The Effects Of Merger Acquisition And Sustainability On Financial Performance

MERGERS ACQUISTIONS AND SUSTAINABILITY 1

THE EFFECTS OF MERGER ACQUISITION AND SUSTAINABILITY ON

FINANCIAL PERFORMANCE.

MARCH 2018

MERGERS ACQUISTIONS AND SUSTAINABILITY 2

Declaration

The project is my unique work and has never been handed over in any institution.

Signed……………………………………… Date…………………………………

The research project has been submitted for examination with my approval as the

university supervisor.

Signed……………………………………… Date…………………………………

MERGERS ACQUISTIONS AND SUSTAINABILITY 3

Dedication

The research is dedicated to my family for their love and care towards completion of the

project, may the next steps in your lives be the best ever.

MERGERS ACQUISTIONS AND SUSTAINABILITY 4

Acknowledgement

I thank Almighty God, for granting me good health, guidance, and understanding

throughout the entire time of preparing the project.

MERGERS ACQUISTIONS AND SUSTAINABILITY 5

Abstract

The study was performed with an objective of establishing the effect of mergers and acquisition

on sustainable development. Mergers and acquisition are known to have abundant value to

businesses and the society at large. Every company with a dream of selling its business aims at

doing so to a party capable of accomplishing what it never achieved. Stakeholders gather all

relevant information pertaining potential buyers exclusively across-the-board of M&As. Despite

taking these measures, some mergers have had a destructive impact on sustainability

advancement. Often, it’s a challenge for new owners to beef up margins. However, if the

business aims at attaining sustainable development then productivity can be improved. Mergers

should make improvements to products and services hence retaining existing consumers and at

the same time attracting potential customers. The paper examines the role of sustainability in

project management, focusing on two outsourcing companies; Capita and Serco. Capita is facing

some difficulties in its operation following the recent financial crisis. On the other hand, Serco

has incorporated the right strategies hence doing very well in its operations. Big firms in the

outsourcing sector face a lot of pressure in the stock market. Secondary data from audited

financial records of both firms was used to measure their performance. The study shows

sustainable advancement in project organization steers up business success.

Keywords: Mergers, Acquisitions, Sustainability, Capita, Serco, Outsourcing.

MERGERS ACQUISTIONS AND SUSTAINABILITY 6

Table of Contents

THE EFFECTS OF MERGER ACQUISITION AND SUSTAINABILITY ON FINANCIAL

PERFORMANCE. 1

Abstract ......................................................................................................................................................... 5

CHAPTER ONE ........................................................................................................................................... 9

INTRODUCTION ........................................................................................................................................ 9

1.1 Background Information ......................................................................................................................... 9

1.2 Research Problem ................................................................................................................................. 10

1.3 Project Aim ........................................................................................................................................... 11

1.4. The importance of the Study ................................................................................................................ 11

1.5 Purpose of this Research ....................................................................................................................... 11

CHAPTER TWO ........................................................................................................................................ 12

LITERATURE REVIEW ........................................................................................................................... 12

Introduction ................................................................................................................................................ 12

2.1 Mergers and Acquisition ....................................................................................................................... 12

Merger and Acquisitions and Financial Performance ................................................................................. 13

Mergers ....................................................................................................................................................... 14

Types of Mergers ........................................................................................................................................ 14

Vertical Mergers ................................................................................................................................. 14

Horizontal Mergers ............................................................................................................................. 15

Conglomerate Mergers ........................................................................................................................ 15

Takeovers and Acquisitions ........................................................................................................................ 16

2.2 Why firms merge or acquire other companies ...................................................................................... 16

How M&As can be Sustainable .................................................................................................................. 17

2.3 Outsourcing companies ........................................................................................................................ 18

Advantages ................................................................................................................................................. 18

Disadvantages ............................................................................................................................................. 19

2.3.1 What to contemplate before outsourcing .................................................................................... 20

2.4 Sustainability in M&As ........................................................................................................................ 21

Challenges that make Sustainability hard to achieve .................................................................................. 22

2.5 Theories of M&As ................................................................................................................................ 23

MERGERS ACQUISTIONS AND SUSTAINABILITY 7

Free Cash Flow Theory .............................................................................................................................. 23

Resource Based Firm Model ...................................................................................................................... 23

Agency Theory ........................................................................................................................................... 24

Transaction Cost Concept ........................................................................................................................... 25

Modigliani – Miller Theorem ..................................................................................................................... 25

Corporate Control Model ............................................................................................................................ 26

Financial Synergies Theory ........................................................................................................................ 26

Managerial Hubris System ......................................................................................................................... 27

Industry Shock Idea .................................................................................................................................... 27

2.6 Sustainability concept ........................................................................................................................... 27

2.7 Sustainable project organization ........................................................................................................... 29

The effects of sustainability on firms ......................................................................................................... 29

Effects of project management on business operations .............................................................................. 31

Advantages of project management ............................................................................................................ 31

2.8 Determinants of financial performance in Capita and Serco ................................................................ 32

2.9 Review of Empirical Studies ................................................................................................................ 33

CHAPTER THREE .................................................................................................................................... 34

RESEARCH METHODOLOGY ............................................................................................................... 34

3.1 Introduction ..................................................................................................................................... 34

3.2 Research design .................................................................................................................................... 34

3.3 Study setting ......................................................................................................................................... 35

Serco plc. .................................................................................................................................................... 35

Capita plc. ................................................................................................................................................... 36

The connection between the two companies .............................................................................................. 37

CHAPTER FOUR ...................................................................................................................................... 38

DATA ANALYSIS AND REPORT OF FINDINGS ................................................................................. 38

4.1 Introduction .......................................................................................................................................... 38

4.2 Data Presentation .................................................................................................................................. 39

Capita Company financial statements of 2016 and 2015,........................................................................... 39

Serco Plc. Financial Statements for 2016 and 2015 ................................................................................... 40

4.3 Research findings.................................................................................................................................. 40

MERGERS ACQUISTIONS AND SUSTAINABILITY 8

4.5 Summary and Analysis of outcomes .................................................................................................... 45

4.6 Research Analysis ................................................................................................................................. 47

Capita plc. ................................................................................................................................................... 47

Serco Group Plc. ......................................................................................................................................... 47

CHAPTER FIVE ........................................................................................................................................ 48

SUMMARY, INFERENCES, AND RECOMMENDATIONS ................................................................. 48

5.1 Summary ............................................................................................................................................... 48

5.2 Conclusion ............................................................................................................................................ 52

5.3 Recommendations................................................................................................................................. 53

5.4 Areas for Further study ......................................................................................................................... 54

MERGERS ACQUISTIONS AND SUSTAINABILITY 9

CHAPTER ONE

INTRODUCTION

1.1 Background Information

One key feature of the finance world includes mergers &acquisitions. An amalgamation

of two organizations to form one business is referred to as mergers while acquisitions arise when

one firm buys another. The company purchased is often smaller and can either operate as a

subordinate or be absorbed into the parent body. The concept of sustainability indicates a firm’s

capacity to maintain its operations at a progressive level over a long period of time. According to

Kleindorfer, Singhal, and Wassenhove (2005), sustainable development incorporates community,

environmental, and fiscal responsibility. The goal is to generate sensible utilization of assets and

offer ordinary life for future peers (p. 485). To scrutinize sustainability, there is a need to fit in

these policies into project administration (Carvalho and Rabechini 2011).

In this case, development helps the business to meet present needs and look out to the

future. A critical business focuses on management of finances as well as risks to ensure

objectives are accomplished. Many impediments evolve during this process. Despite that, a

tough business should endure the difficulties and remain in operation. Corporate sustainability

has a remarkable influence on managerial processes and performance (Eccles, Ioannou and

Serafeim 2014, p. 1235). Consequently, businesses are adopting sustainable expansion which

contributes to profitability.

The research lays out outsourcing businesses that have failed due to poor management

(Werbach 2009). The organization structure fails to assess possible implications through risk

MERGERS ACQUISTIONS AND SUSTAINABILITY 10

valuation. To run any business, cash is a crucial factor and investors evade unprofitable

enterprises. In case two corporations have registered losses, they should go back to the market

and raise capital. Their day to day expenses remains high equated to profit. The main risk is

running out of money cash without the capability of generating more which means makes that

industry to go out of business.

In business, sustainability is the potential of an enterprise to last in time in relation to

financial performance, profitability and productivity. The Organization should also be in a

position to manage its assets, liabilities and capital. However, sustainability is a complex notion

with innumerable contradictions that occur in various circumstances. To increase efficiency in

productivity all parties involved in the running of a business should work hard in the execution

of their duties. Poor management can be avoided through corporate sustainability (Werbach

2009). Strong sustainability is the answer to more valuable management and upgraded

performance of merger and acquisitions.

1.2 Research Problem

Performance analyses are employed to reinforce the perception of advantages of

acquisitions (Ravens-craft and Scherer 1989). Nonetheless, these credentials seem not to reach a

conclusion on these benefits. Each study shows data limitations which raises alarm about the

generality of the findings. Ravens- craft and Scherer investigated more than 5000 mergers and

they found noteworthy drops in the profitability of those firms. On the other hand, Healy,

Palepu, and Ruback (1992) discovered upgrade in sales and incomes of these companies.

MERGERS ACQUISTIONS AND SUSTAINABILITY 11

1.3 Project Aim

The chief objective is to establish the effect of mergers and acquisition on sustainable

development. The key role is to outline a theoretical framework that can evidently construct a

link between sustainability in project management and successful business (Turner & Huemann,

2010). This is achieved by comparing the financial performance of two outsourcing companies in

the UK; Capita and Serco Plc. The study aims at determining whether sustainability has an effect

on the revenues, profit and earnings per share of mergers and acquisitions.

1.4. The importance of the Study

Running most businesses today has been dynamic and challenging thus most companies

prefer adapting the mergers and acquisition process (Schraeder & Self 2003). The research is

significant to executives who might consider M&As in their organization. It will give insight on

what is expected on the firms’ performance among other things. The government will also have

an easy time deciding whether mergers should be facilitated or not through the implementation

of fiscal guidelines. Investors should also obtain all the relevant information concerning a

particular business before venturing into it. Corporations interested in mergers can use this

information to identify capable partners and their future expectations.

1.5 Purpose of this Research

The study pursues to uncover the impact of sustainability on;

1. Revenue from mergers and acquisitions.

2. The trading profit of outsourcing companies

3. Earnings per share of mergers.

MERGERS ACQUISTIONS AND SUSTAINABILITY 12

CHAPTER TWO

LITERATURE REVIEW

Introduction

Research by (Kouser & Saba 2011) has shown support on mergers performance. The

economic effects of mergers and acquisition to a corporation are well stipulated as well as ways

of achieving success on the temporary and long-term basis. The chapter summarizes information

on outsourcing corporations, sustainability, mergers, and acquisitions.

2.1 Mergers and Acquisition

In line with Beena (2011) during the M&A process, companies aim at achieving strategic

goals. Such objectives include resource allocation, cost and loss minimization and profit

maximization. Businesses view this as a technique of restoring success and solving management

problems. The target and acquiring firm must approve legal procedures to come together. As

stated by Halpern (1983), both firms must decide to be associated with each other under lawful

procedures recognized in the states. The mediums of exchange are usually shares of the

purchasing enterprise rather than cash belonging to that corporation or individual Manne (1965).

On the other hand, in acquisitions, one company takes over the share capital of the other.

It’s attained through the exchange of monies, regular shares, or advance stock Halpern (1983).

The purchasing entity keeps its identity and acquires everything the purchased business owns

leading to none existence of the acquired firm. M&As are classified into vertical, conglomerate

and horizontal in line with the connection of the company. Mergers are also divided into

domestic and international considering the location of headquarters (Bowman and Singh 1999).

MERGERS ACQUISTIONS AND SUSTAINABILITY 13

Organizations in similar or different industries can engage in this practice. M&As have in the

recent past been used to increase the organization value as compared to the older structure of

multiplying worth through organic evolution. Mergers & Acquisitions are quicker and

affordable. However, they demand a lot of sacrifice from all stakeholders to guarantee the

business does not hit rocks.

In modern business, it’s important to understand how mergers and acquisition functions.

Most sectors have been transformed by this discipline since the 1990s. The sectors include

telecommunication, oil, and gas, IT, pharmaceuticals and finance. To survive and prosper,

companies should make some changes (Taani 2011). The process involves identifying the

change and implementing it to produce sustainability in development. There are four elements

companies should put into consideration when merging and acquiring other firms, they include;

1. Identify the available transformation option and adopting the most

appropriate. Poor selection does not compensate the losses incurred.

2. Selecting strategies that assist to meet the objectives of the enterprise.

3. A Project management strategy that enables leaders to plan and execute

the goals

4. A risk management tactic that pinpoints and manages the hazards in a

company (Taani 2011).

Merger and Acquisitions and Financial Performance

Mergers result to fluctuations in the investment sector of a firm, including force buyouts,

recapitalization, and debt changeovers. They are getting more famous in both financial and non-

financial sector across the globe. A common way of operation involves accumulating equity

through dispensing new dividends. However, the impact in the monetary sector is quite limited

MERGERS ACQUISTIONS AND SUSTAINABILITY 14

despite the fact that firms engage in this process to enhance liquidity. The performance of a

corporation is determined by its working capital, existing ratios and quick proportions (Kumar

and Bansal, 2008). If such values are insignificant, the firm is prone to risks that might destroy it

in future. Merging deals can impact liquidity either by improving or weakening its financial

resources (Poornima & Subhashini, 2013).

In the United States, organizations incurred over 1.7 trillion dollars on M&As in 2000

(Brealey, 2006). The main goal of merging and acquiring other firms is to expend the value of

shareholders in a business. Once this is achieved, it is the reason why the performance of both

companies increases. M&As are motivated by a reduction in taxes, enhancement of revenue and

economies of scale. Financial performance is the measure of how businesses operate to execute

their financial objectives.

Mergers

It’s a famous tactic to expand a business. When firms merge, both assets and liabilities

are absorbed by the purchasing company ( Sherman and Hart 2006). Often, the buying firm

retains its name after this process however in some cases the two firms can come up with a new

identity. The shareholders of both companies must agree on the share exchange ratio after

merging. This agreement is normally approved through general meetings and court sanctions.

Types of Mergers

They appear in three forms as described below;

Vertical Mergers

It occurs to two firms that are in the identical supply chain but may not compete with

each other. These mergers are mainly in two forms; forward and backward integration. In the

MERGERS ACQUISTIONS AND SUSTAINABILITY 15

former form, a company buys a customer while in the latter, a company obtains a supplier. This

market exchange results to lots of benefits (Lubatkin 2013). First and foremost, it converts all

transactions between manufacturers and suppliers into a partnership relationship. It also gives

the managing team effective ways to improve the firm's performance. The acquired company

also has an effect on competition among the corporation’s traders or competitors. Vertical

mergers can be monopolistic incase new businesses are prevented from joining the market.

Horizontal Mergers

These mergers arise when two firms sell identical products in similar markets. The main

goal is to create a brand new and larger organization with a huge market portion. Three

competitive problems result from horizontal mergers (Lubatkin 2013). Competition may be

eliminated between the merging companies depending on their size and this could be significant.

The operation of these companies may create market owner that may enable the firm to raise

prices by decreasing output. Finally, it might reinforce the left behind participant’s capability to

organize their productivity and pricing choices.

Conglomerate Mergers

This transpires when two firms trade products in diverse markets. Thus they’ve no direct

impact on competition. The main advantage of this process is that the resulting business gains

multiplicity in the business portfolio. The trades take numerous forms from short-term

undertakings to comprehensive mergers. They provide an opportunity for the firms to reduce

capital and overhead costs to achieve their objectives (Lubatkin 2013).

MERGERS ACQUISTIONS AND SUSTAINABILITY 16

Takeovers and Acquisitions

This process is often done to help in the growth of a company. In most cases, large

companies purchase smaller ones. However, there’s reverse takeover that occurs when a small

firm acquires management control over a firm that has been running for a longer period of time

and it keeps its name. It is considered more beneficial to take over an existing firm than the firm

growing alone. Some acquisitions are hostile while others are friendly (Lubatkin 2013). In

friendly acquisitions, both firms liaise in negotiations. On the hand, in hostile acquisitions, the

target company may not be willing to be purchased or the board members may not be aware of

the existing offer.

2.2 Why firms merge or acquire other companies

M&As involve a number of diverse dealings such as management acquisitions, buying of

assets, tender offers, acquisitions, consolidations, and mergers (Trichterborn et al., 2016). Some

of the reasons why companies do that include;

 Synergy- businesses tend to think that combining efforts increases performance

and reduces cost. A business can attain this by merging with another firm that has

corresponding strengths and flaws. However, it is not always true especially in cases where firm

end up underperforming after the M&A process.

 Eliminating competition- competition is healthy among business associates, but

sometimes it gets unhealthy and worth eliminating. Most M&A deals permit the enterprise

acquiring another establishment to gain a big market share and eradicate future antagonism

(Trichterborn et al. 2016). It’s not easy; it often costs a lot to persuade the target firm to accept

the deal.

MERGERS ACQUISTIONS AND SUSTAINABILITY 17

 Progression-in some cases, a company may merge with the other giving it the

opportunity to grow by doing the work. Often known as horizontal mergers. Basically, the

purchased firm ends up doing more than it could do alone. The only difference this time is that

it operates under another enterprise. For better results, the two firms should combine efforts;

they should both put in as much effort as possible to increase productivity.

 To diverge or polish business focus- thousands of M&A contracts are defined by

this idea. For a company to be successful, it should consider merging with a firm that has a

deeper market invasion in various regions (Trichterborn et al.2016). On the other hand,

diversification firms should merge with outwardly unrelated partnerships which aim at

widening the performance of a specific industry on its productivity.

How M&As can be Sustainable

This process can only be executed through a number of stages. The first thing is by the

commitment of the leaders. To create a more sustainable firm the CEO must have the ability to

generate a firm that has an extensive vision in the long run. The commitment of such leaders

should drive the rest of the workers towards success. Again, such firms do not only deal with

themselves; reaching out to others is important. A sustainable company learns from the best;

those who are not within its boundaries. Finally, the involvement of employees is crucial to the

sustainability of mergers and acquisitions. The workers should change their behaviour and

believe for the betterment of the organization. Workers who tend to be more engaged in their

duties are more productive and contribute greatly to achieve the company objectives.

MERGERS ACQUISTIONS AND SUSTAINABILITY 18

2.3 Outsourcing companies

Basically, outsourcing entails requesting a third party to labour on your behalf on a

contractual foundation. It involves transferring the running of the entire organization to an

external service supplier. A contractual agreement must exist between both parties to define the

allocation of services. Outsourcing companies have been running for a long time now and

gaining a lot of popularity (Costa 2001). The primary reason why companies prefer this is to cut

back cost but it has proved to be more beneficial by generating additional profit for the

organization.

In the past, these companies were regarded as the basis of job losses but today this idea

has disappeared. Outsources are spread worldwide and utilize the global market. They aim at

improving day-day operations while benefitting all the parties involved. Most companies

outsource to reduce costs and improve their daily sales. Research shows that these organizations

make significant savings which generate more profit. The acquired profits make outsources

capable of providing more quality services and improve consumer satisfaction.

Advantages

The benefits of an outsourcing company include;

 Companies that contract out concentrate on offshore outsourcing have the advantage of

operating in diverse time zones. They make use of 24/7 hour operation (Zheng and

Davies 2015). They run their day to day business while their partners take over their work

even after employees leave for home.

 Businesses gain the ability to develop new skills and competencies that are applied in

competition. The corporate become more flexible in its performance and picking the

MERGERS ACQUISTIONS AND SUSTAINABILITY 19

finest people to manage its core tasks. This elasticity also assists the merged companies

to meet changing market conditions.

 Subcontracting companies have better risk management programs. It allows them to share

hazards with their partners who reduce the burden (Raz and Michael 2001). Having

competent partners helps the firm mitigate those risks and improve customer service and

delight. Eventually, it creates a stream of loyal customers since quality services are

delivered faster and more efficiently

 Outsourcing gives a corporate a more competitive superiority in the market and

customers get a fine breed of services. The bonus benefit of this process is the

introduction of quality facilities and a huge save up. When a company is retrieving

quality services at a much lower value it avoids spending much of its resources. This has

led to an increase in productivity and profitability to outsourcing firms.

 The practice also aids in monitoring operations and conquering any complications that

arise in the organization (Zheng and Davies 2015).The expense is significantly reduced

as well as the cost of management. In return, work gets done more effectively and

efficiently in the enterprise.

Disadvantages

Despite outsourcing firms having numerous rewards, there are various

shortcomings faced. One key drawback is the possibility of losing delicate data and discretion. If

the stipulations and conditions of operation are not well-defined, legal complications and hidden

expenses that are not foreseen result (Zhang et al. 2018).In scenarios where the outsourcing

provider does not have suitable processes and proficient workers, poor quality services are

delivered. The governance of business roles is also lost as it's not viable to limit actions of the

MERGERS ACQUISTIONS AND SUSTAINABILITY 20

activities you are outsourcing. These suppliers fail to offer 100% attention and time to a

particular company which brings about inexactness and adjournments in productivity. The most

common risks related to mergers and acquisitions are;

 Loss of jobs including experts in diverse fields.

 A drop in performance and productivity of a firm.

 Employees failing to cooperate due to lack of motivation which also leads to increased

rates of absenteeism.

 Dissatisfaction of consumers

2.3.1 What to contemplate before outsourcing

Outsourcing decisions have a long-lasting effect on an entire organization starting from

the stakeholders. It has turned out to be an essential business aspect that most establishments are

undertaking (Dinu 2015). Although sometimes urgent needs could require the business to make

rapid choices, a lot of care is required in this process. However, there are key issues to consider

before signing the contract, they include;

 The reason why you want to outsource your business in the first place. The goals should

be well defined before making the decision.

 The mode in which your organization accounts are managed and how well defined the

process is.

 The level of quality expected in infrastructure, technology, network, location and other

key metrics.

 The security measures that will be put in place to ensure that confidential business

information is not lost. Also, what to be done in case of a security breach.

MERGERS ACQUISTIONS AND SUSTAINABILITY 21

 The financial records of the prospective partner and whether the business is new or it has

been operating (Dinu 2015). The best thing would be to trade with a recognized provider

with a revealed record of profitability of a given period of time.

 If the vendor is flexible enough to accommodate your special needs. However, the seller

cannot reinvent his or her business style to accommodate you. Therefore, you ought to

select a service provider willing to address your disputes and take them into account

(Dinu 2015).

2.4 Sustainability in M&As

Research shows that M&As are important transactions in realizing growth and profit

targets of various enterprises. After this process, the number of employees in the organization

increases rapidly as well as duties. The firm should have a competent risk management team that

addresses all issues that the company might face and how to deal with such issues (Dinu 2015).

In fact, risk analysis and management process are the key steps to increase the performance of

mergers and acquisitions.

There are issues that arise in mergers and acquisition situations. These concerns should

be dealt with before signing the treaty. Sellers and buyers should be aware of their backyard. The

procedure indicates they properly understand how sustainability issues will influence their

operation. Acquirers should access the strength and weaknesses of the Target Enterprise and

efforts required to make the essential changes (Dinu 2015).The two firms should also regulate

the management that will successfully tackle sustainability needs. Changes in administration and

interaction are also important to instil the importance of sustainable development in the

company.

MERGERS ACQUISTIONS AND SUSTAINABILITY 22

The increase in competition among diverse markets has made businesses to not only aim

at succeeding but also sustaining this good performance. For this reason, investors, stakeholders,

traders and consumers are shifting their attention towards sustainability. The short-term focus on

finance is not enough for any running business it should go beyond that. This is achieved by

designing a robust strategy that sustains the business in both finances and environment

development. Different measures are used to determine the influence of sustainability on the

firm’s performance. These measures include profit related, earnings per share return on equity

and investments among others.

Challenges that make Sustainability hard to achieve

Sustaining the current ways of doing things in mergers and acquisitions and making

minor adjustments that yield better results is a bit difficult. However, if any business embraces

sustainability, the outcomes are superb (Turner & Huemann, 2010). Research shows that

significant changes must take place for most businesses to put up with production. Below are

some factors that affect sustainability in Mergers and acquisitions;

 Maintaining customer fulfilment in the organization.

 Challenge in maintaining the quality of services

 Maintaining the firm's sales and making improvements in future

 Increasing the profit the merged companies make annually

 Improving on the earnings per share in the firms.

 Winning new contracts and completing all acquired acquisitions.

 Managing all risks and mitigating them.

 Having a competent team that can run the business without fail.

MERGERS ACQUISTIONS AND SUSTAINABILITY 23

2.5 Theories of M&As

Free Cash Flow Theory

Shareholders and managers conflict over payout of free cash flow, this plays a significant

role in mergers and acquisitions (Jensen 1988). It is a chief root of takeover activity and has

obtained relatively slight attention. The conflict arises since both parties are interested in agency

costs and they fail to agree over the choice of the preeminent corporate approach. Agency costs

refer to the overall costs that arise in such enterprise arrangements. They include the price of

producing financial statements and unavoidable expenses incurred due to conflicts of interest

that cannot be fixed perfectly. The amount can be so huge sometimes and takeovers are used to

reduce them.

Resource Based Firm Model

It is the most important theory that investigates why companies prefer the merger and

acquisition process (Beena 2011). In line with this philosophy, the effectiveness of a firm is

measured based on a superior operation by particular resources it owns. A concrete and

comprehensive framework presented by Barney (1991) is used to categorize the desirable

characteristics of firm properties in order to produce sustainable advantageous competition.

These features include whether resources are: indispensable (such that they exploit available

opportunities and neutralize risks present in a firms environment), exceptional, incomparable

and incompatible.

According to Barney, these resources are defined as the firms’ attributes explicit

possessions, administrative processes, proficiencies, information, and skills among others. They

enable corporations to create performance tactics and should, therefore, possess four detailed

qualities- intermittence, imperfect imitability, worth and in substitutability. It is close to

MERGERS ACQUISTIONS AND SUSTAINABILITY 24

impossible for a single company to have such qualities hence the need for M&A process the

degree of integration necessary can seriously affect cost and time taken for the process to be

completed. In cases where both enterprises largely differ, then the time and cost incurred is high.

Much easier strategies can be adapted such as the processes and systems of one company, but

sometimes this can fail due to much resistance from the other firm. Integration extent can be

reduced by taking the best of both worlds in the integration process.

Agency Theory

Financial economics is an important aspect of research in mergers and acquisitions. It has

the objective to increase wealth for shareholders and the general economy. Agency theory is the

theoretical background for this process (Bosse and Phillips 2016). When one or more owners

engage an outsider to perform a duty on their behalf, an agency relationship arises. If the service

passed on is performed, it results in a delegation of certain decision-making rights to the agent.

Such an activity helps in creating a proficient and industrious economy. However, placing trust

is essential in such a delegation; agents should act on principal’s paramount interests.

Nonetheless, a simple agency model proposes that principals fail to trust their

agents as a result of information asymmetries and self-interest. In such a scenario they

seek to resolve their apprehensions by establishing mechanisms to line up the interests of

agents and reducing the scope of information irregularities. Sometimes agents have

different intentions to principals (Bosse and Phillips 2016). Such actions are caused by

factors such as monetary rewards, association with parties indirectly related to principals

and labour market openings. It can result in agents being more optimistic regarding

economic performance of an entity or their operation under a contract. They are also

MERGERS ACQUISTIONS AND SUSTAINABILITY 25

likely to be more risk-averse compared to principals hence the incentive to bias info

flows.

In trade structure and capital governance, the agency theory and costs are important

issues (Tsuji 2011. Ownership separation and control in an enterprise leads to agency conflicts

that result in managers working insufficiently. More concretely, these disagreements result in a

corporation failing to maximize its value since managers choose inputs or outputs that suit their

own preferences. In line with Shleifer and Vishny (1988 and 1989), this theory argues that

takeover activity in M&As is as a result of acquiring firm superiors’ who focus on their self-

regard rather instead of firm owner's wellbeing. Participating in “expense preference” deeds by

excess intake of bonuses can motivate superiors to maximize their return by expanding the firm

extent or by non-value improving mergers. Mergers & acquisitions are driven by administrative

self-regard and are unlikely to produce operational interactions that lead to improvements in

efficacy or output.

Transaction Cost Concept

Following this concept Coase (1937), businesses evaluate the budget of other governance

organizations for managing business deals. These expenses are defined as the costs of obtaining

and conducting information about inputs quality, applicable charges, dealer’s reputation, and so

much more. Contractual agreements are expensive. Firms merge to reduce the budget in a world

of improbability, where pledged arrangements are too costly.

Modigliani – Miller Theorem

Consistent with this proposal, the value cannot be generated nor ruined by repackaging

an organization’s securities with perfect capital markets. Similarly, any merger or acquisition

that does not affect this value has no effect on the after cash flow of the firm (Brusov et al.

MERGERS ACQUISTIONS AND SUSTAINABILITY 26

2015). For an M&A to generate value, the after money flows of the enterprises must exceed the

summation of the cash of the individual firms before the merger.

Corporate Control Model

Jensen (1988) and Shleifer and Vishny (1988) suggested Corporate concept buyout is a

resourceful way of substituting incompetent directors in target establishments. The business may

perform poorly due to managers’ lack of skills and knowledge to maximize firm value.

Businesses also fail when managers concentrate on personal welfare at the cost of the owners’. If

administrators of the enterprise acquiring the other firm are more capable, the targets

productivity is improved. According to the philosophy badly performing businesses are more

likely to be absorbed. Purchasing firms can also gain from such activities only that they are

capable of bringing operational collaboration to the post-takeover unit.

Financial Synergies Theory

Monetary synergies can inspire mergers and acquisitions. The model argues that an

enterprise with insufficient assets may not embark on all valuable ventures. The misfortune

results even when it has asymmetric information in financial markets (Myers and Majluf, 1984).

Merging this business with another that is slack-rich can increase its value. However, the

information irregularity amidst the two organizations should be lesser compared to that amid the

poor business and external venture capitalist. The purchase is an effective method to minimize

info lopsidedness hence attaining economic synergies. The model foresees partnerships expected

to be tangled in M&A undertakings are those facing fiscal distress but with beneficial

investment opportunities.

MERGERS ACQUISTIONS AND SUSTAINABILITY 27

Managerial Hubris System

In relation to the theory, managers might misjudge the value of what they purchase even

when they try to maximize the firm value due to overconfidence (Roll, 1986). During

consolidation waves, it is predominantly true they blindly follow the market which changes their

views. Often concerning conglomeration contrasted with strategic focus or in cases where

numerous bidders contest for one target. However, they could undervalue the price of

acquisitions or overrate their capability of managing a superior institution. Consequently, a

business deal that is alleged to promote the acquirer is simply bad strategic decisions where

benefits are hyped and expenses underestimated.

Industry Shock Idea

According to the theory, Mergers and acquisitions deeds within a business are not purely

exclusive occurrences. However, they are as a result of “industry shocks” which is the

adjustment of industry to a financially viable environment. The outcomes include deviations in

ruling, response charges, amplified international or local competition and inventions in

machinery. According to Mitchell and Mulherin (1996), group overthrows are less costly

channels for a business to streamline in reaction to the alterations caused by fiscal shocks. The

takeover act of organizations inevitably makes no improvements, in comparison to a pre-shock

standard.

2.6 Sustainability concept

It’s basically the progress form that encounters present necessities without compromising

the capability to meet future needs. The future orientation aspect is a basic component in this

context, especially in the Mergers and acquisition scenario. Sustainability implies that resources

should be wisely utilized among other features. Sustainable expansion further expounds on the

MERGERS ACQUISTIONS AND SUSTAINABILITY 28

close connection between the environment and economic activity (Vagasi 2004). It aims at

endorsing peace between humanity and nature. To achieve this, requirements of the enterprise

and stakeholders must be taken into account. Without profitability in businesses sustaining

humanity and environment is close to impossible. The basic elements of the theory include:

1. Incorporating short-term and long-lasting facets.

2. Integrating financial, social and environmental features.

3. Spending income rather than capital.

 Sustainability incorporates temporary and long-lasting features – it focuses

on the permanent nature of the issue at hand. The financial aspect tends to appreciate

short-term outcomes more than long-standing.

 The concept is about consuming income and not capital- capital is the

money required to start and run a business. It is very important for any organization.

Businesses should consider consuming income and not capital. However, it could be done

in the long run when there are huge profits earned. If consumption of income is

momentary resource degradation follows. With sustainability, the natural capital of a

business remains unharmed no matter what (Schaltegger et al. 2016). For instance, for a

company that just bought another firm, using up its resources would be a terrible idea.

 Joining in fiscal, community and environmentally friendly aspects-

commonly identified as the threefold bottom line. These characteristics are

interconnected and may have an effect on each other in numerous ways.

MERGERS ACQUISTIONS AND SUSTAINABILITY 29

2.7 Sustainable project organization

The manner in which an organization executes its projects has great effects on its future

performance. Therefore, stakeholders should identify and change the things that seem to cause

negative impacts. Mergers and acquisition are the most widely affected. In such cases, the

management should measure risks that the business is likely to face and come up with solutions

that do not affect operations. Research by Brent and Labuschagne (2006) illustrates the

significant intensification with the importance of communal dimension of sustainable growth

(p.3). New projects indicate a shift in the pressure of shareholders from environmental issues to

social concerns.

The solution to a failing business project involves process development followed by the

constant betterment of the organization’s practices. The key players, in this case, are

shareholders; they arrange for the necessary financial resources for the firm’s operations

(Zingales 2000, p.1625). According to Schwalbe, K. (2015), victory in projects talks about the

objectives and paybacks of the plan activities to the entire organization. The effectiveness of a

particular initiative linked to the compliance of its objective enables stakeholders to reap

enormous benefits. Many organizations in the recent past have ignored the need for sustainable

development. The same firms end up being closed in the long run due to fiscal issues. There is,

therefore, need to understand the role of sustainability in the development of schemes and how

this helps the company.

The effects of sustainability on firms

Many business partners talk about sustainability but they do not really focus on it.

Investors tend to think that it is important that firms should have governance on sustainability but

MERGERS ACQUISTIONS AND SUSTAINABILITY 30

their actions are contrary to that. The degree in which buyers and sellers assess sustainability

varies greatly depending on a number of factors. Companies always focus on business that can

generate profits in short periods of time and lead them to grow even in future. If this business

employs sustainable practices in its operation then it is likely to operate for many years and win

against competitors (Carroll and Buchholtz 2014). Risk assessment is a concern in this scope.

Engaging in third-party schemes assists the company to evaluate its pledge to sustainable

sourcing.

Corporations are divided into high and low sustainability (Eccles, Ioannou and Serafeim

2014, p. 1235). The classification is based on embracing social, environmental and political

policies. High-sustainability organizations have adopted approximately 40% of these strategies

while their counterparts 10% only. Although sustainability is criticized in relation to shareholder

value, it eventually pays off (Turner & Huemann, 2010). Any business should ensure sustaining

itself to generate affirmative impact on stakeholders in future. Below are common differences in

businesses:

Table 1: Differences in sustainability in businesses

High-sustainability businesses

Low-sustainability businesses

High customer satisfaction

Low consumer gratification

Pays particular devotion to their

stakeholders through dynamic engagement

practices

Pays no such dedication to

shareholders.

Long-term oriented external public

services.

Short-range focused on outdoor

communications.

MERGERS ACQUISTIONS AND SUSTAINABILITY 31

Have long-term investors

Have short-term investors

Reliable operation in relation to

measurements of yield on equity and assets

Poor and unreliable business operations

Excellent work on both bookkeeping

measures and the stock market.

Poor stock market and accounting

methods

Effects of project management on business operations

One way to improve the performance of a particular organization is using project

management to achieve organizational objectives (Pollack and Adler 2014, p.17). The

administration of projects has positive effects on all aspects that contribute to success in a firm. It

can be applied in small to medium enterprises. For a business to succeed in today’s world, they

need to view management at the core of their operation rather than an action. It’s not limited to

precise industries; it’s relevant to all businesses (Kerzner, H 2017, p.15). Money goes into the

drain due to failure to weigh business risks. To evade this situation managing resources is a

critical way to avoid money and time wastage.

Advantages of project management

a. Protects the firm against future losses. Managing operations are significant at any

level in an organization (Kerzner, H 2017, p.3). Projects are well stipulated including what

to be done when by whom and why. In due course, an issue likely to cause trouble in the near

future is solved before it becomes a predicament this way guarding the company.

b. Improved decision making – the most crucial issue industries face is making

decisions on resources to use, and finances among others. The concept allows businesses to

MERGERS ACQUISTIONS AND SUSTAINABILITY 32

make use of whatever resources they have and use them effectively to yield profits. The

ability to make credible decisions and thus careful planning.

c. It allows effective communication amongst all stakeholders. It permits arising

issues to be clearly laid down and discussed leading to effective resolution. Support for

management is gained

d. Deals with the unforeseen- some unexpected results have a serious impact on

businesses such as delayed operations. In the long run, it could have certain implications, for

instance, additional costs, failure to deliver quality services, among others. Dealing with such

issues before they happen saves the firm a whole lot of trouble.

e. Business dependability- it’s an important factor in business success. Attaining

your goals on time with no extra cost contributes to profitability. In line with Kerzner (2017)

a company gains the confidence to prospective customers without being afraid of failure to

deliver (p.5).

2.8 Determinants of financial performance in Capita and Serco

The financial process involves measuring operation of Companies in monetary terms. It

is usually done over a certain time period and can also be used to compare businesses. Different

measures are applied in this process which includes the return on sales, assets, and equity.

Factors such as liquidity, profitability, and efficiency have an influence on the growth and

performance of a business (Carvalho and Rabechini 2011). It affects the size of the firm too.

Large firms like Capita and Serco can exploit economies of scale, thereby being more

efficient in comparison to smaller enterprises. The available resources in an organization,

describe business success as well; whether tangible or intangible. Both companies are

MERGERS ACQUISTIONS AND SUSTAINABILITY 33

outsourcing firms hence serving a larger spectrum. The revenue they make annually and net

debt of these firms is also a financial determining factor.

2.9 Review of Empirical Studies

Mergers and acquisitions are the most common techniques used by corporations to

improve performance. Therefore, various studies have been done to establish their impact on an

organizations conduct. In line with Firth (1979) takeover activity benefits the shareholders of

the acquired firm. Unfortunately, the purchasing company’s shareholders are often left to suffer.

Andre, Kooli, and L'Her (2004) analyzed purchases in between 1980 and 2000. Results

ascertained that acquirers underperform hence acting out poorly in the long run. Research by

Kilelo (2013) shows that businesses venture into mergers to boost their capital base and returns

on investments. Nevertheless, such an enterprise should have the potential of doing better

financially in the market.

Research by Cummins et al. (1999) examines the connection between mergers and

acquisitions, economies of scale, and efficiency in United State life indemnity industry between

1988 and 1995. They assessed cost and returns ability by means of data envelopment analysis

(DEA). The results proved that acquired companies attained greater efficiency than firms which

were never tangled in mergers or acquisition activities. Besides, corporations operating with

improvements and economically defenceless firms were further likely to be purchase targets.

Based on these results they settled on, mergers and acquisitions in the life insurance trade had a

positive outcome on productivity. Saboo and Gopi, (2007) studied the influence of acquisitions

on performance of gaining firms. Saboo and Gopi achieved this by inspecting some pre-merger

and post-merger monetary proportions of these firms. The core findings demonstrate that these

processes have had useful effects on crucial fiscal ratios of firms purchasing local businesses.

MERGERS ACQUISTIONS AND SUSTAINABILITY 34

The research also indicates the undesirable impact on organizations acquiring cross-border

corporations.

Mantravadi and Reddy (2008) evaluated the effect of buyouts on the firms’ performance

in diverse industries. The assessment was achieved by inspecting selected merger commercial

shares. The sample population selected was acquisitions linking public limited Companies and

transacted corporations in India amid 1991 and 2003. The outcomes showed slight distinctions

in behaviour after merging and acquiring other firms. Explicitly, mergers appear to cause an

impact on the viability of corporations in the funding and finance industry. They initiate

substantial drop in both cost-effectiveness margins and revenues on investment and property.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

It represents procedures followed to execute the study. It involves the research design

incorporated, the study setting, ethical deliberations, data gathering and analysis. It is an overall

scheme considered to assist the researcher to answer the raised questions in this study (Kothari

2004). In this stage, most decisions concerning how the study was carried out are established, as

well as when, where and how the research was executed.

3.2 Research design

It brings up practices applied to different components of a particular study to ensure the

research problem is effectively addressed. It represents the outline of gathering, quantification,

MERGERS ACQUISTIONS AND SUSTAINABILITY 35

and examination of collected data (Creswell and Creswell 2017). The relevant information

acquired should deal with the drawback logically and explicitly. In this case, the role of

sustainability in Serco and Capita companies in the UK. The method is employed to slim down

broad research grounds to one effortlessly researchable subject.it cannot be oversimplified to fit

an entire ecosystem.

3.3 Study setting

Serco plc.

It is one of the leading government service providers in the world that operates in

most continents including the UK (Serco.com, 2018) .it has its headquarters based in Hook,

Hampshire and was founded in 1929 following a takeover in 1985. The company aims at

providing high quality and innovative public services to their service users and shareholders. It

also has an objective of providing sustainable and growing returns on capital to their lenders.

Serco is a business to Government (B2G) business, which specializes in health, transport,

defence, immigration and citizen services. The company delivers these services to North

America, idle East, Asia Pacific, UK and Europe. In 2014, Serco decided to change strategy from

serving the private and public sector to being a B2G business. The amendment was a result of the

number of contracts the firm had lost heavily due to diversification into the private sector. The

B2G strategy was a form of recapitalizing the business. In 2013 and 2014 the management team

was changed gaining over £700m in 2015 using an equity rights issue.

Since its foundation, the company has been delivering quality services to the public. The

task has been easy due to the effective processes involved, competent management and useful

technology. The services delivered are defined by the customers. Serco works hard to develop

MERGERS ACQUISTIONS AND SUSTAINABILITY 36

efficient ways to serve its consumers (Serco.com, 2018). Its management, employees and other

stakeholders have contributed to the great performance of this organization. 2016 was a

successful year; their efforts were not in vain.

The business of providing services to the government is growing rapidly. Serco believes

this will continue because of two main factors (Serco.com, 2018);

1. If public service provision is well managed, the company can deliver high-

quality services at low cost than the government.

2. The government will concentrate on the value of services and money

following pressure resulting from delivering more services for less. The pressure is as a

result of;

 Voters and corporate taxpayers’ unwillingness to tolerate an increase in

taxes.

 Public service users’ high expectations on service quality.

 Requirement to reduce expenditure deficits and public debts.

Capita plc.

It’s a public limited company with its headquarters in London, England. Capita was

established in 1984 as a non-profit division and three years later became an independent

company as an outcome of a buy-out. It started with 33 staffs and with time this number

tremendously rose to approximately 73,000 in 2018.In 2016 Capita company was the leading

business development outsourcing and proficient services in the UK (Investors.capita.com,

2018).The corporation’s clients are in the private sector as well as local and central government.

Capita utilizes B2B and a B2G that is, a business-to-business and business-to-government. In

2006, Capita commissioners were penalized by financial authorities pertaining poor anti-fraud

MERGERS ACQUISTIONS AND SUSTAINABILITY 37

panels. 5 years later, the company got into the healthcare enrollment market over the acquisition

of one of its teams. The establishment was doing very well and other businesses looked up to it.

Unfortunately, in 2014 five out of eight Trusts were reported to withdraw their contracts

from Capita. There were major concerns regarding the value of services the company provided.

Nonetheless, the research indicates the magnitude at which the public sector depends on capita;

the firm secured contracts from 226 diverse buyers from the public in two years. It safeguarded

more than double as many contracts as its subsequent largest competitor (Investors.capita.com,

2018). Recent developments show that Capita has spread over lots of markets hence getting more

complex. The growth has led to a limitation in fresh sales, lack of operating discipline and

financial elasticity. In 2018 the company was looking at selling assets to settle its huge debts

over £1.15bn.

The connection between the two companies

Capita and Serco are both public limited companies that work in the United Kingdom

government. They are both outcrossing, with Capita being one of the latest firm facing trouble

(Investors.capita.com, 2018). They have been in operation for more than 50 years providing

quality services to the public. 2016 was a significant year for both firms, Capita experienced

difficulties during this year while Serco Company made great progress.

MERGERS ACQUISTIONS AND SUSTAINABILITY 38

CHAPTER FOUR

DATA ANALYSIS AND REPORT OF FINDINGS

4.1 Introduction

It entails presenting project data, analyzing it plus interpreting results. The chapter

evaluates the data collected using analytical reasoning to examine each component and its effect.

The research focuses on revenues, profit margins, and debts of these companies in 2015 and

2016 financial years. The financial analysis was then used to pinpoint the strengths and

weaknesses of Capita and Serco plc.

The paper utilizes secondary data acquired in audited financial accounts of the two

companies. The financial performance of these corporations was analyzed to learn more about

the factors that might in one way or another affect their performance. Information obtained from

brochures, web pages from the companies’ sites were reviewed and proper results formulated

(Investors.capita.com, 2018). In addition to that, more concerning these corporations was

MERGERS ACQUISTIONS AND SUSTAINABILITY 39

gathered from magazines, newspapers. The results obtained from the entire research were

confronted with previous theoretical theories on the subject to assist in generating new theories

4.2 Data Presentation

The data below shows the financial performance of both companies during the merger

and acquisition period. To get a clear picture of what the research is all about, it utilizes data for

the year 2015 and 2016. The financial made it easy to analyze the data obtained for the research.

They are both outsourcing companies based in the UK. The study makes use of external analysis;

the analyst is not part of the enterprise. The external analysis involves analyzing data based on

information obtained in published financial records.

Secondary data utilized was retrieved from 2016 financial accounts of both Serco and

Capita plc. 2016 was an important year for the two companies; a fruitful year for Serco and a

challenging one for Capita plc. They have been in operation for 50 years now providing quality

services to the public and the government. The following tables show the financial statements

from both companies used to carry out the research (Investors.capita.com, 2018) and (Serco.com,

2018). The research concentrated on revenue, earning per share, profits and net debts which are

the main financial indicators of a business.

Capita Company financial statements of 2016 and 2015,

(Investors.capita.com, 2018).

Item

2016

2015

Underlying Revenue

Reported Revenue

£4898m

£4909.0m

£4898m

£4836.9m

MERGERS ACQUISTIONS AND SUSTAINABILITY 40

Underlying Operating profit

Reported Operating profit

£541.3m

£148.3m

£541.3m

£206.6m

Underlying earnings per share

Reported earnings per share

56.67p

5.55p

70.73p

7.96p

Serco Plc. Financial Statements for 2016 and 2015

(Serco.com, 2018).

Item

2016

2015

Revenue-continuing and discontinued

operations

Reported Revenue(continuing operations only)

£3,047.8m

£3,011.0m

£3,514.6m

£3,177.0m

Underlying Trading profit

Reported operating profit

£82.1m

£42.2m

£95.9m

£3.8m

Underlying earnings per share

Reported earnings per share

4.13p

0.11p

3.44p

15.47p

Free cash flow

£33.0m

£35.5m

Net debt

£ 109.3m

£62.9m

4.3 Research findings

The underlying revenue of Capita Company aims at making profits and a sustainable

growth through organic development and acquisitions. Revenue increased by 5% to £4898m in

2016. The goal of the main profit before income tax in this organization is to achieve permanent

MERGERS ACQUISTIONS AND SUSTAINABILITY 41

advances in returns. The tax decreased by 19% to £475m in 2016. The earnings per share also

went down significantly by 20% to 56.67p in 2016. Enduring growth in this sector is an essential

influencer of stakeholder worth. In 2016, the companies debts were 2.89 times compared to those

in 2015 and the interest cover 8.8 times (Investors.capita.com, 2018).

The survey in 2016 at Serco showed that over 30000 of the employees were more

engaged in their duties. The improvement caused additional enhancement in the company’s

global score. The score did not only increase for employees but also managers and other

stakeholders. Serco has a five-year plan they intend to execute with a better performance year

(Serco.com, 2018). This plan was executable due to sustainability in the development of this

firms operation. The 2016 results showed that this plan was indeed achievable since trading in

this year was better than earlier anticipated.

The operating costs of Serco firm decreased by £450m. They also reduced contracts that

made losses following OCP utilization in 2016 of £84m. Order intake increased by 40% with the

total value of signed contracts as £2.5bn year (Serco.com, 2018). Reduced finance costs and an

effective tax rate caused underlying the earnings per share to increase by 20% to 4.13p. The

closing net debt also increased by £46m. Comparing the trading profit and underlying trading

profit of this company, the former was higher by £18m.

Revenue is the amount a firm gains, also known as sales. Without this, a business cannot

generate profits and stay viable in the business. To access how much a business has developed,

sales are more closely examined. Stakeholders are often interested in what a potential partner can

generate in terms of revenue. Poor revenue makes it hard for any company to attract investors

and potential contracts. Revenue is also significant when borrowing loans to support the business

(Rehman 2013). A company that generates more sales has the potential of acquiring loans easily

MERGERS ACQUISTIONS AND SUSTAINABILITY 42

and at favourable rates. Sustainability plays a key role in the sales generated by merging and

acquiring companies. From this research, the revenue of Serco dropped in 2016 compared to that

of Capita Company due to poor sustainability. Both firms should aim at increasing their revenue

much higher by adopting more sustainable measures in development.

For a company to survive in any kind of business, growth, and profitability are very

important. Sustainability is the key to all these aspects. When sales exceed expenses the firm

generates profits (Rehman 2013). Trading profits are crucial because they are used to measure

the performance of a corporate. Through profits, expanding the business is made easier since it’s

a source of capital for investments. Profits also attract investors who generate more funds. Most

firms use the profits generated to pay their partners and stakeholders in form of shares (Rehman

2013). Once the shareholders are paid, they get motivated to work hard and make the business a

success. The money can also be used to purchase more equipment and property needed to run the

companies operation. Serco Company showed an increase in profit during the year 2016, unlike

Capita plc. Capita firm should aim at generating more profits to enlarge its operations as well

draw more investors.

Earnings per share are also valuable in a company; they represent the amount of profit

assigned to each unsettled stock. They are affected by profit and can easily decrease once the

company makes losses. They are used to reveal the fiscal health of a business. Investors pay

close attention to these earnings thus businesses should ensure they are maintained at friendly

rates. The only ways organizations can ensure that is by embracing sustainability in running the

business. From the data above, the earning per share of Capita decreased significantly following

a drop in its trading profit. EPS and profit go hand in hand; the business should, therefore,

establish ways to prevent the percentage decrease.

MERGERS ACQUISTIONS AND SUSTAINABILITY 43

Net debt represents the debt that remains unsettled when a company pays off as much

debt as possible using the available liquid assets. The debt shows whether the business has the

ability to repay its arrears or take more when needed. The potential of a business to afford its

obligations is important to investors and analysts. Both Capita and Serco company records show

that they had huge net debts in 2016 (Serco.com, 2018). Net debts are serious issues that need to

be addressed. Sustainable development is one way to ensure that these debts are settled and

profits are produced.

Effects of sustainability on Revenue

The hypothesis that sustainability has an effect on the sales a particular firm makes was

tested. Capital Company increased its Revenue in 2016 whereby 3.3% was from acquisitions

(Investors.capita.com, 2018). A number of strategic acquisitions including education, justice and

cybersecurity resulted in this growth in revenue. In 2015 Capita acquired Avocis; the largest

acquisition ever. The full impact of Avocis acquisition in 2016 led to a reduced volume of

infrastructure work which in return raised revenue. The key to maximizing sales in a firm is

having a strong management team that takes care of all risks involved and manages all the

business operations effectively. Serco dropped its revenue in 2016 due to lack of sustainability in

the skills and competencies of the managing team (Serco.com, 2018).

Effects of sustainability on Trading Profit of M&As

The hypothesis of the impact sustainability has on the profit generated by a running

business has been tested in this research. Profit is very important for any running business; it’s

the key to investments and growth of an organization. The pre-acquisition profit for Capita

Company was £5.6m and £34.2m in 2016 and 2015 respectively (Investors.capita.com, 2018). In

MERGERS ACQUISTIONS AND SUSTAINABILITY 44

2016 there was a significant drop in the profit of Capita which had a huge effect on the balances

sheet. On the other hand, Serco firm had increased its trading profit this year as a result of

sustainable development (Serco.com, 2018). The five-year-plan helped led to the great success

alongside the dedication of the entire team in Serco from stakeholders to the least paid staff.

Effect of Sustainability on Earnings per share of Mergers

The hypothesis of sustainable development influence on the earnings per share of

mergers and acquisitions was put to test. Capita firm had a 20% decrease in earnings per share,

unlike Serco which made 20% increase in 201 (Serco.com, 2018). There are mergers and

acquisitions related costs that firms normally incur during operation. The costs are normally

excluded in the assessment of the performance of that particular business (Investors.capita.com,

2018). Failure to reduce these finance costs and to have an effective tax rates leads a reduction in

the earnings per share. Serco Company did a pretty good job due to the sustainable development

of the working team which resulted in the huge rise in these shares.

Conclusion

Following the results of this research, it's without out that sustainability has an effect on

mergers and acquisitions. Implementing integrated sustainability n merged companies should

take place at all levels of the organization to ensure good results. Effective risk management is

necessary for the organization. It ensures that customers are fully satisfied, the firm achieves its

objectives and it has a remarkable financial performance throughout its operations.

MERGERS ACQUISTIONS AND SUSTAINABILITY 45

4.5 Summary and Analysis of outcomes

Data analysis was done to compute the influence of mergers and acquisitions in the

operation of Serco and Capita public limited Companies. The study employed data on returns,

profits, debts, sales, and shares. The analysis contemplates on the financial reports of the two

organizations in the year 2015 and 2016. Serco showed great progress following the

implementation of a new operational strategy after the poor performance in the previous year

(Serco.com, 2018). Capita outsourcing company, however, had a challenging 2016 making major

losses in its operation (Investors.capita.com, 2018

The research was done with the intention of establishing mergers and acquisitions effects

on financial accomplishments of United Kingdom outsourcing companies. Various researchers

have analyzed these impacts coming up with diverse results (Kumar and Bansal, 2008). The

research focused on activities that have occurred over fifty years of operation within this field.

According to Ndung’u (2011) mergers can lead to the improvement in the financial segment of a

company. Establishments that have utilized sustainable development in their operation seem to

have fewer challenges compared to those who do not. The study findings indicate that

sustainability is beneficial for any business to succeed. While analyzing the data there was a

greater variability in profitability, revenue, liquidity among other financial variables. These

results proved a significant connection amid mergers and acquisitions in organizations alongside

sustainability. Enterprises should, therefore, adopt serious improvements after mergers are

undertaken to ensure the firm's performance does not deteriorate. It is evident that companies

perform poorly than they ever expected due to negligence.

Mergers and acquisitions produce mixed results in companies. However, they can change

the economy and environmental footprint of an organization and its product chain. They also

MERGERS ACQUISTIONS AND SUSTAINABILITY 46

influence the activities of the firm including manufacturing and distribution of services.as a

matter of fact, enhanced supply performance is the greatest cost reduction in mergers. While

some deals are better than other, sustainable management is a key consideration during pre-

merger process and execution (Carvalho and Rabechini 2011). Issues on sustainability have been

receiving increased attention among enterprises. The most important strengths of an initiative are

inorganic approaches which are crucial aspects of the growth of M&As. Although most

companies aim at improving their competition by merging with others, research shows that this

could have negative impacts on their performance. Nevertheless, if such a firm can manage to

succeed in its operations its efficiency and profitability increase enormously.

The efficiency of mergers and acquisition depends on three synergies that include

management, financial and operational. For such an activity to be successful the relationship

between stakeholders and management is a critical integration that can be lost in the process. The

key thing that should be done encompasses assessing the risks that are involved quantifying them

it necessary solutions are applied in their mitigation to deal with the overall economics.

Companies that struggle to improve and sustain their supply chain build stronger relationships

with their customer. The sustainable development applied in this case should remain in progress

for the long term and not just temporary (Carvalho and Rabechini 2011). Ever corporate form

aims at achieving the highest and most sustainable growth level during its operation. However,

problems may arise due to limited resources, lack of funds, inadequate access to the market and

poor management. To perform well and achieve its goals the administration needs to enhance the

strategies applied to run the business.

MERGERS ACQUISTIONS AND SUSTAINABILITY 47

4.6 Research Analysis

Capita plc.

The financial performance of this company in 2015 and 2016 was examined; 2016 was a

tough year. There are various reasons behind this (Investors.capita.com, 2018);

1. The business process management during this period was by and large

subdued. Poor management of the team resulted in unanticipated financial losses and

damage to the firm's reputation. Capita won a lower ratio of major bids compared to other

years and certain client assessments were deferred.

2. The firm also faced several headwinds compelled by a slow-down in

choices of customers. Also, some precise contracts brought up difficulties in 2016 and the

activities in transactional industries shrunk.

3. In 2016, Capita`s revenue reduced primarily as a result of the intended

bow out in the Telefónica UK (O2) deal.

4. Capita faced limited incidents in 2016 due to the poor performance of the

risk management team; however, their levels were slightly low to trigger a concern to the

panel.

5. Capita failed to secure its data. Breach of security impacts the operations

of an organization and achievements of its goals. Corporate data should be prevented

from loss and measures put in place to detect such issues.

Serco Group Plc.

The risk management process undertaken by this company in 2016 contributed to

improved performance. Hazards associated with achieving business objectives were first

MERGERS ACQUISTIONS AND SUSTAINABILITY 48

identified. These risks include environmental factors and internal risks arising from the nature of

the business. The process involved assigning the planning of hazards to a specific team that came

up with the strategy to mitigate them. Their levels were assessed and how each factor could

affect the operations of the business and its performance (Serco.com, 2018). The evaluation team

also determined how available measures could be used to control these hazards effectively.

Controls that could reduce these threats were acquired. The most effective method was employed

in the mitigation process. The mitigation actions were carefully monitored in case of any arising

issues during this process. The changes in business and the surrounding were also examined to

ensure the firm was capable of responding appropriately to any issues that would emerge. During

this process, each and every activity was reported through the chains of management to the

highest administration level. This was done to provide assurance that the threats were well

governed and effective controls put in place (Serco.com, 2018).

The employees and managers in this firm were also dedicated to their work. Research

shows that employees engagement % increased significantly in Serco Company during 2016

compared to other years.

CHAPTER FIVE

SUMMARY, INFERENCES, AND RECOMMENDATIONS

5.1 Summary

The research was conducted with a goal of establishing the impact of mergers and

acquisition on sustainability in outsourcing companies. The study sample comprised two

companies; Capita and Serco. Secondary data from their financial statements were used in the

MERGERS ACQUISTIONS AND SUSTAINABILITY 49

research. Variables such as efficiency and profitability were obtained in this data for the year

2016 which was a tough year for Capita but a fruitful one for Serco plc (Serco.com, 2018)The

two companies have been operating in the UK for a while now causing a great impact in the

countries operations. They are also widely spread across the globe since they operate as

outsourcing companies.

Analyzing Capita`s underlying results, it is evident that the operating profit

consistently decreased by 15% as well as the earnings per share which decreased by 20 %.After

2016 trading period got so challenging the board designed a new strategy that could be adopted

in the preceding year (Investors.capita.com, 2018). The new structure would provide better

management power, reporting line could be shortened, improved alignment of transactions and

other actions to exterior markets. The organization also aimed at strengthening board oversight

and operational control. The year 2016 showed a major step down causing an impact on the

original profit and margin. There was also a significant reduction in infrastructure, in the

organization and real estate which led to the fall in revenues significantly. Immediate challenges

in funding led to fluctuations in the local government markets. Capita Company has a division

known as insurance and benefits services which offer business handling and expert solutions to

certain markets containing pensions, and employee paybacks among others

(Investors.capita.com, 2018).

Serco Company renewed its corporate programs in 2015 and there was a self-regulating

oversight put in place to ensure this was fulfilled. Additional measures have been employed to

advance on the efficiency of its governance, and operational flexibility. The introduction of a

new risk committee in the firm has helped strengthen risk management processes (Serco.com,

MERGERS ACQUISTIONS AND SUSTAINABILITY 50

2018).in return, the corporate team is focusing on its responsibilities having replaced the

supervision panel committee.

The company’s board is engaged in the assessment of individual bids which involves

certain threats. The board also meets up with the administration to discuss matters concerning the

development of new trades and the organization's key tasks. The team is focused on permanent

and sustainable value creation thereby protecting the shareholder's welfare (Carvalho and

Rabechini 2011). Serco’s employees, customers and the societies they work in are not left

behind in this advancement. The management group in this firm is not just dedicated but

passionate regarding public service provision. The strategy has assisted to transform this

business and draw it closer to success.

Serco delivers inventive solutions to most challenges governments encounter. The

company has the experience, capability, and scale to supply standard customer services as

required. In this manner, the enterprise continues to make a difference in the lives of millions of

people across the globe. Similarly, it restores peace in the states which provides a favourable

environment for business to thrive. 2016`s survey showed that Serco Company had made

improvements in its global score (Serco.com, 2018). Since 2011 it was the best achievement

which narrowed down to all categories; managers, personnel, and directors. Serco uses key

performance indicators to monitor its performance; profits, revenue, and debts. The method

ensures there are balance and emphasis on two important aspects. These features are financial

progress and employees’ engagement. They are both critical in providing exceptional customer

service and accomplishing the firms’ objectives. The business still aims at doing better even in

future by doing the following (Serco.com, 2018);

MERGERS ACQUISTIONS AND SUSTAINABILITY 51

 Identifying issues that need to be addressed before they get out of hand. Threats are likely

to affect the performance of a business and if they are not taken into consideration serious

consequences follow. The firm aims at ensuring that such scenarios are avoided.

 Improving management of risks hence harvesting profits which eventually lead to an

expansion of the business. If risks are not well planned, monitored and mitigated, the

company may end up performing poorly in the industry and eventually going out of

business. The management should see to it that such hazards are well addressed and

necessary measures adopted before the situation is uncontrollable.

 Hiring new management that can take the company to the next level in terms of success.

The workload may be too huge to be handled by the existing team and the business may

be forced to recruit more workers to manage the workload and improve performance.

However, this issue should be done in well-planned procedures to ensure it does not

contribute to more problems. The recruited members should be in a position to perform

even better than the existing team (Serco.com, 2018). In this case, employees can be

appreciated once in a while to boost their morale. The act ensures that everyone is

motivated and there is healthy competition among the workers which yields better results

in the long run.

 Undertaking a review of contracts and mitigating loss-making treaties. Contracts can be

good and bad at the same time especially when they are not well investigated before

signing off. Any treaty that a firm gets into should not drag it behind instead it should

ensure that the firm is more effective than ever in all its operations. A contract that can

make a business suffer is likely to be noticed since the beginning when shareholders carry

out their research. Stakeholders should do thorough research on potential partners before

the merging plan is executed.

MERGERS ACQUISTIONS AND SUSTAINABILITY 52

 Rebuild trust, self-assurance and business development. Developing a business is the key

role of the managing team. All measures put in place should take the business a step

closer to attaining success.

 Build capability as it improves on implementation and cost efficacy (Serco.com, 2018).

There are many things companies wish to accomplish but end up not achieving. The team

responsible for such implementation procedures fails to do their work resulting in such

challenges. The board of the company should ensure that every division serves the firm

efficiently undertaking its entire role without failure. In sections where such issues occur,

measures should be put in place to resolve this either by appointing a new team or

managing the existing one.

5.2 Conclusion

M%As are aimed at enhancing competition, improving value in the corporation as well as

attaining synergy (Trichterborn et al. 2016). They influence the profitability and liquidity of

businesses. The study shows that improvements are important in the day to day learning of a

business. Failure for such undertakings results in major losses which affect shareholders and

consumers. Employees should work hard to ensure the takeover period does not result in losses

instead of profits. Liquidity of enterprises also seems to deteriorate as a result of acquired

entities. Increase in debts taken to enhance owning target companies greatly contribute to

reduced liquidity. The study establishes improvements that result in sustainable development in

all aspects. Managers, shareholders and all employees are accountable for guaranteeing that the

company enjoys economies of scale during its operation.

MERGERS ACQUISTIONS AND SUSTAINABILITY 53

5.3 Recommendations

The study recommends that the management should ensure that they perform their duties.

They should promote progress in technology, raise the paid up capital and proceed effectively

even after merging or acquiring other firms (Trichterborn et al. 2016). The management should

not take over another firm to improve its performance or sustain a failing business. Instead, the

team should come up with solutions regarding the organization of their assets and liabilities.

They should also consider the extent of transferring assets in order to acquire firm liquidity

easily. The firms should also carry out projects that generate high-income rates at less cost. The

administration should ensure that these projects are well managed from planning to execution to

yield better results. These companies should also avoid borrowing money for whatever reason.

Debts have led to the failure of many organizations since a lot of time and resources are wasted

trying to fix this problem.

Mergers and acquisitions involve more work to the employees and other stakeholders

(Trichterborn et al. 2016). It is necessary for the companies to identify gaps that could be filled

to improve performance. Therefore, existing workers should all be retained while new staff

should be recruited if need be. The recruited members should have the capability of performing

perfectly without any possibility of dragging the business behind.

The research proposes that mergers should work together to ensure the business operates

in an efficient manner. The administration should understand its role in the company to sustain

it in the business as it improves on finances and competition. The quality of assets should be

retained in a company. Any risks likely to be faced should be properly addressed and relevant

measures applied to have better liquidity and solvency.M&As should borrow less but generate

more income instead (Trichterborn et al. 2016). They can also consider recruiting new staff to

MERGERS ACQUISTIONS AND SUSTAINABILITY 54

increase the effort required to run the business. All the business operations should aim at

gaining profits rather than making losses.

5.4 Areas for Further study

Sustainability is an important aspect for all businesses not only mergers and acquisitions.

The research tends to concentrate on outsourcing companies and fails to look into normal

businesses. Every business is important regardless of its size and performance. Whether the

establishment serves ten people or the entire nation, the issue of sustainability remains crucial

(Carvalho and Rabechini 2011). Growth in all aspects has a great impact on the operations of a

particular enterprise. Further research should be embarked on how lack of sustainable

development affects all sorts of businesses. Many people in commerce believe that since they are

running small businesses working extra hard is not significant. Improvements are necessary for

all establishments; whether small or large. The expansion assists investors to have a

comprehensive view of the entire industry and what should and should not be done.

In addition, the influence of mergers and acquisitions on stakeholder value should also be

given more attention. Shareholders are important people in any company and failing to look into

their welfare affects the organization significantly. Further studies should be done on how the

government and the general public can contribute to sustainability in firms (Carvalho and

Rabechini 2011). At the end of the day, they both benefit from the establishment's performance.

the public and the government enjoy services offered by various companies.They may provide

better solutions to the risks encountered by corporations and better ways of operation to

minimize such possibilities. The government can also enforce certain laws that confirm mergers

and acquisitions are properly managed. Local and state governments can guarantee that these

regulations are followed and any firm that does not adhere to such guidelines is penalized. These

MERGERS ACQUISTIONS AND SUSTAINABILITY 55

laws will guarantee that only serious companies are in business and eventually improve their

performance.

MERGERS ACQUISTIONS AND SUSTAINABILITY 56

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