Pro Merger And Anti Merger - Essay Example

? Pro merger and anti merger Table of Contents Answer one: Mergers 4 Analysis of mergers 4 Lack of cultural assessment in the stages of M&A 5 Global Megamergers 7 Concentration can destroy value 8 Alternatives to big deal 9 References 12 12 Answer two: Expatriation 13 Management values and policy of international staffing 13 Geocentric practices 13 Expatriates and success in business 13 Challenges of cultural complexity 14 Culture Shock 15 Diversity capabilities reduce culture shock 16 Direct costs of expatriation 17 Cost of expatriate failure 17 Diversity management avoiding expatriate failure 18 Repatriation 19 Diversity strategies: keys to success 19 References 22 Answer one: Mergers Analysis of mergers The pace of mergers has reached to extreme heights without showing any sign of subsiding in the nearby future. A new round of consolidation begins in one industry after another. A research by A.T. Kearney shows that 50 percent of mergers are not successful and it fails to produce shareholders value (Kearney, no date, pp.1-5). This draws the attention of media to the spate of marriages. The articles had shown a slew of divorces from trade to local to business press. The most recent ones are the AT&T’s announcement of its division into four entities – business, broadband, wireless and consumer and separation of British Telecom into retail and wholesale segments in its fixed line business in UK. It is difficult to identify the logic behind the changes in activity. In the world of mergers and acquisitions, the chaos still remains. The deeper analysis shows the consolidation of industries conforming to set of laws. The companies analysing the position of their industries on the consolidation curve and developing strategies according to that led them to win. The study conducted by A.T. Kearney shows that a distinct pattern is followed by the activity of consolidation. It makes progress in four phases with varying lengths. Mergers vary proportionally in reverse order to the extent of consolidation. Each consolidating industry passing through four different stages are opening, accumulation, focus and alliance. The time period from first stage to final stage stretches over 20 years approximately. An industry can increase its merger and acquisition from starting at low level of concentration till the saturation is reached. The activities of merger are also dependent on the movement of stock. The rising stocks provide considerable acquisition currency to the companies (Maire and Collerette, 2010, p.281). Massive deregulation in economic sectors and growing globalization also affect consolidations as the levels of stock market affect it. They drive stock prices and consolidation. Consolidation also boost stock prices because the top management is judged in terms of growth usually on its performance and also because the mergers open the access to international capital markets. Other than the phase specific development and cross industry patterns, there are other factors that accelerate industry consolidation like capital market pressures, globalization, advent of internet, technology infrastructure to support networking. More value can be achieved by the company which is demanded by the capital markets through acquisitions and mergers. The infrastructure of technology providing the facility of communication to companies outside their own walls influences the activity of consolidation. The communication via internet and potential of integration facilitates the management of complex enterprises. This makes more mergers and acquisitions possible. As companies strive to get bigger, market fragmentation is followed by consolidation waves. On reaching a certain degree of concentration, the mergers decline. The businesses focus on its core competencies at that time until it no longer look for merger and acquisition rather it choose alliances. Knowing the phases and patterns of the activity of merger and acquisition enable the knowledgeable players understanding the scene of merger in their industry, evaluating the players and forecasting their movements. When companies consider the patterns followed by the activity of merger and acquisition and recognise the position of their industries on the consolidation curve, then setting the targets of strategic acquisition and executing it accordingly can led the companies to emerge as winners. Lack of cultural assessment in the stages of M&A Mergers and acquisitions have high chances of failure. The corporate culture or the cross cultural management is the key factor behind successful integration of two organizations. Differences in the culture of organization is an important factor to be considered by the directors and senior management in their decision making for matters like selecting appropriate merger and acquisition, planning to integrate two organizations, determining the transaction price, retaining the human capital of acquired company (Weber and Tarba, 2012, pp.288-291). Study of pre acquisition stage focuses the relationship between financial performance through firm level measures and the strategic fit between selling and buying firms emphasizing on the potential synergy and buying company getting added value of acquisition. The post merger stage focusses on the cultural fit of selling and buying firms and its impact on the success of merged enterprise. This has paid little attention to cross cultural management. To seize the potential of M&A identified in the stage of pre merger, the steps required to be taken in the process of integration should be properly discussed. All the stages are pre requisite to the success of mergers and acquisitions (Carney, 2009, 95). The reason that no proper assessment is made in regard of culture and cultural differences during the pre merger period and not considered at the negotiation stage is due to the involvement of technical staff, various consultants, and specialists in taking strategic decisions about merger. During assessment in the period of pre acquisition, the chief impediments are fragmented perspectives and activity segmentation. For the analysis of technical complexity, experts from various fields are required like advisor in the field of accounting, investment banking, auditing, legal etc. and consultants for post merger integration. In unsuccessful mergers, the timely assessment of the problems of post merger integration and the related challenges of human resource stays outside the stage of negotiation but in case of successful mergers; the assessment in pre merger stage is immediately implemented after signing of deal as per the earlier planning. Many mergers also fail due to lack of thorough and methodical measurement of the differences in culture. Global Megamergers To be big in a globalizing economy is considered good by most executives. Various cases of merger can be found in oil sector, automobile sector, entertainment, telecommunications, soft drinks, financial services and even cement. These cross border deals is universally believed that industries will inevitably become more concentrated on globalization of world’s markets. It is believed by many companies to raise economies of scale in branding, manufacturing, research and development to be the winners. So they hope to sew up new markets and scare off potential competitors (Ghemawat and Ghadar, 2000, pp. 65-72). Cross border mergers are a do or die proposition from this perspective. If a company want to survive then it is required by the company to be the biggest player of the world. The theoretical links between globalization of an industry and concentration of that industry are weak. The empirical research has indicated that globalizing industries have been marked by steady decrease in concentration in the period of post World War II. This led the executives to pursue larger and larger cross border deals. The relationship between globalization and concentration depends on the underlying economics. The main stay of globalization models is the theory of comparative advantage. This theory points towards industry concentration. The geographical concentration of production is predicted by it but it does not predict the concentration of number of companies in an industry. The theory of comparative advantage is abstract which does not takes into account the economies of scale, the biggest driver in industry concentration. Theoretical models predicting a significant concentration of producers are required to assume high economies of scale. When an industry went to a big change in its technology, companies investing much money in the new technology can reap huge payoffs. Those companies, consequently, drive out competitors leaving only a few standing players (Dearborn, 2000, p.108). Not only the commodity industries are showing a long term trend away from concentration but in the automobile industry also, cross border flows of trade and investment has made it a more global business since World War II. But it has not become more concentrated. Considering the example of General Motors whose world market share fell to its lowest level and this loss of market share was spread among a large number of smaller players. The international merger of Daimler-Chrysler has contributed to increased industry concentration in 1990s but that increase is also relatively modest. The data of Standard & Poor’s Computer has shown that the share of worldwide sales of top five high tech companies in the industry of hardware, software and long distance telephony has declined. This shows less concentration in high tech industries. Concentration can destroy value From domination in a concentrating industry, value can be extracted by a company by reducing risk, reducing production cost or by increasing volume. The deals not offering advantages along these dimensions can reduce value because of transaction cost and takeover premiums. Industries experiencing deconcentration can raise matters like failure of increasing volume to recover cost of capital, failure to increase the willingness of customer to pay, failure to reduce operating costs. The effect of reduction of risk is limited in mergers (Ernst & Young, 1994). It does not expand the geographical scope of companies outside traditional markets leaving the scope of products of company relatively unchanged. Towards mega mergers many management suffer from several cognitive and motivational biases leading to destruction of value in large scale and irrational decision making. Alternatives to big deal A range of alternatives are there which can offer a company more value than global consolidation. Those possibilities have been mentioned as under- Picking up the scraps For every large acquisition or mega merger, there are several divestments, spin offs or asset sales providing companies lot of growth opportunities especially to smaller ones. The merger of BP and Amoco in 1998 led to the disposal of 12 oil storage terminals which were scattered across North America. Those terminals were purchased by Williams Companies which is a small business compared with BP Amoco. William had sales of $8 billion in 1998. Staying at home It makes a lot of sense for many companies to grow regionally or domestically than trying and establishing a global presence. For example, Maytag and Lloyd’s Bank have prospered with their focus on their home markets of Great Britain and United States respectively. A midsize telecommunications company, Telefonica de Espana, has rejected the role of global consolidator being too expensive and has focussed on building of a strong regional presence in Latin America (Brito and Lopes, 2006, p.105). Keeping eye on the ball Lot of time and lot of managerial attention is consumed in cases of big deals. If others in a particular industry are engaged in mega deals then a particular company belonging to that industry not engaged in mega deal can improve its own competitive position during this period. When pharmaceutical players like Glaxo Wellcome and SmithKline Beecham gave their news of merger, then their large competitor Merck used this period to improve its competitive position by aggressive marketing and other initiatives when its competitors are busy with post merger integration. Making friends Building of scale through relationships is another alternative to the mega deal. Partnerships are a more appropriate way to grow than mergers and acquisitions. Alliances are beneficial than acquisitions in many cases as it faces less resistance in companies and from government. Appealing to referee If a company is hurted by the mega deals of its competitors and if the company cannot respond adequately to them then the company can put a spanner in its works by forcing the regulators in its industry for anti-trust proceedings. The international anti-trust cases are Vodafone’s acquisition of Mannesmann and MCI-WorldCom’s purchase of Sprint. Stalking the target Pursuing of global consolidation even if makes sense for a particular organization still it should be judged if significant advantages are offered by the industry. If it does not, it is better to leave the chance to someone else to step ahead to clear the path. For example, the international strategy of Tricon targets explicitly those markets in which McDonald’s has already established a significant presence which reflects the potential of its own chains (Cassiman and Colombo, 2006, p.68). Selling out It is better to the shareholders of a company if the company is seller rather than buyer. The acquisition of Time Warner by America Online is an example. The shareholders of Time Warner did well after the announcement but the shareholders of AOL did not do well. The viability as a non-consolidator directly depends on the imagination and analysis by means of devising alternatives to global consolidation. The strategies of consolidation are wrong in many cases. In the era of discontinuities with technology, focus should not be made by managers on size rather focus should be made to develop new business models that will help them to compete. References Maire, S. and Collerette, P., 2010. International post-merger integration: Lessons from an integration project in the private banking sector. Amsterdam: Elsevier. Ghemawat, P. and Ghadar, F., 2000. The Dubious Logic of Global Megamergers. Harvard Business Review. Weber, Y. and Tarba, S., 2012. Cross Cultural Management. England: Emerald Group Publishing. Kearney, A., no date. Industry Consolidation and Long-Term Strategy. An EDS Company. Carney, W., 2009. Mergers and Acquisitions. Chicago: Aspen Publishers, Inc. Dearborn, G., 2000. Mergers & Acquisitions. London: Fitzroy Dearborn Publishers. Ernst & Young, 1994. Mergers & Acquisitions: Back-to-Basics Techniques for the ’90s. Second Edition. United States: John Wiley & Sons, Inc. Brito, D. and Lopes, M., 2006. Mergers and Acquisitions: The Industrial Organization Perspective. Chicago: Aspen Publishers, Inc. Cassiman, B. and Colombo, M., 2006. Mergers and Acquisitions: The Innovation Impact. United Kingdom: Edward Elgar Publishing Limited. Answer two: Expatriation Management values and policy of international staffing Various factors like technical competence determine whether firms use locals or expatriates abroad. Moreover, values of top executives also play a role. The values of top executives are classified by the experts as ethnocentric, geocentric or polycentric (Lan and et.al., 2001, pp.1-8). Geocentric practices It is believed by the geocentric executives that they must scour the management staff of firm on a global basis assuming that best manager for a specific position anywhere may be in any of the countries in which the firm operates. So, someone from Wales was appointed as CEO by Sony who would run the US operations of firm. In the policy of geocentric staffing, the right people are seeked for the prime jobs in the organisation irrespective of their nationality. This let the global firm to use its human resources more efficiently by transferring the best person to the open job wherever he or she may be. This cross breeding helps to build a consistent and stronger culture and set of values among the entire global management team (Forster, 2011, pp.128-129). Expatriates and success in business Expatriates are employees and managers relocated from one country to another. The management of expatriate assignment is critical to international business success. Diversity management reduces the costs of expatriation and improves success rates of expatriates. Expatriate managers oversee alliances, international joint ventures and overseas subsidiaries. They play a vital role to ensure the success of international operations of multinational enterprises. Specialised expertise is brought by expatriate technicians for business processes of overseas. All expatriates engage themselves in the activities of international business in host environments which is different from parent company (Harzing, 1995, pp.461-463). Challenges of cultural complexity The cultural complexity of environment of operation is the greatest challenge to expatriates. Confrontation with new system of values, ways of doing things and beliefs may be different to the expatriates as compared to their home country. This variation creates complication in the environment of international business and this complexity should be managed by the expatriates. Development of cross cultural capabilities of expatriates is necessary for success in international business. Managing productive diversity ensures creation of cross cultural capabilities by expatriates. Expatriates originating from region or country of their posting readily adjust themselves to their assignments as compared to those who have little experience of their new cultural environment. Such individuals prove to be more effective than those who struggle to adjust to foreign cultures. Their superior performance directly impacts the bottom line of firm. Diversity Diversity is the ways in which individuals differ in terms of organisation related characteristics and on a personal basis. Fig. Components of workplace diversity Source: Australian Centre for International Business The major components of diversity comprises primary personal characteristics like gender, ethnicity, sexual orientation etc, secondary personal characteristics like educational level, marital status, beliefs and values, organisation related characteristics like tenure, hierarchical position, part time/ full time/casual status. Culture Shock Culture shock is experienced by many expatriates. They face inexplicable behaviour from an uncertain and new environment which is governed by a culture that they are unable to understand. The deficiency of comprehensive mental models to understand the local culture inhibits their awareness of behaviour, appropriateness or inappropriateness. It is discovered by the expatriates that their past behaviours do not work in new culture but the appropriate substitute behaviours have not been learned by them. This creates immense frustration, high level of anxiety and confusion. They experiences confusion specifically when they are unable to speak local languages (Brewster and Harris, 1999, p.118). Culture shock is caused due to multiple stresses like emotional, intellectual and physiological. It places the individuals under severe pressure which impairs the functional ability of expatriates. Alleviation of culture shock happens when expatriates accustoms and fits into their new surroundings. While the expatriates adjust themselves, the period undergoes with reduced productivity. Four to twelve months is taken by the expatriates to make them comfortable with the new culture. Sometimes, even longer time is also taken by the expatriates to adjust them whereas around five percent never adapts to new culture. Such individuals experience their postings in an ongoing state of culture shock by trying to adjust constantly. Their productivity, consequently, is impaired permanently. Diversity capabilities reduce culture shock The impact of culture shock can be reduced on the expatriates by diverse organisations through selection of expatriates sharing the cultural background of host country. Fewer surprises are hold by the host culture as expatriates have existing mental modes to understand their surroundings. It also reduces the level of uncertainty. It enables the expatriates to easily relate to others in local language and in culturally appropriate ways. They are already comfortable with the cultural norms of their host country co-workers. The process of adjustment is relatively smooth and fast. Diverse organisations have superior capabilities to cope with the difference as compared to their homogeneous organisations. Managers working in diverse organisations become comfortable with difference. They are accustomed to work with people of different cultural backgrounds having different world views. Managers are fostered with valuable cross cultural skills by diverse organisations. These skills help to reduce the time it takes expatriate managers to adjust to overseas assignments. They experience reduced culture shock followed by speedier recovery. Enhanced expatriate adjustment and reduced culture shock benefits the bottom line of firm by boosting productivity (Edwards and Rees, 2006, p.180). Direct costs of expatriation Direct costs are imposed by the expatriate assignments on firms. The cost to maintain an expatriate manager is estimated to be between $2, 00,000 and $1,500,000 per year depending on the country of assignment, home leave, housing, salary, air fares, company cars, Foreign Service premiums, relocation allowances and schooling for children. The annual cost to maintain an Australian expatriate manager in Hong Kong has been estimated below earning a salary of $2, 00,000. Fig. Expatriation costs Source: Australian Centre for International Business As per the rule of thumb, the total cost to the firm to maintain an expatriate per year is expatriate salary multiplied by three. Cost of expatriate failure The expatriate failure proves costly. Most of the large multinational enterprises had at least some expatriate assignments which had failed. Expatriate failure refers to the failure of expatriates to meet the goals of their assignments of overseas. It is measured usually as the rate of premature recalling back to home country. On the basis of conducted empirical research, it has been estimated that failure of Australian expatriates accounts around five to ten percent. In addition to resources allocated to failed expatriate assignments, there are costs of repatriation of failed expatriate as well as finding a replacement. It has been revealed from US research that estimated direct cost of a failed overseas assignment ranges from US$200,000 to US$1.2 million. Failed expatriate actually causing damage to an overseas business operation can incur further costs. Any damage to the goodwill of partners, distributors, suppliers, buyers and officials of government can have a serious impact on the business prospect of an overseas venture. The expatriate failures are also caused by the inability of individuals and their accompanying families to accustom to foreign cultures. They are prepared poorly for the challenges to be posed by the complexity in culture. Diversity management avoiding expatriate failure Capabilities of workforce diversity can reduce the potential costs of expatriate assignments. The expatriates sharing the background of national culture of country to which they are assigned show that have minimum difficulty in adjusting to the culture of host country. Expatriates who are well adjusted are less likely to fail in their assignments as compared to the expatriates who struggle in foreign culture. Expatriates from the culture of host country are required to adjust to the organisational culture of their new assignment. This process will be easier than for expatriates who are unfamiliar with local languages, ways of operation and customs. Selection of national expatriates generates increased productivity, reduces the time to adjust with the national cultural norms and the ability to focus on the tasks of organization. Repatriation Repatriation refers to the experiences of returning expatriates raising serious attention. This has been encountered by many UK companies over the last ten years. There has been more repatriation of employees rather than the management of expatriation. The returning staffs are facing reverse cultural shock and other adaptation problems. This happens if the home organisation has undergone restructuring or any other form of organizational change or if the original job roles of repatriates have radically changed or removed altogether while they have been abroad (Rao, 2008, p.98). Diversity strategies: keys to success The following five keys are required to expatriate success: Conducting an expatriate audit. Conducting a cultural diversity audit. Refining the procedures of expatriate selection. Providing cross cultural training. Providing assistance to repatriation. Step one: audit expatriation An expatriate audit allows firms to review their current expatriate practices. Firms can identify their failure rates of expatriation and can address the causes of costly expatriate failure. Firms can also determine the sources of success for expatriates. Accumulating information regarding the experiences of current expatriates and repatriates can enable the firms to improve future expatriate assignments. Step two: cultural diversity audit The data on diversity of a firm and characteristics of its employees is required in diversity management. A cultural diversity audit provides opportunity to firm to identify the cultural diversity within its workforce. The aims and process of this audit is similar to the skill audits taken by large organisations. A cultural diversity audit provides the scope to construct the profile of an organisational diversity identifying the diversity capabilities of the firm to manage in the environment of complex culture. This knowledge can be harnessed by the firms to select expatriates having cross cultural capabilities for overseas assignments. Step three: expatriate selection After identifying the diversity capabilities which is residing within the workforce, firms are required to select top performing expatriates. The cross cultural capabilities and the managerial and technical expertise of potential candidates should be considered by the firms. Expatriates possessing clear mental models of the cultural environment of host country and one who are open to difference make ideal candidates. Candidates having the background of host country will have the accurate mental models of foreign culture. In the selection of potential expatriates to culturally distant locations, the relational abilities of the individual should be emphasized. The candidate should be accustomed of managing a diverse workforce and possessing diversity capabilities allowing them to feel comfortable with difference. Step four: cross cultural training The cross cultural training reduces the failure of expatriation and foreign venture. Such training is vital to all expatriates, especially to the individuals having little knowledge of host environment. The burden of culture shock is reduced by cross cultural training and it also helps the expatriates to adjust to new surroundings. It neither provides the expatriates with deep understanding of host environment nor the complex mental models required to navigate foreign informal and formal institutions. The cross cultural training should accompany family since family problems are the big cause of premature termination of expatriate assignments. Such training should include some basic language training, pre-departure country briefing, and assistance of repatriation, training in cross cultural understanding and mentor programmes. Step five: reaping repatriation rewards Assistance of repatriation is an integral component of any package of expatriation. Research with repatriation experience demonstrates major discontent. It is felt by many repatriate managers that skills gained in overseas are not valued in home country. They return from the post of senior management in host country to the post of lesser status when they back home. Poor practices of repatriation can reduce the pool of potential expatriates. Individuals view overseas placement not only as a hardship but also as a move in their career reducing their perceived value on return. They are unwilling to accept foreign postings. Dissatisfaction with repatriation means about half of repatriates leave the firm within two years of their return to home country which makes a loss of valuable skill and experience. Repatriation assistance is vital for preventing the turnover of repatriates with valuable cross cultural and international management skills. Such repatriates are a source of learning and knowledge that can be disseminated throughout the firm. Firms failing to assist repatriate managers can find their repatriates poached by their competitors. References Lau, K., and et. al., 2001. Expatriate Management: A Business Model For Diversity Management. Australian Centre for International Business. Forster, N., 2011. The myth of the ‘international manager’. The International Journal of Human Resource Management. Harzing, A., 1995. The persistent myth of high expatriate failure rates. United Kingdom: Routledge. Brewster, C. and Harris, H., 1999. International Human Resource Management. London: Routledge. Edwards, T. and Rees, C., 2006. International Human Resource Management. New Jersey: Pearson Education Ltd. Rao, P., 2008. International Human Resource Management: Text and Cases. New Delhi: Excel Books. Read More