Critical Review for the Article Essay
The electronic journal entitled: ‘The Long-Term Performance of Horizontal Acquisition’, by Laurence Capron of the Institut Europeen d’Administration des Affaires (INSEAD), published in 1999 by the Wiley and Sons publishing, has studied the creation of “horizontal mergers and acquisition”. In Capron’s paper, he dated his studies from mid-1980’s to early 1990’s financing strategies of firms in divesting and liquidating its assets which he referred as the “horizontal mergers and acquisition”.
Capron has cited about 253 firms in Europe and America that patterns the financing strategies. According to Capron (1999), examination reveals divestment of assets and capital infusion (re-financing of liquidated assets) makes effective to “acquisition performance”, but could have potentially detrimental impact. As what Capron emphasized on the performance of acquisition based on “divestment and redeployment (re-acquisition) of resources”, his study examines the defects and compliments on effective means in “horizontal mergers and acquisition”.
Key points and rationale As reviewed from the journal, the “horizontal acquisitions” may be exemplified as a means and strategy in establishing the resource-divestment scheme, in which by doing so, it “optimizes or exploits the values of cost-based and revenue-based synergies” (Capron 1999: p. 988). As explained, it may be perceived that the “synergy” patterns the continuing acquirement of business values, as a result of divestment wherein merging of the newly diversified firm or business values acquires more assets and capital budget.
According to Capron (1999), the cost efficiency theory emphasizes on the significance of cost-based synergies that occur when assets have been divested resulting the integration of cost-saving measures. Thus, the firm performs effectively in enhancing its revenues that synergizes with the redistribution of the capital towards an enhanced capability. It may be analyzed from the findings of Capron that the 1980’s and 1990’s rapid growth of industries brought about by globalization have emerged more investments in the supply chain.
One of which is the positioning of developed and high-end industries within raw material sources. Like, for example, diversification process has been developed in Asian countries wherein more investment in cheap raw materials and labor are available and can be acquired easily. The “horizontal acquisition” could be drawn from establishing partnership, subsidiary in operation, joint ventures and inter-dependency in export and import schemes. Hence, for example “Company A” has divested in establishing “Company B” to engage in tire manufacturing that source out the cheapest raw materials.
In which case, a diversified industrial firm could venture out into “versatile” business values that optimize capital investments for a larger revenue generation translated into cost effectiveness that means substantial profitability. In Capron’s finding, the so-called “economy of scale” became the bases of diversification process that paved the way to a “large-scale” industrialization. The 20th century practice of the economy of scale has favored more industries to capture the “investment areas”, specifically in poor countries.
The “dispensation of merging” through open-ended stockholding in small-medium-large enterprises units has put significant relevance in acquiring industrial partnership, wherein capital investment has a critical role in merging companies. As cited from Capron’s findings, the logical economic explanation is capturing revenue-based synergies which are commonly identified as allocating and complementing resources by providing “core competencies” or “mobilizing invisible assets” (Penrose 1959; in Capron 1999: p. 989).
As cited, Capron also pointed out in his “theoretical model” of post-acquisition and target redeployment (Capron 1999: pp. 990-995). According to Capron, the theory describes the diversification process as focusing on (1) asset divestiture, (2) cost-saving, (3) resource redeployment, and (4) revenue-enhancing capabilities as an effective means of “acquisition performance” (Capron 1999: p. 992). The theoretical model refers to and explains the “basic economic behavior” as outlined in the acquisition performance.
Capron further theorized that capabilities in a divested firm are being distributed as an organizational undertaking. Meaning, it can be explained that the system of corporate governance and human resources are distributed or being shared that composes the acquisition performance. However, key “organic elements” were emphasized to have been integrated in the divestment process, in which the re-deployment (or deployment) of the organizational “system or setting” are acquired. Conclusion
Capron’s examination on the horizontal acquisition and projection of model in strategic post-acquisition and redeployment could be understood as a fundamental undertaking in diversification process. It may be true that most of merging firms in their acquired assets or business are mainly distributing their in-placed “organizational or corporate system”. However, the merging firms could likewise optimize or “streamline the existing organizational set-up, which is the common occurrence in most firms that undertaken a “buy-out”.
It may be perceived that the revenue-generation could be largely acquired into options by streamlining the existing organizational set-up or re-organizing both human and capital resources. Capron’s findings have emphasized more on the performance capability on the theory of “horizontal acquisition” referring only to capital budget, as implied on the capital resources or fixed assets of the firms. The human resource aspect [as a critical unit] of the post-acquisition process may have not been well emphasized.
What has been generally discussed in the study is the transformative business value in divestment schemes referring to capital investments and fixed asset liquidation. It could be reflected that the capital investment and fixed asset liquidation are the critical factors in the divestment schemes as the primary resource of merging stakeholder. It could be suggested that the “potentially detrimental impact” [as also pointed out by Capron] could be referred to the human resources or labor force in a diversified industry.
The merging stakeholder in Capron’s findings were much given relevance on how they could effectively perform in targeting their post-acquisition and redeployment, in which the study itself envisions to complement the performance capabilities of the stakeholders. At this point, we may re-examine Capron’s “theoretical model” as giving more “weight” to the envisioning of transnational and multi-national enterprises in furtherance of globalization, in which the continuing divestment scheme competes in the large scale economy of labor market and capital build-up.
We may then conclude that Capron’s findings could be re-examined with further studies relating to human resources re-deployment or deployment on its horizontal development complementing the diversification of industries, in which the parallelism envisions both human and capital divestment. Section B Morrison’s bid to Safeway The electronic magazine of the Financial Times on its December 8th 2003 issue at the www. ft. com web site has published the news article of Richard Milne entitled: ‘Countdown Starts for Morrison’s Bid for Safeway’.
According to the news article, the Morrison Supermarket bided 21 days from its competitors, such as Tesco, J. Sainsbury and Asda-WalMart, following the UK government’s offer to sell the Safeway supermarket. The UK Department of Trade and Industry disclosed that “Morrison was willing to sell its 53 stores if acquisition of Safeway is successful” (Richard Milne 2003; in Ft. com 2008). Morrison’s negotiation was favored by the UK Competition Commission that disqualified the three major competitors from the bidding and upheld Morrison to takeover Safeway with a share of 219-1/2 from the 279-1/2, in which Safeway acknowledged the buy out.
In a follow up report in 2004, after a year of the buy out, the Safeway has gained 40% of sales growth. Financial analysts claimed that Safeway has “migrated customers” to Morrison supermarket, as it cited that “quality of sales has gone better because Morrison has stopped the Safeway policy of rolling deep discounts” (Martin Dickson 2004; in Ft. com 2008). Perception of the issue Morrison’s takeover of Safeway supermarket has gauged the situation of significant financial divestment venture.
The business potentials of Safeway [being an established supermarket that solely competes with Tesco, J. Sainsbury and Asda-WalMart] were the “strong intent” of financial divestment of Morrison to even offer the sell of its 53 stores. The financial divestment of Morrison could be relating Capron’s findings on the “horizontal acquisition” of merging stakeholders by way of capital investments through diversified assets. In which case, the Safeway supermarket has found by Morrison as a “potential divestiture” that shall absorb the vulnerability from tough competitors.
The merging of stakeholder through a buy-out or takeover of an established investment [like Safeway] may have validated Capron’s theory of “post-acquisition and redeployment”, in which Morrison has able to “contain” the migratory customers and could further develop the acquisition performance of divesting financial investments. The divestment process of Morrison’s takeover to Safeway has likewise described Capron’s finding on merging firms that engages in the economy of scale. One that Morrison has learned from the Safeway’s enterprise approach on rolling deep discounts, wherein it found to be defeating the “selling schemes”.
Thus, managing the risks in “horizontal acquisition” has gained Morrison’s capability to undertake strategic competition that transformed the “old Morrison business” through the new outfit of Safeway supermarket. It may be then generally perceived that Capron’s theory on “horizontal acquisition” has transformative business value in enhancing the financial investment and liquidating a frozen asset [like Morrison’s 53 stores that are non-performing], of which a “unilateral” financial divestment scheme in managing risk investment, that is vulnerable to tightened competition, gains flexibility upon acquiring an established business venture.
However, this assumption is perceptive of a challenge to the continuing financial divestment of core industries in the global market. List of References Capron, L. (1999) ‘The Long-Term Performance of Horizontal Acquisition’. Strategic Management Journal, pp. 987-1018, John Wiley & Sons, Ltd. , CCC 0143– 2095/99/110987–32. Dickson, M. (2004). ‘Companies UK: Safeway Sale’. The Financial Times (2008). [online]
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