Analyze the risk of Merger and Acquisition on enterprise - Dissertation Example

? Analyzing the risk of Merger and Acquisition on enterprise Supervisor’s This is a dissertation proposal to assess the impacts of mergers and acquisitions of organizations. The topic was chosen following a much reports that indicate that over 50 percent of the mergers and acquisition fail. Moreover, most of the surviving merged enterprises do not result in increase in productivity. Some of the risks associated with mergers and acquisitions include financial risks, relational risks, and risks associated with corporate cultural clash. This research will assess the impacts of mergers on organizational performance and the wealth of the stakeholders in the communication sector in Europe and America. The research will employ both exploratory and descriptive research to gain in-depth and concise information in the research area. Introduction In the commercial sector, larger corporations are considered to be better because such corporations are considered to have larger pool of resources to enhance their operations and to reach out to a great number of customers. In light of this, mergers and acquisitions have become the order of the day in the corporate world. Some acquisitions and mergers are so successful that it is possible to remember when the companies involved were separate and distinct entities. However, other mergers fail to accomplish their intended purposes and companies engaged either runs bankrupt, executives are sacked or they go into a corporate separation. Mergers and acquisitions get together varying people, processes, and technologies with the aim of creating a large unified organization (Carbonara and Caiazza, 2009, p. 184). The organization generally seeks to gain from the synergies of the acquisition and merger by consolidating, integrating and rationalizing the people, technologies and procedures of the two organizations. Organizations purse mergers and acquisitions for different reasons including growth strategies and when seeking to enter into a new market which has been identified as the main reason behind acquisitions (Elmuti and Kathawala, 2001, p. 205). According to Elmuti and Kathawala, since companies lack enough time to get established in the new markets and especially given the great competition, forming alliances with an already established business is usually the most appealing option. Moreover, enterprises acquire other existing companies in order to get new technology (Elmuti and Kathawala, 2001, p. 205). They explain that not all companies have the ability to provide the desired technology to compete effectively with other players in the market and therefore they choose to team up with other enterprises that have the desire technology or with which they can combine resources to get the needed technology. Mergers and acquisitions may also be adopted by enterprises as an attempt to mitigate their financial risks and share costs involved in research and development of a new product (Elmuti and Kathawala, 2001, p. 205). They assert that financial resources required to purse a new product may be too high for one company and therefore they may result to merger. According to Elmuti and Kathawala (2001, p. 206), when airplane manufacturers realized that construction of a large jet plane involved high cost; they formed an alliance between Boeing, Aerospatiale of France, British Aerospace, Deutsche Aerospace of Germany and Construcciones Aeronauticas of Spain. This alliance was geared towards spreading the financial risks involved in the venture among many players. The other reason for mergers and acquisitions is to help enterprises achieve competitive advantage. Elmuti and Kathawala (2001, p. 206) describe that alliances are attractive to small organizations as they provide the required tools required to give them a competitive edge. The risks and problems involved in merger and acquisition range from financial risks, relational risks, incompatible cultures, lack of trust, inadequate coordination between the management teams and differences in operation practices and attitudes among the partners. Other risks involved include performance risks and lack of a clear goal and objective (Elmuti and Kathawala, 2001, p. 210). Financial risks in merger and acquisition implies that there is a possibility that there will be financial crisis occurring during the operations of the merger enterprise due to financing for merger or the paying the debts that occur during the acquisition (Liu, 2010, p. 147). Relational risks touch on the possibility that the partners in the acquisition may lack commitment to the enterprise and their probable opportunistic behaviors may undermine the prospects of the success of the merger (Elmuti and Kathawala, 2001: p. 210). Moreover, mergers and acquisitions may be locked into corporate cultural clash leading to their failure. Performance risk is the possibility that a merger will fail even when partners are committed to the alliance (Kasipillai, 2004, p. 53). Performance risks mostly come from external factors including changes in government policies, war and economic downturn. Moreover, this may be caused by market factors such as stiff competition and decline in demand (Elmuti and Kathawala, 2001: p. 210). Internal factors leading to performance risks include incompetence in crucial areas of the business or simply bad luck to the organization. Mergers and acquisitions are based on mutual agreement of sharing risks; however, in case one partner lacks trust on the partners, the venture starts experiencing problems and is bound to fail. Additionally, lack of coordination between the teams involved in managing the enterprises could spell doom to merger enterprises leading to their eventual collapse (Bioye, and Abdul-Rasheed Amidu, 2005, p. 173). Enterprises seeking to get into a merger must streamline their operations and procedures because varying operation practices and attitudes could lead to the downfall. Problem Statement Mergers and acquisitions are management activities having high risks existing throughout the process of merger and acquisition (Liu, 2010, p. 147). Perry and Herd (2004, p. 14) reckon that more than half of all merger and acquisition activities have not yielded long lasting value to the shareholders. They further note that only 30 percent of enterprises that form mergers are able to outperform other firms in their industry by more than fifteen percent in addition to earning a penny as profit. Moreover, even after fives of operating as a single enterprise, over 70 percent of the surviving merged enterprises are usually faced by chronic under performance indices (Perry and Herd, 2004, p. 14). Margolis (2006, p. 167) asserts that mergers are essentially risky and lack of a proper strategy, knowledge, and intuition can make them a catastrophic. This research will investigate the risks inherent to mergers resulting from corporate cultural clash. According to Elmuti and Kathawala (2001: p. 209) cultural clash is generally the largest problem facing corporations in mergers. They assert that more than 70 percent of the mergers and acquisitions that fail to achieve their projected synergies blame cultural clash and people issues in the organization. Furthermore, more than 50 percent acquisitions and mergers that register a decline in productivity in the first eight months of operation blame cultural clash. This demonstrates that organizational cultures of merging companies are a major risk determining the success of a merger and must be well managed to ensure its success. Major mergers that failed to achieve the envisioned goals due to corporate cultural clash include the AOL/Time Warner merger of 2001, Daimler Benz and Chrysler of 1998 and Sprint and Nextel merger in 2005. The findings from this research will enhance the number of successful mergers. This will be achieved by first identifying the causes of cultural clash and recommending strategies for ensuring successful integration. Background of the Study When one enterprise buys another company; this is known as acquisition or take over (REF). Such a takeover is usually initiated by a larger firm with an aim of gaining control of smaller firms. A merger on the other hand refers to joining the operations of two distinct enterprises or amalgamation to form one large firm. The two; mergers and acquisitions are voluntary in nature and involve exchange of shares and payment of cash to the acquired firm. However, the enterprises do not relinquish their original identity (Meyer and Altenborg, 2008, p. 508). Mergers and acquisitions are more prevalent and influential corporate activities although having high risks (Maden, 2011, p. 188). Perry and Herd (2005, p. 12) concur and explain that between identifying the potential value of an acquisition or merger and achieving a new integrated enterprise is usually a risky balancing ground where anything can go wrong. Maden (2011, p. 188) observes that majority of the studies on the risks involved in mergers focus on economic, strategic factors and financial factors which determine the success of such ventures. However, the success of enterprise mergers and acquisitions are assessed from the reactions of the employees affected. Cultural incompatibility leading to clash is generally one of the largest problems experienced by corporations forming alliances. The cultural risks involved comprise of varying language, chauvinism and egos (Elmuti and Kathawala, 2001, p. 209). The other cultural concerns derailing the success of mergers and acquisitions are different attitudes of the enterprises. In international mergers and acquisition for instance a merger between a company in Europe and Asia can result in language barriers. It is critical that organizations working together communicate and comprehend each other well in order to enjoy smooth transition (Elmuti and Kathawala, 2001, p. 209). After guaranteeing effective communication, it is important to have a harmonized organizational culture. According to Elmuti and Kathawala (2001, p. 209), different enterprises have different cultures, for instance, USA based companies evaluate their performance from the profits and market share enjoyed. On the other hand, businesses in Japan look at the way an operation has ability to enhance the strategic position of the company by enhancing its skills (Elmuti and Kathawala, 2001, p. 209). National corporate cultural traits directly determine the success of an alliance and influence its formation and moderate the relationship. The acquisition and merger process flows through five stages that start from formulation, location, investigating, negotiation and integration all in which the human factor must be taken into consideration (Ross, n.d, p. 7). The first three stages occur before the deal is closed and are referred to as pre-deal stages. It is during this stage that the company sets out its growth objective and acquisition strategy. The company identifies and assesses the potential integration of the proposed company into its operations. At this stage, due diligence must be exercised in evaluating the financial and cultural risks. The acquiring company should seek to identify similarities and differences in areas such as leadership models and organizational structure. Furthermore, companies should look into the performance management systems of the prospective partner and their staff development approaches. This forms part of the organizations culture and incompatibility would lead to the failure of the deal. Following the closure of an acquisition or merger deal, the two enterprises should be integrated. To achieve high level of integration, project managers should be disciplined consulting throughout the process and employing tactical problem solving approaches. Ross (n.d, p. 7) observes that use of a unified infrastructure to co-ordinate the integration process and communication in the enterprises helps to assure success. There are various cultural alternatives that determine whether a merger is successful or it fails to appeal to the staff (Ross, n.d, p. 8). An organizations culture may be caring or paternalistic and organizations having such cultures usually slow in adopting change. This is because its members are usually family oriented and rewarded for their efforts and activities. Consequently, any firm that wants to join them must be ready to fit into their structure. Organizations may also have demanding or exacting culture. Under such organization, their policy is to focus on efficiency, competition and performance of an individual. Their policy is ‘eat what you kill’ and will therefore work hard to ensure their culture overrides that of their partner (Ross, n.d, p. 8). The other organizational culture is the status quo culture where apathy is the order. Organizations having such a culture generally hold that they have always done things in a particular way. They hold that procedures must be followed and the seniors have their way in everything. It is therefore hard to integrate an organization having such a culture since they are not open to learning. Another form of organizational culture that may determine the success of alliance between two enterprises is the integrative otherwise known as high involvement culture. This culture fosters cooperation, group performance and risk taking. Moreover, in the integrative culture, organisations are always keen to learn from each other, have strong communication channels and receiving of feedbacks. They are also team oriented and therefore are easy to be adapting to changes which comes following mergers and acquisitions. Corporate cultural clash can lead to negative behaviours among the staff thereby affecting the transition. These include high voluntary employee resignation rates, employee stress, absenteeism or sabotage. This is because business alliances involve previously independent organisations and may affect employee motivation and their career plans following changes in the assignments, roles or they may be transferred to a new location. Moreover, mergers and acquisition could lead to adjustments in the compensation and salaries packages, changes in perks, colleagues and bosses. These eminent changes in the work environment results in resistance and fear among the employees and some decide to quit. This in turn means that companies may lose experienced and critical employees resulting in underperformance in contrast to what is envisioned in the change. Several mergers have failed due to failure to harmonize the cultures of the partners. An example of this is the Daimler Benz and Chrysler merger valued at $ 37 billion in 1998. Daimler the manufacturer of Mercedes-Benz merged with a US based auto manufacturer, Chrysler with the objective of creating a trans-Atlantic vehicle manufacture that would dominate the global market. However, ten years after, the merger was broken and Chrysler was old out. According to El Hag (2009, p. 23), the main contributor of the termination was cultural clash where Chrysler was not considered as coming anywhere near the performance of Daimler and therefore latter always wanted to dominate telling Chrysler what to do. Research objective The main objective of the dissertation is to conduct a study on the impact and the cultural risk of merger and acquisition on enterprises and why the organisations are undertaking the inorganic mode of expansion. Specific Objectives 1. To critically analyse the impact of the merger and acquisitions on the operating performance in European and American communication companies. 2. To investigate the organizational cultural clash that arises from mergers and acquisitions in the communication industry. 3. To strategically evaluate the impact on the shareholders wealth post merger and acquisition. Research Questions a. What are the impacts of merger and acquisitions on the operating performance of the communication industry in Europe and America? b. What are the cultural conflicts arising from the mergers and acquisition in the communication industry? c. What are the strategic impacts on the shareholders’ wealth after a merger or acquisition in the communication industry? Research Method and Procedures In the research both exploratory and descriptive research will be employed. Exploratory research design is used to extract the background information of the topic and to enhance the researchers understanding of the problem (Beall, 2002, p. 26). Additionally, exploratory research is used to establish a detailed analysis of the problem. Descriptive research on the other hand is used to investigate, describe and measure a phenomenon at a specific time (Beall, 2002, p. 26). The main reason for choosing descriptive research design in this research is to ensure that data collected is precise and structured therefore making the analysis factual and simple. In addition, the researcher will collect data concerning to mergers and acquisition in the European and American communication industry and then evaluate whether these have had impacts on the operating performance and the wealth of the shareholders of the acquiring firm. Exploratory research will be used in a limited format. The researcher will conduct in-depth interviews with some of the top executives of the organizations involved. The interviews will help to understand the synergies that were envisioned in the merger and acquisition strategy and assess any corporate cultural clash. In order to analyse the impact of the merger and acquisition, both primary and secondary data will be collected. There was a merger between Time Warner and AOL of America. Data will be outlined on the asset per employee, profit after tax, and customer base and market capitalization. Financial analysis will be conducted based on operating profit margin, gross operating margin net profit margin return on employed capital, return on net worth, debt equity ratio, EPS and PE before and after the merger. Limitations The study may be limited by finances because the participants are widely distributed. Moreover, the researcher may have hard time convincing company executives to participate in the research and providing financial reports of the company. Bibliography Beall, G.H. 2002, "Exploratory research remains essential for industry", Research Technology Management, Vol. 45, no. 6, pp. 26-30. Bioye, T.A. & Abdul-Rasheed Amidu 2005, "Corporate Business Valuation for Mergers and Acquisitions", International Journal of Strategic Property Management, vol. 9, no. 3, pp. 173-189. Carbonara, G. & Caiazza, R. 2009, "Mergers and Acquisitions: Causes and Effects", Journal of American Academy of Business, Cambridge, vol. 14, no. 2, pp. 188-194. El Hag, F.L. 2009, Impact of organizational culture on success of mergers and acquisitions: An analytical study, University of Louisville. Elmuti, D. and Kathawala, Y., 2001, ‘‘An overview of strategic alliances’’, Management Decision Vol. 39, no. 3, pp 205-217. Kasipillai, J. 2004, "Tax Implications of Mergers and Acquisitions Involving Financial Institutions", Managerial Finance, vol. 30, no. 4, pp. 48-62. Liu, Z. 2010, "Causes and Control of Financial Risk in Mergers & Acquisitions", International Business Research, vol. 3, no. 1, pp. 147-150. Maden, C. 2011, "Dark Side of Mergers & Acquisitions: Organizational Interventions and Survival Strategies", Journal of American Academy of Business, Cambridge, vol. 17, no. 1, pp. 188-195. Margolis, D.N. 2006, "Should employment authorities worry about mergers and acquisitions?", Portuguese Economic Journal, Vol. 5, no. 2, pp. 167-194. Meyer, C.B. & Altenborg, E. 2008, "Incompatible strategies in international mergers: the failed merger between Telia and Telenor", Journal of International Business Studies, vol. 39, no. 3, pp. 508-525. Perry, J. and Herd, T. 2004, ‘‘Mergers and acquisitions: Reducing M&A risk through improved due diligence’’ Strategy &Leadership Vol. 32 no. 2. Ross, D. n.d, ‘‘Culture management in mergers and acquisitions: A focus on culture and people is critical to make integration strategies work’’ retrieved from on 9th April, 2012 . Read More