisitions include achieving economies of scale, combining complementary resources, acquiring advanced technology, improving market reach, and increasing market power and market share. Since mergers and acquisitions are so complex, however, it can be very difficult to evaluate the transaction, define the associated costs and benefits, and handle the culture differences between companies.

China's regulatory regime used to limited mergers and acquisitions for a long time. However, that regime is changing now, both to accommodate these recent developments and to further stimulate foreign investment. Not only foreign companies may now purchase and restructure Chinese businesses, but also domestic Chinese companies are merging and acquiring one another, and the more successful ones among them have begun to buy out foreign investors. The

result of all of these developments is a rapidly expanding mergers-and-acquisitions (M&A) market in China. Nowadays, more and more Chinese companies are going global through cross-border mergers and acquisitions.

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1. Introduction 

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. In today's global business environment, companies are eager to grow, and one of the best ways to grow is by merging with another company or acquiring other companies. In general, mergers and acquisitions are performed in the hopes of realizing an economic gain.

1.1 Research Background 

Merger and acquisition activity has been seen as growing at a fast pace in recent times. Mergers and Acquisitions, a development which was seen primarily in the United States at one time, are now turning out to be increasingly popular in other parts of the world. Apparently, Merger and Acquisition activity has turned out to be significant business-level advancement in recent corporate world.

China's regulatory regime has long been hostile to merger-and-acquisition transactions (Norton, & Chao, 2001). That regime is changing, however, both to accommodate these recent developments and to further stimulate foreign investment. China's World Trade Organization (WTO) accession will no doubt accelerate these changes. Gone are the days when foreign companies wishing to invest in China were limited to greenfield investments. They may now purchase operating Chinese businesses and may restructure their existing investments in China through mergers, spin-offs, and holding companies that were impossible only a few years ago. Now these developments are not confined to foreign investors. Domestic Chinese companies are also merging and acquiring one another, and the more successful ones among them have begun to buy out foreign investors. The result of all of these developments is a rapidly expanding mergers-and-acquisitions (M&A) market in China. Nowadays, more and more Chinese companies are going global through cross-border mergers and acquisitions.

The case, going to be discussed in this paper, is Lenovo, a China-based company, successfully acquired the PC department of IBM, a shining symbol of American company.

1.2 The Theories in Relation with Merger-and-Acquisition

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

In general, mergers refer to negotiated deals that meet certain technical and legal requirements. Acquisition (also called "tender offer") usually means that one firm or person is making an offer directly to the shareholders to sell (tender) their shares at specific prices (Weston, Mitchell, & Mulherin, 2006). In one sense, the word merger refers to negotiations between friendly parties who arrive at a mutually agreeable decision to combine their companies. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. However, in practice, actual mergers of equals don't happen very often. Usually, one firm in a merger might be stronger and might dominate the transaction. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. There may be wide variations in attitudes in either direction as negotiations proceed.

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Economists have grouped mergers-and-acquisitions based on whether they take place at the same level of economic activity - exploration, production or manufacturing, wholesale distribution, or retail distribution to the ultimate consumer (Weston, Mitchell, & Mulherin, 2006). From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

1.3.1.1 Horizontal mergers-and-acquisitions

A horizontal merger-and-acquisition involves two firms that are in direct competition and share the same product lines and markets. Forming a larger firm may have the benefit of economies of scale. Usually, a horizontal M&A activity is motivated by a desire for greater market power.

1.3.1.2 Vertical mergers-and-acquisitions

A vertical merger-and-acquisition occurs between firms in different stages of production operation. In the oil industry, for example, distinctions are made between exploration and production, refining, and marketing to the ultimate consumer. In the pharmaceutical industry, one could distinguish between research and the development of new drugs, the production of drugs, and the marketing of drug products through retail drugstores.

Firms might want to be vertically integrated for many reasons. There are technological economies such as the avoidance of reheating and transportation costs in the case of an integrated iron and steel producer. Transactions within a firm may eliminate the costs of searching for prices, contracting, payment collecting, and also might reduce the costs of communicating and coordinating production. Planning for inventory and production may be improved due to more efficient information flow within a single, vertically integrated firm.

1.3.1.3 Conglomeration mergers-and-acquisitions

A conglomerate merger-and-acquisition involves firms engaged in unrelated types of business activity. Among conglomerate mergers, three types have been distinguished:

A product extension merger-and-acquisition broadens the product lines of firms. These are mergers between firms in related business activities they also can be called concentric mergers.

A geographic market extension merger-and-acquisition involves two firms whose operations have been conducted in nonoverlapping geographic areas.

Finally, other conglomerate mergers that are often referred as pure conglomerate mergers-and-acquisitions, which involve unrelated business activities that would not qualify as product extension or market extension mergers.

There are two important characteristics define a conglomerate firm: First, a conglomerate firm controls a range of activities in various industries that require different skills in the specific managerial functions of research, applied engineering, production, marketing, and so on; Second, the diversification is achieved mainly by external mergers and acquisitions, not by internal development.

1.3.2 Types of mergers-and-acquisitions from how the M&A is financed

There are two types of mergers that are distinguished by how the merger-and-acquisition is financed. Each has certain implications for the companies involved and for investors:

1.3.2.1 Purchase mergers-and-acquisitions

As the name suggests, this kind of M&A occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.

1.3.2.2 Conglomeration mergers-and-acquisitions

With this M&A, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger

1.4 Motivation Theories

Why do mergers and acquisitions occur? One plus one makes three: this equation is the special alchemy of a merger-and- acquisition.

In the Lenovo and IBM deal, the new Lenovo will be a stronger competitor in global PC market, combining all the advantages of IBM and Lenovo's existing PC businesses into the new company.

The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that is the reason behind M&A.

This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

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Synergy is the magic force that allows for enhanced cost efficiencies of the new business (Ravenscraft, & Scherer, 1987). Synergy takes the form of revenue enhancement and cost savings. By merging-and-acquiring, the companies hope to benefit from the following:

1.4.1 Achieving economies of scale

Growth is the most important motive for international mergers, and it is vital to the well-being of any firm. Merger-and-acquisition provides instant growth. A common feature of all mergers-and-acquisitions is an increase in firm size. Consequently, a standard reason offered for a merger is that the union of the two firms will create economies of scale or synergies. Economies of scale may be defined as a lowering of the average cost to produce one unit due to an increase in the total amount of production (Encyclopedia of Business, 2nd Ed.). Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. In one word, the larger firm resulting from the merger can produce more cheaply than the previously separate firms. Efficiency is the key to achieving economies of scale, through the sharing of resources and technology and the elimination of needless duplication and waste (Hughes, 1989). Economies of scale sounds good as a rationale for merger, but there are many

examples to show that combining separate entities into a single, more efficient operation is not easy to accomplish in practice.

Mergers and Acquisitions can also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers, which means, economies of vertical integration. This involves acquiring firms through which the parent firm currently conducts normal business operations, such as suppliers and distributors. By combining different elements involved in the production and delivery of the product to the market, acquiring firms gain control over raw materials and distribution out-lets. This may result in centralized decisions and better communications and coordination among the various business units. It may also result in competitive advantages over rival firms that must negotiate with and rely on outside firms for inputs and sales of the product.

In Lenovo and IBM case, after the transaction, Lenovo became the world's third-largest PC maker, trailing only Dell and Hewlett-Packard in sales.

1.4.2 Acquiring advanced technology

To stay competitive, companies need to stay on top of technological development and business applications. Acquiring new and advanced technology has become a very important consideration in mergers-and-acquisitions, especially cross-border mergers-and-acquisitions. There are two ways that technological considerations impact the activities: A technologically superior firm may make acquisitions abroad to exploit its technological advantages; while a technological inferior firm may acquire a foreign target with superior technology to enhance its competitive position at home and abroad.

In Lenovo and IBM case, Lenovo was in the second situation. The new Lenovo represents not only the efficient productivity of itself and also the advanced IT technology of IBM PC department.

1.4.3 Improving market reach

Companies buy companies to reach new markets, that is, to penetrate new geographic regions. A merger-and-acquisition may expand two companies' marketing and distribution, giving them new sales opportunities.

In the case, Lenovo has a strong client base and sales infrastructure in the Chinese market, while IBM has a comprehensive network in PC sales on a global basis. This action was to help Lenovo to enhance its awareness in global market and help IBM to develop markets in Asia, especially China, a fast growing market.

1.4.4 Increasing market share

The market share will be increased when a horizontal merger-and-acquisition happens. The market power of the buyer company will be significantly increased by capturing increased

market share. Greater market share also may result in advantageous pricing, since larger firms are able to compete effectively through volume sales with thinner profit margins (George, 1989).

In Lenovo and IBM case, the new Lenovo was going to have an annual sales volume of 11.9 million units and revenue of $12 billion, with a 7% market share, increasing Lenovo's current PC business fourfold.

Besides the three main forces driving mergers-and-acquisition, there are some other points that a company can benefit from the merger-and-acquisition activity, like brand awareness, diversifications, taxes, roll-ups, and some other factors.

1.5 Issues Raised by M&A Activity

Merger-and-acquisition can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, one and one add up to three sounds great, but in practice, things can go awry. We had to say, achieving synergy is easier said than done. It is not going to automatically realized when two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two, especially for the cross-boarded M&A activities.

No merger-and-acquisition activity is considered easy, and no firm is going to successfully shape up after the transaction. M&A and industrial restructuring activities may raise many important issues for business decisions.

Firstly, the failure of an acquisition to generate good returns is due to the huge amount the parent company paid. Usually, the transaction cost of an acquisition gives the parent company a very hard time. It is very hard to evaluate the associated costs and benefits. In most cases, the financial benefits may not be realized for a short time.

Secondly, culture differences are often ignored. When a company acquires another one, the decisions are typically based on product or market synergies, but not the cultural differences. Companies often pay undue attention to the short-term legal and financial considerations involved in a merger-and-acquisition, and neglect the implications for corporate identity and communication, factors that may prove equally important in the long run because of their impact on workers' morale and productivity (Balmer & Dinnie 1999).

However, even a deal that is financially well off may ultimately prove to be a disaster, if the new management does not deal sensitively with the companies' people and their different corporate cultures. It's a mistake to assume that personnel issues are easily overcome. There may be acute contrasts between the attitudes and values of the two companies, especially if the new partnership crosses national boundaries. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and even shrinking productivity. A merger-and-acquisition is an extremely stressful process for those involved: job losses, restructuring, and the

imposition of a new corporate culture and identity can create uncertainty, anxiety and resentment among a company's employees (Appelbaum et al 2000). Research shows that a firm's productivity can drop by between 25 and 50 percent while undergoing such a large-scale change; demoralization of the workforce is a major reason for this (Tetenbaum, 1999).

2. Case Study: LENOVO & IBM

"As Lenovo's founder, I am excited by this breakthrough in Lenovo's journey towards becoming an international company. Over the past 20 years, I've watched Lenovo develop into the leading IT Company both in China and throughout Asia. Since the beginning, however, our unwavering goal has been to create a truly international enterprise. From 2003 when we changed our international brand name to 2004 when we announced our partnership with the International Olympic Committee, to today's strategic alliance with IBM, I have been delighted to watch Lenovo become a truly world-class company." (Press Release, Dec. 08, 2004, www.legendgrp.com)

- Liu Chuanzhi, Chairman, Lenovo Group

2.1 Brief Introduction of the M&A Deal

In December 2004, the China-based Lenovo Group (Lenovo) announced that it had acquired the personal computer (PC) division of the US-based IT major IBM. Lenovo had completed its $1.75 billion purchase of IBM's PC division. Based on both companies' 2003 sales figures, the joint venture was going to have an annual sales volume of 11.9 million units and revenue of $12 billion, increasing Lenovo's current PC business fourfold (Spooner, & Kanellos, 2004). This made Lenovo the world's third-largest PC maker, trailing only Dell and Hewlett-Packard in sales.

According to the report of Reuters news agency, the agreement called for Lenovo to pay IBM $650 million in cash, $600 million in Lenovo Group common stock and for Lenovo to assume $500 million in net balance sheet liabilities from IBM. Lenovo was taking over IBM's PC business, including research and development and manufacturing. With taking an 18.9% stake in Lenovo, IBM had become its second largest shareholder.

Lenovo will be the preferred supplier of PCs to IBM and will be allowed to use the IBM brand for five years under an agreement that includes the "Think" brand. Big Blue has promised to support the PC maker with marketing and via its IBM corporate sales force.

The combined venture was going to have roughly 10,000 IBM employees and 9,200 Lenovo employees. It will be headquartered in New York, with operations in Beijing and in Raleigh, N.C. (Gibson, 2004).

Stephen Ward, vice president of IBM's Personal Systems Group, was becoming CEO, while Yang Yuanqing, Lenovo's current CEO, was becoming president (Dec. 08, 2004, www.chinaview.cn).

2.2 Background of the Deal

2.2.1 Background of Lenovo

Lenovo, formerly known as Legend, was founded in 1984, started its business as a distributor of computer products for foreign companies including IBM, AST (AST is one of the leading IT companies in South Africa. It is an IT services and solutions organization with more than 2500 employees) and HP. In 1990, Lenovo manufactured its first PC and within a decade it grew to become the leading PC manufacturer in China.

In the early 2000s, Lenovo expanded into new business areas including the manufacture of mobile phone handsets and digital cameras, and management consulting.

In the fiscal 2003, Lenovo manufactured around 4.5 million PCs including laptops and desktops. Lenovo has also diversified into other business areas including handheld devices and IT. By the end of 2003, Lenovo had captured a 27 percent market share of the PC market in China. Lenovo was Asia's leading and world's ninth largest PC manufacturer.

In March 2004, Lenovo joined The Olympic Partner (TOP) to sponsor Olympics games to be held in 2008 at Beijing. According to analysts, this move would help Lenovo gain brand recognition globally. As an industry analyst said, "For Chinese firms, like Lenovo, the Olympic Games provide an honorable opportunity to enhance their image and demonstrate their strengths in key technologies, products and services worldwide (Wang Yu, 2004). In April 2004, the company changed its name from 'Legend' to 'Lenovo,' where 'Le' stands for Legend and 'novo' stands for novelty and innovation.

For the fiscal year ended March 31, 2004, Lenovo reported a turnover of HK$ 23.2 billion and a net profit of HK$ 1.05 billion. About 51.5% of its revenues came from the corporate segment, 33.5% from the consumer segment, 8.8% from handheld devices, 3.8% from contract manufacturing and 2.4% from IT services (www.lenovo.com).

After its significant success in the Chinese market, Lenovo made plans to go global. In March 2004, Lenovo joined The Olympic Partner (TOP) to sponsor Olympics games to be held in 2008 at Beijing. This move helped Lenovo gain brand recognition globally.

2.2.2 Background of IBM

IBM incorporated in 1911, starting as a major producer of punch card tabulating machines (Pugh, 1995). In the 1960s, it was growing at the rapid rate of 15 to 20 percent a year and soon achieved a domination of the computer market that was historically unparalleled in any other major industry.

From annual sales of $1.8 billion and a head count of 104,000 in 1960, it had rocketed to sales of $7.2 billion and 259,000 employees by the end of the decade (Chposky, & Leonsis, 1988). IBM's success was creating a difficult environment for its competitors. By 1960 the mainframe computer industry had already been whittled down to just IBM and seven others. For many years

IBM's domination of the computer industry was attributed to a variety of factors: its managerial competence; its technological excellence; its formidable marketing organization; its monopolistic and antitrust business practices; and the leadership exerted by the Watsons (Maney, 2003). It has been nicknamed "Big Blue" for its official corporate color.

John R. Opel's appointment as CEO in 1981 coincided with the beginning of a new era of computing (Bellis, 2000). Thanks to the birth of the IBM Personal Computer, or PC, the IBM brand began to enter homes, small businesses and schools.

When designing the PC, IBM for the first time contracted the production of its components to outside companies. The processor chip came from Intel, and the operating system, called DOS (Disk Operating System), came from Microsoft.

The IBM PC was sold in high enough volumes to justify writing software specifically for it, and this encouraged other manufacturers to produce machines which could use the same programs. The clones of IBM PC, called "IBM PC Compatible", were created and followed by many companies like Compaq.

In the late 1980s, IBM damaged its own market by itself failing to appreciate the importance of "IBM compatibility". There was a struggle period for IBM when buyers began to regard PCs as commodities, and doubted the IBM brand for the very high price.

In the 1990s, the important turning point of the Big Blue was coming. IBM's influence on PC architecture became increasingly irrelevant. Instead of focusing on staying compatible with the IBM PC, vendors began to focus on compatibility with the evolution of Microsoft Windows. An IBM-brand PC became the exception not the rule. IBM lost its market share in PC market.

By 1993, the company's annual net losses reached a record $8 billion (IBM archives: 1990s). IBM faced mounting pressure to rebuild its product line, shrink the workforce and make significant cost reductions, even to split the business into separate companies.

We can see from the chart, IBM didn't have a huge worldwide market share for its PC products in recent years - 5.6% in 2002, far behind market leaders Dell and HP, and shrinking as time went by.

In addition to losing market share, the PC business was bleeding money for IBM. The PC department had lost almost $1 billion from 2001. As the economy pick up, the global PC market achieved growth in both size and performance in 2004. But in the first nine months of 2004, IBM's PC business earned margins of 0.75% (IBM archives: 2000s). Even grocery stores do better.

2.3 The Strategy Analysis

To summarize the points of this deal:

To create world's third-largest PC business;

To create global business with powerful brand name and world-class products;

To create PC business with global reach, say a demographic shift.

Commenting on this move, Leslie Fiering, an analyst from Gartner said, "Lenovo aspires to become a major international player and a recognized brand, a company with the ability to sell into multinational corporations and be profitable."

Considering IBM's PC business generates about $10 billion each year in revenues, onlookers might think this sale doesn't make much sense. But it does, once we look under the covers.

As I mentioned above, though IBM was the No.3 seller of PCs worldwide, it did not have great market share in the global PC market anymore, 5.2% in the first three quarters of 2004, and far behind the leaders Dell and HP. Despite the fact that IBM continued to offer fine products with technical innovations, customers drifted to the lower-priced products from IBM's competitors. Apparently, customers didn't see the value-add in IBM's technology. The fact is, PCs are now a commodity, and a few extra bells and whistles aren't worth the added dollars.

Retrospect to the operation situation of IBM PC department in 2003, the sales revenue of IBM PC department was $9.56 billion, while the net loss was $258 million , which mainly caused by the huge expense (about $586 million) of product warranty. At the meantime, the retained profit of Lenovo reached about $135 million, with the sales revenue was just $2.97 billion (Ren, Zhou, Li, & Shen, 2004). We can see that IBM really needs an improved financial profile.

In my opinion, the deal is about shifting demographics. Lenovo has a strong client base and sales infrastructure in the Chinese market, while IBM has a comprehensive network in PC sales on a global basis. Lenovo has achieved a significant success in the Chinese market, but the brand awareness still not be recognized in global market. It will be a major milestone for Lenovo in its efforts to globalize its operations. It was also perceived as an important step towards achieving the company's goal of becoming a Fortune 500 company by 2010. While, IBM's largest markets for its PCs are North America and Europe, the brand is highly recognized in the global market for its advanced technical services. The action has shifted to developing markets in Asia, especially China, a fast-growing market targeted by a number of global tech giants.

After the transaction, IBM will become the preferred services (including warranty and maintenance) and customer financing provider to Lenovo. Lenovo will become the preferred PC provider to IBM and its wide range of clients.

2.4 SWOT Analysis

2.4.1 Strengths

2.4.2.1 Successful expansion of market share in global PC markets

The new Lenovo, No. 3 PC seller worldwide, successfully expand its market share in global PC markets. The acquisition made Lenovo one of the leading global PC makers. As can be seen

from the chart above, Lenovo expanded its global market share to 7.1% in 2006, the No.3 PC seller worldwide. While, it was just the ninth seller in 2004 with a 2% market share in global PC market.

2.4.1.2 Extension of markets, and enhancement of brand awareness

The deal helps both Lenovo and IBM to expand their markets, and to enhance the brand awareness. As I mentioned above, Lenovo has a strong client base and sales infrastructure in the Chinese market, while IBM has a comprehensive network in PC sales on a global basis. This action was to help Lenovo to enhance its awareness in global market and help IBM to develop its markets in Asia, especially China, a fast growing market.

2.4.1.3 Complementarity of technology and marketing

The two companies complement each other neatly in technology and marketing. Lenovo will be a strong new competitor for them both in the global PC market, combining all the advantages of IBM and Lenovo's existing PC businesses into a new company. The new Lenovo represents not only the best option for customers' PC needs, and also the best overall solution for IBM to continue to provide warranty service, and help customers apply technology and service to achieve their toughest business challenges and goals. Lenovo will continue the progress that IBM PCs have made: developing innovative personal computing technologies that provide the lowest cost of ownership and the highest return on investment in Lenovo PCs.

Lenovo specializes in consumer PCs and low-cost manufacturing. IBM ranges worldwide and focuses on businesses. Its 30,000-person sales force and global network of 9,000 business partners will help sell Lenovo PCs. The new Lenovo will create a formidable force against the direct rivals, like Dell.

For IBM, just as it answered the question of "Why is IBM making this change?" on its website, "Our PC business has made tremendous progress over the past several years and extended our market leadership in our targeted business segments. To build on that success, IBM's PC division, as part of Lenovo, will be able to compete in all areas of the PC marketplace. The combined company will gain advantages neither PC operation could have on its own, and be a powerful global leader in the $180-billion global PC business.

"Working together, IBM and Lenovo will be able to provide excellent value in PCs for companies of all sizes, with the same research and development, quality manufacturing, sales, service, support, financing, and long-term relationships our IBM PC customers have today."

The new company starts from a good spot. Rather than simply compete on price, the company plans to distinguish itself through innovation. Declares Yang: "We will be the PC company with the best balance between innovation and efficiency."

2.4.2 Weaknesses

2.4.2.1 A tough challenge in merging two distinct corporate cultures

Lenovo faced a tough challenge in merging two distinct corporate cultures. The big test comes when the two organizations actually operate together. "The difference in corporate cultures would normally be a formidable obstacle," said Geraldo M. Vasconcellos, a finance professor at Lehigh University in Pennsylvania. What will happen when Lenovo, a partly state-owned company that has benefited immensely from its government ties, gets together with IBM, a shining symbol of American capitalism? Whether both of them can find right way to solve the problem within short time?

In addition, Lenovo performs very little independent R&D and mostly manufacturers low-end systems. While, IBM sells to the corporate and often to customers that have invested heavily in IBM services and software.

2.4.2.2 Possibility of failing to earn the trust of IBM's old customers

The merger deal may cause the panic and distrust of IBM's old customers. The warranty services and technical supports were often the most important reason why corporations bought from IBM with a relative high price than its rivals like HP and Dell. Thus, the new Lenovo has to spend some time to convince IBM's clients that Lenovo will continue to provide advanced PCs and services. The biggest beneficiaries of this move, at least initially, are HP and Dell -- currently the largest branded worldwide PC companies. These firms will spend the next several years trying to convince IBM's base that they are now the most trusted firms in technology.

The deal presents a number of new opportunities for the new Lenovo. But the combined entity will have to work hard towards proving that the change represents real benefits for its existing and potential customers.

2.4.2.3 Poor and low presence in the U.S. markets.

Lenovo did no great performance in the U.S. PC market, even not in the top five. Enhancing the brand awareness is still a very tough problem for Lenovo.

2.4.2.4 Poor financial performance of IBM PC department

Besides the huge amount of cash that Lenovo paid to IBM, Lenovo will face the deficit of IBM. The financial performance of IBM PC department was poor with a huge deficit each year.How to improve the financial performance and continue to invest in Research & Develop department will be a thorny difficult problem that Lenovo has to handle with.

2.4.3 Opportunities

Compare to the European and American PC markets, China and other developing countries are the emerging markets with great potential. The main difference between Lenovo and other global suppliers is the company already has a strong sales network in the smaller cities which are growing fast. What makes Dell so successful is the efficiency of its purely direct-sales approach and build-to-order manufacturing. While, Lenovo makes its sales channel in very different way. Lenovo will sell its PCs through retailers, corporate resellers, the IBM sales forces, and Dell's route as well. That presents a sizable opportunity, particularly in emerging markets. Worldwide, more than 80% of PCs are sold through retailers and other resellers. That figure is even higher in China and other developing countries, where consumers like to get their hands on products and frequently don't have credit cards.

2.4.4 Threats

2.4.4.1 The economic downturn is giving a shock on PC market.

According to the IDC analyst, consumers and businesses will be much more conservative in their purchases over the recession years, and while low prices will remain essential. That means consumers and businesses will not drive volumes as they did the past few years.

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After the deal in the end of 2004, Lenovo just kept its No.3 position in global PC market for two years, until the powerful rival, Acer, made a great movement. In 2007, Lenovo dropped to no.4, behind Acer. Why did this happen? After Lenovo taking over the PC division of IBM in the end of 2004, Acer bought Gateway in 2007. At the same time, the Taiwanese company took over Packard Bell, which had the side effect of thwarting Lenovo's bid to acquire the company and build its European business (Einhorn, 2009).

Can be seen from the chart above, Lenovo is stuck with about 7% of the market for almost three years, from 2006 to 2008. Meantime, Acer was growing at an alarming rate. Acer has moved into double-digit, say 13.5%, overtaking Dell as the world's second-largest seller of personal computers, trailing only Hewlett-Packard. Acer's low-cost operation strategy helped it to invest more in R&D department and become more profitable.

No doubt the declining growth in the consumer market and the stagnant commercial market is expected to intensify competition among PC vendors. Even worse, when the demand of emerging markets like the Middle East, Africa are slowing down, which had been growing fast over the last several yeas.

However, Acer's ascent even accelerated during the global economic slowdown. The company made an aggressive move into the market for netbooks - the small, low-cost laptops that have

been a rare bright spot during the worst slump the PC industry has ever faced. While other PC manufacturers, like Dell, which depends far more on PC sales to businesses, has struggled as companies have avoided buying new computers.

Lenovo is inevitable facing the tough situation in the intense competitive climate - the lower volumes and thinner margins.

3. Conclusion

After presenting the theories of mergers-and-acquisitions, and analyzing the strategies of Lenovo and IBM case, we could see both sides of merger and acquisition action. Obviously, the economies of scale, the advanced technology, the potential market and the increased market power are appealing to the companies who are eager to grow and develop fast. However, no merger-and-acquisition activity is considered easy, and no firm is going to successfully shape up after the transaction.

As for the case discussed above, synergies have been achieved when Lenovo successfully acquiring the PC department of IBM. Meantime, the new Lenovo also faces lots of challenges ahead its road.

Although there are many different opinions on precisely what causes so many mergers and acquisitions to fail, and on how these problems can be avoided, there are certain points that most analysts appear to agree on. It is widely accepted, for instance, that the 'human factor' is a major cause of difficulty in making the integration between two companies work successfully.

Besides, even though the merger-and-acquisition action has been conducted smoothly, there may be also some tough challenges on the firm's road ahead. The suggestion for all companies, not only for Lenovo, always being ready for the changing of market, never slacken in economic growth and never being panic-stricken in economic downturn.

3.1 Recommendation

Why are so many organizations apparently unable to overcome such difficulties? A merger-and-acquisition is often a unique, one-off event in the lifetime of a firm, companies therefore have no opportunity to learn from their experience and develop tried-and-tested methods to ensure that the process is carried out smoothly. However, there are some recommendations for those companies whose merger-and-acquisition activities are ongoing.

First, during the period in which the acquisition is being negotiated, the management of the two companies can liaise with each other and draw up a clear integration strategy. Starting earlier not only allows the integration to proceed faster and more efficiently, but also gives company the opportunity to identify potential problems, such as drastic differences in management style and culture. The merger-and-acquisition plan could be abandoned if the difficulties are realized to be so severe that the acquisition is likely to fail.

Second, if uncomfortable changes, such as layoffs and restructuring, have to be made at the acquired company, it is important that these are announced and implemented as soon as possible - ideally within days of the acquisition. This helps to avoid the uncertainties and anxieties that can demoralize the workforce of a newly-acquired company, allowing employees to move on and to focus on the future.

Last but not the least, it is important to integrate not just the practical aspects of the business, but also the firms' workforces and their cultures. A good way to achieve this is to create groups comprising people from both companies, and get them to work together at solving problems.

If the transition is carried out without sensitivity towards the employees who may suffer as a result of it, and without awareness of the vast differences that may exist between corporate cultures, the result is a stressed, unhappy and uncooperative workforce - and consequently a drop in productivity.

With this in mind, it is important that a clear 'integration plan' is in place, and that it is overseen by a dedicated manager with the experience and interpersonal skills to calm employees' anxieties and reconcile cultural differences. Preparation for the transition should begin as soon as possible, preferably before the deal has been signed, and any necessary changes should be implemented as quickly as possible to avoid stressful uncertainties that can damage morale. Open and honest communication throughout the process is vital in retaining the trust of employees.

Sometimes, even when following these principles, there may be situations in which a tie-up between two companies could never be made to work effectively, because there are irreconcilable differences in corporate culture or because the drawbacks of a merger would outweigh any potential benefits. Although it is obviously impossible to predict with certainty the outcome of a merger or acquisition before it takes place, thorough preparation can definitely help, and companies should not be afraid to abandon plans for a tie-up if there is evidence that it is unlikely to be a success.

3.2 Limitation

Although many recommendations on how the problems caused by mergers-and-acquisitions can be avoided are put forward, it is based on very limited resources and researches. The evidences presented may be insufficient to prove that the analysis and conclusion are absolutely right.

As the author of this paper, I just hope that this paper can be helpful to understand the general concept of mergers and acquisitions, and to further research.

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