Performance Measurement in a Post Merger Integration Process - Essay Example

PERFORMANCE MEASUREMENT IN A POST MERGER INTEGRATION PROCESS Introduction In the recent past there have been increased trend toward formation of mergers as companies strive to position themselves in the changing world. There has been a general movement towards merging of small companies to form a lager company to increase their strength in the market and consolidate their market well. Faced with the threat of entry of multinational as previously closed markets become open, most small companies have found out that a merger could be the only way out of possible loss of market. A merger works like a form of integration of the firms to form one firm which is mainly in the interest of enhancing the performance of the two firms. The objective of any merger is to increase the value of the enterprise which means the there is always an objective that helps the company to come up with such a strategy to merger with another company. This is mostly seen as a long term strategy culminating from inside research in the market as there is not firm which would like to lose its identity in the market as a result of the merger. (ndrade 2001, p. 106; Ronald and Suzanne 2000, p. 5) In the recent past, there have been increasing interest on the issue of mergers. Many people have tried to look at the effect of those mergers in the face of looking who are the real winners and who are the real losers of merger. There have been many studies which have been looking closely into the issue of outcome of the mergers and acquisitions. The outcome of these two processes has been evaluated on many grounds from economic, communication, and other performance standards. (Caves 1999, p. 4; Lipin 2000, p.4) Once we realize that the objective of any merger is to increase the value of the enterprise in the market in order to create a formidable force the can compete effectively with others in the market, it will be easy for us to analyse then how does a merger affect the operation of each firms after they merge. This paper will concentrate on assessing the post merger effects on trust building performance and communication in the new enterprise. It will review various literature and findings that have come from many researches. (Ghosh 2001, p. 13) Outcome of mergers Many studies that have conducted research on mergers and acquisition have basically centred on some of the interesting characteristics of the mergers. They have been able to categorize the effect of merge on three broad classes. The first class consist of measureing performance after a merger based on share price. The second one has categories it on profitability while the class takes in many studied which have used other effect of merger success. (Paul 2002, p. 49) As we mentioned earlier the aim of any merger is to ensure that there is success of a business. This success should not only be measured in term of finical success but also in the degree of integration the two firms. In this regard cultural integration is one of the most important aspects that help the merger to succeed. Whether a merger can be considered a success based on the financial implication depends on many factors including the benchmark that is used to evaluate the merger. Many studies have concentrated on the share price of the firm pre and post merger as a measure of success in themes. This is often based on the confidence the investors will have on the merger. In this regard, the revenue of the firm is used as bench mark for evaluating the success of the firm since the dynamic trend in the share price of a firm will depend on the revenue collection of the firm. (Sitkin 1996, p. 17; Kaplan 2000, p. 243) Based on the financial performance of the mergers, studies that have been carried out shows that 82% of all mergers evaluated have shown success in the share price and economic performance. However it has also been shown that more that 50% of all mergers do not meet the expectations of the investors with majority of them failing to attain the objectives of the new merger. Once a merger is planned, there is usually a systematic way to integrate the overall strategy of the two firms. In this regard, there is a move towards integrating the vision and objective of the merging firms which is important for ownership of the new merger. However there have been conflicting results as far as the post merger economic and share price of the firm is concerned. For example as study by KPMG in 2001 showed that there was 82% relative successful merger as compared t another study by Business week and Mercer in 2002 which showed that 50% of the firms in a merger reduce their overall value with only 27% of the merger increasing the value. (Mercer consulting group 2001, p2) Therefore as we have said evaluating the economic performance of a firm postmeger will be based on the bench mark that will be used by the firm which is conducting the study. All the cases that we have evaluated above used the value of shares of a firm in evaluation of the success of the merger. In this case they were using the increase or decrease in value of share in the market which is a good indicator of the financial position of the firm. (Grawal 2000, p. 23; Alexandra1998, p. 62) The outcome of any merger will depend on the way it is going to be managed. Management of a merger will involve strategic ways in which the operations of the two firms are closely integrated as one. In this regard it will involve merging the management of the two firms which are entering in the merger. Let us look at trust building measures and communication measure management in the new merger. (Joseph 2001, p. 8) Trust building measure and communication measure after a merger One of the key components of the success of any merger is planning in advance for the merger. In this regard there is need to carry out extensive market research which will provide the base for the formation of the merger. Many of the firms which have successfully carried out mergers have emphasized on the need to have a strategic plan that will act as guideline for the management of the new merger and which also provides ways for evaluating the performance of the merger. Many of the successful mergers are those which have focused on achieving their initial plan as had been laid down in their strategic plan but with variations to suit the changing environment. Merger that retain the main focus of both firms have been shown to be successful. It has also been shown that the size of the firms in the merger is also very important in determining the success of the firm. In his regard, merger which is of equal-sized firms works much better than merger which involves one large firm and a small one. (Robert 2001, p. 91) For a merger to get success there are crucial success factors. First there is a clear vision and strategy as we have discussed above. There must be a clear vision by the participating firms which shows the direction in which they are headed to before they enter into a merger. This has been shown as an important aspect of trusting building between the firms in the sense that it helps the firm to lay out similar vision for their development. The firms must be able to determine a definite responsibility of leadership. (Weisbach and Kaplan 1992, p. 100) In this sense there must be a level of trust between the management of the two firms in the sense that they have to decide who among the merger of the firm will be at helm of management of the firm. The merger must be able to assess do exhaust all the synergies realistically. In this sense the must be able to consider all the dynamics of the firms in the way they are going to integrate their performance. The firms must be able to limit the risks that they may be facing. In this sense there must be an integrated way in which the firms will minimize their risks. One of the issues that face the difficulty of implementing a mere is there cultural difference between the firms. The difference between the culture of the firms can be a source of misunderstand and hence the start of collapse of the merger. The other factor that is very important for the success of a merger is the way in which the firms communicate. Efficient communication is very important in enabling the merger to grow as it determines the communication and understanding factors which are important in the management of the firms. (Mueller 1985, p. 211) But one of the most important factor in the success of the merger has been shown to the the way firms build trust with each other despite the fact that one firms may be bigger and therefore try to boss over the other. In this sense it has been found out that equal sized firms easily create a trusting atmosphere within the merger and therefore make it easy for the merger to work. Mergers cannot take place if there is no trust building between the firms which are involved in the deal. It means that for firms to enter in merger, they must have evaluated their stand and their perception for the other firms. But there are management issues that change with time once the merger takes place. One way in which firms can build trust in their operations through their culture. In many merger there has been little attention that have been given to the culture of the firm which at the end result in mistrust in the firms. Culture has been rated high in many studied as one of the factor that determine the custom of a post merger assessment. It has been rated important in integration of the operation of the firm. In this sense, there is need to bring together some aspect of the culture in the firm like customer orientation, management polices, and others which are all important in the management of the firm. There has been a difficult in the way merger integrate their cultures and the general trend has been described as transferring the culture of the firm to the other firm instead of coming up with a strategic way that will help both firms to integrate. It has been shown that 78% of the firms do not rate integration of their cultures as one of their most important factor that can assist them to merger their operation. As result this resulted to dominance of the firms by the culture of one organisation which had the overall effect of creating a misunderstanding and lack of trust between the firms. (Donald 2000, p. 23) Lack of culture integration has been explained on many fronts. It has been shown that culture is always taken as a source of failure and it is not given significance as firms plan their mergers in advance. Therefore it is not considered as one of the most important factors that need to be cemented in the operation of the firm. The aspect of cultural dominance is a source of suspicion and a posse's cause of a fall out in the merger process. Although the aspect of compatibility of culture of the merging firms seems to imply affinity, similarity in cultures may not be conditions for a success in the firm. What is imprint is the way the firms integrate their culture of that there is no one culture that emerges as dominant to the other. The post merger management issue can be contributed greatly to building of trust between the merging firms. This has been to be more influential is financial matters in the way the new merger. Stemming from the issues of how the new firm is to be run, there is a function of mistrust in case one of the parties feels that it was given a raw deal in the new merger. In this regard, this has been shown to be one of the causes of collapse of a merger as one party suspect financial mismanagement of the firm. The redeployment of resources the new merger must be carried out in an open manner such that all the parties are given a hand to play in the new management. Communication measures The sooner the sealed merger takes place, the better the chance that it will have in succeeding. Therefore one of the most important features of a successful merger is the way in which the firms integrate all its management and takes off. At the initial phases the firm is faced by a difficulty of deciding who among the teams will take on the managers of the firm. But a clean team that understands the operation of the firm is one of the most important aspects that can help a merger to take off. One of the most important steps that the new merger needs to take into consideration is communicating to all the concerned parties of the roles that they are supposed to play in the organisation. This also involve communicating to the staff on the formation of the new merger and there position in the merger. This is the starting of the most important aspect of the success or failure of the new merger. (George 1999, p. 54) Once the merger comes up with a well formulated communication process that will inform all the concerned parties of the whole process, it will be easily for the merger to take off. But the biggest challenge lies ahead in the way the merger will manage the communication process in the organisation. In this regard communication is one of the most important measures that are used to help the organisation in building trust between the merged firms. There is a lot of attention that is paid top the communication programs in the new merger once it is formed as it is an important factor in the configuration of the way the new merger will be managed. (Spence 2000, p. 94) Communication acts as the means of reducing barrier between the merging firms who have now become partners in the new corporation. The important factor here is that there must be an effective means of communication that will be used to communication between the management of the two firms and between the management of the merger and the employees. Studies have shown that only 33 percent of the internal application in the merger is direction meant to create proximity to the employee of merger while it also showed that only one third of publications in merger carried the identity of the firm especially which it comes to communicating the new vision and mission of the new merger. It this regard the most neglected areas are corporate objectives, corporate principles and guidelines, programs that target individual persons, training and development programs, corporate problems, development of the new merger, and other which are all important in creating a well informed employee who understand the operation of the firms. (Weston 1999, p. 4) There are a lot of studies which gives empirical evidence that suggest the important of giving the employees all the information that they need which is one factor of a successful merger management. It has been shown that there are a lot of discontents and other negative reactions to the employees once they are given insufficient information which apparently affects the operation of the firm. Lack of enough information on this side of employee have been shown to be a great cause of stress and anxiety same as it applies to the shareholders as they are not aware of the future of their firms. Employees usually tend to try and gather information about the performance of the firms from other channels especially in regard to the future of the merger which depends on its growth path. This is usual seen as an unproductive behaviour as it makes the employees neglect their work and spend most of their time conversing about the performance and position of the merger. (Zweig 1995, p. 43) Therefore literature have shown that there is need to provide the employees and all the staff in the merging firms with all the information that they need in order to reduce the level of anxiety on the position of firm. Again this is not just a way of effective merger planning but it is also a factor in building of confidence in the employees. Provision of quality information to both the employees and to the shareholders should not happen at the phase of preparing for the merger but it should also happen at the implementation phase. (Vishny 2001, 82) What managers should realize is that the future of organisation depends on perception for the shareholder and the employees on the viability of the firm. As such there must be a systematic way in which the flow of information in the merger is managed. The management should ensure that only the important information flows out of the firm. The negative effect of rumour can have great consequence the success of the new merger. Managing the flow of information is the merger should be reinforce with a working mechanism that ensure that there is a systemic way to keep this information confidential until it is to be realised to the concerned party. Infiltration or leakage of information in the organisation can have negative effects on the management of the information in the organisation and can lead to passage of the wrong information. The communication channels developed in the new merger should ensure that only the required information is sent to the concentrated parties especially when it comes to information the shareholders on the performance of the firm. (Susanne 2002, p. 71) In most cases, there is a wait and see approach that is taken by many investor especially after their firms merges. In case they don't have access to the right channels of information, the will depend on the information that is coming from the workers insider the firm. Incase the workers are also not given the correct information, and then they are likely to spread rumours which may have a damaging effect on the operation of the firm. Therefore it is very important for the firms to come up with a proper information management scheme that will ensure that all stakeholder in the against will access the correct information and at the needed time. This is a part of corporate governance and one of the responsibilities to the management that ought not to be neglected. (Mark1997, p. 21) Conclusion Mergers have become one of the most important way that have helped companies overcome the challenges they are facing in the market and the economic globalisation takes place and their markets become more open to international competition. As such many small firms have resulted to merging in offer to have strength it the market or they have been acquired by the larger firms in order to consolidate their market. As such the interest has shifted on elevation of the performance of these firms after they merge. One of the issues that have attracted scholars has been performance measurement based on trust building measures and communication measure. From our analysis it come out clear that mergers should integrate their cultures and enhance free flow of the correct information not only in the management but also to the employees and the shareholder in order to build trust in the new merger. 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