Why Do So Many Mergers Often Fail - Essay Example

1. Mergers & Acquisitions Mergers and Acquisitions replace former organisational culture with the new one and with this transformation employees are uncertain about the future while strategic decisions coming from top management disengages workers attention and loses performance soon after the transformation. So, the fate of companies after mergers and acquisitions rests upon the strategic management (Harding, et al., 2004) and in the event of failure to do so, most of the mergers fail. 1.1. Uncertainties among workers and customers One thing that arise from M&A is the uncertainty among employees and customers. Their concerns are justified because new management and their ideology is unknown to employees which makes them worry about their job stability and customers on the other hand have concerns regarding the price and quality of the product or service targeted company offers whereas insecurity among employee will also affect customer relations (Clark, 1985). So, companies must be prepared for Mergers and acquisitions otherwise this uncertainty becomes the main cause of failures. In most of the cases mergers and acquisitions occur under confidentiality which restrain advance notification considering employee motivation. Confidentiality does not mean that companies should not prepare for the integration. Advance preparations help reacting to the transformed culture merger and acquisitions success. 1.2. M&A Communication Failure It is theoretically believed that in mergers both companies are the same but in reality in almost all cases one company dominates the other (Walter, 2004). It is necessary for both companies to initiate M&A communication plans way before the legal announcement whereas all primary constituencies should be addressed in this endeavour that include senior managers, shareholders, partner companies, employees, and important suppliers etc. (Meyer & Estrin, 2007) Successful mergers and acquisitions demand prior communication of virtual activities, needs and decisions to be taken after M&A otherwise communication gaps lead to M&A failures. 1.3. Failure to Protect top Performers No doubt every organisation is blessed with certain top performers which are productive and prized by their extra ordinary capabilities. Companies should identify such valuable employees and should evaluate which individuals are assets and must be protected pre close and during the transformation process (Eweje & Perry, 2011). Acquiring companies usually fail to channelize employee insights from the Target Company and end up losing efficient employees which later cause managerial lapses leading to M&A failure. 1.4. Failure to Establish Corporate Culture & Integration Successful integration can be attained by aligning company’s culture to the targeted culture. In most of the cases combination of both cultures and its renovation into third corporate culture is used in practice. Examination and identification of obstacles for integration can also be helpful in aligning corporate cultures (Amy & Mansour, 2004). Control over internal affairs can be used for business and employee reengineering which will ensure corporate governance. Aligning company culture would require understanding of both cultures whereas good aspects of both cultures can be extracted while minimal and negligible facets should be ignored (Ulijn, et al., 2010). . In a new integrated company there always prevail tensions and clashes between managers and employees for dominance which harms company’s progress and image (Freund, 1975). In such scenarios companies concentrate their efforts to maintain their hegemony rather than communicating each other for collaboration, developing new corporate culture and focusing on post integration issues (Jenny & Simon, 2009). If work tensions are not resolved after M&A, it may lead to failure. 1.5. Failure to Establish Top to Bottom Approach In a new company set up employees would require morale and motivation to work for new leadership which can only be triggered by tough and timely decisions whether they are managerial or policy decisions (Schaede, 2008). It must be ensured that managers and workers are the representative off their work otherwise they are nothing. Employees must be ensured of their responsibilities for their actions. Such motivational tactics engage employee’s motivation to perform and lead to merger success otherwise if companies fail to establish top to bottom approach and in the absence where individual are not aware of their responsibilities and roles in the company then dream for merger and acquisition success will never come true. 1.6. Deficiency of Proactive Management Each M&A is faced with targets and challenges while the only way to overcome these challenges is to adapt proactive stance in decision making and execution of company vision and policies. Combining both companies will definitely have human capital issues from senior management to file employee but the companies must antedate such crisis and be prepared to manage them with proactive leadership. Companies are faced with the questions that who will do what at executive management level and at manager level. Companies are required to decide about some important positions such as Chief financial officers and operating officers etc. These decision matter a lot in the success of a merger. If company makes poor decisions then whole building of the merger will tumble down whereas those deserving candidates will resign in disgust for better opportunities (Jeffrey, 2009). Lack of courage can also be quoted as a disparity in proactive management. When management fails to take strict and tough decisions in time then of course the result will be a disappointment for merger and acquisition (Finkelstein, 2003). It is highly likely that such decision won’t be welcomed by majority but for progress and success proactive decision making is obligatory. Proactive management requires strong leadership, if senior management is not strong and fail to manage company matters which will create a gap between company’s vision and output while ultimately the whole mission will lose its credibility. 1.7. Focus on Due Diligence Due diligence refers to investigating relevant information about the contract or deal being presented for transaction. Due diligence can be very helpful in influencing one’s decisions. Due diligence can be attributed as business due diligence, accounting due diligence, legal due diligence, and even "special" due diligence. In depth information about the contracting terms, company’s financial standing, motives, assets, resources and liabilities is imperative (Peter, 2003). Besides business and accounting due diligence, companies should never ignore legal due diligence. Legal due diligence provides help in knowing about the legal documents of the target company, their contracts to other firm, their lawsuits, insurance policies, employment, labour and pension benefits, intellectual rights, and environmental policies etc. The most important of all legal due diligences, it is important to have an expert counsel looking forward to your best interests. Usually technical legalities such as termination policy, contractual drafting, disclosure of information, consequences for misinterpretation and legal jurisdiction are matter of international M&A which can never be left unattended (Arthur, 2002). Even a single loopholes in the deal can be fatal for the ultimate existence of the company. So for a successful M&A, focusing on due diligence is mandatory otherwise failure is imminent. 1.8. Misapprehending Strategic Fit Success of M&A relies upon strategic fit, if new transformed company operations are beyond strategic competencies of the acquirer then the result will be failure. If the company’s strength is manufacturing and it is to acquire selling unit then the company must think deeply about the rationality of their strategic fitness and capabilities (Straub T., 2007). Companies have their working strategies, if the target company strategy does not fit acquirer operation then it should not initiate the deal at the first place. If companies anticipating merger and acquisition omit the fact that the particular attributes of the target company are beyond the acquirer company attributes then the result will most likely be a lost baby with bath water. 1.9. Getting the Deal Structure and assets wrong M&A requires determination of target company’s assets and liabilities. Understanding the structure and terms of the agreement is very vital part of the deal. If company estimates wrong valuation of assets and Returns on investment, the integration will be a big blow. Acquirers sometimes hold their half or more payments of the purchase based upon future performance (Ralls & Webb, 1999). These held earn out can be tricky if the payment is to be paid by the post-acquisition performance while the target company employees are not incentivized about the payment then it would be disastrous to achieve those payment. So, selection of deal structure and assets valuation can either build to sky or ruin the M&A to ashes. On the other hand valuation of company’s assets and liabilities is also an imperative step whilst failure to get the right statistics and observations about the company’s resources can be fatal for sustainability of the merger and acquisition. 2. Conclusion Managing a merger is not a child’s play and requires managerial and leadership skills. It is a hard fact that around 60 to 80 per cent of the mergers and acquisition fail. Communication, corporate culture, integration, due diligence, leadership, decision making, mergers logics, merger structure and corporate development are all factors which if managed correctly can lead to success other failure to overcome these challenges will result have disastrous effects on mergers and acquisitions. References Amy, L. P. & Mansour, J., 2004. Mergers and acquisitions : creating integrative knowledge. Malden: Blackwell Pub.. Arthur, H. R., 2002. Due diligence for global deal making : the definitive guide to cross-border mergers and acquisitions, joint ventures, financings, and strategic alliances. Princeton: Bloomberg Press. Clark, J., 1985. Business merger and acquisition strategies: A handbook for entrepreneurs and managers. s.l.:Prentice-Hall. Eweje, G. & Perry, M., 2011. Business and sustainability: Concepts, strategies and changes. Bingley, UK: Emerald Group. Finkelstein, S., 2003. Why smart executives fail and what you can learn from their mistakes. New York: Portfolio. Freund, J. C., 1975. Anatomy of a merger: Strategies and techniques for negotiating corporate acquisitions. Law Journal Press. Harding, D., Sam, R. & Alistair, C., 2004. Avoid Merger Meltdown: Lessons from Mergers and Acquisitions Leaders. Strategy & Innovation, pp. 3-5. Jeffrey, A. K., 2009. Mergers and acquisitions : turmoil in top management teams. New York: Business Expert Press. Jenny, D. & Simon, B., 2009. Employee communication during mergers and acquisitions. Farnham : Gower. Meyer, K. & Estrin, S., 2007. Acquisition strategies in European emerging markets. England: Palgrave Macmillan. Peter, H., 2003. Due diligence : the critical stage in mergers and acquisitions. England: Burlington. Ralls, J. G. & Webb, K. A., 1999. The nature of chaos in business using complexity to foster successful alliances and acquisitions. Houston: Cashman Dudley. Schaede, U., 2008. Choose and focus: Japanese business strategies for the 21st century. Ithaca: Cornell University Press. Straub T., 2007. Reasons for frequent failure in mergers and acquisitions: A comprehensive analysis. Wiesbaden : Deutscher Universitäts-Verlag. Ulijn, J. M., Geert, D. & Elise, M., 2010. Strategic alliances, mergers and acquisitions : the influence of culture on successful cooperation. Northampton: Edward Elgar. Walter, I., 2004. Mergers and acquisitions in banking and finance: what works, what fails, and why. 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