Text 3 Mergers and Acquisitions

In the past few years news media have been filled with reports of businesses combining and splitting to form new businesses. These deals vary dramatically in magnitude, form, and effect.

The terms most often used to describe all of this activity are mergers, acquisitions and leveraged buyouts. The difference between a merger and an acquisition is fairly technical, having to do with how the financial transaction is structured. Basically in a merger, two companies combine to create a new company by pooping their interests. In an acquisition, one company buys another company and emerges as the controlling corporation. The slip side of an acquisition is a divestiture. One company sells a portion of its business to another company. In recent years, many acquisitions have taken the form of a leveraged buyout, when one or individuals purchase the company (or a division of the company) with borrowed funds, using the assets of the company they’re buying to secure (or guarantee repayment) of the loan. Mergers and acquisitions represent relatively radical ways in which companies are combined.

There is nothing new about the deals of this sort. Companies have been combining in various configurations since the early days. In fact, one of the biggest waves of merger activity occurred between 1881 and 1911, when ”robber barons” created giant monopolistic trusts to control the market. These trusts were horizontal mergers, or combinations of competing companies performing the same functions. The purpose of a horizontal merger is to achieve the benefits of economies of scale and to prevent cutthroat competition.

A second great wave occurred in the boom decade of the 1920s. This era was marked by the emergence of vertical mergers, in which a company involved in one phase of a business absorbs or joins a company involved in another phase of that business. The aim of a vertical merger is often to guarantee access to supplies or markets.

A third wave of mergers occurred in the late 1960s and early 1970s, when corporations acquired strings of unrelated businesses. These conglomerate mergers were designed to augment a company’s growth and diversify its risks.

A new round of business combinations is currently underway. A number of factors have combined to bring about the recent wave of “merger mania”. Here are three of the most significant:

Operational improvements. Perhaps the most fundamental reason is a desire to improve operations. Mergers, acquisitions, and divestitures often perk up a company’s performance. In some industries, like the airlines, for example, consolidation lowers costs. In others, splitting a company into pieces gives performance a boost. In still other cases, mergers represent the cheapest, fastest way to achieve growth or to expand into new product and market areas.

Profit potential. The opportunity to make money is also a factor. When a recent wave of merger mania began, many companies were actually worth more than the combined value of all their stock. As the stock market rose in the late 1980s, fewer companies were undervalued, but enough bargains remained to stimulate activity, particularly deals financed largely with debt. The “leverage” in leveraged buyout enables the investors to achieve a big return on their investment.

Political and regulatory climate. A final factor that favors the merger wave is the political and regulatory climate. Deregulation has shaken up transportation industries to such an extent that railroads, trucking companies, and airlines have found it necessary and desirable to consolidate. Similarly, deregulation of the financial-services industry has paved the way for bank mergers. In addition to deregulating certain industries, the government has relaxed its position on trusts, thus paving the way to for mergers that would have been ruled illegal only a few years ago.

In the final analysis, mergers are probably a mix of good and bad. In some cases and for some people, the results are beneficial; other cases, no real advantages are achieved for either a company or society.

Unit 5. Small Business. Entrepreneurship

Text 1

An Entrepreneur Can Be Made as well as Born

The following essay is by Mr Kian Petit, the secondary school winner in the Young Business Writers Award, which is sponsored by Ericsson, organized by Dublin City University and supported by The Irish Times.

The term "entrepreneurship" has become very fashionable over the past decade. It is associated with enterprise, small businesses and job creation.

High-profile entrepreneurs such as Richard Branson and Gillian Bowler have become well-known media personalities.

Small business has become an important engine of job creation and the European Union had taken a particular interest in encouraging a higher rate of small business start-ups. The general work climate has become less secure, leading more people to consider the option of self-employed or contract work. Within Ireland, attitudes towards enterprise are changing, and government policy is now geared towards giving more incentives to would-be entrepreneurs.

The term "entrepreneur" has its origins from the French word entreprendre, meaning to undertake something. Entrepreneurs were viewed as people undertaking risk.

Cantillon (1755), an Irish businessman living in France, was the first economic commentator to identify an entrepreneur as a person who takes on uncertainty in the hope of making a profit. He observed that some traders "buy at a certain price and sell at an uncertain price, and those who cope with this are the true entrepreneurs.

John Stewart Mill (1862) described the entrepreneur as a bearer of risk and supervisor of business enterprise. He introduced the word entrepreneur to the English language, using it to refer to an individual who founded a business.

Many studies have tried to analyse the psychological make-up and personality of the entrepreneur. The most widely known psychological theory is that entrepreneurial behaviour is the result of a need for achievement.

In the Irish context, a study by O'Connor and Lyons, contained in the book Modern Management – Theory and practice for the Irish Student, found that the most common personal traits among the entrepreneurs they surveyed were: a strong self-image, a need for control and independence, a need for achievement, calculated risk-taking and seeing money as a tool to achieve aims rather than an end in itself.

Generally, the entrepreneur has the following distinguishing characteristics: the ability to recognize an opportunity; the ability to marshal resources in response to an opportunity; and the ability to undertake risk, which by its nature implies being willing to live with the consequences of failure.

Dr Michael Smurfit, the highly-respectful and highly successful Irish entrepreneur, once said: "I must, I can, and I will." Any other attitude is doomed to instant failure, he said.

Richard Branson is a good example of someone who possesses the above characteristics and is perhaps one of the world's best-known entrepreneurs.

There are two Richard Bransons: the public man is informal, friendly, idealistic, happy-go lucky, attached to his family, guided by strong principles and concerned to improve the society he lives in.

The private man is a ruthlessly ambitious workaholic, a hard bargainer, an accountant with an instinctive feel form minimizing the losses on each new venture, and a gambler who prefers to put his assets at risk every day rather than retire to a life of luxury on what he has already made.

He is an empire-builder who keeps the inner workings of his businesses secret.

And where did it all start? At 44 Albion Street, Shamley Green, Surrey, where a 17-year-ole Branson, out of school and looking for something to do, established Student, a student magazine, and his very own record company selling records from the local phonebox. From there, many years of diversification later, he has his millions his mother told him he would get as a child.

I believe that one can be taught the criteria and attitude to be an entrepreneur at any age. Richard Branson's childhood was full of parental observation and in his autobiography he tells us of tests set by his parents even before the age of 12, tests where he was woken early in the morning and told by this mother to cycle to Bournemouth, which was 50 miles away.

Even at the age of four, Branson remembers his mother stopping the car on the way home and telling little Richard to find his own way back through the fields.

On the other hand, Michael Smurfit was taught these essential criteria through his school years and, unlike Branson, Smurfit has three university qualifications.

So it is quite clear to see that one can be taught the necessary information and also one can be taught to adapt to a certain way of thinking and a certain essential attitude.

A Napoleon Hill, author of Think and Grow Rich, said: "If you can conceive it, you can achieve it."

Text 2

Power of a Great Idea

A dream in the hands of the right person is a winner every time

In this era of multinational corporations run by Master of Business Administration, lone entrepreneurs don’t have a chance. Or do they?

This is a story how.

On October 30, 1980, 35-year-old pipe fitter Ross Hansen of Fredericton was driving home from work when his car blew a tire and plunged into a ditch. The next thing Hansen knew, he was in the neurological unit of Saint John General, paralyzed from the neck down. Doctors told him he’d never walk again, but Hansen was determined to prove them wrong.

During three years of rehabilitation, Hansen had to relearn everything, from sitting up to writing with his unparalyzed left hand. Though he was able to get around with a cane in good weather, winter’s snow and ice proved insurmountable. Frustrated at being “marooned,” he scoured the market for anti-slip footwear, but the local stores carried what he considered cheap junk. “I can do better than that in my garage," he scoffed.

A qualified journeyman-tradesman who once worked his way around the world, Hansen had loved working with his hands. With the help of longtime friend Peter Baldwin, a former schoolteacher and musician, he put together a prototype sole that used the principle of studded snow tires to create traction. Although Hansen knew little about running a business, Baldwin thought he was onto something. They pooled their savings of $5,000 and incorporated their company in 1987. Super Soles was born.

Two years of intensive research and development followed, including 26 working prototypes and hundreds of design changes. Friends and neighbours were enlisted for tests on icy walkways as the partners experimented with a variety of tire studs and other materials. Finally a consensus was reached on the winning product: strap-on rubber soles studded with modified sheet-metal screws. With business plan firmly in hand, Hansen took out a $100,000 loan, but only after mortgaging the equity on his house.

By the spring of 1989, production was under way. A staff of five worked out of a rented church basement, cutting and assembling the materials by hand. Hansen, who was easily fatigued and prone to muscle spasms, sometimes felt overwhelmed by the demands of his business. But he drew strength of his business that he had something useful to contribute.

At first Hansen thought Super Soles’s market would be limited to the elderly and disabled. But as he searched for a way to establish credibility in the marketplace, he came up with the true acid test. Who better for field-testing than letter carriers? His ingenuity paid off. A major contract with Canada Post to gradually outfit thousands of postmen nationwide reeled in safety-supply companies – and healthy sales, which more than doubled in the second year to $150,000.

By now, company headquarters was bursting at the seams. Raw materials, finished product and shipping containers vied for space as orders poured in. Hansen leased a warehouse complete with a loading dock. With a second loan of $50,000 he bought new machinery and set himself the goal of expanding into foreign markets.

After licensing Super Soles to a U.S. manufacturer in 1991, Hansen found a distributor in Norway. He got more than he bargained for. Instead of perhaps 50 units, Norway was ordering 500 at a time. For three months Hansen and his team struggled to keep up with the demand.

Once he’d caught his breath, Hansen determined never to be caught short again. He leased a larger warehouse and crammed it with supplies. Sales broke $300,000. He made further inroads into cold climates – Sweden, Switzerland, Greenland – which meant annual sales that continued to increase. By 1995 Super Soles (now renamed Icer’s Inc.) reached close to $1 million in sales. More than 500,000 pairs are in use in nine countries, where they’re worn by, among others, utility and sanitations workers and, of course, letter carriers.

Hansen’s struggles were enlightening. ”I’ve been everything from CEO to janitor,” he says. “I realized I could do a lot more than what I originally thought I could.”

Unit 6. Employment

Text 1