Ethical Issues in Mergers and Acquisitions

MERGERS AND ACQUISITIONS-AN OVERVIEW:

The phrase mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company (in a given industry) grow rapidly without having to create another business entity. In legal terminology, mergers and acquisitions can be defined as follows: Merger: A full joining together of two previously separate corporations. A true merger in the legal sense occurs when both businesses dissolve and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation. Acquisition: Taking possession of another business, also called a takeover or buyout. It may be share purchase (the buyer buys the shares of the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities. ) or asset purchase (buyer buys the assets of the target company from the target company). 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. 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. It is quite normal though for M&A deal communications to take place in a so called 'confidentiality bubble' whereby information flows are restricted due to confidentiality agreements (I.A., 2006).

Merger waves:
The economic history has been divided into Merger Waves based on the merger activities in the business world as: Period 1889 1904 1916 1929 1965 1989 1992 1998 2000 Name First Wave Second Wave Third Wave Fourth Wave Fifth Wave Facet Horizontal mergers Vertical mergers Diversified conglomerate mergers Congeneric mergers; Hostile takeovers; Corporate Raiding Cross-border mergers

M&A is a common phenomenon in USA and Europe. India is emerging as a vibrant player in the world of mergers and acquisitions (M&A). Not long ago, Mr Lakshmi Mittal acquired Arcelor. Tata Group companies and many in the information technology, pharmaceutical and banking sectors have made a host of other acquisitions.

TOP 10 ANNOUNCED MERGER DEALS OF 2009:(REUTERS, 2009)

Target Wyeth Schering-Plough MTN Lloyd's Banking Group Royal Bank of Scotland Petro-Canada Acquirer Pfizer Merck Bharti HM Treasury HM Treasury Suncor Energy Size in Billion ($) $64.5 $46 $23 $22.3 $18.6 $18.2

Liberty Entertainment Endesa Essent Nuon

DirecTV Enel RWE AG Vattenfall

$14.5 $14.2 $12.4 $10.9

On paper, mergers and acquisitions often look terrific. But in practice, they are generally costly and frequently disappointing. They often disrupt organizations, sometimes for years, and divert the time and energy of senior management. Since managers' principal ethical obligation is to serve the interests of their shareholders, the first question senior executives should ask is this: Is there a detailed, realistic, implementable plan for making a merger or acquisition succeed? Every company has implicit contracts with its shareholders that are the result of its past actions, statements, and commitments.(Badaracco). When an M&A; modifies or breaks these contracts, as they sometimes must, compensation may be due to people and groups that reasonably depended on the company to make good on its commitments. Thus, another question that senior executives must ask themselves is:
What does a company owe the people and groups,

particularly the weakest and most vulnerable that may be left behind as the company moves forward? While public and media attention tend to focus on the corporate gamesmanship and dizzying sums associated with M&A activity, such deals are often more interesting as windows inside organizations, revealing how they adapt and perform in times of dramatic change. M&As increase the visibility of a number of theoretical and practical challenges related to an organization's philosophy and operations.

ETHICAL ISSUES IN MERGERS AND ACQUISITIONS:

Mergers and acquisitions involve a wide array of ethical questions, some of which relate to the degree of "fit" between the value systems of the merging firms. A mismatch can sometimes lead to serious problems, such as when one firm invests heavily in employees and the other focuses mainly on shareholders or customers.(Paine)

A secondary category of ethical issues, she notes, involves questions arising from the actual M&A; transaction. Some really vexing issues surface in the course of these deals. Management must decide, for example, when to disclose plans for the merger, what restrictions to place on insider use of information, what counts as fair and proper accounting and taxation, and how to treat employees who may lose their jobs. In M&As that cross borders, these issues can be particularly difficult because of cultural and legal differences. For example, the legal definition of 'redundant employees' varies widely as do requirements for severance arrangements. In the face of such differences, managers of the merging companies have to wrestle with what is fair to the different sets of employees and what will help build a cohesive organization with a single set of ethical standards going forward. Host governments may present additional challenges and opportunities in the international context. Managers of firms that enter foreign countries through their M&A strategies need to be aware of these issues. Governments tend to protect their national interests when dealing with foreign-owned firms. For example, in the United States an airline cannot have more than 25% foreign ownership. Governments may have currency laws that prevent a foreign-owned firm from taking money out of the country. Labor laws may be different from those in a firms domestic market. Such differences may be rooted in culture and tradition that may prove to be difficult to recognize and/or understand.

SCOPE AND OBJECTIVES:

Most discussions of business ethics focus on the interaction between organizations and the external stakeholders. On the other hand, internal organizational ethics has received relatively less attention. Managers are confronted with some of the most complex ethical dilemmas in their daily human resource related responsibilies. Such internal quandaries can be especially problematic during mergers and acquisitions. One of the primary objectives of this paper would be to address questionable management decisions and tactics from ethical perspective. The paper will also cover the process of the transactions involved in M&A as these transactions offer many possibilities to show ethical as well as questionable behaviour on the part of all the parties involved.

METHODOLOGY:

We will use a case based approach to analyze the effects of mergers and acquisitions and various ethical issues arising out of it. We will apply ethical theories (teleological, deontological, utilitarian, etc) to weigh the various options available to the management during Mergers and Acquisitions.