Analysis of the Statement that Mergers and Acquisitions Seldom Deliver the Benefit that Is Expected - Research Paper Example

Order 132345 Topic: mergers and acquisition Introduction: This paper seeks to analyse and discuss the ment that mergers and acquisitions seldom deliver the benefit that is expected. The paper will talk first why do companies adopt the strategy of merger and acquisition and afterwards finds evidence whether there is truth to the to the merger and acquisition failures. The latter part will try to find the causes for such failure and will end with a lesson of what should company learn from these merger and acquisition failures. 2. Analysis and Discussion 2.1 Why do companies adopt the strategy of merger or acquisition? Merger or acquisition is a strategy (Churchill, Jr. & Peter, 1995) adopted for growth A growth is sometimes explained in terms of horizontal integration or horizontal mergers (Brigham and Houston, 2000). Such companies resort to such strategy for companies to have powers over suppliers, buyers or competitors, to benefit from experience curve effects and to reduce unit costs, to turn around opportunities as in the case of Morrison’s and Safeway, as a response to turbulence, technological or regulatory and as sometimes as response to acquisitions by competitors. 2.2 Not all mergers deliver the value added that is expected. Reality however has a different way of validating what managers and chief executive officers believe about the prospects of merger or acquisition. It is found through surveys that not all mergers deliver the value added that is expected. This is confirmed by www.olin.wustl.edu/discovery/feature in its article on Making Mergers Work. Olin School of Business (n.d.) said that whether judged by the growth of shareholder value or by the new company’s performance within its industry, the results of mergers and acquisitions have been disappointing. It the suggested to consider the AOL-Time Warner mismatch and the fiasco at WorldCom, a company that failed to integrate its many acquisitions. It further mentioned a 1999 study published in the Harvard Business Review, which found that only 21 percent of acquisitions in several industries could be viewed as clear successes. Olin School of business (n.d.) telling every body that in other words, nearly 80 percent of those acquisitions were either disappointing or clear failures. It then asked the question: “How can such a commonly practiced, promising business strategy so often end in disaster?” The Harvard Business Review survey, according to Olin School of Business (n.d.) from CFOs surveys conducted from the Forbes 50 revealed the top 10 roadblocks to achieving synergies from their answers as follows: Incompatible cultures Inability to manage targets Inability to implement change Nonexistent or overestimated synergies Lack of anticipation of foreseeable events A clash of management styles Overly-high acquisition premium Unhealthy acquisition target Need to spin off or liquidate too much Incompatible marketing systems The Olin School of Business (n.d.) then mentioned that The Society for Human Resource Management (SHRM) Foundation was intrigued with the CFO survey results because they tended to confirm anecdotal evidence that people issues are, indeed, critical to the success of mergers and acquisitions. It is indeed intriguing that people issues are on the top of roadblocks to success. For some it must not be surprising on the basis if companies merge for profits one is thinking of more lean and efficient operation therefore management would be inclined to terminate people from their employment. Could one then blame the employees when they know that such will be the plan of management as result of merger (Van Horne, 1992) or acquisition? Could you one blame the employees when they will not cooperate with the merger thinking that they will be sacrificed in the name of more profits for the companies involved in the merger or acquisition. 2.3 Analysis of the factors causing failures of mergers If one now analyses what really happened after the merger. One would ask whether a corporation was too much for the acquisition. Was there a miscalculation of the financial health of the companies for merger or the company to be acquired including the companies gearing ratios? Alternatively, is it because there was lack of understood of the business it was purchasing? These questions would seem to find answer by survey conducted report by Globusz Publishing (2005) which cited the following other causes of failure or reasons for the high failure rate of takeovers: (a) Over-optimistic assessment of economies of scale. Such economies can be achieved at relatively small size; expansion beyond the optimum results in disproportionate cost disadvantages. (b) Inadequate preliminary investigation combined with an inability to implement the amalgamation efficiently. (c) Insufficient appreciation of the personnel problems, which will arise. (d) Dominance of subjective factors such as the status of the respective boards of directors. Globusz Publishing (2005) explained that perhaps the fact that acquisition is often favoured as an alternative to expansion by other means implies a tendency towards laziness in management. It thus argues that it is probably easier to acquire an existing business rather than to subject oneself to the discipline of seeking and justifying more difficult investment projects. It further argued, “The high level of redundancies evidenced in larger groups indicates that mergers and acquisitions create a situation where rationalization (which would otherwise be shirked) may be carried out more acceptably”. Globusz Publishing (2005) however concluded that not all mergers are failures; and some fact is very successful. However, it confirmed the higher percentage of failures over success when it posited that on the average, research shows that expansion based on merger and takeover seems to bring few value gains to acquiring company shareholders. In addition, it further confirmed that the importance of people issues in merger and acquisition by stating that these managers are often in the interests of managers and that they view success in a different light from shareholders and are often more concerned with the job security and career prospects brought by sheer size (Emphasis supplied). 2.4 With the dominance of people issues, what could be done to address the same? Grovewell (n.d.) posited the concept of “Cultural Integration" as an additional strategy in merger or acquisition. It said : “How we get things done around here" is a short yet evocative definition of culture.  It stated that it is applicable to corporate culture (Oden, 1997) because it focuses on the how of accomplishing productive work day after day.” It does pointed to the fact that when two firms combine, deal-makers and process managers always are to be careful to integrate the formal rules and policies for previously governed each separate firm.  3. Conclusion The decision to merge with or acquire another corporation is a growth strategy. Obvious is the fact that it is an easy way to grow but it was found per survey that there were more failures. The most dominant factor is the attributed to people issues. When an organizational issue involve blames people as the cause of failure, it only speaks of one of the greatest realities in the management. While people could the best source of competitive advantage, it could also be cause of the failure of a merger or acquisition by the non-cooperation, or simply trying to survive because of fear of losing employment because of alleged synergies that would be created because of the merger or acquisition. Organizations have cultures too which cannot easily melt with other organizations’; Therefore corporations who really want to adapt the strategy of merger or acquisition must really take things seriously whether it would be possible to accomplish cultural integration (Maddox, 1993). Bibliography: 1. Brigham and Houston (2000), Fundamentals of Financial Management, Thomson South-Western, United Kingdom 2. Churchill, Jr. and Peter (1995), Marketing, creating values for Customers, Irwin, Sydney, Australia 3. Globusz Publishing (2005), 6 Causes of failure, {www document} URL http://www.globusz.com/ebooks/Mergers/00000014.htm#38 4. Grovewell (n.d.) , International M & A Integration, {www document} URL http://www.grovewell.com/intl-M&A-integration.html, August, 31, 2006 5. Maddox, R. (1993), Cross-Cultural Problems in International Business: The Role of the Cultural Integration Function, Quorum Books 6. Oden, H. (1997) Managing Corporate Culture, Innovation, and Intrapreneurship; Quorum Books 7. Olin School of Business (n.d.) Making Mergers Work, { www document} URL http://www.olin.wustl.edu/discovery/feature.cfm?sid=37&i=2&pg=1 , Accessed August 31,2006 8. Van Horne (1992), Financial Management and Policy, Prentice Hall International Editions, London, United Kingdom Read More