Mergers and Acquisitions on the Market - Coursework Example

On Mergers and Acquisitions Introduction There is more to the story of the beautiful princess kissing a handsome prince hidden in a toad’s body. There are many unlocking potentials and interconnecting events before the real thing should have come out. The points we have to deal: Why do corporations go on a merger? Why despite the high rate of failure in mergers and acquisitions corporations still insist in consolidation? Many still jump on the bandwagon. Donald C. Spitzer, the U.S. national partner in charge of the Global Financial Strategies (SM) practice of KPMG LLP, the U.S. accounting, tax and consulting firm, says: “More than 8 in 10 deals fail to enhance shareholder value because of poor planning or execution or both, yet, by contrast, most of the executives interviewed (82%) believed their deals were successful.” (KPMG Press Release) One of the causes of merging is competition or the thought of managements that they could dominate the market if they get other companies to join them. But there are grave consequences to their action if things are not well planned. And planning a merger and acquisition involves many things to include cultural, employees’ feelings and attitude, not to mention the technical and financial sides of the bargain. “It seems that almost daily one hears of corporations – some willingly, some not – involved in such transformations as part of a strategy designed to achieve corporate growth, economies of scale, vertical integration, diversification, and even provision of capital for future leveraged buyouts.” (Buono and Bowditch 3) There is this danger in merger mania but corporations seem to ignore. KPMG International conducted a study in 1999 on 700 of the most expensive deals from 1996 to 1998. “Summary of findings: 83% failed to boost shareholder wealth. 53% reduced shareholder wealth.” (Grubb and Lamb 155) Once merging and acquisition are in the offing, two and more managements are in double time. They have to prepare and commit themselves to activities and events they do not really know. In fact, they are unprepared for the eventualities. And instead of doing the regular business of the day, they become more preoccupied with the new activities of an entirely new company. And there will be more and more jobs to be done. Management and employees become preoccupied with new things instead of their usual job. History Grubb and Lamb studied some of the worst takeovers in American businesses, and they said, “Merger failure is not a recent phenomenon nor is it a single isolated measurement at one moment in time. A continuing pattern of merger and acquisition failures has been well-documented since 1950.” (Grubb and Lamb 11) Chandler (quoted in Temple and Peck 2002) argued that “merger was often an efficient way of rationalizing horizontal combinations of firms (cartels)” (6). This was to control big businesses at that time or when there was an appearance of a cartel. The growth through a takeover seems to be a solution. So here, we see that there are valid objectives for a consolidation. Managements insist no matter what the costs. Depamphilis (25) states that: “M&A activity worldwide reached an historical peak in 2000 in terms of both the number and dollar value of transactions, following surging economic growth and the Internet bubble of the late 1990s.” At the turn of the century, there is an increase of M&A activity even with the failure rate, and with the emergence of high-technology, computers, the internet, and the Information Technology applied to manufacturing strategies. There are advantages and disadvantages; there have been positive outcomes. But the negative seems to outnumber the positive, especially in hostile takeover, due to some reasons that we will discuss here. Management Style One issue that should be dealt with immediately after a takeover is on management of a new organization. “[W]hen management styles are similar across organizations, the level of cooperation is often enhanced and perceptions of the degree of change taking place may be cushioned” (Diven 1984, Marks 1982, Buono and Bowditch 1989, Walter 1985, quoted in Temple and Peck 444). A study conducted by Datta in 1991 (Cray and Mallory 84), the issue of which was cultural fit and post-acquisition performance and the cultures examined were those of the United States, found that “differences in management styles lead to lower post-acquisition performance”. It means that the new management is not performing well due to the differences in the management style of the former two separate corporations. Management of the new business should be handled by a team, not by two separate groups of the former businesses. This can be one of the delicate stages of the takeover: how to handle and who are to handle management of a bigger enterprise. Cray and Mallory defined cultural fit as “attitude toward risk, decision-making approach, and preferred control and communication patterns” (82). Employees’ Reactions In “The Human Side of Mergers and Acquisitions,” Buono and Bowditch discuss the “impact that mergers and acquisitions have on people in the workplace; the psychological difficulties that people experience, the culture clashes that can emerge in organizations during the postmerger integration, and the ways in which these problems can manifest themselves” (xiii). Mergers and acquisitions can have a profound effect on the employees and their families, more specifically, the careers of those employees. They can lead to “a sense of loss, psychosomatic difficulties, marital discord, and at the extreme … suicide” (Buono and Bowditch 3). Organizations that are in the verge of consolidation have to deal with the “impact that mergers and acquisitions have on people in the workplace; the psychological difficulties that people experience, the culture clashes that can emerge in organizations during the post-merger integration period, and the ways in which these problems can manifest themselves – such as communication breakdowns, a “we-they” mentality between the component organizations in a merger, lowered commitment, drops in productivity, organizational power struggles and office politicking, and loss of key organizational members.” (Buono and Bowditch xiii-xiv) Are there success stories? There are mergers and acquisitions that have been successful and these are, in the words of Carlos Ghosn, President and CEO of Nissan Motor Co., Ltd., based on “partnership and trust rather than power and domination.” (Ghosn and Pierre xvi) Nissan is now part of the Renault-Nissan Alliance, but the two business organizations went through merger and acquisition. Ghosn says that they have kept the company’s identity and the self-esteem of their people. They respect and learn from one another. Basically their alliance is founded on cultural and bridging cultures because their organization is global and multi-cultural. (xvi) Another company is GlaxoSmithKline (GSK), which is one of those that have experienced a series of mergers and acquisitions, and Jean-Pierre Garnier, CEO, says that these have been successful – first was the merger of Glaxo with Wellcome in 1995, and then SmithKline with Beecham in 1989. Their new thrust is for the people behaving as GSK people and not Glaxo or SmithKline people. They are heading as a new organization, and their “Corporate Executive team (CET) did a remarkable job in distilling the essence of what the new GSK stood for and what our vision and guiding principles were” (Ghosn and Garnier xvii-xviii). The success of the CET (or any team or committee formed in the course of the negotiations) depends very much on people. People will work in these teams, and they have to be people who know the companies. Mergers and acquisitions are not to be rushed. But what about those who failed? Boeing’s acquisition of McDonell Douglas resulted into blunders. Boeing announced that it would purchase McDonnell Douglas, a producer of fighter aircraft, to consolidate with Boeing’s commercial aircraft production. This was after Boeing acquired Rockwell’s defense operations. Officials of Boeing and McDonnell were ecstatic of the deal. (Grubb and Lamb 177) McDonnell Douglas Chairman John Mc Donnell was even more glowing, proclaiming the new Boeing would be the ‘largest, strongest, broadest, most admired aerospace company in the world.’” (Greg Schneider, The Baltimore Sun, quoted in Grubb and Lamb 177) This is just like the beautiful princess dreaming of the handsome prince after she would have given that miraculous kiss. Now, what happens? The merger was grounded from the start. It never entered into their minds the needed great amount of “time, energy, and effort to integrate the operations of Rockwell and McDonnell Douglas.” Besides, Boeing’s operations and production of commercial aircraft were already antiquated; they haven’t introduced the high technology and Information Technology already available at that time. Boeing’s stock went to an all-time low. This was further aggravated when it entered into “money-losing deals with three major airline carriers”, promising to produce aircraft that they could not deliver. In mergers and acquisitions, there are distractions in the business. This is the theory of Grubb and Lamb, that if your competitors are planning for a consolidation, you take hold of the opportunity, of the so-called “merger chaos” and you can get over your rival in the business. This was what happened to Compaq’s acquisition of Digital Equipment Corporation. Michael Dell got hold of the opportunity, and his famous statement was, “I gotta believe these guys handed as a huge gift.” (Grubb and Lamb 1) It’s just like saying that he would soon receive a gift over the beautiful princess’s kissing the handsome prince in the body of a toad. Compaq is Dell Computer’s competitor in the computer industry. Dell’s stocks would soon climb ahead of Compaq, after Dell took advantage of the acquisition. “Dead launched a barrage of marketing and sales attacks that took dead aim at Compaq’s market-leading position, especially in the lucrative business PC market.” (4) Merger Integration Tools Grubb and Lamb (2000) introduced the merger integration tools to ensure that foundations are “interwoven into integration planning, decision making, and implementation.” These are: 1.) Leadership Readiness – this is very necessary as employees “look to their leaders to learn what are the acceptable or expected actions as the companies join together.” 2.) Re-recruiting – Key employees with the right mindset and the real talents needed for the new team should remain and properly pinpointed. 3.) Fast-Track Join-Up – “Merging organizations must jump start the ‘getting to know you process’.” (Grubb and Lamb, 101) 4.) Merger Communication System – This is another important tool as timely information is necessary in the new organization. Misinformation and rumour mills are right there in the system as if it is also a part of the business, and this is very devastating to the organization. 5.) Merger Integration Teams – As stated earlier, a workable and effective team is needed. This is the team which should have the knowledge of the former organizations. “Any merger or acquisition can produce overlapping, redundant, or conflicting organization design components, systems, procedures, policies, or roles.” (Grubb and Lamb, 105) 6.) Optimal Culture Design – In a merger, there are two or more cultures being merged, and what should remain or become predominant is the one that can bring the new company to new heights. Employees and managers of this merger should be able to adjust with the new system or culture, for their own good and success. 7.) Shared Action Planning – There should be no “we-they” attitude and conflicts. All members and employees must be focus their efforts 100 percent to delivering results for the new organization. Conclusion There will continue to be more risks in the consolidating world. “Worldwide rampant consolidation is gathering steam and will continue to propel itself forward at record rates” (Grubb and Lamb 137). There will be “marriages” and takeovers of big organizations, and hostile takeovers in the business world. But there is nothing to be afraid if M&As are carefully planned and handled by responsible and expert teams. As we have discussed, some of the corporations are already experts in the field, and experience can truly teach them how to be more careful and successful. The integration planners should have the needed “industry-specific experience and cultural know-how to make a cross-border deal work.” Each particular business has a distinct culture so that in the integration process these cultural differences should also be taken into consideration. Some Recommendations KPMG wants this kissing the handsome prince cured once and for all. It identified six “keys” necessary for a deal to succeed. There are three hard keys and three soft keys, according to Spitzer. The three hard keys are “pre-deal business activities that had a tangible impact on the ability to deliver financial benefits,” and they are: “synergy evaluation (business fit) integration planning, and due diligence.” The three soft keys are “human resources issues that must be examined even before a deal is announced,” and they are: “management team selection, cultural issues, and communications with employees, shareholders and vendors.” (KPMG Press Release) KPMG’s recommendation is a clear-cut evaluation of things before anything else has to be done. Everything has to be planned and not just go on with the deal with the thought that everything will be just as fine considering the size and the resources now on hand of both companies. Works Cited Buono, Anthony F. and James L. Bowditch. The Human Side of Mergers and Acquisitions: Managing Collisions Between People, Cultures, and Organizations. Beard Books, 2003. ISBN 1587981769, 9781587981760 Cray, David and Geoff Mallory. Making Sense of Managing Culture. Surrey: International Thomson Business Press, 1998 Ghosn, Carlos and Jean-Pierre Garnier. Introductory Comments: Managing Culture and Human Resources in Mergers and Acquisitions: The CEO’s Point of View. Mergers and Acquisitions. Eds. Günter K. Stahl and Mark E. Mendenhall, Stanford University Press, 2005, ISBN 0804746613, 9780804746618. xvi-6. Grubb, Thomas M. and Robert B. Lamb. Capitalize on Merger Chaos. New York: Simon & Schuster, Inc., 2000. KPMG Press Release. 2008. KPMG Identifies Six Key Factors for Successful Mergers and Acquisitions; 83% of Deals Fail To Enhance Shareholder Value. [Online]. 18 November 2008. Temple, Paul and Simon Peck. Mergers and Acquisitions: Critical Perspectives on Business and Management. Taylor & Francis, 2002 Read More