Contemporary business environment requires companies who want to compete for a higher market share to have a strategic management skill. This is always related to the companies' management decision making, which must be in line with the principle of maximisation of shareholder wealth. While sometimes we must realise that companies may lack the competitive power due to the shortage of innovation and technology, good ability of resource allocation and certain degree of brand name. In this case, strategic decisions such as mergers and acquisitions can be a powerful weapon for companies to conquer such problems. Even though sometimes this kind of activity may also be accompanied by a set of risks arising from the conflict of culture, misguided strategies and improper bidding fee, companies still can acquire what they need through this decisions.
Strategic Hotels & Resorts Inc. is the one only focusing on the upper-upscale and luxury lodging market. Their acquisition of Essex House located in New York mainly stems from the corporate strategy. However, we cannot judge the purpose of such activity through the surface. First, I think the the choice of Essex is because the location of Essex can be a landmark in Manhattan. The hotel was previously owned by Dubai Investment Group and they chose to pay the bidding fee amounting to $362.30 million. As they are the real estate investment trust (RETI) who have the business over America, Mexico and the Europe, the combination of Essex will definitely enhance the competitive power of their further development. The bidding fee was contracted as several payments and the first payment would be dealt at$190.00 million financing from the bank of America. While I personally think this behaviour is improper as the loan will be signal as the poor operations of Strategic Hotels. We cannot deny that companies paying the transaction out of their current asset side can be good news for investors as they are operating under a very robust cash base, meaning their investment will not be damaged if the companies are facing severe credit issues as they have a good command of liquidity. While on the other hand, if we change another view of this issue, holding the huge amounts of cash sometimes does not mean companies are creating shareholder value because they do not realise the usage of gearing. Certain liability can be a useful tool for managers to maximise the shareholder wealth, to certain extent, it is like to mix the equity and debt in their capital structure.
Since the financing decision has been reviewed, we need to look if there is any potential risks which may become the obstacles for the future of companies. The very first thing should be the cultural issues. Due to the cultural conflict, companies may have to be faced with the problem to achieve goal congruence. This is the biggest barrier for managers to maximise the shareholder wealth. While in this case, we can see both parties are both aiming at the luxury lodging market, they will have little possibility to pursue self-interest. Furthermore, as they are in the same sector(industry), they are following the same codes and principles, which is more convenient for the parent company to control the acquired. Then, since they both in the investment trust originally, the combination will just enhance the communication between internal divisions. So the second problem of misguided strategy can also be avoided in this case.
While actually, in the real business world, we must recognise that there are more than these three forms of conflicts which may lead the companies taking mergers and acquisitions to failure. Such risks are like the exchange rate fluctuation for multinational acquisition, the change in economic of scales and regulated restrictions. These external factors sometimes also must be taken into considerations before the M&A activity is carried out.
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