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Mergers and Acquisitions

In recent times mergers and acquisitions (M&A) have been a favorable way for companies that seek expansion but do not have enough internal resources to ensure successful expansion. The essence behind mergers and acquisitions is to ensure that the resulting shareholder value is over and above the one of the two companies before the merger. The reasoning is that when two related companies come together they can be able to enjoy such aspects as economies of scale and cushion each other during financial hard times. Such considerations are particularly important for companies when financial times are tough. M&A also help already established companies to create a more efficient and cost effective empire. Companies come together with the aim of colonizing a greater market and to attain a greater degree of efficiency. Realization of the benefits of M&A as led companies that are on the verge of collapse to give larger and established companies to take over if only to ensure their survival. However it is also important to point out that mergers and acquisitions imply very distinct ventures and should not be confused with each other. Acquisition occurs in a situation when one company in most instances the larger company takes over the smaller company completely assuming full ownership. The smaller company therefore ceases to exist legally. On the other hand mergers mostly involve two companies that are roughly of the same size that agree to form a single company. Therefore instead of the merging companies existing as two different entities they exist as a single unit under one ownership and operating name. The stocks of the both companies are foregone and new stocks are traded under the new company. In most instances acquisitions are frowned upon not only by the staff but also the shareholders of the target company, therefore it is a common business practice that even in the instance where one company acquires another they agree to make it look like a merger to avoid agitations from the shareholders and staff. As a matter of fact most mergers are in actual sense acquisitions. Therefore acquisitions which refers to the complete takeover of a company by another should be carried out in a prudent manner because there are some subtle aspects involved that may affect the business ventures of the resulting company.

Background of the Acquisition

During the 1970s McDonnell Douglas Corporation (MDC) was like a household name in the aircraft and aerospace industry. The company began operations in 1967 after the McDonnell Company merged with the Douglas Aircraft Company. Although termed as a merger it was actually an acquisition by the McDonnell Company of financially unstable MDC.  The two companies after the merger produced both military and commercial aircrafts and furthermore produced spacecrafts, missiles and data processing equipments not forgetting electronic products. The resulting company existed until in 1996 when it was subsequently acquired by the Boeing Company.  MDC Company had managed to establish itself as the fourth major manufacturer of planes in North American after Boeing. MDC was involved in the manufacturer of missiles and space equipments. After the merger MDC managed to secure various contracts which involved the manufacture of DC-10 body airliner for the American United Airlines. However the company was not able to enjoy the complete benefits of this contract because it had to split the market with Lockheed another major airline producer in North America. Another major production of MDC was the DC-9 airliners that started during the 1960s and saw the company make more than 300 units of the airliners. The productions included military aircrafts which were sold to countries such as Canada and Italy. After the merger the MDC was able to make substantial improvements in terms of market scope, customer base and production capacity. These are some of the driving forces that push companies to form mergers or acquisitions and MDC took full advantage of the fact. After the successful merger MDC took wider strides because in 1984 the company had become established enough that it was able to acquire the Hughes Helicopters at a cost of $480 million whose production of the Apache helicopter had reached a production of a total of 6,000 helicopters by 1981. However MDC was not able to take full advantage of the merger because by 1989 the company had lost close to $108 million due to cost overruns.

As a common occurrence with mergers mostly when they do not succeed the company sought the services of Thomas Gunn who became the President of the helicopter production unit. The new president as expected strategically reduced the staff by a whopping 20 percent and established a new assembling method that optimized productivity. Gunn was subsequently able to bring the company back to its track. The acquisition of Hughes also gave the company the legal right to adopt the no-tail rotor contracts from Hughes. The company continued to thrive in the business because the Hughes acquisition together with the merger had strengthened the company’s capital base and ensured that it also enjoyed a wider market. Apart from that the acquisition of Hughes brought with it major advantages to the company as it was able to produce the no-rotor tail helicopters that were subsequently approved by the government because they were less risky to the ground personnel. However come 1991 MDC had already began experiencing problems related to cash flow. There were also reductions in the number of air travel a fact that affected significantly the company leading to losses close to $10 billion in the industry. Consequently customers cancelled their order and MDC was forced to delay some deliveries all of which did not go well with most customers. Significant was the fact that MDC was forced to reduce the production of MD-11 leading to extensive layoffs. MDC’s existence has always been marred by extreme highs and lows.  During the 1990s the company enjoyed the post of being the largest defense contractor. A restructuring strategy employed soon after the financial difficulties became beneficial as the company was able to rejuvenate its finances and by 1993 the revenues had revamped to $145 billion. Army squadrons began to take notice of the C-17 and periodically it seemed that they would make substantial profits for the company. The company also experienced increase demand of the Apache helicopters both locally and overseas. Soon after the United States Air force signed a contract with the company worth $ 1 billion geared towards the manufacture of Delta Rocket Launch vehicles. Furthermore research institutions also signed contracts totaling $ billion.

The company was also able to capitalize on it production by venturing in the recycling business where it was involved in used commercial planes by using them in the production of much smaller planes. So far the company seemed as if it was once again getting to its feet towards regaining of the apparently lost glory. However in 1996 as a turnaround of events the company announced that it was considering being absorbed by Boeing for a total of $13 billion in stock. Apparently MDC had been losing market to Boeing especially in Europe where Boeing had established itself as the major producer of Airbus. The executives of the company were also uncertain whether they would continue to depend on military contracts as the major source of their markets. Apparently the future seemed not promising enough pushing the company to consider acquisition by its major competitor in Europe Boeing. Subsequently after an apparent up and down experiences with some highs enabled the company to acquire other smaller companies and some lows threatening its existence MDC finally threw the towel and agreed to be absorbed b Boeing.

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