Mergers and acquisitions: The case of Stericycle Inc. and Healthcare Waste Solutions Inc.
Stericycle Inc., a medical waste service company operating in New York is planning on making an acquisition of Healthcare Waste Solutions Inc., another waste service company also based in New York. The two companies operate in the same industry and essentially offer the same service in the same location. The deal will see Stericycle acquire 90% of healthcare Waste Solution’s business in the city, giving the acquiring company control of over 90% control of the market.
Benefits of the acquisition
The acquisition of Healthcare Waste Solutions by Stericycle will result in an enormous growth of the market share currently enjoyed by the acquiring company. The company controls about 50% of the market in the city, and it is projected that with the acquisition of the competitor, the company will grow its market share to about 90%. This leap in the size of the market share is bound to reflect positively in the future of the acquiring company’s earnings which are expected to record a favorable growth rate in the coming periods (Miller 2008).
The planned merger will enable the reduction of competition to a lower level. With the acquisition of its main competitor in the location of operation, Stericycle will reduce the costs related to competition substantially, further improving its profit margins. Coats associated with competition such as advertising and pricing strategies will be reduced and the company will be able to channel such funds into other operations meant to increase the returns of the company both in the short run and in the long run.
The acquisition will avail more resources at the disposal of Stericycle. This will enable the company to effectively utilize the economies of scale that are associated with availability of such a higher magnitude of resources. The company should be able to carry out its operations at a lower cost than it does without the resources of the acquired company. The company will thus become more efficient and is likely to improve the quality of its service delivery after the acquisition of the competitor. Improved quality of service will enable the growth of goodwill for the company, further improving its customer base and thus its earnings (Coyle 2000).
Greater efficiency will be achieved by Stericycle by making the acquisition for Healthcare Waste solutions. The human resources available to the company will be improved, and there is a likely harmonization of the strategies of the two companies to develop a more efficient and effective strategies in many aspects of the business such as service development, promotion, research and development. Improved efficiency will ultimately enable the company to reduce its costs to the minimum possible levels while improving the revenues of the company. Maximization of shareholder wealth will be achieved by increasing returns which will enable the company meet all the needs of all its stakeholders (Miller 2008).
Research and development is a very important aspect of business in the industry under which the two companies operate. The acquisition will in effect enable the pooling together of the resources of the two companies in research and development. The investments in research and development for the company will increase and the results of the process will be more informed and relevant. The company will thus be able to develop relevant and appropriate products, services and marketing strategies aimed at improving the earnings of the company.
An increased potential of expansion for the company is presented by the acquisition. The company has in its disposal more resources which it can use to expand its operations to cover more geographical area or develop new services. This will be in tandem with the profit maximization of the firm; it enables the growth of a market share (Straub 2007).
Potential disadvantages of the acquisition
Though the merger has obvious benefits to the company, it also has a downside. The effects of the acquisition may not have the desired positive effects and unforeseen issues may arise which may be financially disastrous to the acquiring company.
Through the acquisition, the two organizations will be attempting to merge two organizational cultures. The organizational cultures in the two organizations may be different to such extend that the attempt of merging them can only result in a clash. The employees from the company being acquired may develop a feeling that a new and alien culture is being imposed upon them by the employees of Stericycle. This kind of relationship may result in conflicts which will affect the performance of the employees and ultimately the earnings of the firm (Cartwright, S. & Schoenberg 2006).
Most acquisitions result in the laying off of part of the employees of the company being acquired. This develops into a sense of job insecurity by those who have been left, and as members of anew organization, they may not have the same motivation that the employees of the acquiring company may have. This situation ultimately leads to reduced performance levels due to lack of motivation and the overall performance of the new company are adversely affected both in operations and in returns (Miller 2008).
The process of making an acquisition by Stericycle can make its management spend more time on the acquisition and neglect their core business. The performance of the core business is likely to suffer in this scenario, and as the management focuses of ways of employing the acquisition to cut costs, the revenues and profits of the core business of the parent company will be eroded partially as a result of this improper management. The overall profits of the merged company are then bound to take a downward slip, earnings and dividends per share is reduced and investor confidence is eroded away.
The two businesses operate in the same location and in the same industry. However, the two businesses may have very different objectives. The impact of this will only be felt when a conflict of objective arises between the two businesses. Decisions will become more difficult to make since reconciling the objectives will be a long and expensive task. This may result in slow decision making processes and this is bound to disrupt the operations of the business and erode its profit margins. The costs of running a large business may become too high when compared to the level of services offered. The company will end up incurring more costs than it would have at lower level operations. Diseconomies of large scale will have an adverse impact on the business profitability (DePamphilis 2008).
Diseconomies of large scale may also be experienced if through the acquisition the business becomes inefficiently large. The size of the company may become large to such extend that the operational fixed costs level is higher than the corresponding production level required to make a profit. The unit fixed costs become high. Diseconomies of large scale will result in higher unit costs, and the profitability objective of the company will be adversely affected (Straub 2007).
The acquisition presents a risk of dilution of ownership of the acquiring company. If only part of Healthcare Waste Solutions is acquired, the level of control of the existing shareholders of Stericycle will be reduced substantially. This may reduce the earnings per share and the level of dividends per share. Shareholders in the company may feel that the company no longer presents a viable investment opportunity and disinvest from the company (Coyle 2000). The reputation of the company in the stock market may be lowered and the company would need to perform excellently in the next few periods to regain the confidence of investors. Such a performance may not be possible, especially considering that benefits of acquisitions are usually felt after the long term and cannot be achieved within a period of one or two years.
The risk perception of an acquisition by a company may not be favorable. Investors in the stock market may feel that the company has acquired more risk through the acquisition and thus its risk classification changes. Investors will be demanding a higher return for their investments due to the perceived increased risk. The share price of the company in the stock market will thus be affected and the reputation of the company lowered due to the acquisition (Coyle 2000). The changes in the market share price of a company will result in the reduction of the company’s market value, and although it may not have a direct implication on the operations of the company, it will adversely affect the company’s ability to attract financing for its projects due to the increased perceived risk.
The payment for the acquisition may also be a downside to the acquisition. If the payment is not made in stock or debt but is made in cash, the company will require a large cash outlay to cover the cost. This may impact on the liquidity of the firm and the company will bear an increased bankruptcy risk. Such a risk usually impacts on the operations of the business since both short term and long term creditors require a high amount of return for their investments in the company. This increased bankruptcy risk results in higher costs of financing for the company. Such an increased bankruptcy risk also will erode the returns attributable to common stockholders in the company (Straub 2007). This bankruptcy risk will also adversely affect company’s ability to attract financing for its projects.
In conclusion, all the advantages and disadvantages of the acquisition of the company mentioned above need to be put in to considerations by weighing them relative to each other. The risks accompanying the acquisition of the company need to be checked one at time and a possible solution drawn to each one of them. These will help the company to prepare in advance for any challenge that may arise after the acquisition and hence maintain the company at its best in the business.
Cartwright, S. & Schoenberg, R. (2006). Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities. British Journal of Management,17 (1),1–5.
Coyle, B. (2000). Mergers and Acquisitions. Chicago, IL: Fitzray Deaborn Publishers.
DePamphilis, D. (2008). Mergers, Acquisitions, and Other Restructuring Activities. New York: Elsevier, Academic Press.
Miller, E. L. (2008). Mergers and Acquisitions: a step by step practical guide. Hoboken, NJ: John Wiley & Sons Inc.
Straub, T. (2007). Reasons for frequent failure in Mergers and Acquisitions: A comprehensive analysis. Wiesbaden: Deutscher Universitätsverlag.