Corporate Finance-Mergers and acquisitions Essay

Corporate Finance-Mergers and acquisitions - Essay Example Generally, mergers are brought about in a consensual and cordial environment where the target company helps the purchaser in a 'due diligence' process to ensure that the deal is beneficial to both parties. But acquisitions are sometimes "hostile", in that the acquiring company purchases in the open market a majority of outstanding shares of the target company against the wishes of the target company's board of directors. 'Mergers and acquisitions should be value creating for the shareholders of both the 'offeror' and the 'offeree' companies'. Value creation is also necessary for further growth. Creating value implies earning a return on invested capital in excess of the cost of capital over time; or earning a strictly positive profit, that is where revenue minus all expenses is greater than zero. Value creators do not have to worry about a capital shortage. They are either flush with internal funds to meet their investment needs, or can attract the needed capital from the markets, which are always in search of profitable investment opportunities. And such companies will also create over time a cadre of managers who have higher standards and better capabilities than the competition. Many companiCurrent state of M&A Many companies have had recourse to M&A as a sure path to fast growth. Operational synergy and economies of scale are the strengths of M&A propelling growth. But the failure of many M&A in the 1990s has actually reduced shareholder value instead of increasing it and as a consequence, both management and investors are now taking a closer look at what makes a merger or acquisition a success or a failure. (K@W, 2003). But there have been some exceptions and one exception has been the recent acquisition of Arcelor by Mittal. The Acquisition of Arcelor by Mittal The rise of Mittal Steel has been a story of growth and expansion through acquisitions, beginning with that of the Iron and Steel Company of Trinidad and Tobago in 1989 and culminating in 2006 in the acquisition of Arcelor, Europe's largest steel producer. Mittal has grown by buying struggling steel plants around the world and knitting them into the world's biggest steel company. It has a strong presence in North America and Europe, but in Asia its operation is confined to Kazakhstan. It is the world's largest and most global steel company, with shipments of 49.2 million tons and revenues of over $28.1 billion in 2005, owning steel-making facilities in 16 countries and employing over 224,000 people. The shares of the company are listed on the New York and Amsterdam stock exchanges. The company produces a broad range of products for the flat and long products markets and has among its customers well known names in the automotive, engineering and appliance sectors. (http://www.mittals teel.com/company/Profile.htm) Mittal Steel announced its intention to acquire Arcelor on 27 January 2006, for a total of 24 billion euros. Arcelor had been created in 2002 by the merger of Aceralia, Arbed and Usinor, with an intention of mobilizing their technical, industrial, and commercial synergies in a joint