Introduction

Mergers and acquisitions have been a common phenomenon in the modern business world.  This has been escalated by the current dynamism in majority of the corporate sectors. The level of competition and current economic meltdowns has been instrumental to the current increase in number of mergers and acquisitions. For a long time, the two concepts have been mistaken to mean the same or to be synonyms but have two different meaning from legal perspective.

Acquisition occurs when a business entity take over another entity and a new business entity is created. After an acquisition process, the target company ceases to exist and the new entity continues to trade. Most acquisition process is concluded as purchases. On the other hand, mergers occur as a result of two entities virtually of the same size decides to combine their operations(DePamphilis, 2011). There is formation of a new entity where the stocks of the parent companies cease to trade and the stock of the new company trade. In most cases, these are referred to as mergers of equals. However, it is important to note that these mergers of equals do not usually happen as one of the parent companies tends to buy the other.

In essence, both mergers and acquisitions are takeovers. The only difference is the nature of the takeover as it could be friendly or a hostile takeover. This largely depends on how the purchase is perceived by target company’s employees, directors and the stock holders. Firms venturing in mergers and acquisitions are driven by different reasons such as economies of scale, staff reduction, improved market reach among other reasons(Bartolacci, 2012).

Mergers are of different varieties depending on the business structure and reasons for coming together. The relationship between the merging entities describes the different varieties of mergers. The most common varieties of merges include; horizontal mergers, vertical and conglomeration. For instance, horizontal mergers occur when the merging companies are in direct competition. Vertical mergers are as a result of market or product extension motives by the merging firms. Lastly, conglomeration is a type of mergers whereby the merging companies have no relationship. Mergers can also be distinguished by means through which they are financed.

Acquisition of Carso Global Telecom by America Movil

The acquisition of Carso Global Telecom by America Movil has been noted as one of the greatest acquisition in telecommunication industry. This acquisition was completed by mid-2010 for an estimated cost of $17.6 billion. This acquisition was a part of $21 billion plan by CarlosSlim (owner) of consolidating telecom holdings in Latin America.  This entrepreneur, who is regarded as one of the wealthiest business man in the region had a plan of consolidating the telecom industry in Mexico. The merger aimed at forming a giant telecommunication firm offering variety of services such as fixed line, broadband and wireless services to the growing consumer base of around 20 million customers.

Analysis of the merger

The merger involved two companies in the telecommunication industry. They were both competing in the same sector and their coming together constituted a horizontal merger. This is because the two firms offered telecommunication services to their respective customers. The merging process was intended to consolidate Slim’s telecom holdings in the American market. This was a strategic move that would help the merger enjoy economies of scale and reduce significantly its operation costs. The move would also improve the efficiency in service delivery.

The acquisition of Carso Global Telecom was a strategic move by America Movil. This is because the company had a significant market share in Mexico. Carso Global Telecommunication also had several subsidiaries such as Telmex and AT&T INC. this would present Slim Carso with an in formidable business ventures that would provide high quality services and have a competitive edge over its competitors.  The company would enjoy great economies of scale and reduce its operational costs significantly(Steinbächer, 2007).

A continuous acquisition of smaller telecommunication firms would fit Slim’s long term strategy of having a sole telecommunication service provider in Latin America. The mergers are said to have significant synergies and is likely to increase its customers from 206.4 million to excess of 20 million. The move will also establish the company as the largest telecommunication firm in America.

Regulatory of the merger

The success of any merger or acquisition realty depends on the set rules and regulations for the merger. This plays a significant role in determining whether a merger is a hostile or a friendly one. According to the proposed deal of Carso Global Telecom and America Movil merger, it was agreed that the target company’s shareholders to be given 2.047 shares for every share they held. It was also agreed that the 0.373 shares in America Movil would be given to Telecom’s shareholders. Alternatively, 11.6 pesos for every share they hold would also be given to them. The merger was approved by Commission Federal de Competencia (CFC)which is antitrust office in Mexico. This is an indication that the process had followed all the legal requirements(Bartolacci, 2012).

Valuations of the acquisition

The acquisition of Carso Global Telecom is one of the most recognized mergers in the world. This is because Carso Global Telecom had other subsidiaries of other Mexican firms namely Telmex and Telmex Internacional.  The deal was to be accomplished to be accomplished through a stock-swap deal which was estimated to cost around $27.55 billion. Carso Global Telecom owned only 71% of Telmex and America Movil valued the remaining 39% at $6.6 billion. The total acquisition process was valued at $ 34.1 billion which was accredited by CreditSuisse.

As a result of this merger, the value of the newly formed has increased significantly. The America Movil had established itself as strong player in the telecommunication sector. The company’s annual sale had increased to over $47 billion, by 2012, making it the largest company in terms of revenue. This translated to increase in annual profits which had hit over $ 5 billion mark. This made it the most profitable company in Mexico. America Movil profitability had exceeded the combination of the other top three companies in profitability. This resulted to increase in the company’s assets which s currently at $67 billion.

Financing of the acquisition

The nature of financing a merger or an acquisition is very paramount in determining the type of merger. The manner through which a merger or an acquisition is financed has several implications both to the shareholders and investors of the involved companies. The most common type of mergers is the purchase merger. This kind of mergers occurs when one company purchases the other. This purchase can be made through cash or issue of some debt instrument. In case of a purchase merger, tax deductions must be involved since the sale is taxable. Another notable means of accomplishing merger or an acquisition is through consolidation process. This involves formation of brand new company where its operations are under the new entity(Agren, 2011).

Slim Carson had set his goals straight on consolidating his telecommunication empire. In order to realize this dream, acquisition of his other subsidiaries to form a strong and competitive entity was unavoidable. To achieve this, a purchase merger had to take place whereby Carso Global Telecom together with its subsidiaries had to be merged into a single entity. The purchase was done though issue of shares to the shareholders who previously owned the target companies. Some shareholders opted to tender their shares in exchange of cash whereby America Movil paid $2.12 billion to shareholders of Telmex Internacional.  The company also paid further $1.35 billion who decided to own shares in the newly formed entity. After the acquisition, all the subsidiaries associated with Carso Global Telecom were delisted from their respective stock markets. In essence, the acquisition of Carso Global Telecom by America Movil was through stock plus cash deal(Bartolacci, 2012).

Acquisition’s defense tactics

In mergers and acquisitions, the sole objective of the merging companies is to increase synergy. However, it should be noted that the shareholders interest should also be considered in an acquisition or the merging process. Both the parent and target company will strive to implement defense tactics that greatly suits their concerns. Synergy and investors welfare will be the driving force in accomplishing a successful merger or an acquisition(Jenkinson& Mayer, 2004).

The defense tactics employed in the acquisition of Carso Global Telecom by America Movil can be termed as sensible and viable ones.  This is because the investors interests of both the parent and target company have been taken care of. By accomplishing the acquisition, the newly formed company will have a better competing front that it was earlier. This is because it will make the company the largest telecommunication company in Latin America. Consequently, increase in profits will be realized thus increasing the net gains by the company’s shareholders.

The conditions for the acquisition were also favorable to the shareholders of the target companies.  This is because the acquisition was shares plus cash deal to the shareholders of the target company.  This offered the management and the investors of the target companies with a variety to choose from. It also made the takeover to be a bit friendly from the perspective of shareholders and management of Carso Global Telecom. The opportunity for the investors in the target company to have ownership in the newly formed entity was also critical as they could benefit from the realized synergy. Slim Carson could have easily acquired his firms under Carso Global Telecom without necessarily offering the shareholders such a deal.  However, presence of good defense tactics from both the target and parent company enabled a smooth takeover which was mutually beneficial.

Implementation of the acquisition

Effective implementation of a merger or an acquisition is critical in achieving of its primary goal which is synergy realization. The level of implementation mainly depends on the type of merger in question. For instance, horizontal and vertical mergers can be easier to implement as compared to conglomeration. The variance in the business area and products offered by the participating companies plays a significant role in the implementation process.

In the case of America Movil acquiring the Carso Global Telecom, the implementation process has been smooth and effective(Kumar, 2012). The reason behind this successful acquisition is because that the participating companies are within the same line of production. Both horizontal and vertical mergers have been achieved through acquiring of Carso Global Telecom by America Movil. Market and product extension in the telecommunication sector have been realized in this acquisition process. The merger has made the company the largest company in Mexico and the company enjoys a sizeable market share of around 70%. The company has been able to serve over 20 million customers in over 18 destinations.

Risks

Majority of mergers and acquisitions in the past have faced numerous risks. There has also been a great debate on whether or not majority of takeovers destroy the shareholders’ value and the various risks it is associated with. However, it is always critical to determine that the greatest risk likely to befall takeovers is their failure to integrate.  In case the takeovers successfully integrates, there is high chances that numerous risks such as culture, exchange rate, loss of control and share valuation just to name but a few can be detrimental to the shareholders value. Previous researches have indicated that majority of takeovers have not significantly boosted the shareholders’ value but instead have negatively affected them(Gaughan, 2005).

Cultural risks

Cultural risks can be more evident in mergers are pursuing full integration strategy. This mainly happens in case where takeover is mainly a conglomerate. This is likely to cause great loss to the shareholders as these cultural shocks will adversely affect the performance of the organization. The level of cultural risks can be significantly low in cases of horizontal mergers. For instance, the takeover of Carso Global Telecom by America Movil was faced with little cultural shock since there was no integration problem. The firms were also from the same region which promoted full integration of the takeover.

Shares valuation

Value of shares has a significant meaning to the value of the shareholders.  A beneficial merger is the one that post-merger value of share supersedes or matches the value of potential synergy. However, as a result of auction theory and ‘’winners curse’’, there is high likelihood that the value of shares will fall miserably thus adversely affecting the shareholders’ value.  However, this is not the case in this takeover since there was no bidding war in the merging process (Jenkinson& Mayer, 2004).

Accounting risks

Most mergers and acquisitions can translate to accounting risks. Improper accounting processes can be detrimental to the shareholders value. Majority of accounting risks in mergers and acquisition happens in cases of cross border mergers. Consolidation theories are critical in assessing the extent at which accounting process can affect the value of the shareholder. Push-down accounting procedures have since been adopted in an attempt to eliminate complexity in the consolidation process(Bartolacci, 2012).

In consolidated financial accounting, there is adequate summary of the financial statements from both the parent and target company. It helps in easier assessment of the performance of the two businesses combined. This process will greatly assist the shareholders to determine whether synergy is achieved as a result of the merger.  In case the consolidation process is not accurate, there is high likelihood that the value of the shareholders will be adversely affected. However from the company’s consolidated statements, the America Movil takeover has not posed any accounting risk to the shareholders.

Risk management

Risk management is very instrumental in the success of any single business entity. Any investor must look at the organizations risk management policy. Investors will fear investing in risky businesses since their returns on investment is not guaranteed. This is the case in mergers and acquisitions since prospective shareholders must keenly watch the risk management of the newly formed entity(Jenkinson& Mayer, 2004).

Q-theory can be of great significance in in determining the risk management of a merger. It is critical in determining investment behaviors of entrepreneurs.  The theory accesses the implications of additional investment to the general profitability of the organization. The value of the shareholder in a merger is likely to increase if the Q is greater than 1 since there will be motivation for further investments.

Customer loyalty risk

Most mergers and acquisitions are likely to be faced with customer loyalty risks. This is because majority of customers may fear that the quality of goods or services earlier provided may be compromised. The problem may even be worse in cases of cross border mergers. Most consumers are always wary of switching costs and ‘’lock in’’ where they find it difficult to shift their allegiance from one provider to another(Bartolacci, 2012). This has not had significant implications on the Carso Global Telecom acquisition by the America Movil. This could be explained by the fact that the two companies are from the same region wand offers same services.

Internal management risk

The management of firms’ internal affairs can prove costly to the value of the shareholder. Free cash flow theory also plays a significant role in determining the rate of internal management risk in a merger. Agency cost is the cause of conflict between managers and shareholders over the pay out of free cash flow which significantly determines major investment decisions in the merger. Funding of projects with negative net present value in an organization will have adverse effects on the shareholders’ value. Only projects with positive NPV should be encouraged to improve the shareholders’ value.

References

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