Operational and Psychological Preparation for Mergers and Acquisitions - Research Paper Example

Operational and Psychological Preparation for Mergers and Acquisitions Introduction The age of globalization has forced firms to use their fullest potential and resources to be able to stay competitive. To be successful is an almost vertical climb. Yet firms continue to seek growth and they see combinations as a form of growth. At the turn of the century, there was a sharp increase of the number of mergers and acquisitions following the economic growth and the internet bubble of the late 1990s. Firms insist on consolidation and many still jump on the bandwagon. In 1999, there was 36% increase in worldwide M&A activity, with the total amount rising up to $3.4 trillion. In the United States alone, M&A volume reached $1.75 trillion; Europe was trailing with $1.23 trillion after the takeover of Mannesmann by Vodaphone Airtouch with $181 billion. America Online took over Time Warner with $183 billion, and in Europe there was the $76 billion merging of Glaxo Wellcome and SmithKline Beecham. Pfizer took over American Home Products, acquiring Warner-Lambert for $230 billion. (Grubb and Lamb, 2000, p. 9) “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, 2003, p. 3). Some objectives for joint ventures are strategic in nature, or to gain competitive advantage. Harrigan (1988, cited in Yan and Luo, 2001, p. 13) argues that joint ventures can: (1) exacerbate competition, (2) stabilize profit levels, or (3) precipitate structural changes in vertical integration, technological scale, or other industry traits. The objective is to gain more profits through advantageous positioning in the particular industry. Firms choose to form joint ventures to enhance competitive positioning in the market (Kogut 1998, cited in Yan and Luo, 2001, p. 13). When two firms decide to merge, both their objective is to increase shareholder value. It is an effective way of creating value (Hitt, et al., 1996; Vermeulen & Barkema, 2001, cited in Zhou et al., 2008, p. 397). But there are those whose objective is to erode competitors’ strategic positions. Vickers (1985, cited in Yan and Luo, p. 13) shows that joint ventures are an effective mechanism to guarantee the entry-deferring investment. Joint ventures are a form of defensive investment because of the uncertainty in the world of business (Yan and Luo, p. 13). Mergers occur when “two or more entities combine to form one new entity” (Schraeder & Self, 2003), while acquisitions occur when “one organization acquires sufficient shares to increase the level of control, gain ownership of another organization, and maintain their identity” (Horwitz et al., 2002, cited in cited in Kongpichayanond, 2009, p. 375). What went wrong? The percentage of success for mergers and acquisitions is estimated at 20%; in other words, 80% is in the failure rate. With the present worldwide economic meltdown, are there more victims of M&A activity, or just closing down for other reasons such as bankruptcy? A Boston Consulting Group study revealed that many firms failed to do adequate pre-merger integration planning (Zangwill, 1995, cited in Grubb & Lamb, 2000, p. 14). Following a merger, there are substantial restructuring and reorganization, and some existing routines maybe disrupted. Two management teams prepare and commit themselves to activities and events they may have little knowledge of. Many are unprepared and instead of doing the regular business of the day, they become more preoccupied with new activities of an entirely new company. There are more jobs to be done, and they are psychologically affected in the process. There are many reasons why collaborations, mergers, acquisitions, and joint ventures, occur, and there are just as many reasons why most fail. Marks & Mirvis (1998) cite some of these instances why mergers fail, such as: questions of putting strategy to work, questionable objectives, lack of thorough assessments of the internal capabilities of the firm to be bought or poor evaluation of the strengths and weaknesses, no clear criteria in selecting a partner, lack of thorough screening of the two management teams, and so on. There’s that one good ‘alibi’: Firms are doing it because – well – everyone else is doing it. a) Lack of Preparation Some firms rush to action without the proper premerger activity. This is one of the primary reasons: lack of preparation. A pre-combination phase involves analysis of the company’s structure, profile, culture, and other relevant information needed for a new beginning of both companies to become one company or partners, as the case maybe. Top managers do not know what to do. They lack the necessary data and information about the company they want to acquire, or they just failed to do the necessary preparation. One issue that should be dealt with immediately after a takeover is on management of a new organization. “When 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” (Temple and Peck, 2002, 444). But differences in management styles lead to lower post-acquisition performance. Acquiring another organization, or being the lead in a merger alliance, provides ego-boasting for the CEO or manager. Study from financial experts revealed that CEO ego was the primary force driving mergers and acquisitions in the United States (Marks & Mirvis, 1998, p. 64). A study of large combinations found that 65 percent of successful acquirers reported managerial talent to be the most important instrument for creating value in a deal. “Smart buyers evaluate current executives but also look closely at managers within the target organization who are not yet in leadership positions” (Marks and Mirvis, 1998, p. 64). b. Cultural fit There is also the question of integration, which includes cultural. Cultural fit is defined as attitude toward risk, decision-making approach, and preferred control and communication patterns (Cray & Mallory, p. 82). An assessment of the cultural fit between potential partners must be a priority. The case of Abitibi-Price and potential partners is an example of cultural fit assessment. They used the Merging Cultures Evaluation Index (MCEI) in assessing the cultural fit of the members of the executive teams who were asked to complete a questionnaire of cultural dimensions for their own firm and the other company. Individual scores were aggregated into team rankings and gaps identified first between the two sides’ self-assessments and second between both sides’ self assessments and the evaluation of them made by the other side. The summary report displays mean scores for the two companies and the extent to which people within the companies agreed on the particular dimension of their culture. (Marks & Mirvis, 1998, p. 65) Cultural fit assessment is very important before the final decision to merge between the two companies. Then when the degree of fit has been determined, the central task now is to “integrate these dimensions into a coherent picture of the combination” (Marks & Mirvis, p. 67). Cooperation between partners from radically different cultures is a major challenge. For example, Americans tend to be individualistic and, generally, not group-oriented. Even in joint ventures between the United States and Britain, the issue of cultural differences still exists. A danger to international joint ventures, however, is that one partner may unilaterally impose its own cultural values and norms on the other partner without considering the latter’s cultural attributes. Or a partner may inadvertently relinquish its unique culture and strategic strengths to the other firm. In addition to the national culture, every company has its unique corporate culture. Potential joint venture partners need to assess and ascertain how well they can manage their differences in organizational culture, because the achievement of cultural synergy is a key factor in the building of mutual trust, which in turn contributes to venture success. Marks & Mirvis (1998) say that a moderate of cultural distinctiveness is beneficial to the right combination (p. 66); meaning it is not necessary that the two cultures should be absolutely the same. When there are two cultures, they don’t need to clash but could cooperate for a common organization. Integration should be a cooperative process between two organizations wanting to be one. Acculturation is a term that is relevant in M&A activity. It results from a cooperative process whereby the beliefs, assumptions and values of two previously independent work forces form a jointly determined culture. This is a post-acquisition challenge to acquiring firms. (Larsson and Lubatkin, 2001, p. 1574) Relative to this is the ‘cultural clash’ or resistance which occurs because of lower commitment and cooperation among acquired employees (Buono et al., 1985; Sales & Mirvis, 1984, as cited in Larsson and Lubatkin, 2001, p. 1574). Among other reasons for the cultural clash are: Greater turnover among acquired managers (Hambrick & Cannella, 1993, cited in Larsson and Lubatkin, 2001, p. 1574); A decline in shareholder value at the buying firm (Chatterjee et al., 1992, cited in Larsson and Lubatkin, 2001, p. 1574); and A deterioration in operating performance at the acquired firm (Very et al., 1997; Weber, 1996, cited in Larsson & Lubatkin, 2001, p. 1574). Cartwright and Cooper (1992, 1993a, 1993b, cited in Larsson & Lubatkin, 2001, 1574-1575) studied acculturation using data gathered from more than 150 formal interviews and 600 questionnaires, on four M&As (three in the UK and one cross-national). The studies found that pre-merger cultural attributes play the major role in determining post-merger acculturation. Drawing empirical generalizations from a sample of 50 M&A cases in several countries, Larsson and Lubatkin (2001) studied Cartwright and Cooper’s studies on acculturation and the psychological impact on individual employees in M&As, by examining alternative explanations to acculturation outcomes using organizational, strategic and national factors. All four of Cartwright and Cooper’s cases represent horizontal combinations and only one involved a non-UK firm. Cross-national mergers bring together two firms not only with different organizational cultures, but also with organizational cultures that are nested in different national cultures (Very et al., 1997; Weber et al., 1996, cited in Larsson & Lubatkin, 2001, p. 1574). The researchers found that that achieving acculturation depends mainly upon how the buying firm manages the informal integration process (i.e. its reliance on ‘social controls,’ or the amount of coordination and socialization efforts expended by the buying firm). Social controls also seem to also have an indirect and positive influence on acculturation, by acting in concert with formal integrative efforts. (Larsson & Lubatkin, 2001, p. 1574) Boeing’s acquisition of McDonell Douglas is an example of premerging and postmerging failures. Boeing, a commercial aircraft manufacturer, acquired McDonnell Douglas, a producer of fighter aircraft. This was after Boeing acquired Rockwell’s defense operations. Chairman John Mc Donnell proclaimed that 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, 2000, p. 177). The merger was grounded from the start. There should have been more time, energy, and effort to integrate the operations of Rockwell and McDonnell Douglas. Boeing’s operations and production of commercial aircraft were already antiquated; they hadn’t introduced the latest technology already available at that time. (Grubb & Lamb, 2000, p. 177) b. Psychological Effect on Employees Mergers and acquisitions can have a profound effect on employees and their families, more specifically, the careers of those employees. They can lead to psychological stress, a sense of loss, psychosomatic difficulties, marital discord, or suicide (Buono & Bowditch, 2003, p. 3). Employees need to be informed and oriented. The firm has to use a strategy to attract a successful collaboration and use top talents in the company who are often so anxious to help in the process. Employees feel the uncertainty. Who is the acquirer and who is to be acquired? Combining forces have to deal with the psychological impact of mergers and acquisitions on people in the workplace. This includes the culture clashes that can emerge in organizations during the post-merger integration period, and the ways in which these problems can manifest themselves. Being acquired is debilitating to an organization. A hostile takeover can be a traumatic experience for the employees. Marks & Mirvis (1998, p. 84) interviewed employees of hostile takeovers who expressed feelings of being raped and described their buyer as an attacker or barbarian. Rank-and-file employees feel being lost at the prospect of mergers acquisitions, and downsizings. They sometimes don’t see them as opportunities but rather as a threat to their job security and career advancement. (Marks, 2003, p. x) Employees feel the stress (Marks & Mirvis, 1998, p. 92). The executive team commit themselves to a stressful, new job. For the people in the new formed combination, there is a new load of work, and employees become preoccupied with new things instead of the usual job. Grubb & Lamb (2000) call this the merger chaos. When two organizations combine, they better have a good preparation, and a good team to implement, for the merging can create disruption in the workplace, and their competitor can surely take advantage of the merging. When Compaq acquired Digital Equipment Corporation, Michael Dell knew he was ahead of the competition because of the opportunity provided by the disruption. Compaq is Dell Computer’s competitor in the computer industry. Dell’s famous statement caught the headlines: “I gotta believe these guys handed us a huge gift” (Grubb & Lamb, 2000, p. 1). Dell’s stocks would soon climb ahead of Compaq. Employees are often the most valuable assets in the postmerger firm and are key in accomplishing the merger’s ultimate goal of value creation (Hitt et al., 2001). Employees feel an uncertain future. Rumors and innuendos abound, two distinct people question each others’ integrity and intentions. People from the low- and middle-rank become insecure and feel they’ve lost control of the situation and their fate. (Marks & Mirvis 1998, p. 93) c. What should be done to solve the problem? Successful acquirers should know what they are looking for. In their premerger assessment, they should include the strategic and financial criteria, as well as assessments of the human and cultural elements. They should determine many aspects including why the company is selling or why the managers of the other side are anxious to sell. 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. Marks & Mirvis (1998, p. 57) put more emphasis on the right combination and the responsibility of the CEO, the corporate and division management, and various advisors to translate the objectives into specific strategic and investment criteria. Further weight is given on company earnings, discounted cash flow, annual return on investment. Then there is the impact of a combination on profitability, the combined organization’s earning per share, and future funding requirements. In other words, there should be clear boundaries on desired ratios of expense to return and the extent of risk and exposure that will be tolerated. Employee creativity can be tapped in the process. Employee creativity refers to the generation of new and potentially useful ideas concerning products, services, or processes by individual employees at work (Amabile, 1988; Oldham & Cummings, 1996; Shalley, 1991; Woodman, Sawyer, & Grifin, 1993, cited in Zhou et al., 2008, p. 398). Organizations should nurture employee creativity during postmerger integration. Creativity is a key contributor to organizations’ innovation, growth, and competitiveness (Zhou et al, p. 398). The success of the Renault-Nissan Alliance has been, in the words of Carlos Ghosn, President and CEO of Nissan Motor Co., Ltd, due to “partnership and trust rather than power and domination” (Ghosn and Pierre, 2005, p. xvi). The successful M&A activity of Renault-Nissan Alliance kept the company’s identity and the self-esteem of their people. They respect and learn from one another. The multi-cultural alliance is founded on bridging cultures. The partners have a sense of how they work together during the precombination period and getting the key elements for the right mind-set. Marks & Mirvis (1998, p. 86) explain these key elements: 1. Trust – Trust should be innate in the relationship; this has to be present or it may have to grow as the relationship develops from the time of precombination planning. Trust cannot be a precondition in a relationship, but it has to be present between the partners or the partnership cannot proceed. 2. Compatibility – Partners should have that bond to form between them so that issues and conflicts can be resolved. The spirit of partnership has to develop in order to propel collaboration and eagerness to work together. 3. Shared Purpose – A sense of purpose and an agreeable direction should be shared and be the main focus in a collaboration. 4. Cooperative spirit – Partners should work in a cooperative spirit and erase all thoughts of competition; they should work instead for the success of the collaboration. An example is the merging of company GlaxoSmithKline (GSK) and Beecham which is one of those with the key elements of the right mind-set. CEO Jean-Pierre Garnier commented that their new thrust was for the people behaving as GSK people and not Glaxo or SmithKline people. They were 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 their vision and guiding principles were” (Ghosn & Garnier, 2003, pp. xvii-xviii). The success of the executive teams (or any team or committee formed in the course of the negotiations) depends very much on people. People work in these teams and they have to be those who know the two companies. But what good do merger and acquisition bring? The question perhaps is how the organizations are prepared operationally and psychologically. d. A Model Alliance An alliance or joint venture provides something that even the friendliest of acquisitions never can achieve: the opportunity to test the compatibility and working style of the partners (Marks & Mirvis, 1998, p. 85). The partners can work together or get a sense of how they work during the precombination period. During the precombination period of GlaxoSmithKline and Beecham, the two executive teams worked together and succeeded in finding the right formula for the two cultures to merge. The executive teams should be able to compare the two companies, and answer the question: What are the differences between the two companies in organizational structure and business strategy? Are they centralized or decentralized in decision making? Are both managements flexible and committed to overcoming potential conflict? How compatible are their core values and philosophies? Financial planning is one of the most important aspects of the collaboration. This is to evaluate and construct a detailed plan that will envelope the strategic/tactical plan, compare the plan with the alternative options, and ensure that the collaboration is financially and commercially viable. Moreover, apart from the financial planning, we also have to consider four broad yet fundamental factors in choosing an appropriate partner which concern the cultural, strategic, organizational, and financial traits of the partners. The successful configuration of these factors requires not only an appropriate alignment of an international joint venture’s organizational capabilities to the external industry or market and its strategic goals, but also a proper match between one partner’s competitive advantages with the other’s distinctive operational competencies. These operational competencies reflect on the firms’ operation-related attributes such as market share, industrial experience, and relationship with the local government. These can constitute for the venture’s success in exploring the new market opportunities and exploiting product potentials in the new environment. There is a need for involvement from relevant stakeholders and clear articulation of a win-win formula or outcome. Some other questions will have to be asked to give focus on the project. How can a common and accepted agreement be reached for defining and implementing these efforts among all parties involved? What are the strategies that can achieve these outcomes and keep them in focus throughout the implementation of the collaboration? Business strategies and financial issues are constantly critical in successful mergers and acquisitions, although these should not be over-emphasized – they can also lead to failure (Kongpichayanond, 2009, p. 376). Failure occurs when organizations overlook the importance of their human resources (Grotenhuis & Weggeman, 2002; McIntyre, 2004; Mitleton-Kelly, 2006, cited in Kongpichayanond, p. 376). As we’ve noted, corporations will continue to merge, CEOs always like something big. 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&A is carefully planned and handled by responsible and expert teams. As cited in the literature, some of the corporations are already experts in the field, and experience can truly teach them how to be more careful and successful. Experience can teach the lesson that even if size does matter, if may not be the ultimate thing. The teams should learn to study the statistics, of the great percentage of failure with reasons that are apparent and obvious. The present economic meltdown can exacerbate the situation. But despite the high failure rate, joint ventures still ring a bell on corporations. This is because organizations draw some benefits in joint ventures: it can exacerbate competition, stabilize profit levels, and can lead to integration. What can be drawn from all the negative results of mergers and acquisitions is that there should be the right preparation. The contending partners should work hand in hand for the right mind-set. There should be an appropriate psychological preparation “to ready people to join forces by sensitizing them to the dynamics as the combination is negotiated and a deal is made” (Marks & Mirvis, 1998, p. 87). This can be done by having the employees sit together to find the right mind-set, or probably do it in a seminar and have a dialogue among the employees and managers. During the seminar, the employees “hear about combination mind-sets, express their hopes and concerns in going forward, and learn tactics for coping with their own mind-set and that of their counterparts” (Marks & Mirvis, p. 87). There are many points that can be dealt with in finding the right mind-set. The question of integration may not be too difficult; cultural fit may not be easily assessed. There should be a working relationship between the two groups of managers and employees at the joint venture, each nominated by and thus representing a different parent. This is also critical to the venture’s operation, creating significant implications for interpartner trust as well as the venture’s performance. The teams working on the precombination and postcombination phases should acquire or enhance their knowledge management. This is a process that helps organizations to meet their needs in handling knowledge to predict, control, and make decisions (Kongpichayanond, 2009, p. 376). First, what is knowledge? Knowledge is considered a significant resource for sustainable competitive advantage (Bock & Kim, 2002; Davenport & Prusak, 1998; Drucker, 1993; Quinn & Rivoli, 1991; Toffler, 1990, cited in Kongpichayanond, 2009, p. 376). Knowledge is a meaningful resource in the knowledge economy (Drucker, 1993, 1998, cited in Kongpichayanond, 2009, p. 376). Knowledge is surrounding truth and beliefs, perceptions and ideas, decisions and expectations, and methodologies and know-how (Wiig, 2004, cited in Kongpichayanond, p. 376); and it is about information and data that facilitate performance, problem solving, decision making, and learning (Beckman, 1999, cited in Kongpichayanond, p. 376). The teams working on combinations should have all those mentioned in the above paragraph. Operational and psychological preparations are two of the most needed prerequisites for mergers and acquisitions. There’s always time for preparation, combining forces don’t need to rush. In the preparation process, the two groups should sit together and work for finding the right mind-set and reach an agreement. This can only be done through a cooperative endeavor where the employees and managers work together with the thinking that they are going to be one and single group. This effort is only a preparation; they have to find a solution. In the course of the preparation, problems may occur, i.e., they find they may not be compatible, or the cultural fit had failed. The two groups should know when to accept failure. References Buono, A. F. & Bowditch, J. L. (2003). The Human Side of Mergers and Acquisitions: Managing Collisions Between People, Cultures, and Organizations. Washington D.C.: Beard Books. Cray, D. & Mallory, G. (1998). Making Sense of Managing Culture. Surrey: International Thomson Business Press. Ghosn, C. & Garnier, J. (2005). Introductory Comments: Managing Culture and Human Resources in Mergers and Acquisitions: The CEO’s Point of View. In G. Stahl and M. Mendenhall (Eds.), Mergers and Acquisitions. Stanford University Press. Grubb, T. M. & Lamb, R. B. (2000). Capitalize on Merger Chaos. New York: The Free Press. Kongpichayanond, P. (2009). Knowledge management for sustained competitive advantage in mergers and acquisitions. Advances in Developing Human Resources 2009; 11; 375. DOI: 10.1177/1523422309339725. Larsson, R. & Lubatkin, M., (2001). Achieving acculturation in mergers and acquisitions: An international case survey. Human Relations 2001; 54; 1573. DOI: 10.1177/00187267015412002. Marks, L. M. & Mirvis, P. (1998). Joining Forces: Making one plus one equal three in mergers, acquisitions, and alliances. New York: Jossey-Bass Inc. ISBN 978-0-7879-0350-3. Marks, M. L. (2003). Charging back up the hill: workplace recovery after mergers, acquisitions, and downsizings. San Francisco, CA: Jossey-Bass, A Wiley Imprint. Temple, P. & Peck, S. (2002). Mergers and Acquisitions: Critical Perspectives on Business and Management. Taylor & Francis. Yan, A. & Luo, Y. (2001). International Joint Ventures: Theory and Practice. New York: M. E. Sharpe, Inc. Zangwill, W., (1995). “Models for Successful Mergers,” The Wall Street Journal, December 18, 1995, p. A14. Zhou, J., et al. (2008). Employee self-perceived creativity after mergers and acquisitions: interactive effects of threat-opportunity perception, access to resources, and support for creativity. The Journal of Applied Behavioral Science, Vol. 44 (4), December 2008, 397-421. DOI: 10.1177/0021886308328010. Read More