Mergers & Acquisitions, a Knowledge economy perspective.

One of the longest go from my end. This article is a research paper, I’ve submitted during my college days along with my friend. This blog welcomes you with few catchy topics like knowledge management, Mergers & acquisitions and an insight on knowledge economy.

Understanding,  “Knowledge Economy”  !

The phrase knowledge economy was coined by Peter F. Drucker in the year 1966 in his book “Age of Discontinuity”. Knowledge economy refers to an economy of knowledge focused on production and management of knowledge in creation of value. It refers to the use of knowledge technologies such as knowledge engineering and knowledge management to produce economic benefits. In a knowledge economy, knowledge is a product, knowledge is a tool and the key stress is on creating knowledge that would lead to a value creation. The implication of the knowledge economy is that there is no alternative way to prosperity than to make learning and knowledge-creation a prime importance.

The break out of Industrial revolution in the late 18^th century, manual labour and animal-based economy was replaced by machine-based manufacturing. Starting from late 19th century, emphasis on human capital and intellectual property is gaining importance in any business model in a knowledge economy(21st century).

“The concept supports creation of knowledge by organizational employees and helps and encourages them to transfer and better utilize their knowledge that is in line with organizational goals”

In a knowledge economy the organization’s emphasis is on human capital and intellectual capital where in developing and sustenance of intellectual capital is closely related to the creation and maintenance of competitive advantage in the knowledge economy. Drucker in his book described the difference between the traditional Manual worker and the knowledge worker, a manual worker who works physically and produces goods or services. In contrast, a knowledge worker works with his intellect to produces ideas, knowledge, and information for organizational success.

Knowledge has become a valuable asset A firm's intellectual capital i.e. Employees' knowledge, brainpower, know-how, and processes, as well as their ability to continuously improve those processes has become a source of gaining competitive advantage.

Over the last decade we have seen the emergence of an economy in which the digital component has become a constant presence in all areas of knowledge. There are new business concepts, new strategies based on innovation, new mechanisms to create value, with more of human resource involvement and intellect adding to it. 

The various driving forces that are changing the rules of business and competitiveness

1. Globalization markets and products are more global.

2. Information technology

Information technology changed the way people generate & disseminate information.

• Information/Knowledge Intensity: Efficient production relies on information and know-how; over 70 per cent of workers- in developed economies are information workers many factory workers use their heads more than their hands. The birth of giants in the internet industry like Google & Yahoo bought sea changes in the way people search for information.
• Out of box Media: New media increases the production and distribution of knowledge which in turn, results in collective intelligence. Existing knowledge becomes much easier to access as a result of networked data-bases which promote online interaction between users and producers. Thanks to blogs, social media, online discussion forums & online content sharing platforms.

Mergers and Acquisitions they say.

Mergers and acquisitions helps organizations reach out new avenues/markets, bring in product innovations, helps stretch their arms globally in an inorganic way.

Mergers & Acquisitions offers tremendous opportunities for companies to grow and add value to Shareholders wealth. It is a strategy for aiding its growth and expansion plans.

Let us examine the trends of mergers & acquisitions over the years.

1^st merger wave (1897-1904) Merging for monopoly & its characteristics

• Technological developments
• Rapid economic expansion
• Corporation laws relaxed.
• Voluntary code of ethical behaviour
• Characteristics of 1^st merger wave
• Horizontal merger.
• Heavy manufacturing industries.

2^nd merger wave (1916-1929) Merging for Oligopoly & its characteristics

• Produced fewer monopolies, rather oligopolies, vertical mergers, and conglomerates (usually related)
• Primary metals, petroleum products, food products, chemicals, and transportation equipment were the most active M&A industries
• Used significant proportion of debt to finance deals
• Investment banks played central role in financing (as in 1st wave)

3^rd Merger Wave (1965-1969) Conglomerate Mergers & its characteristics

• Primarily conglomerate mergers
• Some bidders smaller than targets
• Primarily equity-financed – investment banks did not play central role
• Aerospace most active industry, while industrial machinery, auto parts, railway equipment, textiles, and tobacco also active
• CEOs with vision to create conglomerates

4^th Merger Wave (1981-1989) the Megamerger & its characteristics

• Size and prominence of acquisition targets much greater than before.
• Oil and gas industries dominant in early 1980s, while pharmaceuticals most common in late 1980s; airlines and banking also common.
• Foreign takeovers became common
• Heavy use of debt to pay for acquisitions.
• Junk bonds.
• More hostile takeovers.

5^th Merger Wave (1992-2000) Strategic restructuring & its characteristics

• Emphasized longer-term strategy rather than immediate financial gains.
• More often financed with equity than debt.
• Consolidation in the telecommunications and banking industries.

The Prowl for the small fish !

Now there is a shift in the inward essence of considering mergers and acquisitions, the bottom line is to empower knowledge assets for gaining competitive edge.

For instance Microsoft's acquires an average of six companies a year. The company has purchased more than ten companies a year since 2005, and acquired 18 firms in 2006, for enhancing its human assets for meeting the ever growing global requirements in programming and IT. Its even more aggressive with Google, in the year 2010 Google acquired on an average more than one company a week.

Some other examples at a glance. 

1. Satyam Computers IT giant from India received a warm hug from Mahindra & Mahindra even after it was painted with India's largest corporate scam image, to form Mahindra Satyam. Just by considering the knowledge base and brand image Satyam holds, the balance sheet no big problem as seen by Tech mahindra.                                                                                                                                                                       “It’s no doubt that Mr. Ramalinga Raju had built a great brand over the years” - C.P. Gurnani, CEO Mahindra Satyam says.

2. Yash Technologies a fast growing global enterprise and business solutions provider headquartered in East Moline, USA acquired Aarseya (Pune, India) a niche player seasoned in Oracle applications, in Dec 2011. This acquisition helps Yash to leverage the customer centric models & practices Aarseya build over the years and also a strengthened Oracle applications center of excellence across US and Europe regions.

3. In 2008 Daiichi Sankyo of Japan acquired 63.92% stake in India's pharmacy  major Ranbaxy laboratories limited. Vesting up on manufacturing practice innovation that Ranbaxy build since 1961 & valuable patents the company holds in generic drug manufacturing. 
4. Genpact acquired 90% stake in Citi BPO, in October 2007. Adding an employee base of 1800 to the company.

From these illustrations one can understand, organizations are on a prowl for knowledge assets through mergers and acquisitions, pooling up intellectual capital is the key at recent times in many of the mergers and acquisitions . Its a fact that the trend continues where the human resources are given at-most importance to any other resources to run a business.

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I thank my Professor Mr. Raju who helped us with the outline & I also thank Miss. Megha my colleague at Dhruva college of management, for her efforts in drafting this article.

References:

1  http://www.slideshare.net/kishanankani/mergers-acquisitions-in-knowledge-economypdf

2 http://www.yash.com/news-events/2011/acquires-aarseya-a-recognized-services-provider-around-oracle-applications.php?obj=pr-yash-aarseyaDec11&ptr=aarseyaDec11&camp_id=1104&source_id=1