The Financial Impact of Acquisition of South Star Drug of Manson Drug in Angeles City
Business combinations have been interesting and considered as on of the most significant topics of accounting theory and practice. Many businesses engaged in this activity because most of them perceive that it may be the answer to expand their business. Furthermore, growth is one of the major objective of many business organizations. It may grow slowly and start to develop its product lines, facilities and services. New management strength or better use of existing management, achieve operating economies and meet income tax benefit (Dayag, 2016 p.81).
As stated by Web Finance (2016), financial impact refers to the outlay or cost in the revenue coming from the unexpected instances such as disaster, change in market conditions, failure of the product which cannot be manipulated anymore by the management. And for these reasons, it is difficult for the company to predict what will happen.
However, in some cases, not all business combinations are successful. Clash of culture, redundancy as to employees and its job, concentration of the market, increasing in number of debt and conflicting objectives are some of the few reasons why acquisition can be considered as a drawback. As these reasons are known and the company was able to recognize these, they must be take into account of the pitfalls and possible effects (Picardo, 2014).
Additionally, according to Dayag (2016 p.83), “there are four types of business structures as classified namely a) horizontal integration, b) vertical integration, c) conglomerate combination and d) circular combination in which each classification depends on both internal and external factors.” Given the many success and failure experienced by companies, it is necessary for them to mainly understand and analyze the strategic approaches in which one of these should be evaluated.
In addition, mergers and acquisitions can include a number of different transactions such as consolidation, tender offers, purchase of assets & management and the mergers & acquisitions itself. In all cases, two companies are involved in this kind of business strategy where and acquirer makes an offer to buy the other company in its entirety of purchase of some of its assets.
Merger and Acquisition build by many companies to continue new innovation opportunities. Because of these, the main objective of this study is to provide the financial impact on acquisition of South Star Drug to Manson Drug. It aims to identify the reason on acquiring a business and to determine the effects or impacts of financial stability of each business before and after the acquisition.
The study wanted to identify the financial impact on the acquisition of South Star Drug to Manson Drug. Specifically, it will attempt to answer the following questions:
1) What is acquisition in business?
2) What are the motives that influence acquisition of business?
3) How will the acquisition affect the following:
a. Financial Position
b. Financial Performance
4) What is the accounting method used in the acquisition?
5) How will the acquisition of the South Star Drug help them achieve its visions?
6) What are the possible effects of the companies' merging and acquisition to its consumers?
7) Enumerate some of the advantages and disadvantages of acquisition.
The researchers are considered as the primary beneficiaries of the study as concerns and interests developed while devoting time to carry out the study.
This study will be also helpful to accountancy students to enhance their thought about the topic as this is one of the significant procedure business undertakes in the real life and to give them an overview why these instances in businesses occur.
Also, this study will be beneficial to the university as it may become as one of their informative material wherein students can look for helpful information.
This study will be also helpful to the company itself to be able to identify the effects of acquisition and how to utilize its resources efficiently.
Lastly to the future researchers as they conduct study having the same topic as a reference and to inspire them to dedicate hard work in construct a new study.
Just as stated by Dayag (2016 p. 86-87), PFRS 3 Appendix A deals with “business combination as a transaction or event where in an acquirer manipulates on or more businesses. Besides, this transaction is also known sometimes as “true mergers” or “merger of equals”. One of the elements of business combination is control in which the economic event involved is not just merely a decision or judgment. Examples are the buying the assets themselves and buying enough shares in the corporation that owns the assets to enable the acquirer to control the acquired corporation as a subsidiary are the transactions involved to consider that the control is obtained. Another element is the business in which also the PFRS 3 defines business as the integrated set of activities or assets that is able to carry out and manage with the intention of providing returns in the form of dividends, lower costs and other economic benefits directly to involved individuals. Moreover, the purpose of defining the business is to know between the acquisitions of or an entity is involved.”
Since mergers are rare nowadays, most company use the acquisition as long-term business strategy. These strategies are mostly based on company's mission and vision statements which reflect on its ways on how to achieve its goals. Along with these, the three important factors in which consideration must be taken into account are: a) Company must be willing to take risk make an early investment to fully benefit from merger, competitors and business itself; b) Multiple bets must be made in order to reduce and diversify risk; c) The management of the acquiring firm must be resilient, patient and able to follow ever-changing business dynamics industry (Martin, 2015). Due to extreme competitions, it became more popular between two businesses in becoming one or either the stronger one takes over the weaker one.
According to S and Curtis (2015), Merger is the fusion of two or more than companies to form a new one where there is shared ownership, control and profit while Acquisition is the purchase of business of another entity. There is a mutual decision between merger while in acquisition is either a friendly or unfriendly decision. The purpose of merger is for the company to decrease competition and increase operational efficiency while in acquisition is for the spontaneous growth of the company. In addition, acquisition can be done either by the purchasing of the assets of the company or by acquiring ownership over 51% of its paid-up share capital.
Merging and acquisition have the tendency to create a vast profit for a company and to expose the business to financial resources. One way to save a company that is on the tip of bankruptcy is to merge with another company; it can also help to accredit some much needed cash and credit.
According to Picardo (2014), the process of Merging & Acquisition may have a great effect on company's growth and long-term outlook. Even though acquiring an existing business may be simple, there is significant degree of risks involved as they have estimated that only 50% of transactions are a chance of success. In addition, some of the most common reasons why companies engage to mergers & acquisition are: a) To become bigger, b) To pre-empt competition, c) To take advantage of the Synergies and Economies of Scale, d) To achieve domination, e) For tax purposes.
Related to this study, De La Salle University (2015) also states that most economic theories describe the motive for merger and acquisition is revolving around the creation of synergy and economies of scale. First is the efficiency theory where merging are being planned and take action in achieving synergies like for example financial, operational and managerial synergies which can lead to increase studies concerning synergy using corporate performance data or profit. Second is the disciplinary mergers theory which suggests that obtaining firms acquire other underperforming companies which have the objective of improving performances by becoming fully aware to the potential of the target. Lastly, synergistic mergers theory where in combining firms together with the other performing companies can obtain a well-organized benefit.
South Star Drug is considered as the country's third largest drugstore chain and known as 90% subsidiary owned by Robinsons Retail Holdings Inc. Recently, it has successfully acquired another drugstore chain in Batangas named Chavez Pharmacy. Moreover, it had a total of 265 stores as of end-March 2014 and plans to end 2014 with over 300 stores. On the other hand, during 2013, “South Star Drug acquired the 53-drugstore chain of Manson Drug in Central Luzon and it has successfully integrated the stores in its portfolio in less than a year. It also generated P6.3 billion in net sales on robust same store sales growth of 6%. It sustained this SSSG growth in the first quarter of 2014 at 6.2%, resulting in a 12.1% year-on-year increase in net sales to P1.7 billion. EBITDA expanded by 18.2% year-on-year in first quarter 2014 to P78 million while full year 2013 EBITDA reached P320 million” (Rappler.com, 2014).
Probably the most evident reason is to take advantage of the synergies and economies of scale since the two pharmaceutical companies have the same course of business as they can easily establish or reduce duplicate resources like branch and regional offices, facilities, research projects and the like. Because of this, they will be able to save more, boost earnings per share and make the M&A transaction an accretive one. Furthermore, Goedhart, Koller and Wessels (2010) stated that “Pharmaceutical companies have also significantly reduced their R&D capacity as they found more productive ways to conduct research and pruned their portfolios of development projects”
Another related article by Finance World (2016), more than US $500 billion worth of merger and transactions have taken place in the pharmaceutical-biotechnology industry between years 1988 and 2000. And as a result, the top ten global pharmaceutical companies together contributed 20% of overall pharmaceutical sales and the industry rose to 48% due to the mergers and acquisition of pharmaceutical industries. It is not surprising anymore why pharmaceutical industries enter into acquisition or merging, South Star Drug as mentioned, finds it as one of their strategies to strengthen and expand its presence and reach of what they have become.
Conforming to the statement of Merritt (2015), acquisitions should not affect financial performance in the first place because only transactions involved would affect the financial position of the company, such transactions include initial acquisition of assets including capitalizing costs, amortization, disposing of assets and the like to name a few. Nonetheless, as acquiring of assets occurs, there would be the minimal involvement of financial performance because of the amortization. Financial impacts, as explained earlier, is an expense that has an effect on the financial position and beyond management control that is why accountants and managers of the company pay special attention on the related matters. Acquisitions are aimed at improving profits and productivity of a company. Also, the objective is also to reduce expenses of the firm. Because of the financial advantages, eradicate competition and unite with big players or product extensions and synergies, most companies engage in acquisition strategy. Successful acquisition also results from on well-defined goals and strategic value creation logic (Richa, 2014).
However, acquisitions are not always successful. There number of factors at times wherein the main goal of the company loses its focus which can affect not only the labor force but also the credibility of the company. Aside from deviating from the actual aim, psychological impacts are also many. Studies have suggested that mergers and acquisitions affect the senior executives, labor force and the shareholders. Related to this study, there are also consequences during merging and acquisition. It can affect the morale of employees because of the clash of culture and different habits of handling their business. Like for example is that the difficulty to cope with new environment which could lead to stress. Another thing is the conflict that may arise among employees that can cause fear of losing a job. Lastly is the competition among employees as this may creates tension to other employees (Richards, 2016).
The Philippine financial system has dealt with the significant regulation in order to preserve the risk of failure of one bank that is significant to failure of the other banks and to reduce asymmetry of information (Castillo, 2009). Because of this logic, having bigger players in the financial industry can help to create strong financial system that regulatory authorities believed. In order to accomplish this, mergers and acquisitions are advised to lessen the number of players as well as enlarge the average size of the bank. Although obtaining banks should be able to produce synergy (De La Salle University, 2015).
According to Finance (2016), strategic considerations involved in pharmaceutical mergers are economies of scale, better sales and marketing, improved R&D and availability of more funds. However there are some shortcomings of pharmaceutical mergers like leadership attrition, drop in productivity, lesser employee satisfaction and job losses. Unfortunately, there are instances wherein merging may have drawbacks such as the clash of culture, unhappy employees resulting to leaving, less valuable assets, failure to achieve synergy, and other reasons.
Merging & Acquisitions are a big help to many firms. Before a company would engage in a merging process, it would surely consider the benefit it will give to the company as well as to its workforce.
No wonder that there is no magic formula in making a business successful and one way to achieve this is to seek risk. Once said by Jean Paul Getty, a famous businessman, “You must take risks, both with your own money or with borrowed money. Risk taking is essential to business growth.” Yes, acquisition may be a literally be simple and one of the most time-efficient growth strategies it may costs us because of the significant risks involved. Many businesses engaged into acquisitions because of more opportunities. Acquisitions may also help companies meet and even exceed stakeholder expectations.
Merging and Acquisition is the desire of the companies to increase productivity and improve their profits. It will help the companies to grow bigger and might beat their rivals. It may have negatives impact about how employee will handle the change doesn't mean the companies doesn't have solutions on the particular problem.
Some companies are still keeping on making Merging and Acquisition even though they know they need to take risk. It will add value to the company if they started it right to enhance shareholder price as well as on how they will handle employees who are having a hard time to come up with change. According to Hawkins (2012), there are 8 ways shared services to add value in Mergers and Acquisition. These are metrics for synergy identification, a credible ‘best of both' approach, accelerated de-duplication, accelerated revenue synergies, enhanced customer retention, early engagement of operational expertise, reduced operational risk, a reliable target footprint, and wrap up.
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