Failures of Cross Border Mega Mergers - Research Paper Example

? Failures of Cross-Border Mega Mergers and Acquisition and the International Human Resource Approaches Introduction The emergence of global mergers has tremendously increased in the recent times, companies merge in order to increase their international global presence and market share in the major world economies. These mergers occur in many sectors including the oil companies, financial institutions and automobile companies. The merger of ford with Volvo and the acquisition of shares within Nissan by Renault are some examples within the automobile sector. The telecommunication, entertainment and food industries have not been spared either in this merger craze; moreover, most executives believe that these mergers provide an opportunity to increase the economies of scale in production and reduce the advantages possessed by competitors. According to Ghemawat and Ghadar (2000), global mergers are made for a completely misguided and wrong reason. I support the arguments that the two authors advanced in their article,’ dubious logic of global mega mergers. Nothing more explains the wrong reasoning behind the mergers except the levels of their failures. There much that should therefore guide international businesses while considering an international merger. This paper provides the illustrations to support my position on this matter. Failures in cross border mega mergers Ghemawat and Ghadar (2000) argues that the wisdom of the ‘winner takes it all’ in globalization and mega mergers is misplaced and has no empirical evidence to support it. The craze for globalization has had no significant impact on the financial strengths and growth of a given company. To them, there is need for executives to stop pursuing the biases that have led them to make mega mergers and cross border deals. Globalizations have different facets, which are more economically viable as opposed to needless expansion. Cross border mergers are viewed by investment analysts as a way of making entries into foreign market, and several reasons explain the high number of cross border mega mergers around the globe. However, the high number of failures and low business experienced after international mergers strengthen the stand taken by Ghemawat and Ghadar (2000). The significant number of cross border mega failure has resulted into increased studies to ascertain whether the craze for acquisition and mergers is out placed. Ghemawat and Ghadar (2000) are of the view that the increased number of crossed border mergers and acquisitions are a waste of resources and time to the companies as they are bound to fail. The process of expansion into new borders and foreign lands has a number of economic factors that needs to be put into consideration. These include the foreign currency of operation, the socio-cultural and political set up of the nation and the political stability; therefore, any organization must factor in all these factors before making a step towards acquisition and mergers in foreign states (Sudekum, 2009). In cross border mergers, companies that have their headquarters and operation bases in different countries and regions come together and merge their operations, this results into the merger of different political and social settings that affect the operations of a business. Political, social and economic differences between countries make globalization and cross border mergers a tough undertaking. Differences in the fiscal policies also present a number of challenges to companies operating in foreign settings. The harmonization of fiscal policies even in the European Union has not created a business environment that is economically and politically homogenous. International labour laws in organizations also differ significantly. This present challenges to companies operating in new economic and political setups (Hughes, 2012). In the process of finalizing cross border mergers, companies tend to overlook essential factors and this has created failures in a number of mega mergers. Most companies focus on the operational and financial aspects of mergers and acquisition while overlooking fundamental aspects of business operations in foreign lands. Companies focus on the shareholder value, the returns on their capital employed and the market share that they would control (Bednarski, 2003). Menapara and chadamiya (2012) attributed the high number of cross border mergers and acquisition to the slow nature of organic growth within organizations. There is therefore an instant explosion in the global business arena where companies strive to increase their scales of productions and market ratio. Statistics show an increase in cross border mergers as from 2011as compared to the local expansion of such companies. Failure in cross border mergers has affected all major industries including food companies, oil industries and the telecommunication sector. These failures are because of both international and outside factors that touch on the operations of the business. However, major failures in cross border mergers and expansions have been attributed to internal weaknesses of a business. These include incongruent management style, organizational culture differences and differences in decision-making stages (Liao, Erel and Wesbach, 2012. Opening new frontiers of business especially into the international and foreign business arena present a number of opportunities and challenges to the business. The high number of failures of mega mergers is attributed to lack of proper considerations of foreign business environment. Businesses have different organizational cultures that are mostly dependent upon their mother country of operations. Such behaviours mould the culture of doing business and management within such organizations. Cross border mergers must therefore take into consideration the cultural differences between the two organizations that planning to merge (Heffernan, 2009). The confusion in the industry of concentration theory has led to the emergence of many mergers as business thinkers and analyst interpret it amalgamation of businesses within one area. However, this theory is based on the geographic concentration of production as opposed to industries. Bringing together global company into one area of operation and production does not produce significant benefit to the company. This has been the notion presented by many companies who endlessly pursue international mergers and acquisitions. Economies of scale are the parameter used to justify concentration of companies within one area (OECD, 2011). Ghemawat and Ghadar (2000) highlighted several factors that companies pursuing mega mergers avoid thus resulting to mass failures. Local growth provides the basis for development and increase in the market share. It enables a company cut an economic niche within the local market, which leads to increased growth and market presence. Companies however forsake the need for domestic expansion and growth at the expense of local growth. This has been a major reason for mass failures in mega mergers and even mergers between smaller companies. Gaining enough economic statistics and information that will guide future decisions once the member is completed is also very important. However, companies jump into the opportunity of merging whenever it presents itself without due consideration of the impacts that it has n their operation. The study of the success index and challenges facing other companies that are operating in the global arena also provides greater insights into the merger and acquisition process. The mergers of Smithkline Beecham and Glaxo welcome provide other pharmaceutical companies with an opportunity to study the post integration challenges and processes (Denison and Adkins, 2011). Historically, a number of big and multinational companies have posted failures immediately after mergers and acquisition. This has been attributed to the lack of apathy that follows mergers and acquisition among investors and stockbrokers. Pfizer, one of the largest pharmaceutical companies performed terribly for three years after a high value acquisition of Pharmacia in 2003. The company posted the worst performance in the world index of stock and has been categorized as one of the worst acquisitions. However, other companies have suffered similar fate of Pfizer due to lack of post exposure integration measures well in advance. Mergers and cross border acquisition also base the decisions made on the current performance of the organization or its products. Such may not be case after some time due to a number of market and regulatory factors. When Pfizer acquired the Celebrex painkiller from Pharmacia, it was of the most preferred CNS based painkiller. The sales were therefore quite remarkable and this dissuaded Pfizer into acquiring it. Two years after the acquisition, the drug was withdrawn from the market following post market surveillance report. The value of the acquisition was not attained within this period and therefore Pfizer posted loss due to the mistake (Wallace and Moles, 2012). As explained by Ghemawat and Ghadar (2000), economic gains from global mergers and cross border acquisitions has been most of the time o on the performance overshadowed with integration issues. Pre-merger considerations are thus important for any business and company before penning down the acquisition contract. All stakeholders in the company must also be involved in the acquisition process to avoid a future backlash from shareholders, which may affect significantly on the stock performance of the business. Recommendations and Conclusions Mega mergers are usually accompanied by craze and much expectation from a number of market players and stockists. Companies that expect to enter such deals make hasty business decisions without making due considerations of the economic and business environments that characterise the foreign markets. The issues of post merger integrations and familiarization with the new business environment are most of time ignored by such businesses. This results into waste of time and resources as businesses take into consideration the economic factors of the new environment after integration. Foreign mega mergers have been a hoax and a mirage that most companies pursue out of the craze and trends that is witnessed in the global arena. As captured by Ghemawat and Ghadar (2000), mega mergers have been a major failure as witnessed in the high number of failures that has occasioned such economic steps. Therefore, a number of considerations must be taken into consideration by businesses before stepping into foreign business environments. Cross border merger deals are exposed to a number of challenges that international managers need to factor in before endorsing a cross border merger. These factors determine the success index of any cross merger and foreign business engagement. Operations in a foreign business atmosphere expose a business to a number of risks and challenges that determine its success. The after merger integration of operations and production has been considered as one of the major determinants of a business success in a foreign setup. Socio-cultural and political changes also differs significantly between countries, this can also produce much impact on the operation scale and continuity should a business enter a foreign environment (Daines and Koumrian, 2012). Menapara and chadamiya (2012) highlights a number of considerations that international managers should consider before making the final cross border merger or acquisition. The major problems that face companies upon cross border mergers and acquisition include but are not limited to dissatisfaction of the customers, communication breakdowns, lack of cultural cohesion, employee attrition, depreciating productivity among employees and slow decision making process. This negatively impacts on business ability to adapt to new environments, and their capacity to break even within a short period. In navigating the problems that international mergers face, managers must be able to appreciate and acknowledge the distinct differences that occur in cross culture businesses. Reducing the risks of failures witnessed on the international cross border mergers require a wide faced approach. The major problem that occurs immediately a merger has been finalised involved the human labour. In the merger process and preparation stages, managers tend to put more emphasis on the financial and the outcome of the entire process while neglecting the human resource issues. People related issues have been shown to be a leading cause for most cross border merger failures. Employee concerns arises during the process of mergers that acquisitions that affects the final output and performance of a company. Proper management of employee issues is paramount to the success of any merger exercise. Honesty must be the driving force and all the workers must be made aware of what to expect from the merger, employee participation is also essential in the entire process of initiating the merger for lack of inclusion may result into sabotage and failure. The merger process should also involve the input of qualified human resource consultant to provide advice on how to handle the issues of the people that may arise from the merger process. Any business cannot be considered a worthy business without the people and therefore any investment that is made on them during merger will increase the chances of its success. The after merger process is characterised by a period that analysts describe as the honeymoon period. During this phase, the business environments are highly favourable and the stocks of the company increase in value. During this time, the press provides the company with much positive coverage and the expectations of growth are highly high. This period has been identified as the source of downfall for most cross border mega mergers. This period is also characterised by making deals, which may not be well analysed and evaluated. Such deals may affect negatively on the performance of the company once it begins proper operations and production. It is therefore imperative for a company to conduct a pre-merger evaluation of the company’s practises and conduct before finalising the business deal. This ranges from how the business treats its customers to the approaches that the company employs in risk taking and management issues. Cross border mergers involves the integration of two different cultural setups and practises. This presents a number of opportunities and challenges that must be effectively handled by a business before success can be guaranteed. Organisations have different organisational culture and practises and this depends on the environment of operations of the two businesses. The success of any cross-culture merger depends on a deep understanding of the different cultural behaviour and practises of the two organisations. Organisational cultures affect the management styles, practises and the structure of leadership of an organisation. Most companies however fail to put proper considerations on the cultural differences and organisational structures of their businesses before merger. Frank and open discussion of the different business cultures must therefore be done especially during the initial merger stages before the final deal is finalised. This will provide an opportunity for identifying the areas that will require reviews and readjustments before the deal is finally finalised. During this process, the differences and similarities will stand out, this provides room for a frank and open assessment on the areas to integrate, and change before the operation begins. Mega mergers and acquisition process are characterised by a huge number of propaganda, innuendos and hearsay that affects the morale and performance of employees. This has been quite common due to the lack of a proper communication channel that is used to pass important decisions and board resolutions to the employees. Communication strategy must therefore be developed that enhances communication between the high-ranking managers of both the companies. This will help ease the stress and anxiety that affects employees during this time. As a time for transition, there is also much need for proper communication channels and avenues for employees. Recommendations and Conclusions Mega mergers are most of the time associated with mega layoffs. There is much need for the management of the two companies to convince their employees that they are part of the organisation. Great communication channels during the times of mergers and acquisitions are also important in integrating the cultural differences of the organisations. Proper communication channels have a number of benefits that can increase the chances of succeeding of the merger process. Communications enables the retention and motivation of loyal and hardworking employees. Talented and creative employees can also lose interest and trust in organisations during mergers if the organisation lacks proper communication channels. It also strengthens the brand image of the company especially at a time that it is facing economic tests. Communication of steps taken by the two merging companies can also uphold the investor confidence and increase the chances of success for the organisations. Section B Introduction The globalization of the economy has seen the development of large multinationals that operate in more than ten countries. This has resulted to the shifting of production and manufacturing from the home countries to the countries where the market for the goods are. Operation in the international arena calls for the application of international staffing principles in human resource management. International staffing present a number of challenges to the human resource managers just like beginning operations in the international market does. International staffing is far much complex and has much considerations when compared to domestic staffing. Therefore, it is imperative for a multinational to adopt an approach, which is both cost effective and has the potential of succeeding. Polycentric approach allows for the inclusion of locals in the operation and management of a multinational company. It enables the locals to master and understand the levels of operation and standards of the multinational. I strongly support that polycentric approach to international human resource management is less expensive as compared to the used of expatriates. This paper seeks to highlight the benefits that an organisation can derive from adopting polycentric approach. Polycentric and expatriate approach in international human resource management According to Treven (2011), there are different approaches employed in the management of international staffing, the success of a multinational is dependent upon the inclusivity of the approach employed and citizens of the foreign country view it. Polycentric approach involves the use of a local expert to manage a subsidiary of an international organisation. The human resource practises are developed locally in polycentric approach, the head office recruits and trains the locals to run the operations of the subsidiary with assistance for the head office. In ethnocentric approach of international human resource management, key decisions and appointments within the subsidiary are made by the head office. Employees from the home country of the multinational hold key positions in the subsidiary but in line with the home country human management practises. Expatriate managers are international or foreign managers who are sent to manage subsidiary branches; as a result, they are foreign citizens operating in a foreign country with different business culture and systems. The use of expatriate managers has witnessed tremendous failure in the practise of international human resource management. This has been attributed to several reasons chief being the high cost of maintaining expatriate managers (Price Herod and Burns-green, 2012). Polycentric approach to international human resource management has proved to be an easier and cheaper practise as compared to expatriate approach. This explains the high number of failures witnessed in the latter and the current shift to polycentric approach in international HRM. Polycentric approach seeks to equip the locals with the necessary skills to manage the local entity while the headquarter offices are managed by parent country nationals. Both employees and workers (Vogel, 2006) have lauded this localization strategy for its success and acceptability. Polycentric approach reduces the chances of firms suffering from cultural myopia which may interfere with their growth and operation of the subsidiary according to (Hill, 2008). Polycentric approach is also less expensive as compared to ethnocentric and expatriate system for multinational subsidiaries (Mcnulty, 2009). There have been a high number of expatriates returning to their home countries before the end of their contracts. This has been attributed to a number of factors, which makes it impossible for them to lead and manage the international subsidiary. This has a significant impact on the operation of an organisation for it interferes with the smooth operations. The head office must therefore begin afresh the process of recruiting a new expatriate to take over. Recruitment and employment of an expatriate requires many resources that affect the financial position of the organisation. Before a foreign expatriate is paced in foreign country, several international procedures have to be adequately considered. These increases the expenses that organisation must incur in the process of recruiting an expatriate to its foreign subsidiary unit (Pattaravongvisut, 2006). Expatriate managers move to foreign countries together with their spouses and children. This requires a lot of paper work as far as visa and travel documents are concerned. All these must be incurred by the headquarter office who are responsible for the placement. During the stay in the foreign country, the expatriate and his/her, family must live a life according to their traditional standards. This calls for better education and health packages at the behest of the head office; therefore, adapting to the foreign culture has been one major reason for failure of the expatriate system. The spouses and children of the expatriate must adapt to the foreign culture for them to have a constructive stay in the country. However, this has been a major problem as the spouses and children find it hard to adapt. As a result, most expatriates leave their families behind when taking international assignments. This may be viewed as the basis of success for some of the expatriate cases but maintaining such an approach is highly expensive. The constant travels by the managers back to their home countries to be with their families are shouldered by the head office (Bonache and Sanchez, 2009). Oversees and foreign responsibilities come with more and more roles to cover. The area of operation is also wide and the business atmosphere is alien. This adds up to the challenges that face multinationals that employ the expatriate system in the international human resource management. Local managers have operated within the business environment long enough to understand all the factors that affect its success rate. Therefore, the use of expatriates in a foreign environment increases the operation cost for the organisation as it’s oversee managers struggle to adapt and learn the business nature of the new environment. This will require a large number of seminars and trainings to enable them acquaint them with the new business environment. Polycentric approach is however cheaper as the local managers quite clearly understand the local business terrain and may not require further trainings to familiarise with how it operates (Hill, 2013). Expatriate managers also require training form a different frontier that may indicate whether they will succeed or not. Cultural integration is an important aspect of expatriate preparation. The change of culture interferes with the mindset of an individual and prior preparation is therefore needed. Multinational organisations must therefore train their expatriate managers on the need to appreciate the host country culture. This is very important if the individual desire to have a healthy working relationship with the locals who form part of the human resource team. The problem or language barriers have also been a major concern for international expatriates. Most countries in the world are either Anglophones or Francophone (Bonache and Sanchez, 2009). Expatriates who are neither a native speaker of the two may find it very difficult to integrate into the foreign language. Language barrier is also one of the reasons for business failure for it prevents clear articulation of company policies and decisions. The expatriates must therefore be trained on the local language that is used by the subsidiary country. All the financial commitments of the training process all left for the head office that must be ready to incur the extra expense. This is however not important when a company employees polycentric approach. The locals employed are much more conversant with the local language and the culture; this saves the organisation from incurring training and orientation expenses. Vogel (2006) acknowledged the expenses that organisations incur in transferring expatriates to foreign countries. It becomes even more unreasonably expensive if the manager and his family fails to adjust and must therefore be transferred back to their home country at the expense of the company. Polycentric approach is much more beneficial due to the experience that the local managers posses on local stuffing procedures. This is even more important in countries where the political situation is volatile. Using an expatriate in such an environment may be a risky and expensive affair to the business. In some countries, legal requirements also make it impossible to maintain expatriate managers as such countries have a legal requirement that a certain percentage of the top managers be locals. The use of expatriates also prevents the local managers and staffs from developing and learning the operations of the organisations, this is even common in organisations that may require a transition from the use of expatriates to employ locals. New organisations should therefore adopt a breed of both the polycentric and expatriate system to enable smooth transition once the organisation makes the step. Expatriates also earn using the foreign scale depending on the home country. This may change due to the difficulty allowances that such a manager will be subjected to. The use of locals is however beneficial to the organisation as the local index of remuneration will be employed. This makes it cheaper to maintain locals in the regional and local subsidiaries as opposed to importing an expatriate. Treven (2011) highlighted the selection and the process of hiring an expatriate as another challenge that makes it a financial burden. Expatriates are under little supervision from the headquarter office. The organisation must therefore ensure that highly efficient and qualified personnel are hired. This requires emphasis on the recruit’s ability to manage cultural diversity and international labour variations. Previous experience of international assignment is also important for an expatriate for it to be a success. The new for doing an effective job while positively handling the new cultural setup determines the success of an expatriate. This makes the recruitment process more expensive and complex as compared to local managers (Turley, 2006). The continued of expatriates by multinational organisations in their foreign countries subsidiaries presents a number of challenges to the parent organisation. The reason that is normally advanced by organisations that have adopted this approach is continuity and clear understanding of business practises. Despite the fact that the expatriates may be well familiar with the operations of the business, they certainly lack local exposure. This makes it a tremendous challenge for such expatriates to adopt into the new environment and master the cultural settings. The period for adjustment of the managers results into a vacuum of leadership which may result into failure of the subsidiary. The high number of repatriation of the expatriates also makes this approach unfavourable financially (Paik and Sohn, 2003). Conclusion Polycentric approaches provide an opportunity to locals and regional staffs to learn the internal operations of the organisations. This is very important in situations where the company plans to incorporate majority locals in the management of the organisation. Such a process may be successful only if the locals were made part of the organisations at the beginning of the process. References Bednarski, A., 2003, From diversity to duplication: mega mergers and the failure if the marketplace model under the telecommunication acts of 1996. Indiana: Indiana University press. Bonache, C., and Sanchez, I., 2009, The interaction of expatriate pay differential and expatriate inputs on host country nationals’ pay unfairness, Miami: Routledge Taylor and Francis group Chadamiya, B and Menapara, M., 2012, success though strategies in cross border mergers and acquisition, Rajkot university. Daines, R and Koumrian, O., 2012, Shareholder litigation involving mergers and acquisition, Boston: cornerstone research. Denison, D and Adkins, B., 2011, managing cultural integration in cross-border mergers and acquisitions, New York: Emerald group publishing limited. Ghemawat, P and Ghadar, F., 2000, The dubious logic of global mega mergers, Harvard business review Heffernan, K., 2009, Cross border mergers and acquisition. Hill, C., 2008, Global human resource management, New York: McGraw hill corporation Inc. Hill, C., 2013, International business, New York: the McGraw hill corporation Inc. Hughes, M., 2012, Cross border mergers and acquisitions: building momentum, Washington: Grant Thornton international. Liao, R., Erel, I and Wesbach, M., 2012, ‘Determinants of cross-border mergers and acquisitions’, The Journal Of Finance Vol. Lxvii, No. 3, pp. 1045-1082. Mcnulty, Y., 2009, Measuring expatriate return on investments in global firms, Australia: Caulfield east Victoria. OECD, 2011, Cross border merger control: challenges for the developing and emerging economies, Geneva: global forum on competition. Paik, Y and Sohn, D., 2003, Expatriate managers and MNC’s ability to control international subsidiaries: a case of Japanese MNCs, Los Angeles: science direct. Pattaravongvisut, V., 2006, Global human resource management, New York: Pearson publishers Price, M., Herod, R and Burns-green, C., 2012, Benefits, challenges and trends for expatriates and internationally mobile employees, New York: marsh and Mclennan companies. Sudekum, J., 2009, Cross-border mergers and national champions in an integrating economy, university of Duisburg-Essen. Treven, S., 2001, Human resource management in international organisations, Maribor, Slovenia: school of economics. Turley, J., 2006, Wining in a polycentric world: globalization and the changing world of businesses, New York: Ernest and Young Inc. Vogel, A., 2006, International staffing, university of Pretoria. Wallace, W and Moles, P., 2012, ‘Mergers and acquisitions’, United Kingdom: Edinburgh business school Read More