Effective Merger and Acquisition Process - Essay Example

Mergers and Acquisitions

Introduction

It has been projected that mergers and acquisitions are among the popular means for the growth and expansion of some firms, not only in the United States but the entire world in general. There are numerous reasons which necessitate participation in Mergers and Acquisitions (M&As). Among the basic reasons include the created room for faster growth. Since the targeted organisation is already in place, the production capacity, distribution network, as well as the developed clientele, necessitates faster growth of the company. Additionally, it is regarded that the expenses accrued in the case of a takeover are relatively lower than the costs that would be charged considering internal expansion of a single firm. The case is very prevalent in the case where the replacement costs of the target assets greatly supersede the market the market value of the assets. Further, it is regarded that M&As can be paid for by with the stock and this, therefore, proves very convenient for small cash reserves, or in other cases limited debt capacities.

Hypothesis

Despite the benefits associated with the establishment and participation in mergers and acquisitions, it is however noted that some the M&As do not take a course to the very end, and hence, the successfulness of the project is shuttered at some time. Almost 90% of the total transactions considering takeovers do not get to pass and materialise because of some fundamental steps that are neglected, either because of missed knowledge or in other cases because of misinformation. It should be notable that mergers and acquisitions are never be taken lightly since it is just never a matter of two companies integrating under a common corporate mission, but a merging of diverse and huge enough companies with different personalities, ambitions, and behavioural traits as well as the ways of working. Complex scenarios are, however, encountered with the inclusion of multiple branch offices, cross-border IT infrastructures as well as financial regulations. Bearing the above in mind, it is, therefore, necessary for clear strategies, effective project management as well as evident and open communication between the stakeholder groups to be factored in for there to be experienced a smooth delivery of the results that were desired. Similarly, there is a great need for transparency in the process which will ensure that realistic goals are attained hence the success of the entire project.

Effective Merger and Acquisition Process

For a considered merger and acquisition to be effective and successful, there are three essential and critical components that need to be greatly featured to ensure that the entire process measures up to the desired standard (Harford 2005). Strategic planning; engagement of the stakeholder as well as third-party meditation and company-wide management are fundamental in ensuring that the success of the merger is guaranteed.

Significantly, an elaborate project strategy is an essential component that necessitates an understanding of the other elements in the entire process. There is a need therefore for effective management to be considered irrespective of the scale of the entire deal. Since the process of merging and acquiring a company may be seen to drain both a personnel as well as a financial perspective, it follows that the deal can get out of hands if a comprehensive and elaborate outline has not been out forth to aid in the achievement of the desired results (Hijzen et al. 2008). The course of planning will entail development of a unified business plan, consideration of enough time for the employees to adjust to the changes as well as ensuring that there are enough training programs for the people that need to be brought up to speed.

Additionally, there is a need for a defined financial and legal adjustment plan, a plan for a consolidated IT department as well as the creation of a brand identity that everyone can relate to easily and conveniently. Similarly, there needs to be a clearly defined purpose of the merger or the acquisition which features growth, market shares in addition to mutual benefits (Schiereck et al. 2009). The plan establishes realistic goals as well as a natural process that can be easily managed. Since challenges are unavoidable, it follows therefore that the strategy will seek to assess some potential risks and complications that are prone to arising in the course of the process and seek to devise ways requisite for their management.

In the course of the process, it is essential that the parties establish a wise advisory board, which includes stakeholders, the heads of departments as well as internal staff and an outside specialist to guide the entire process and ensure that it is due. M&A, therefore, require experts that are highly sophisticated to enable assessment of the situations prevalent and the objectives that have been set without any bias whatsoever. Since the expert will be and independent source, it follows therefore that the claims developed can be easily challenged, while validating great business decisions. Similarly, the expert will seek to ensure that the leadership stays on track in its defined goals without biases or compromise. Additionally, the expert will seek to ensure that the employees of the involved companies receive the support they need through the entire process as well as ensuring that they stay focused, happy and deliver up to their full potential.

Failure of Mergers and Acquisitions

Regardless of the developed process that facilitates mergers and acquisitions to be adopted and consequently become successful, there are some impediments that cause the entire process to be brought to a halt and thereby limiting the success of the entire deal (Becker & Fuest 2011). The reasons for the failure of the mergers range from both internal as well as external factors, involving the business environment and other factors in general. Among the factors that necessitate the failure of the deals include the following.

• Limited involvement from the owner

The owner of the business is the primary reason for the initiation of the entire project. The objectives for the involvement in the deal are well known by the business owner hence the need for full participation of the owner in the transaction and the deal taking place. Though there is a need for the appointment of a board to oversee the entire process, the board is however limited in the role it plays in the effective management of the deal. The business owner is the overall overseer of the project and hence needs to be fully involved in ensuring that the deal is successful. In line with this, the developed entity is regarded as the onus of the owner. Hence, the owner should be thought to be involved in the entire process from the start to the end and not delegate the activities of the job to the people involved. Similarly, it is regarded that the inherent benefits of the project will be to the owner. Hence adequate involvement in the deal will ensure that he gains enough experience for future and life-long benefits.

• Clarity in the execution of the process

Post-merger integration has proved to a major challenge that faces the entire of the process. Clarity and execution of the integration process is key in ensuring that the entire process in as per the objective stipulated. Objectives, therefore, need to be well set to ensure that the entire process is in order (Becker & Fuest 2011). As discussed in the effectiveness of the plan, recruitment of an expert can clearly work to ensure that the process is aided and is per the needs and objectives developed by the owner. Similarly, cultural integration comes hand in hand with the deal and therefore a proper strategy needs to be developed to ensure that the entire process is per the needs and regulations required by the people. Similarly, the business can set to ensure that there is a proper strategy developed that mandates the integration process. The strategy may encompass a hard decision for a forceful integration aimed at setting aside the cultural differences. Additionally, the owner can seek to allow the regional or local businesses to run businesses on their own, in their respective units, as long as the targets are clear and the major strategy being glued on profit making.

• Lack of an ambient backup plan

A backup plan is effective in ensuring that disengaging of the entire process occurs in an appropriate time and hence hinders future damages that may be caused to the business. Execution of the plan in an appropriate time will effectively work to ensure that the deal is worth and in the case of any changes; the process is thwarted to avoid damage and unnecessary losses. The plan may include the development of alternatives in case the initial plan fails as well as ensuring that the alternatives are true to the alternatives of the business. More recent reasons and thought for the engagement in M&A should be effectively considered rather than sticking to the older ways of action and hence experiencing losses.

• Ignorance

It is evident that ignorance is a key impediment to the success of any business transaction, with the inclusion of M&A. Preparation will, therefore, ensure that the deal is sufficient and that the timelines for the entire process are rightly met. Among the consideration in the case of ignorance include lack of a common between the parties that involved in the deal as well as some critical considerations which may be neglected but result in a disastrous experience (Nocke & Yeaple 2007). The considerations include poor governance, poor managerial skills for the entire program as well as poor communication between the parties involved in the entire of the process. Similarly, cases of lack of courage delay the integration process while bringing low the cases of clarity and honesty in the entire deal.

• Weak leadership

Leadership is the main determinant factor in the course of the success of any business deal. The leaders have the need to stand strong enough in ensuring that the process is due and as per the perspectives that are required. The leaders need to be energetic, enthusiastic, clear and appropriate communicators, aimed at ensuring that the objectives of the entire project is per the needs of developed. Their behaviours are requisite to ensure that there is a transference of desired traits and ambitions from one person to another.

Conclusion

Mergers are critical in the development of the business as well as ensuring that there is perceived growth and expansion in the course of the business world. The benefits accrued due to adherence and correctly following the right course in the effecting of the business deal are vast, and there is a necessity for alignment with the due course for proper experience of the benefits. The success rate of the M & A has, however, remained to be low because of the inhibitory factors outlined above. There is a call therefore for the business owners, advisors as well as associate participants to be keen and vigilant with regards to the possible pitfalls and consequently avoid them to ensure that there are secure and successful business deals, M&A being the essential.

Data

A few empirical research studies have demonstrated that negative abnormal returns many times are realised after the consummation of a once promising merger. There are a number of consistent explanations in this regard, which explain why mergers fail. In analysing the success and failure of these mergers, we assess the abnormal returns of the resultant merged organisation. The abnormal returns are contrasted over a period of time to comparable equities of the market capital weighted index. The abnormal returns are averaged over one, three and five years and have been adjusted for the performance of the market in the specified years. The sampled company mergers that have been used in this study comprise a group that the US Government reviewed for probable “anti-trust” violations.

Data in this analysis contains a sample of 63 mergers consummated and announced during an eleven year period, from 1999 to 2006. The common factor is that all these mergers were all contained in the government list and reviewed and many times challenged by the DOJ (Department of Justice) and FTC (Federal Trade Commission) for violating the Clayton Act, particularly Section 7b of the Clayton Antitrust Act. In this review, only companies traded publicly in the stock exchange market and free-standing organisations in the US were used in obtaining stock prices as well as other data on the organisation. The target had to account for 10% (a least) of the total value of the buying organisation, since the takeover/merger needs to be huge enough to have an effect on the post-merger/takeover performance.

AR (Abnormal Returns) for every merged organisation was calculated through the following summarised equation as explained in Agrawal, Jaffe, and Mandelker (1992).

AR = Rit – Rst – (βi– βs) (Rmt – Rft)

Where: - Rit = returns (monthly) for the merged organisation from the time of the merger

• Rst = market decile returns of the merged firm
• (βi– βs) – Market adjustments for the Rst

ARs are subsequently added up for one year, three years and five years to get CARs (Cumulative Abnormal Returns). The initial observation for the 1, 3 and 5-year Cumulative Abnormal Returns correspond to the time of the announcement of the merger.

CAR = Σn1iAR

For every merger, the main explanatory elements were computed. The following table demonstrates the industry-frequency of the merger as well as the average 1, 3 and 5-year CAR according to industry. In this list, the telecommunications industry had the lowest returns; while conversely, the service industry recorded the best returns.

Industry

Frequency – Total Mergers/Challenged Mergers

One year Abnormal return

Three year Abnormal Return

Five year Abnormal Return

Petroleum

6

-17%

-26%

-20%

Gen Manufacturing

10

10%

-15%

-33%

Life Sciences

16

-8%

-30%

-57%

Consumer

3

-11%

8%

7%

Hardware/ Software

8

11%

-13%

1%

Chemical Processing

2

-12%

-5%

-27%

Defense/Aerospace

4

-4%

5%

-9%

Telecommunications

7

5%

-60%

-79%

Other Services

10

21%

40%

43%

Health

3

-21%

-35%

-48%

Total

63

-2%

-17%

-28%

Methodology

The above CAR ratios will be regressed using the main control, valuation and structural variables as indicated in the following equation.

CARj= β1 + β2lnRDj + β3 (lnRDi) + β4ln (HL) m

RDj – acquirer’s R&D

• j = the acquirer
• i = the acquired company

Industry

Frequency – Total Mergers/Challenged Mergers

One year Abnormal return

Three year Abnormal Return

Five year Abnormal Return

Weighted Mean of

∑RDj+RDi

Petroleum

6

-17%

-26%

-20%

52.14

Gen Manufacturing

10

10%

-15%

-33%

16.29

Life Sciences

16

-8%

-30%

-57%

33.25

Consumer

3

-11%

8%

7%

47.01

Hardware/ Software

8

11%

-13%

1%

66.04

Chemical Processing

2

-12%

-5%

-27%

16.28

Defense/Aerospace

4

-4%

5%

-9%

84.24

Telecommunications

7

5%

-60%

-79%

19.21

Other Services

10

21%

40%

43%

77.33

Health

3

-21%

-35%

-48%

18.88

(See attached excel).

A positive coefficient will provide support to the proposition that the value of R&D efforts increase with increased concentration/size since the merging organisations are within the same sector. Analysing from the point of a negative coefficient, we can make a conclusion that the combination of Research and Development (R&D) efforts decreases value, as a result of loss of innovating champions or/ as a result of inefficiencies. HL is used to evaluate if the presumed post-merger market concentration has AR.