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 Name Facet

1889 - First Wave Horizontal mergers

1904

1916 - Second Vertical mergers

1929 Wave

1965 - Third Diversified conglomerate mergers

1989 Wave

1992 - Fourth Congeneric mergers; Hostile takeovers;

1998 Wave Corporate Raiding

2000 - Fifth Wave 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 Acquirer Size in Billion ($)

Wyeth Pfizer $64.5

Schering-Plough Merck $46

MTN Bharti $23

Lloyd's Banking Group HM Treasury $22.3

Royal Bank of Scotland HM Treasury $18.6

Petro-Canada Suncor Energy $18.2

Liberty Entertainment DirecTV $14.5

Endesa Enel $14.2

Essent RWE AG $12.4

Nuon Vattenfall $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&A’s
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&A’s 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 firm’s 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.