Strategic Leadership Requirements for Mergers and Acquisitions - Literature review Example

Title: Strategic Leadership Requirements for Mergers and Acquisitions Student’s Name: Institutional Affiliation: Date Assignment is due: Abstract The paper has been segmented into four sections. The first part looks at the strategic leadership requirements for mergers and acquisitions. The second part is devoted to critically examining literature that has been written for strategic leadership requirements for mergers and acquisitions. The third section links academic research to the corporate world. The last part is about the conclusion and recommendations. Strategic leadership requirements for mergers and acquisitions Mergers and acquisitions have continued to be a leading growth tactic for organizations world wide. Acquisitions and mergers are due in part because of pressure from important stakeholders in their pursuit of increased investor value. It is, therefore, imperative to identify the key strategic leadership requirements for mergers and acquisitions. This is because the identification of these requirements will assist CEOs and company boards to achieve success in M&A. In the past, most acquisitions and mergers have not been well planed (Hayward 2002, p.26). This has resulted in the acquiring companies suffering for the M&A. In 75% of the mergers that have failed, it has been found out that they did not follow the strategic leadership requirements for mergers and acquisitions (Hurtt, Kreuze & Langsam 2000, p.18). Most of those that have failed have had a poor strategic rationale. More often than not, they had a poor understanding of the strategic acquisition levers. Other companies overpaid for the acquisition based on overestimated value. For other companies that have merged, the failure came from a void in strategic leadership, and also from lack of strategic communications (Hayward 2002, p.26). The first requirement for strategic leadership in acquisitions and mergers is active investing. Private- equity firms and leveraged buyout corporations must engage in active investing in order to ensure that mergers and acquisitions turn out profitably. This is the acquisition of a company and managing it more profitably, and efficiently as a stand- alone entity. This ensures that the acquired firm is improved through financial engineering, management changes, incentive compensation and stripping out costs. Active investing is a key strategic leadership requirement for acquisitions and mergers because it adds value (Schneider 2003, p.33). Another requirement for strategic leadership acquisitions and mergers is growing scale. This is because most mergers and acquisitions aim to grow scale. This is far from just growing large. In strategic leadership, for acquisitions and mergers, growing scale requires gaining scale in elements of business. It also requires using these elements to increase the competitiveness overall. For example, if the business has to acquire customers, the channel scale will have to be pursed. The correct business definition provides the scale based initiatives. This is in addition to getting the correct, market definition. This is not an easy task as the industry’s’ definition of scale can change dramatically (Rovit & Lemire 2003, p.17). Building adjacencies is another common impetus for acquisitions and mergers in strategic leadership. For most businesses to grow after a merger after an acquisition, the business must expand into adjacent or highly related businesses. Building adjacencies may mean expanding the business into new locations. It could also mean the expansion into new products. Still it could be the expansion into higher-growth markets. For other business entities, building adjacencies means ‘getting new customers’. The most important thing is that the business that the company intends to expand into must be related to the existing company. Expanding into related businesses drives the company into high profitability. It also sustains growth and profits. It increases the range of financial services a company can enjoy. It also enjoys the combination of customers from the merger, and the previous company. Another crucial requirement for strategic leadership in acquisitions and mergers is broadening the scope. This is the broadening of the scope of products, or technologies that can push forward that company. The smart, strategic leader serially and systematically buys the technology, and expertise that will substitute a traditional business. The new expertise could also be to accelerate research and development for acquired technology. The growth strategies of most companies are the ongoing investment to look for new technology. The said growth strategy also includes the continual scanning for new business concepts. These include companies like GE capital, Cisco and Intel. The said companies are involved in financial services, computer hardware and the manufacture of computer chips. For most companies that are involved in acquisitions and mergers, organic development is extremely slow. Organic development is unnecessarily expensive and dilutes their focus on their existing enterprises. Another requirement in strategic leadership for acquisitions and mergers is the redefinition of business. This is because merges and acquisition redefine business. This is when they are deployed strategically. Thus, the redefinition of business is an important requirement for mergers and acquisitions. This is especially so when the capabilities of a company, and also when the resources of a company grow stale. This could be due to major technological changes. In the scenario depicted, organizations cannot quickly revive their technology. They cannot also refresh their knowledge through making incremental adjustments, and internal investments. Redefining industry is another key requirement in strategic leadership for acquisitions and mergers. This is because in some cases, a daring strategic acquirement can redefine a whole industry. This can change boundaries of competition, and force rivals to reassess their business models. The requirements for strategic leadership in acquisitions and mergers are critical. It is important to note that they are not enough to guarantee success. They help to point out the right target, and may be set the boundaries for negotiations. The hard work of bringing two companies together remains. The leadership in place at the time of the merger should be careful to follow all the requirements that have been outlined in this paper. This way the emerging company can be able to survive the new market and challenges that come with acquisitions and mergers. Ignoring the requirements discussed is like driving blindly at night. It can only lead to a collision and possible loss (Yin 2003, p.76). Section Two Critical discussion of academic resources This part critically reviews literature on the effects of allying company strategy and mergers and acquisitions strategy. Strategic leadership has long been emphasized by organizations as an important tool leading to corporate accomplishment (Wick & wick 2001, p.16). In an investigation done by Harding and Rovit (2004), the import of aligning company strategy to the preparation for mergers and acquisitions was studied. They reviewed more than1700 mergers and acquisitions and interrogated 250 Chief Executive Officers. It was found that less than half of chief executive officers interviewed had a clear tactical justification for the M&A, or understood the contribution the contract would make to their organizations’ long-term fiscal prospects. This study also found that over half of those corporations with a clear rationale supporting their mergers & acquisitions action came to a post-M&A conclusion that their validation had been wrong. A number of writers have talked about the different growth tactics available to the chief executive officers (Chanmugan et al 2005; Gulati et al 2004; Lynch & Lind, 2002). Lynch and Lind (2002) describe M&As acquisitions as being one of the essential procedures for organizational expansion, whilst Hurtt, Kreuze and Langsam (2000) go further and propose growth is the key motive for M&As. Perry and Herd (2004) stress the significant function of tactical preparation when using M&As to grow a corporation. They imply that in the 1990s companies shifted the focal point for undertaking mergers and acquisitions from an expenditure saving viewpoint to using mergers and acquisitions as a strategic medium for company growth, which the authors considered as an intrinsically more complex challenge(Gopinath 2003, p.24). Harari (1997) catalogs numerous reasons specified by company managements to rationalize an acquisition, or a merger. The reasons are to, get economies of scale, and obtain synergies cost savings, increased products and validation of supply and distribution channels. Selden and Colvin (2003) draw attention to the way corporations focus on the probable return on principal investment. Selden and Colvin (2003) also propose that the most widespread reason corporations acquire one another is to obtain clients. Selden & Colvin (2003) highlight the demands on CEOs to use their surplus money, and raise income by amalgamations, or purchase even if that may not be a suitable tactic for the corporation. The specific requirements for strategic mergers and acquisitions in the contemporary setting have been identified by Gadiesh and Ormision (2002).They post that the first major requirement is to have a strong strategic rationale. This is because Gadiesh and Ormision post that most failures that have besieged the most pitiable M&As have been caused by poor tactical validation. This has usually been the doing of company boards getting into a merger without getting to know the most important thing to look for in the merger. Gadiesh and Ormision (2002) post that the strategic leadership in a company will look for the customers of the company it wants to acquire. Poor strategic leadership looks at the profits little knowing that profits are the result of getting steady customers. This requirement of getting a visionary, strategic rationale ensures that the company will be guided by the right justification. Gadiesh and Ormision (2002) post that if a company does not mess its acquisition rationale, it will flourish in the merger. This is because it will have made the correct resolution at the correct point in time. Such a company is difficult to be cheated by impressive financial records. This is because financial records tell half the story in a merger justification (Sinickas 2004, p.12). Lynch and Lind (2002) argue that another requirement of strategic, corporate merger and acquisition is ensuring that there is a matching of the cultures of the two organizations that intend to merge. A mismatch is a sure killer of such a merger. This can be understood in the light of the postulation of Gadiesh and Ormision (2002) that corporations should buy customers in mergers and not profits. This means that the company that makes the mistake of mismatching the cultures has already lost the customers. A mismatch of cultures results in culture clashes. To ensure that such a clash does not happen the acquiring company should identify, and make use of an efficient tool in the configuration of a corporation’s tactical plan, and mergers and acquisitions. This is known as due diligence. Due diligence is meant to guard the corporation against merger failure. This is because mergers fail for reasons like culture clashes, slow post merger growth and lack of requisite risk management skills. Due diligence is the scrutiny of targeted companies for takeovers. It is a critical tool in strategic leadership because it ensures that misunderstandings are avoided at the earliest point possible. It also ensures that the company does not regret latter. Potential pitfalls are realized through due process. This tool can be effective in making sure that the company does not buy a shell that is going to drag the corporation into the doldrums. Effective due diligence is wholesome. It is the examination of the whole company not just focusing on the financial books and cash flow (Covin, Kolenko, Sightler & Tudor 1997, p.22). Perry and Herd (2004) posts that due diligence is remarkably important in the contemporary setting. This is because in the past mergers used to be done by referrals and acquisitions in the 1960s and 1970s.In the contemporary setup, due process is the tool that enables the process for mergers and acquisitions. This is because many companies targeted for acquisitions have many companies that want to propose to them. Thus, the process of even choosing the company to partner with is congested with many potential suitors. Even the candidates have to be sure that they get the right suitor. Otherwise, they might just throw a superb company to the wolves in the name of being acquired (Carey 2000, p.147). The available literature also posts that another requirement for strategic leadership in acquisitions and mergers is making sure that the acquiring company did not pay too much for the acquisition. This is because most mergers that failed had paid too much for the merger. A company gets to pay too much for merger if it does not do it research properly. This is especially so in this era when most companies want to buy those companies that look successful. When a company realizes that it has many potential suitors, it keeps increasing its price. Many companies, in a bid, to outdo each other, just keep hiking their asking price. In the end, they end up with a company in which they have paid too much. The recovery period becomes extended. During this time, the company has outlived its PLC.It is past the growth and maturity stages. It is mostly in the declining stage. This means that other competitors have cropped up that challenge the acquired company. The literature available also for this subject is wide and expansive. It spans from the 1980s when the subject became vogue among scholars. It is also during this period that most companies began to expand by acquiring, and merging other companies. One of the things that come out in examining the available literature is that most companies do not learn from experience. They will replicate similar errors that they did if they ever acquired another company. They also commit the cardinal sin of acquiring companies that are not related to their businesses. Section three Link between Academic research and organizational context Academic research acts as a lighthouse to guide the industry in the right direction. It warns the industry of potential pitfalls that await anyone who will not follow simple advice. One of the important things to note is that academic research points out of the factors that make most mergers fail to thrive despite a lot of input from the parties concerned. While still at this, it is useful to note that most mergers have failed to take off because the CEOs of the acquiring companies have a negative tendency of not learning from experience. Those that do learn from experience get to outperform the competition (Angwin 2001, p.36). Academic research is important because it helps the industry gurus to observe trends that have been established by earlier acquisitions and mergers. It gives company CEOs substance to work with in their assessment drive. A preview of the chances of succeeding, or failing, is given in the literature. This means that the industry has material to work with in the acquisition drive (Wick & wick 2001, p.16). It is also imperative to note that academic literature provides guidelines for guiding the corporations in this sensitive area of mergers, and acquisitions. For example, it is a fact that if a corporation purchases another corporation that is not in the same business, the probability of the merger failure is quite high. This is a trend that has been observed, and recorded in literature for the last 30 years. It is another observed trend that if a company acquires another at a remarkably high cost recovery of the monies spent in the acquisition is going to be difficult. Thus, the discerning company will use the guidelines that are availed in literature to judge its act. The company that wants to stay in business will thus use the gained wisdom to make its acquisition decision (Cartwright & Cooper 1990, p.70). The knowledge that is gained in academic research is useful the negotiation process for an amalgamation, or a purchase. This is because such knowledge arms the negotiator with important knowledge that if well applied, can prove to be quite useful in the negotiation process. This knowledge is important in making sure that company to be acquired not overpriced. This is because the paper has shown that one of the reasons that make most merges fail over a short period is buying a company at an exaggerated price. Price exaggeration is a result of not doing enough research during the acquisition period. It is also due to the ignorance of basing acquisitions on the financial books only. Academic research shows that successful mergers are those that even scrutinize the share market of the company they want to acquire. Academic research also posts that the most crucial thing to acquire in a merger is the customers of the targeted company. This is because it is remarkably difficult to penetrate a market. Existing customers make profits be gained easily (Albizzatti & Sias 2004, p.28). Conclusion and recommendations A company that wants to engage in the merging and acquisition business must do its research first. This is to make sure that it knows what it is getting into in the first place. It must not rely simply on experience even if the company it is acquiring is not its first takeover. This is because it has been established that most mergers fail because their top managers rely on experience during the acquisition process. They forget that each acquisition takes a life of its own. The rules of mergers and acquisitions continue to be written, and it is a fatal mistake to think that any merger will just be like a previous one (Balmer & Dinnie 1999, p.184). Thus, the first recommendation for this paper is that companies that intend to acquire other companies should not overemphasize on the financial books. A company could be doing well financially while it is headed for the doldrums. It could have outlived its product life cycle, and be in the decline stage. The company that wants to save its resources, and survive in the merger should focus on the requirements. These are the requirements that make a company float in the market. They are some of the requirements that have been covered in the first section of this paper (Guest, Cosh, Hughes & Conn 2004, p.S4). Due diligence is another tool that is recommended by this paper if mergers and acquisitions have to be successful. Due diligence is critical in screening the probable targets for mergers and acquisitions. Due diligence should not simply be used as a financial assessment tool. It should also be used as a detailed investigation tool that checks the viability of the potential merger and acquisition. Some of the chief issues that corporations should investigate include cultural alignment, strategic fit, people attributes and skills and the ability to meet financial responsibilities. The requirements of strategic leadership for the acquisition of companies and mergers are many and varied. The study has just highlighted some of them. Those that have been mentioned just make a small number of the overall reasons. The season of mergers is here with this generation. This means that it is the high time to increase research in this crucial area. This way, the subject will be well covered, and mergers are going to be done for the profitability they bring. While this is being done, it is also important to note that this field in strategic leadership is not lacking in literature like other subjects. It is, therefore, recommended that those involved in merges should explore this literature. This is because it is going to help them avoid many pitfalls. The CEOs should not assume anything. Let them explore literature. References Albizzatti, N and Sias, D 2004, New Tricks for the Old Deal Pro. Mergers and Acquisitions: The Dealmaker’s Journal, 39 (6): 28. Angwin, D. 2001, Mergers and Acquisitions across European Borders: National Perspectives on preacquisition Due Diligence and the Use of Professional Adviser Journal of World Business, 36 (1): 36. Balmer, J, M. T & Dinnie, K 1999, Corporate identity and corporate communications: the antidote to merger madness, Corporate Communications, 4 (4): 184. Carey, D. 2000, A CEO roundtable on making mergers succeeds. Harvard Business Review, 78 (3): 147. Cartwright, S. & Cooper, C 1990, The Impact of Mergers and Acquisitions on People at Work: Existing Research and Issues, British Journal of Management, 1 (2), 70. Chanmugan, R., Shill, W., Mann, D., Ficery, K. & Pursche, B 2005. The intelligent clean room: ensuring value capture in mergers and acquisitions, The Journal of Business Strategy, 26 (3):43-49. Covin, T., Kolenko, T., Sightler, K. and Tudor, K. 1997, Leadership style and post-merger satisfaction. The Journal of Management Development, 16 (1): 22. Cullinan, G. and Holland, T 2003, Strategic Due Diligence. USA: Bloomberg Press. .Gadiesh, O. & Ormiston, C 2002, Six rationales to guide merger success. Strategy and Leadership, 30 (4), 38-40. Gadiesh, O., Ormiston, C. & Rovit, S 2003. Achieving an M&A’s strategic goals at maximum speed for maximum value. Strategy and Leadership, 31 (3): 35-41. Gopinath, C 2003, When acquisitions go awry: Pitfalls in executing corporate strategy. The Journal of Business Strategy, 24 (5): 24. Gulati, R., Freeman, K. W., Nolan, G., Tyson, J., Lewis, K. D & Greifeld, R. 2004, How CEOs Manage Growth Agendas. Harvard Business Review, 82 (7/8): 124-132. Guest, P., Cosh, A., Hughes, A. and Conn, R. L 2004. Why Must All Good Things Come to an End? The Performance Of Multiple Acquirers. Academy of Management Proceedings, Academy of Management Best Conference Paper 2004. S4. Harari, O 1997. Curing the M&madness. Management Review, 86 (7): 53-56. Harding, D. & Rovit, S 2004. Building Deals on Bedrock, Harvard Business Review, 82 (9): 121-128. Hayward, M 2002, When Do Firms Learn From Their Acquisition Experience? Evidence From 1990-1995, Strategic Management Journal, 23 (1): 26. Hurtt, D. N, Kreuze. J, G. & Langsam, S. A 2000, Can this merger be saved? Journal of CorporateAccounting & Finance, 11 (2): 18. Jensen, A 1982. Seeking a Candidate for Merger or Acquisition. Business Horizons, 25 (3): 80-85 Lynch, J. G. & Lind, B 2002. Escaping merger and acquisition madness, Strategy and Leadership, 30 (2): 12 Perry, J. S. & Herd, T. J 2004. Mergers and acquisitions: Reducing M&A risk through improved due diligence, Strategy and Leadership, 32 (2): 12-19. Rovit, S. & Lemire, C 2003, Your Best M&A Strategy. Harvard Business Review, 81 (3): 17. Schneider, W 2003, Trouble at the Top: A Sign of Deal Disorder. Mergers & Acquisitions: The Dealmaker’s Journal, 38 (4): 33. Selden, L. & Colvin, G. 2003. M&A Needn’t Be A Loser’s Game. Harvard Business Review, 81 (6): 70-79. Sinickas, A, 2004, How To Do Due Diligence Research. Strategic Communication Management, 8 (4): 12. Stan wick, P. A. & Stan wick, S. D 2001. Designing Your International M&A Strategy. Journal of Corporate Accounting & Finance, 12 (6): 16. Yin, R 2003, Application of case study research, 2nd edition. California, USA: Sage Publications, 76 Read More