the fundamentals of strategic logic and integration for merger and acquisition projects
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Fundamentals of Strategic Integration for Merger and Acquisition”.
PREPARED BY
SHASHANK MITTAL
ROLL NO. 581117084
UNDER THE GUIDANCE OF
Dr. Sanjna Jain
IN PARTIAL FULFILLMENT OF THE REQUIREMENTFOR THE AWARD OF
DEGREE OF
MBA (FINANCE)NIMACT INSTITUTE
(2011 – 2013)L.C. CODE:-01802
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
ABSTRACT
‘Mergers and Acquisitions’ (M&As) are strategically planned
transactions between two or more companies in which the target and
the acquiring firm jointly create a new entity to gain competitive
advantage in the market place. In other words, mergers and
acquisitions allow the purchase of assets that would be difficult, risky,
time-consuming or even impossible to obtain by other alternative
business collaborations or organic growth. ‘Merger and acquisition’, or
‘M&A’ is a field of study in which the definitions often vary in different
publications. The traditional framework how to distinguish between
‘mergers’ and ‘acquisitions’ is the perspective on the legal
independence of the business entities
There is lacking evidence on the correlation between the relative size
of the merging firms and long-term performance. Some researchers
have suggested that small mergers (mergers where the two firms are
very different in size) tend to produce higher performance than larger
mergers (mergers where the two firms are similar in size). They
attribute these performance differences to the ease of combining
operations. With smaller mergers the integration of the new entity is
more easily controlled and the disruption to the organization as a
whole is minimized. With a large merger, the integration problems are
multiplied and disruption can occur throughout the whole organization.
On the other hand, those researchers neglect the fact that a small
merger often provides also less significant gains to the large
organization.
A comprehensive introduction for practitioners to assess merger and
acquisition activity from an acquiring firm perspective – motives,
synergy realization, integration planning.
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
ACKNOWLEDGEMENT
IT IS THE MATTER OF GREAT PLEASURE AND PRIVILEGE TO BE ABLE
TO PRESENT THIS PROJECT REPORT ON FUNDAMENTAL OF STRATEGIC
INTEGRATION FOR MERGER AND ACQUISITION.
THE COMPILATION OF THE PROJECT IS A MILESTONE IN THE LIFE OF
THE MANAGEMENT STUDENT AND ITS EXECUTION IS INEVITABLE WITH THE
CO-OPERATION OF THE PROJECT GUIDE. I WISH TO RECORD A DEEP SENSE
OF RESPECT AND GRATITUDE TO MY PROJECT GUIDE, DR.. SANJNA JAIN FOR
HER ENCOURAGEMENT TO COURSE OF MY WORK. IT IS DUE TO THE
ENDURING EFFORT AND GUIDANCE OF MY GUIDE THAT ULTIMATELY MADE
IT SUCCESS.
I ALSO TAKE THIS OPPORTUNITY TO EXPRESS MY DEEP REGARDS AND
GRATITUDE AND WOULD LIKE TO THANK THE HEAD OF S.M.U. DEPARTMENT
WHO GAVE US GUIDANCE TO TAKE UP AND PURSUE THE PROJECT
I CANNOT JUST CONDONE THE VALUABLE OPPORTUNITY GIVE TO ME
BY THE SMU UNIVERSITY FOR COMPILING AND SUBMITTING THE PROJECT,
WHICH I FEEL IS AN OPPORTUNITY TO EXPRESS MY VIEWS ABOUT EXPORT
PROCEDURE AND DOCUMENTATION.
I ACKNOWLEDGE MY INDEBTNESS TO VARIOUS AUTHORS FOR
MAKING USE OF VALUABLE INFORMATION LIBERALLY.
IT IS MY PROUD PRIVILEGE TO EXPRESS MY DEEP SENSE OF
APPRECIATION AND GRATITUDE TO MY PARENTS AND FRIENDS FOR THEIR
SUPPORT AND CO-OPERATION IN THE COURSE OF THE PROJECT EITHER
DIRECTLY OR INDIRECTLY INVOLVED IN TIME WITH THEIR VALUABLE
CONTRIBUTION.
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Table of content
Abstract……………………………………………………………………………02
Acknowledgment…………………………………………………………….....03
1) Introduction.................................................................................07
1.1Motivation...................................................................................07
1.2 Objectives, perspective and limitations of this work....................08
1.2.1
Objectives ...................................................................................08
1.2.2
Perspective .................................................................................09
1.2.3Limitations...................................................................................09
1.3 Content description....................................................................09
2) Classification of mergers and
acquisitions..............................12
2.1 The merger ................................................................................13
2.2 The acquisition...........................................................................13
2.3 Classification according to companies’ relatedness ....................14
2.4 Other classifications...................................................................14
2.5 ‘Merger and acquisition’ as used throughout this work...............16
3) Post-M&A firm performance
studies........................................17
3.1 Motivation to consider performance studies ................................17
3.2 How is post-M&A firm performance measured? ..........................17
3.3 What is failure and success? ......................................................18
3.4 Factors with and without relationship to post-M&A performance.18
3.4.1 Positive or negative relationship to
performance .........................19
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
3.4.2 No significant relatedness to performance or conflicting
evidence21
3.5 M&A performance........................................................................23
3.6 Diversification .............................................................................24
3.7 Degree of integration ...................................................................26
3.8 Criticism on performance study methodology...............................26
4)Motives for merger and acquisition
activity..............................29
4.1 Exploitation (synergy motives) .....................................................30
4.1.1 What is
‘synergy’? .......................................................................30
4.1.2 Classification of
synergies ...........................................................31
4.1.3 Cost synergies
(‘rationalization’)...................................................32
4.1.4 Revenue
synergies........................................................................33
4.1.5 Synergies from
intangibles ..........................................................34
4.2 Exploration..................................................................................35
4.3 Preservation and survival.............................................................35
4.4 Managers’ self-interest and prestige ............................................37
4.5 Finance motives...........................................................................38
5) Post-M&A integration and
transformation................................40
5.1 What is an adequate level of integration? .....................................41
5.2 What are the difficulties and dangers during integration …..........41
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
5.2.1 Under- and
overintegration...........................................................42
5.2.2 Post-merger management of positive and negative
synergies......43
5.2.3 Speed of integration ....................................................................
43
5.2.4 Communication to internal and external
stakeholders ................44
5.2.5 Cultural fit and anticipation of culture dissonance......................45
6) National and organizational culture and culture
clashes .........46
6.1 What is culture in the M&A context? ...........................................46
6.2 Which forms of acculturation exist……………………………………...47
6.3 Are cultural stereotypes a real assist or just convenience? ..........47
6.4 Can culture be ‘measured’? .........................................................48
6.5 What is the result of perceived culture dissonance…………….......50
6.6 How can one understand culture dissonance……………………......51
6.7 What can be learned for practice to anticipate culture……………..52
6.7.1 Avoid insurmountable integration
problems................................52
6.7.2 be aware of potential cultural dissonance ..................................53
7) Success factors, reasons for failure and
risks...........................54
7.1 Financial overextension and price premium.................................54
7.2 Realization of synergies................................................................55
7.3 Negative synergies .......................................................................56
7.4 An example on the difficulties of synergy
assessment………..........57
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
7.5 Strategic logic ..............................................................................58
7.6 Interview studies .........................................................................60
8) Alternatives to mergers and
acquisitions.................................61
9) Reasoning of M&A activity in an early project
phase ..............65
9.1 The acquiring company’s strategy................................................65
9.2 M&A motives...............................................................................65
9.3 Strategic fit between target and acquiring firm ............................66
9.4 Sources of synergies and price premium......................................66
9.5 Integration, transformation and culture.......................................67
9.6 Costs and negative synergies ......................................................68
9.7 Competition’s reaction ................................................................68
9.8 Alternative business collaborations .............................................69
10) A case study : HP COMPAQ Merger deal……………………………
70
11)
Conclusions...........................................................................8
3
Literature ..............................................................................
.....87
1) Introduction
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
‘Mergers and Acquisitions’ (M&As) are strategically planned
transactions between two or more companies in which the target and
the acquiring firm jointly create a new entity to gain competitive
advantage in the market place. The motives and objectives for M&A
activity are various. Competitive advantage could arise from synergies
due to economies of scale, an increase in market share, better access
to a customer base, ownership of distribution channels and access to
knowledge and technology to mention just a few. In other words,
mergers and acquisitions allow the purchase of assets that would be
difficult, risky, time-consuming or even impossible to obtain by other
alternative business collaborations or organic growth.
While strategic logic for M&A projects seems to be straightforward,
however, most empirical studies reveal that a majority of M&A projects
fails to reach their objectives
“[…] mangers generally want a company that is fully staffed, with a
general manager and all functional heads and, since it takes three to
five years to develop a good operating team, they want assurance that
these key people will stay on the job.” (Paine)
1.1 Motivation
The present work is conceptualized around the set of questions raised
above. The work is motivated by the recent necessity of the author’s
employer to obtain a comprehensive introduction to the field of
mergers and acquisitions that is of practical relevance in the
employer’s current economic context.
The Strategic Business Unit (SBU) Mat Char (Materials
Characterization)
Of METTLER TOLEDO AG faces a worldwide consolidation phase in the
field of Thermal Analysis and neighboring analytical lab techniques.
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Competitors’ mergers and acquisitions and the limited organic growth
potential due to harsh competition make it necessary to consider M&A
as a feasible mechanism for growth and protection. However, beside
financial analysis a systematic assessment concept and the
corresponding knowledge required in a pre-M&A phase are largely
missing.
Considering the fact that an M&A deal can be one of the biggest
decisions a company or business unit ever makes, missing
fundamentals for a proper decision put a high risk to the acquiring
company. Many managers however do not have adequate time and
knowledge to carefully evaluate merger and acquisition projects. Such
time pressure increases the chance of rushing headless into
unqualified decisions of poorly planned M&As, leaving important areas
of uncertainty unresolved and resulting in the widely reported
disappointing outcomes.
1.2 Objectives, perspective and limitations of this
work
1.2.1 Objectives
Indeed, research on M&A consists of two distinct categories: the
empirical performance literature and the post-merger integration and
culture literature. While these two very extensive areas of research
dominate the whole M&A literature, they are highly specialized
focusing mostly on very distinct subjects. As a consequence they
provide little guidance for managers due to their very fragment-like
research questions.
Interestingly, there is even very little literature on strategic concerns of
mergers and acquisitions not to mention a comprehensive (but still
trustworthy) introduction for practitioners.
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
As a consequence, the overall objective of this work is to
Provide a comprehensive introduction to subjects being relevant
in an early stage of a merger and acquisition project (before due
diligence) to increase the likelihood of M&A success.
Allow an informed decision on strategic logic and integration
matters of merger and acquisition projects and to sensitize to the
profound interdependence of these to subjects.
Introduce the prerequisites for a systematic assessment and
more objective comparison of potential target firms.
Evaluate alternative business collaborations.
Be a guide for practitioners enabling them to cope with the many
difficulties attached to M&A projects and to build awareness of
common pitfalls.
1.2.2 Perspective
The addressed readers of this work are managers of acquiring firms
and consultants that need to evaluate, advice on, decide on and
conduct merger and acquisition projects.
1.2.3 Limitations
Although the following matters find their reflection in this work it is not
a guide on how to:
Conduct a due diligence
Define and review a company’s strategy
Perform a market or company analysis
1.3 Content description
The first step towards the objectives defined above is to present
various definitions and categorizations of mergers and acquisitions
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
emphasizing the multifaceted and complex nature of such
undertakings (refer to chapter 2).
On this basis, the most often reported findings of empirical post-M&A
firm performance studies are reviewed to gain insight into why certain
M&A projects fail and others succeed and to discover universally valid
performance-enhancing key success factors that do not depend on the
specific characteristics of an M&A project (refer to chapter 3).
From the results of these performance studies and the critical review
of their methodology, a broader set of motives and objectives for
mergers and acquisition activity emerges and is discussed in the light
of multiple motive M&As. In particular, an extensive overview on the
manifold classical strategic motives like synergy is presented and
illustrated with a few examples. While considering a number of motives
that receive far less attention also irrational and illegitimate motives
find their reflection (refer to chapter 4). Once this basic framework is
established, various integration and transformation concerns are
discussed like the adequate level of target firm integration, generic
scenarios and the parameters determining the level of integration. In
particular, it is illustrated how M&A projects can be compromised to
reach their objectives, if post merger management fails to realize
positive synergies and does not foresee negative synergies. Beside
strategic considerations of the integration and transformation period,
determining national and corporate cultural fit between target and
acquiring firm, results of cultural dissonance and means of anticipation
for culture clashes and are deduce d from a group of surveys (refer to
chapters 5 and 6).
From all these areas under discussion, success factors, reasons for
failure and risks of an M&A project are figured out (refer to chapter 7).
As an addition, feasible alternative business collaborations are
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
contrasted with mergers and acquisitions in terms of strategic motives
and objectives to be realized (refer to chapter 8).
As a summary, a guide to reason M&A activity in an early project phase
is developed.
Without credible answers to these basic questions, acquirers are on
their way to losing the acquisition game from the beginning even
before the due diligence or even the integration starts to happen (refer
to chapter 9).
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
2 Classification of mergers and acquisitions
‘Merger and acquisition’, or ‘M&A’ is a field of study in which the
definitions often vary in different publications. The traditional
framework how to distinguish between ‘mergers’ and ‘acquisitions’ is
the perspective on the legal independence of the business entities
(Fig. 2.1):
Collaboration between business entities
Effects on the legal independence Of the involved companyNo effect on the At least one company Legal independence losses its legal independence
Cooperation Merger &
Acquisition
Number of companies that lose their legal independence All involved companies At least one but
not all involved companies
Merger
Acquisition
Organizational integration Of the required firm Closely integrated into Remains relatively The acquiring company independent subsidiary Of the acquiring firm
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Absorption Subsidiary company
In Corporate Group
Fig. 2.1: Types of collaboration between business entities categorized
by effect on legal independence (Metzenthin).
2.1 The merger
A ‘merger’ is a combination of assets of two previously separate firms
into a single new legal entity. All involved companies lose their legal
independence as all their assets become the pieces of a new firm. A
‘merger’ may be characterized by an equal rank of the involved firms
with respect to their sizes, resources and power. In this context, the
phrase ‘merger of equals’ is frequently used to refer to the equality of
the formerly independent companies. However, even when
theoretically and officially ‘mergers’ are supposed to be between equal
partners, most result in one partner dominating the other (Ghauri).
Terming the combination a ‘merger’ rather than an ‘acquisition’ thus
can be done purely for political or marketing reasons. The number of
‘real’ mergers in M&As is either way almost vanishingly small. Less
than 3% of cross border M&As by number are mergers (Ghauri).
2.2 The acquisition
‘Acquisition’ (or ‘takeover’) usually refers to a purchase of a smaller
firm or a part of a firm by a larger one. In an ‘acquisition’, the control
of assets is transferred from one company to another. The acquired
firm (target) loses its legal independence, while the acquiring firm is
not affected in that respect.
‘Acquisitions’ can be subdivided into full absorption or a subsidiary
status within a corporate group depending on the level of
organizational integration of the acquired firm (refer to chapter 5.1).
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Sometimes, however, a smaller firm acquires management control of a
larger or longer established company and keeps its name for the
combined firm. This is known as a ‘reverse takeover’.
2.3 Classification according to companies’ relatedness
While the traditional distinction between ‘mergers’ and ‘acquisitions’ is
mainly based on their differences in legal structure there exist many
other ways how to categorize M&As. One is to group M&As into four
categories with respect to the companies’ relatedness (Ghauri):
1) Horizontal: takes place where the two combining companies
produce similar Products in the same industry and/or are competitors.
2) Vertical: occur when two firms, each working at different stages in
the production of the same good (value chain), combine (e.g. buyer-
seller, client-supplier).
3) Conglomerate: takes place when the two combining firms operate
in unrelated businesses (unrelated diversification).
4) Concentric: occurs where two combining firms are in the same
industry (related diversification), but they have no customer or supplier
relationship (e.g. a merger between a bank and a leasing company).
2.4 Other classifications
Depending on the perspective on M&As other criteria for classification
are discussed in the literature. These perspectives are reflected in the
field of M&A performance studies (refer to chapter 3) to conclude on
the key success factors for mergers and acquisitions projects. Here, list
of some alternative classifications is given (Metzenthin; Ghauri):
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Management cooperation perspective:
M&As can be friendly or hostile. In the former case, the companies
cooperate in negotiations, finally agree to the transaction and ensure
that the deal is beneficial to both parties. In the latter case, the
acquiring company purchases the majority of outstanding shares of a
company in the open market while the takeover target is unwilling to
be bought or the target's board has no prior knowledge of the offer.
Stock market perspective:
‘Accretive’ mergers are those in which an acquiring company's
earnings per share (EPS) increase and/or in which a company with a
high price to earnings ratio (P/E) acquires one with a low P/E. ‘Dilutive’
mergers are the opposite of above, whereby a company's EPS
decreases. The company will be one with a low P/E acquiring one with
a high P/E.
Financing perspective:
Stock-financed versus cash-financed (self-finance or borrowed)
Collaboration between business entities
No Exchange of capital shares capital shares exchange
Minority position majority position 100%
share
Fig. 2.2: Types of collaboration categorized on the basis of involved
capital investments (Metzenthin).
Market perspective:
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Both partners focus onto the same or different target customers,
distribution channels, technologies, products and services.
Motives perspective:
Similarity M&A versus complementary M&A
Geographic perspective:
Domestic versus cross-border M&As
Technology perspective:
Technology oriented enterprises versus non-technology firms
Strategic perspective:
Diversification (cross-industry, focus decreasing) versus concentration
(focus increasing)
Integration perspective:
Degree of loss of control or degree of integration of the target firm
2.5 ‘Merger and acquisition’ as used throughout this
work
The various perspectives on the field of M&A emphasize how
multifaceted and complex such an undertaking is. Since most of the
perspectives given above will find their discussion throughout this work
the terms ‘merger’ and ‘acquisition’ are not assigned to an specific
type of deal. In fact, the term ‘merger’ and ‘acquisition’ or ‘M&A’ is
generally used for a project where two firms (the target and the
acquiring company) combine to one legal entity or one or several parts
of a firm (target) change their belonging to the entity of the acquiring
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
firm. However, ‘merger and acquisition’ is clearly set apart from
collaborations as ‘alliance’, ‘co-operation’ or ‘joint venture’ (refer to
chapter 8).
3 Post-M&A firm performance studies
The most often researched and reported findings of post-M&A firm
performance studies are described here focusing on those being of
strategic importance in a pre-M&A stage. A critical review on
performance study’s methodology is given and other sources of
evidence are discussed.
3.1 Motivation to consider performance studies
The surveys on acquiring firms’ post-M&A performance build the vast
majority of all research studies beside those focusing on M&A
integration matters (Paine). Thus, one could assume that performance
studies provide, first, insight into why certain M&A projects fail and
others succeed and, second, present universally valid performance
enhancing key success factors that do not depend on the specific
characteristics of an M&A project.
3.2 How is post-M&A firm performance measured?
In the literature manifold ways can be found how an acquiring firm’s
post-M&A performance is measured relative to its pre-M&A
performance:
Turnover and profit growth
Relative firm value
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Short- and long-term stock price (event study methodology)
Abnormal stock return (difference between actual returns and
the previously
Expected returns)
Present value of the post-M&A incremental cash flows
For a more complete understanding of different types of performance
studies and their characteristics (data collection, time horizon
considered, statistical evaluation, relative performance vs. absolute
performance methodology, definition of failure and success etc.) refer
to the corresponding literature. Beside the many performance studies
also a large number of reviews can be found of which those by Sirower
and Agrawal are the most complete and most recent.
3.3 What is failure and success?
Failure has been understood in terms as extreme as ‘resale’,
‘liquidation’ or ‘divestment’, or as conservative as “failing to reach
certain projected growth or profit” in benchmarking. As a result, the
definition of failure and success depends on the performance
measures applied and thus is exceedingly broad and almost a
peculiarity of every single performance study.
3.4 Factors with and without relationship to post-M&A
performance
This work distinguishes between factors having a positive/negative
impact and factors having no significant or a highly controversial
impact on a firm’s performance. Since there is mostly no agreement on
the extent of positive or negative impact no concrete figures are given
here.
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
The findings on the factors ‘M&A activity’, ‘Diversification’ and ‘Degree
of Integration’ have biggest significance for the validation of potential
firms to be acquired and thus are discussed in more detail
subsequently to the list below.
3.4.1 Factors for which a majority of empirical studies
found a positive or negative relationship to
performance of the acquiring firm:
1. M&A activity (e.g. Dyer)
Most studies report, on average, a negative long-run performance
following
M&A deals (see a more detailed discussion subsequent to this list).
2. Acquisition premium (e.g. Epstein)
The level of the acquisition premium (price paid) has a strong negative
effect on performance across most measures of shareholder
performance. The higher the premium is, the larger the subsequent
loss. Alberts and Varaiya (in Datta) conclude that post-acquisition gains
to most bidding firms were not adequate to cover the premiums paid
to acquire the targets.
Epstein reports that even if the price paid is not public, acquiring
companies experience a decrease in stock price when the market is
anxious that the bidder will overpay for growth opportunities of the
acquired firm.
3. Multiple bidders (e.g. Datta; Goergen)
The presence of multiple bidders has a negative impact on short- and
long-term acquiring firm performance. As a result, bidding firms should
20
“Fundamentals of Strategic Integration for Merger and Acquisition ”
avoid getting involved in tender offers. The vast majority of worldwide
M&As are single-bidder auctions (more than 72%). The increased
competitiveness in such cases tends to drive up acquisition premiums.
4. Means of payment (e.g. Loughran; Goergen)
An all-cash offer for acquisitions results in better performance than an
all-equity or a combination of cash and equity. The fact the takeover
will be paid with equity might signal to the market that the bidding
managers believe that their firm’s shares are overpriced or already
expect a subsequent long-term underperformance of the combined
firms.
5. Percentage of the target firm shares acquired (e.g. Sirower)
Majority holdings in the target firm correlate positively with the
acquiring firm’s long-term performance.
6. Managerial ownership (e.g. Goergen)
The fraction of managerial ownership (e.g. through equity stakes) in
the acquiring firm is found to be strongly significant for long-term
performance. This suggests that managers are more likely to
undertake value-destroying M&A deals, if they do not own equity in
their firm.
7. Type of takeover (e.g. Loughran; Goergen)
In comparison to friendly M&A offers, hostile bids trigger large positive
abnormal returns for the target shareholders but significant, negative
returns for the bidder.
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
The overwhelming proportion of M&As are friendly. In 1999, there were
only 30 hostile takeovers out of 17’000 friendly M&As.
8. Industry phase
A study by Kröger evaluating 30’000 firms over 15 years reports
successful M&A deals in almost 60 per cent of the cases across various
industries in their opening phase (Öffnungs phase) and accumulation
phase (Kumluations phase) of his model. In the subsequent focusing
phase (Fokussie rungs phase) the success rate diminishes to 30 per
cent and even less in the balance phase (Balance phase). The reason
for this decline in success rate is seen in the decreasing realizable
synergy potential due to the raising price premiums paid for target
firms and, when the industry matures, the value chains that are
already substantially optimized in the later phases of the model.
3.4.2 Factors for which no significant relatedness to
the acquiring firm’s performance or heavy conflicting
evidence is found:
1. Stock market behavior at announcement (e.g.
Goergen)
There is little consensus about the announcement effects for the
bidding firms. About half of the studies report small value-destructive
effects for the acquirers’ shareholders (Sirower) whereas the other half
finds zero or small positive abnormal returns. Considering that the
average target is much smaller than the average acquirer, the
combined net economic gain or loss at the announcement is expected
to be rather small. However, the literature findings for target firms’
returns are much more consistent. Goergen et al. in their extensive
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
empirical study across various industries find large announcement
effects of 9% for target firms, but the cumulative abnormal return that
includes the price run-up over the two-weekn period prior to the event
rises to 20%.
2. Acquisition experience
According to Straub the number of acquisitions in the years prior to the
relevant acquisition is not significantly related to performance while
Duncan identifies a company’s previous acquisition experience as a
factor for success.
Selden et al. (in Sirower) on the other hand find that most companies
outperforming the S&P500 have low M&A activity, and if, rather small
firms are acquired.
3. Diversification (e.g. King)
Strategic relatedness does not generally outperform strategic
unrelated M&As (see a more detailed discussion subsequent to this
list).
4. Size of merging firms
There is lacking evidence on the correlation between the relative size
of the merging firms and long-term performance. Some researchers
have suggested that small mergers (mergers where the two firms are
very different in size) tend to produce higher performance than larger
mergers (mergers where the two firms are similar in size). They
attribute these performance differences to the ease of combining
operations. With smaller mergers the integration of the new entity is
more easily controlled and the disruption to the organization as a
23
“Fundamentals of Strategic Integration for Merger and Acquisition ”
whole is minimized. With a large merger, the integration problems are
multiplied and disruption can occur throughout the whole organization.
On the other hand, those researchers neglect the fact that a small
merger often provides also less significant gains to the large
organization. However, as Lubatkin and Seth point out, the few studies
that have examined this size issue have found that larger mergers, on
average, tend to be more successful than smaller ones.
5. Degree of integration
The post-merger integration level (i.e. fully integrated versus not or
partially integrated) has no relationship with a firm’s performance (see
a more detailed discussion subsequent to this list).
Many other factors exist being reported in a smaller number of
studies, as for example the pre-merger book-to-market ratio (e.g. Rau
and Vermaelen in Megginson), the premerger financial performance
(e.g. Kruse), the net cash held by the target and growth potential of
target as central factors influencing long-term firm performance of the
merged firms.
3.5 M&A performance
Success and failure with M&A deals has been studied in the vast
majority of all surveys in terms of narrow measures as given in chapter
3.2 leading to the claims that most M&As fail. Acquiring firms loose, on
average, 10 per cent of stock value in a five years period as found by
Dyer in his study across various industries. Only about 35% of
acquisitions are met with positive stock market return. According to a
KPMG study (2000), 83% of recent deals failed to deliver shareholder
value and 53% actually destroyed value. Also Porter (in Datta), based
on an analysis of acquisitions made by 33 Fortune-500 firms, concludes
that acquisitions have been largely unsuccessful when one considers
that over half were subsequently divested.
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When gains to targets and bidders are combined, most acquisitions are
wealth creating. Although Seth et al. (in Ghauri) find that positive total
gains occur in 74% of the acquisitions they estimate in their review
that total gains are only 7.6% of the pre acquisition value of the
combined firm. From a macroeconomic point of view one can argue
that acquisitions transfer resources from less to more productive
sectors of the economy. However, bidders have only minimal or no
incentives at all to be a participant in such transactions (Datta). Ghauri
claims that more than 50% of the mergers so far have led to a
decrease in share value of the bidder firm and another 25% have
shown no significant increase. Ghauri reports that targets realize the
majority of the gains, while acquirers appear to experience positive
effects on shareholder value only in about onethird of M&As and gain
nothing on average.
In summary, the aggregate evidence from the performance literature
is toward negative performance for acquiring firms in M&A deals.
Results indicate that while the target firm’s shareholders gain
significantly from M&As, those of the bidding firm do not. Moreover,
historical evidence documents that the returns to acquirers have
gotten progressively worse, on average, for acquisitions occurring in
the 1960s, 70s, 80s and 90s, respectively (Sirower). As a conclusion
one is tempted to claim that the M&A activity itself inherently is a
reason for under-performance or failure of M&A deals. Clearly this
negative evidence raises serious doubts over the massive and still
increasing size and number of M&A deals over the last 40 years (refer
to chapter 3.8).
3.6 Diversification
There is considerable disagreement in the literature about whether
strategically related acquisitions are more beneficial than strategically
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unrelated acquisitions. However, most publications suggest from a
theoretical point of view that corporate focus is the primary
determinant of long-term M&A performance. Continuing to focus on the
acquiring firm’s core business should help to maintain its strengths and
to minimize the risks associated with acquiring a business in an
industry of which the firm may have only limited knowledge. However,
many studies document that relatedness (focus-preserving or focus-
increasing, FPI mergers) had a marginal positive effect on long-term
performance.
On the other hand, unrelatedness (focus-decreasing, FD mergers) is
often reported to result in significantly negative long-term performance
(e.g. Megginson; Duncan). To classify corporate diversification
Megginson uses the ‘Herfindahl Index’ (HI), which describes the
merger-related degree of change in corporate focus (Megginson). He
finds that every 10% reduction in focus results in a 9% loss in
stockholder wealth, a 4% discount in firm value, and a more than 1%
decline in operating performance. These results suggest that
companies should not attempt to do what investors can do better
them, i.e. creating a diversified portfolio.
However, several authors have found no significant effect of
relatedness on performance. Some researchers even have found that
acquiring firms making conglomerate (i.e. unrelated) acquisitions
outperform those making non-conglomerate acquisitions (Sirower;
Kruse; review in Megginson). They report advantages of unrelated M&A
to be improved cash management, more efficient allocation of
investment capital and reduced cost of debt capital.
In summary, although a majority of studies have found
overperformance of related M&A deals, the evidence is very vague.
Boutellier reminds that the decision for relatedness or un relatedness
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is very dependent on the industry within which the firms operate. This
matter of fact is visualized by Palich et al. (Fig. 3.2):
(A)
Performance
Single Related unrelated
(b)
Performance
Single Related unrelated
(c)
Performance
Single Related unrelated
Fig. 3.2: Performance versus degree of diversification: (a) the linear
model; (b) the inverted-U model; (c) the intermediate model (Palich).
An excellent summary on various studies (with conflicting findings)
regarding diversification and relatedness can be found in Sirower and
Agrawal.
3.7 Degree of integration
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The finding that the degree of integration of the acquired into the
acquiring firm is a particularly interesting result because performance
gains presumably should be driven by some type of synergy realization
through integration. On the other hand, the level of integration is
assumed to be related to the number of integration difficulties limiting
the realization of the synergy potential. As a result one could conclude
that the advantages of a full or moderate integration are diminished by
the disadvantages such integration creates.
3.8 Criticism on performance study methodology
Empirical performance studies have almost exclusively concentrated
on whether M&A projects create abnormal shareholder value or
profitability for the acquiring and the target company and whether
strategically related acquisitions are more beneficial than strategically
unrelated acquisitions. The overall conclusion from hundreds of studies
is that most M&A fail. The vast majority of studies on M&A performance
in the last 40 years show failure rates for acquirers of between 40%
and 85% with an average of approximately 2/3 on a wide variety of
measures (Angwin). Despite considerable research effort being
devoted to assess M&A performance the findings of strategic
importance in a pre-M&A stage are mainly vague or inconsistent. That
fact is troubling since first, no significant success factors for M&A deals
that drive the returns can be extracted and second, a reasoning of the
findings in these studies seems to be inappropriate in the view of such
lacking evidence:
“[…] M&As’ influence on post-acquisition firm performance remains
inconclusive.
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[…] the existing empirical post-acquisition performance studies have
not recognized any prerequisites that would be useful in forecasting
post-acquisition performance.” (Straub)
These findings raise a paradox: Why do managers continue to transact
M&A deals on such a massive scale in both number and monetary
terms, when there is little economic justification for M&As from the
bidding shareholders’ point of view? This difference between action
(the continued pursuit of mergers) and performance (the low rate of
successful mergers) are caused by:
Managers being overly optimistic, continuing to make estimation
errors in valuing target firms, thinking that they have learned
from past merger mistakes and that the next merger will be
successful (while in fact they continue to make the same merger
mistakes).
Past empirical studies being inaccurate because of data
collection, time-periods covered, statistical errors or aggregation
of different deal structures (e.g. size of merger, cross-industry
comparison etc.). Angwin states that too often M&A projects are
considered as whole homogeneous entity not taking into account
project-specific characteristics.
Managers pursuing goals other than shareholder wealth
maximization and, thus, empirical research is using an
inaccurate measure of performance (e.g. Angwin).
Some researchers raise the fundamental issue of whether the financial
markets are always best placed to value the actions of management.
For instance, a CEO embedded in an industrial context may be more of
an expert on how firms should be run and necessary investment
decisions which should be made (such as M&A) than financial analysts
and shareholders eventually far away from that context. The CEO may
take actions which may not result in positive shareholder returns in the
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short run but could be of vital importance to the long-term success of
the firm.
Evaluation of long-term changes in stock price must be done with care
since merger strategies often require years of integration efforts
before potential benefits are reflected in stock price. And, changes in
stock price often tells little about the M&A and its motives but more
about the company overall and the economic context. If the existence
of multiple merger motives and motives other than share holder
wealth creation is correct, then past merger studies that attempt to
measure merger success by examining single financial indicators of
performance (most commonly profitability and share value) tend to
undervalue the achievement of other goals and may fail to provide an
accurate picture of M&A success. Thus, the results from performance
studies may be biased since many deals are being assessed on
motives which were never the main intention of management.
4. Motives for merger and acquisition activity
Categorization of mergers and acquisitions according to the
management’s motives is fairly generic since motives can have
manifold facets, overlapping each other or even belong to several
categories. While it is attractive to categorize M&A deals into single
motives research studies show that this would be an oversimplification.
A survey from Angwin in 2000 involving CEOs of 100 domestic
acquirers in the UK about their motivations for carrying out a specific
M&A transaction reveals up to seven reasons in some instances, 45%
gave three or more reasons and 71% of CEOs gave two or more
reasons.
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Angwin in his survey groups motives into four categories:
Exploitation of the target through synergies to increase acquirer
value with a high degree of certainty (classical motivation)
Exploration of new territories of latent value and for future
opportunities with low certainty of improving returns to the
acquirer but with a big potential
Preservation (‘stasis’) attempting to defend the acquirer’s
competitive situation through control of potential new competitors
Survival attempting to prevent the acquirer’s end through being
acquired itself
The payoffs for these different types of motives are different. From
‘exploitation’ deals there should be reasonable certainty about value
created. ‘Exploration’ deals may have the potential for much greater
returns than exploitation deals as well as much higher risk about
whether those returns will be achieved and how far into the future. For
‘preservation’ deals the acquirer may not receive any direct benefit,
with neutral or even mildly negative returns but the negative threat of
severe future change may be reduced.
‘Survival’ deals are not so much about increasing value as to survive
potential takeover threat or current demise of the firm. For
‘preservation’ and ‘survival’ type deals, value creation maybe an
inappropriate way of viewing performance. Instead ‘worse off test’
should be applied answering the questions “would the acquirer be
substantially worse off if it did not transact a particular acquisition?”
4.1 Exploitation (synergy motives)
Synergy motives are widely seen as the most frequently mentioned
motives when managers argue for an M&A project (Schweiger).
Synergies are accepted as a legitimate reason for such undertakings
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since their realization appears to directly correlate with the
enhancement of economic performance of a firm.
4.1.1 What is ‘synergy’?
A target firm has an intrinsic value that is based on what a firm is
worth as a stand-alone entity. This value is typically based on the
expected stream of cash flows it can produce as a going concern. If an
acquirer pays more than this value (price premium), value is likely to
be destroyed. However, a buyer can utilize the acquisition to improve
cash flows of either the target, itself or both such that value still can be
created. This concept is known as ‘synergy realization’.
Kuhn in his publication gives a few examples of synergy realization,
however, not without closing his illustration with an ironic undertone:
‘Synergy’ is the increase in performance of the combined firm above
what the two firms are already expected to accomplish as independent
firms through gains in competitive advantage. Thus, the synergy
hypothesis proposes that M&As take place when the value of the
combined firm is greater than the sum of the values of the individual
firms.
The relationship between price, synergy and value is illustrated in Fig.
4.1.
The figure illustrates that value can be created when the price paid for
a target is below its stand-alone value. When the price exceeds the
stand alone value, synergies must be captured for value to be realized.
When the price exceeds all synergies, there is no chance that value
can be created.
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Overpaid price 3
Must capture
Some or all Price 2
Synergies
No Synergies
Required Price 1
Price Paid for Target
Fig. 4.1: The relationship between price, synergy and value
(Schweiger).
4.1.2 Classification of synergies
Dyer proposes the following classification of synergies:
Modular synergy: if firms manage their resources
independently but their final outcomes combine to potential
synergy realization (e.g. common usage of distribution channels)
Sequential synergy: if one firm completes its activities first
and transfers the outcome to the partner firm (e.g. after-sales
offering)
Reciprocal synergy: if firms jointly work together in activities
and mutually share resources along the value chain (e.g.
common R&D activities)
Other authors divide synergy according to the types ‘cost’, ‘revenue’
and ‘intangibles’ (Angwin; Weber; Schweiger; Ghauri; Cullinan):
4.1.3 Cost synergies (‘rationalization’)
Reducing costs is one clear way to increase cash flows and has been
the most common form of synergy. If synergies are expected to come
from cost savings for price and/or cost structure competitiveness, they
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Range of Synergy valve
Stand Alone Value
“Fundamentals of Strategic Integration for Merger and Acquisition ”
must emerge from eliminating duplication due to similarities between
the firms. Synergistic benefits from potential duplicated resources can
come as fixed or variable cost synergies:
Economies of scale i.e. increasing volume of production/sales
reduces costs per unit
Economies of scope i.e. spreading or shearing resources
across more business activities
Examples: sharing of products/services, marketing/advertising and
brand development efforts
Bargaining power along the value chain i.e. increasing
power over suppliers
(Purchasing efficiency) and distributors to reduce transaction
costs
Elimination of redundant functions i.e. reduction of
overlapping work force (administration, overhead, corporate staff
like finance, IT, human resources etc.) and rationalization of
processes
Control over value chain i.e. vertical integration Such moves
are made to increase value added into the business, to gain
control over more aspects of the business (supply, distribution)
and to reduce transaction costs in the value chain.
Examples: Lower variable costs of raw material through control
over raw materials, lower overall costs through improved product
development and manufacturing interfaces.
Flexibility of capacity i.e. using excess capacity of one firm to
fill the other firm’s excess demand (improved agility).
4.1.4 Revenue synergies
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Typically, revenue synergies are associated with complementary (i.e.
non-overlapping) activities resulting in higher volume and revenue
sales:
New customer base i.e. increase sales coverage or acquire
new distribution network or new sales channel that can result, for
example, in more profitable or loyal customers.
Cross-selling of products or services through complementary
sales organizations or distribution channels that serve different
geographic regions, customer groups or technologies (increased
sales productivity by selling more volume with the same number
of sales people).
Broadening a company’s products and services portfolio
to provide needed bundling or a more complete/full offering.
Internationalization i.e. increase sales volume and market
share through geographic extension and access to new
customers M&As are means to expand internationally more
rapidly or they make it possible to enter new markets using the
distribution network and the specific knowledge of local partners.
Thanks to the contributions of these partners, the foreign
company is offered a geographic presence, less effort and time
has to be put into learning how to succeed in very different local
environments (Garrette).
Internationalization can also foster a company’s responsiveness
by moving production processes, distribution, warehousing,
and after-sales activities closer to customers. This can result in
increased competitiveness by being better able to serve
customers with needs for broader geographic coverage.
4.1.5 Synergies from intangibles
This type of synergy results from the acquisition of immaterial goods or
goods that hardly can be acquired in the market:
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Access to brands, reputation and intellectual property
Example: increase appeal to more and better distributors,
suppliers and employees.
Access to human resources i.e. people, knowledge, experience,
skills, brainpower (talent-based M&A).
Access to technology and the attached knowledge,
innovation and product development efforts i.e. create new
business opportunities or enhance a firm’s core business.
Knowledge often cannot be acquired in the market as it is
bundled with other assets. Due to the asymmetric information
regarding knowledge and technology the valuation of this asset
is extremely difficult however important as it the key reason for
an acquisition is very often.
Access to superior managerial practices, business models and
operational excellence (e.g. quality control system, delivery
concepts, after-sales service…).
The reverse is ‘victim infusion’ (Ghauri): a firm can infuse the
‘victim’ with better management, organization skills, or superior
marketing.
4.2 Exploration
There are motives other than synergy realization which receive far less
attention:
Greenfield entry
As new markets and knowledge emerge there will always be a
need to engage in these areas. By definition there will be
significant uncertainty since acquirers cannot know the future.
They can form views about whether the potential of an M&A deal
maybe high, but in new unfamiliar areas (geographic,
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technological etc.) the information available maybe extremely
unreliable or difficult to interpret.
Learning prologue i.e. sequential M&A to learn about a sector as
a prologue to a later larger M&A deal (e.g. a common practice
amongst Japanese firms in cross-border M&As) (Ghauri).
4.3 Preservation and survival
This type of synergy results from the elimination of competitors from a
market and to gain a more dominant position in an industry:
Affecting competitive dynamics
M&A deals can be used as a weapon to harm the actions of
competitor firms. Here performance is less about the
contribution of the target firm to the new parent, but more in
terms of the damage done to the competitor and prevention of
unpleasant challenges in an industry (e.g. Angwin; Ghauri).
Overcapacity reduction i.e. purchasing competitors and closing
them down to gain market share or critical mass
Pricing flexibility i.e. elimination of capacity from the market
place allowing an acquirer to maintain or increase prices in the
market thereby improving margins and cash flows.
Innovation quenching (Angwin)
The acquisition is intended to suppress rather than develop the
competitive potential of the acquired firm (Ghauri). For instance,
buying infant firms and closing them down prevents any possible
takeoff of that firm which could change industry dynamics. An
alternative to closure is to purchase infant firms so that the
acquirer can control the rate of innovation leakage into an
industry. Such acquisitions itself may not result in positive
returns, but may be less damaging than allowing the firm to
emerge.
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Competitor actions
The actions of a competitor may induce a firm into engaging in
M&A. It is known that when an industry begins to consolidate
there is a rush of other firms to follow. The motive here is the
fear of being taken over (M&A as a defense mechanism) or the
fear of no suitable targets being left for an M&A deal.
Customer / supplier pressure
Powerful customers or suppliers can force firms making M&A
deals. For instance, in the IT industry Nokia brought pressure on
one of its suppliers to purchase a high tech firm as they wanted
aspects of this technology integrated into the components they
were sourcing, but they did not want to purchase the firm
themselves. The supplier, wanting to keep its main client had no
choice. It may not have benefited from the actual M&A but to
lose Nokia as its primary customer would have been a far worse
outcome.
Political persuasion
Governments can bring substantial pressure upon top
management to act in a way which would further the national
interest. For instance, in France there has repeatedly been
pressure upon firms to merge rather than accept approaches
from Italian, Spanish and Swiss firms.
4.4 Managers’ self-interest and prestige
All of the above motives for M&A assume rational managerial
motivation based upon improving firm performance. However, not all
motives can be considered rational from the business perspective:
‘Agency’ motive (self-interest, greed motive)
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
In the context of M&A the agency motive suggests that
takeovers occur because they enhance the acquirer
management’s welfare at the expense of acquirer shareholders
(e.g. Angwin; Brouthers).
Hubris motive (prestige motive)
The hubris hypothesis suggests that managers make mistakes in
evaluating target firms (excess confidence) and engage in M&As
even when there is no synergy potential or other legitimate
motive (Berkovitch). Diversification of management’s personal
portfolio, managerial challenge, the increase of the firm size and
prestige, the increase of the firm’s dependence on the
management (empire building) and fashion (Ghauri) are
manager motives summarized under the hubris hypothesis.
The agency problem and hubris motive receive support from studies
reporting that acquirer returns from M&A deals are positively related to
the level of management ownership in the acquiring firm (Berkovitch;
refer to chapter 3.4.1).
Considering the increase in shareholder wealth as the primary reason
for any M&A and taking into account that most M&As fail, Berkovitch
jumps to the conclusion that many M&A deals are motivated by agency
and hubris. However, the huge variety of motives different from
shareholder wealth creation as the primary motivation for M&A puts
some doubt on that straight conclusion. “If all takeovers were
motivated by synergy only, one would never observe negative gains.”
Here, Berkovitch does not take into account that there are many other
issues except the motivation that decide upon M&A financial success.
4.5 Finance motives
The main motives cited in the finance literature:
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Improving stock market measures (classical motive referred as
‘exploitation’ or ‘synergy’ motive)
Reducing cost of capital (e.g. through reducing firm risk by
stabilizing earnings due to diversification or buying a listed
company)
Reduction of tax liabilities (e.g. through benefits achieved in
cross-border M&As)
Adjusting the debt profile of the company
Accessing cash or other financial resources in the target
company
Generate cash flow from the break-up of the target firm (e.g.
Megginson)
Move capital to higher valued uses / Reinvestment of financial
resources (e.g. firms with poor investment opportunities acquire
firms with outstanding growth opportunities; Goergen), in the
extreme case: Replace a business with a new one (respond to
market failures)
Asset stripping
Speculative transactions driven by the intention to buy shares in
companies solely to resell them at a profit in future.
The vast majority of M&A literature assumes that M&A deals must
improve returns to shareholders. However, this ignores many other
‘legitimate’ and ‘illegitimate’ motives for M&A activities and ownership
structures other than public companies. The broad set of\ motivations
presented here now, first, allows a much more subtle assessment of
post-
M&A firm performance while the lack thereof was criticized in the
chapter ‘Performance studies’ (refer to chapter 3), second, simplifies a
sound review of strategic logic and reasoning for M&A activity and,
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
third, opens a much broader view on upcoming integration and
transformation difficulties like negative synergies and culture issues.
5 Post-M&A integration and transformation
Independent of the underlying motives for an M&A project, during post-
merger integration many different matters must be carefully blended
such as for example different strategies, brands, product portfolios,
production processes, knowledge and technology, pricing policy,
support functions, sourcing and distribution partners, administrative
policies and processes including the management of human resources,
technical operations, marketing activities and customer relationships.
Depending on the level of integration such a blending imposes many
difficulties and pitfalls for synergy realization and for reaching other
M&A objectives. The lacking awareness of those difficulties (fostering
positive synergy realization and anticipating negative synergies) are
seen as prominent reasons why M&A projects can be compromised to
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
reach their goals, in particular when not considered at a very early
stage in the M&A project (e.g.Datta; Haspeslagh). Mace and
Montgomery already noted in 1964:
„The values to be derived from an acquisition depend largely upon the
skill with which the […] problems of integration are handled. Many
potentially valuable acquired corporate assets have been lost by
neglect and poor handling during the integration process. “
As a consequence, besides recognizing the strategic logic that predicts
value creation the processes through which the M&A’s objectives come
to be realized must be taken into account and planned in detail.
Management must find the appropriate integration practice (e.g.
procedural, physical, and socio-cultural) given the motives and
characteristics of the acquiring and acquired firms (Marks).
5.1 What is an adequate level of integration?
There are several possible generic scenarios how a company can be
integrated in the post-M&A phase (Sirower; Duncan), although, hybrid
and intermediate forms may exist:
1. The company is acquired as a stand-alone (total autonomy).
2. The company is acquired as stand-alone but with a change in
strategy (e.g. restructuring followed by financial control).
3. The target company is to become part of the acquirer’s operations
(e.g. centralization of key functions).
4. The target and acquirer are to be completely integrated (full
integration).
5. The target takes over the acquirer’s existing business and the
acquirer is integrated into the target’s operations (reverse integration).
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5.2 What are the difficulties and dangers during
integration?
Difficulties and dangers during the integration process are manifold
and widely discussed not only in the M&A literature but generally in the
transformation literature. Here the most often cited issues in the M&A
context and those of major relevance for the pre-M&A phase are
discussed. To foster a positive attitude in an often negatively charged
environment success factors are presented instead of a list with
frequent reasons for integration failure (no particular order):
a. Choice of appropriate level of integration
(2)Post-merger management of projected positive and negative
synergies
(3)Speed of integration
(4)Communication to internal and external stakeholders
(5)Cultural fit and anticipation of culture dissonance
(6)Experience with transition structures and transformation
management (Reimus)
(7)Avoidance of leadership vacuum (Duncan)
(8)Choice of top management positions reflecting the values being
applied in the merged firm and the true distribution of power
between the former firms (Trauth).
(9)All parts of the organization have the knowledge and resources,
and give their commitment for the integration efforts (Epstein).
5.2.1 under- and overintegration – or the appropriate level
of integration
An acquired firm must be aligned to a certain extent to the
requirements of the acquiring company. The accomplishment of
43
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integration, however, requires that target-specific bases of critical
resources and skills be kept intact. The organizational task therefore is
the preservation of any unique characteristics of an acquired firm that
are a source of key strategic capabilities. Pablo advises against “fixing
things that aren’t broken”.
However, under- or overintegration has been cited as one of the
leading causes of M&A failure (Pablo). The realization of potential
synergies can be short-circuited given an insufficient level of
integration, but excessive integration (reconfiguration) can hinder the
development of fruitful conditions (e.g. when executives depart,
expertise is lost etc.).
Management of the acquiring firm has the tendency to over-integrate
the target firm, means to completely change the whole setup and the
processes. These practices (besides demotivating the employees) can
result in the loss of the firm’s success factors before the M&A deal
5.2.2 Post-merger management of projected positive
and negative synergies
Acquiring companies must view potential synergies in the light of
realization problems:
“When two previously sovereign organizations come together under a
common corporate umbrella, the result is a hybrid organization in
which value creation depends on the management of
interdependencies through the facilitation of firm interactions and the
development of mechanisms promoting stability.” (Pablo)
Specifically, management should:
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Have an integration plan in considerable detail on how to
implement the strategy (e.g. integration of sales force,
distribution system, information systems, R&D processes,
marketing efforts, reward and incentive systems).
Examine how different issues impact the success of changes
needed in the acquirer, the target, or both firms and the impact
they can have on positive potential but also negative synergies
(value leakage e.g. through reduction in cash flows and earning
during integration period).
Develop different integration scenarios leading to a series of
realistic M&A evaluation.
5.2.3 Speed of integration
Angwin in his studies argues:
“[…] the first 100 days is when all the critical actions should be
launched, as this is the outer limit of employee enthusiasm, customer
tolerance and Wall Street patience”.
Early wins to convince internal and external stakeholders keep the
momentum of positive attitude while sustained uncertainty, not only
amongst employees, is seen as one of the most corrosive elements of
the soundness of post-acquisition integration.
Faster integration may reduce the length of time to experience
uncertainty as well as reduce the effects of the rumor mill.
An organization, Angwin then argues, benefits from well planned and
thus shorter integration periods in several ways:
Spending less time in a sub-optimal condition
Less costly readjustments and iterations
Cuts time for competitors’ reactions to the new organization
Favorable response of financial markets to quick wins
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
5.2.4 Communication to internal and external
stakeholders
The preparation during the period leading up to the merger
announcement is vital to success since it is critical to present the
merger to key constituencies with confidence.
During this period, the integration process is formulated and key
decisions should be made in the areas of leadership, structure, and
timeline. Unprofessional communication to employees, clients,
shareholders, suppliers and the media fosters uncertainty, mistrust
and rumors. Thus, it is necessary that the companies and their
stakeholders involved understand the advantages associated with the
merger.
The communication should generate a culture where employees see
the merger as enabling them to develop the business rather than
inhibiting them from progress.
Employees then can concentrate on reaching the objectives of the
whole M&A project or the integration process in particular.
Management must define the necessary changes that will bring a
successful transaction. It is important to establish clarity in roles and
responsibilities for those involved in the integration process, versus
those in operating businesses. And, the final authority and
responsibility should be communicated on all levels.
This chapter on ‘communication’ passes into to the subject of ‘culture
dissonance’ since Communication is an inherent part of culture and
lacking or unprofessional Communication shares the same set of
human reactions to culture dissonance.
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5.2.5 Cultural fit and anticipation of culture
dissonance
For Ansoff citing Machiavelli “[…] resistance to change is proportional
to the degree of discontinuity in the culture and power structure
introduced by the change”. Resistance comprises cultural and social
aspects, at both the individual and collective level.
Culture dissonance, which might be real or just perceived, is a major
risk for M&A integration success and thus is widely discussed in the
literature and is treated in a separate but complementary chapter in
this work (refer to chapter 6).
6 National and organizational culture and culture
clashes
Numerous authors have discussed the potential troubles of culture
dissonance (culture clashes) between merging organizations and
report culture dissonance to be one major source of conflict that can
undermine potential synergistic effects and endanger a whole
M&A project. Duncan found that 65 per cent of those acquirers who
had experienced serious problems with post-acquisition integration
said that these difficulties had been due to cultural differences.
Cultural fit is therefore a vital success factor for international and
domestic M&As. The interesting point is that many studies show that
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culture is an important issue even when the firms come from the same
country and the same industry Ghauri). On the other hand, culture
issues are worth to shed light into them since they can be used as
almost uncontroversial alibi for anything that goes wrong with M&As
(Sirower).
6.1 What is culture in the M&A context?
There exist various definitions of ‘culture’, but a classic definition is a
“shared set of norms, values, beliefs, and expectations” which are
translated into behaviors. A ‘corporate culture’ includes this shared set
but also implies incentive and reward systems, performance
evaluation, chain of command, leadership styles, information and
decision processes, operating procedures etc. (Veiga).
However defined, organizational culture is seen as being important in
determining an individual’s commitment, satisfaction, productivity, and
permanence within an organization. This is because individuals tend to
select groups that they perceive as having values similar to their own
while trying to avoid dissimilar others (Veiga).
6.2 Which forms of acculturation exist?
Similarly to the possible integration scenarios (refer to chapter 5.1)
Jöns defines different degrees of acculturation between the acquiring
and acquired firm while the degree of integration and degree of
acculturation do not necessarily correspond to each other. This is due
to the fact that the acculturation depends on the way companies
manage the formal (organizational aspects) and informal (socialization
aspects) integration process:
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1. Integration is characterized by cultural and structural changes on
the part of both partners without a dominant culture.
2. Assimilation is a one-sided process where the acquiring company
fully absorbs the acquired one.
3. Separation means minimal cultural exchange; the acquired
company therefore remains almost unchanged.
4. Enculturation leads to completely new organizational practices and
systems that are different from those of both previous cultures.
6.3 Are cultural stereotypes a real assist or just
convenience?
Two statements reflect the conventional understanding of culture we
have and how we normally think about it:
“Surprisingly, the monolithic vision of organizational and national
cultures is still dominant in the strategy field and has tended to use
organization-wide or nationwide classifications (one organization – one
culture; one country – one culture).” (Irrmann)
“Cultural stereotypes are a condensation of reality in that they simplify
and overgeneralize the characteristics of a societal group. In the
absence of detailed knowledge and direct experience of a potential
merger partner or acquisition target, stereotypes offer a means of
reducing the cognitive complexity of a decision.” (Cartwright)
Thus, culture should not be considered as something objective and
given which a nation or an organization has. For instance, companies
can be characterized by subcultures linked to departments, professions
and other communities. Although some scholars define national and
organizational cultures as separate constructs, others agree that these
two constructs are interrelated and have a strong influence on each
other.
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6.4 Can culture be ‘measured’?
As culture is intangible, it is a very difficult concept to evaluate.
Although the concept of ‘culture clash’ has been widely discussed in
the context of M&A, the literature has been relatively quiet about how
to empirically measure this phenomenon:
Hofstede (1980, in Veiga) introduced a classification concept
based on country indices for ‘Power Distance’, ‘Uncertainty
Avoidance’, ‘Individualism’ and
‘Masculinity’ as a way of representing cultural distance between
collaborating companies.
Veiga et al. present a ‘perceived cultural compatibility’ index
(PCC) as a tool for assessing culture based on interviews with
various people “…who live in the organization and […] could help
to uncover the basic cultural essence”. Different to Hofstede,
Veiga et al. focus on the cultures of the single organizations and
do not measure the level of compatibility of two merging national
cultures only. They present 23 items to be considered for their
congruence index within and across national and organizational
contexts:
The organization:
1) Encourages creativity and innovation
2) Cares about health and welfare of employees
3) Is receptive to new ways of doing things
4) Is an organization people can identify with
5) Stresses team work among all departments
6) Measures individual performance in a clear, understandable
manner
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7) Bases promotion primarily on performance
8) Gives high responsibilities to mangers
9) Acts in responsible manner towards environment, discrimination,
etc.
10) Explains reasons for decisions to subordinates
11) Has managers who give attention to individual’s personal
problems
12) Allows individuals to adopt their own approach to job
13) Is always ready to take risks
14) Tries to improve communication between departments
15) Delegates decision-making to lowest possible level
16) Encourages competition among members as a way to advance
17) Gives recognition when deserved
18) Encourages cooperation more than competition
19) Takes a long-term view even at expense of short-term
performance
20) Challenges persons to give their best effort
21) Communicates how each persons’ work contributes to firm’s
big picture
22) Values effectiveness more than adherence to rules and
procedures
23) Provides life-time job security
A respondent’s overall compatibility score can range from -20 to
+20, where -20 signifies the highest degree of unattractiveness. A
zero suggests neutrality, i.e. the respondent perceives no
differences between the buying firm’s culture and the acquired
firm’s culture. The calculation customizes each respondent’s
assessment on each item by using their response to the respective
value item’s ‘ought to be’ question as a weight.
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6.5 What is the result of perceived culture
dissonance?
The impact of culture dissonance on the M&A project, the
organizational structure and the employees’ behavior is frequently
discussed in the literature. “Lack of trust, lack of competence,
unwillingness to cooperate, unacceptable behavior, bureaucratic
system
…” are just a few attributes often named when ‘partners’ interact in
M&A projects. Such phenomena are not exclusively restricted to M&A
projects but to any sort of cultural interaction in business contexts
such as team building, buyer-seller interaction and transformation
projects in general. Irrmann and Jöns report in their extensive study
the most often perceived consequences of cultural dissonance in M&A
projects cited by employees:
Non-cooperation
Information retention
Lack of competence
Organizational silence
Competitive atmosphere within the company
Mistrust among employees
Increased bureaucracy
Higher degree of hierarchy, bureaucracy and authority
Avoidance of responsibility
Bypass of hierarchy
Stress and uncertainty due to potential layoffs
6.6 How can one understand culture dissonance?
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Considerable differences in corporate cultures as, for example,
according to Veiga’s congruence index might impose serious culture
clashes during and even after the M&A integration process. Irrmann
argues that the often cited ‘culture clashes’ mainly arise from
communication dissonance and communication absence between
acquiring firm and target as a result of two types of failures: the
‘linguistic pragmatic failure’ and the ‘business pragmatic failure’.
The first one is grounded in differences in:
Accepted cultural forms of discourse
Message content and medium of communication
The second one is grounded in different interpretations of:
The appropriate decision-making process
The divergent vision of the appropriate business strategy to
adopt
The economic role of the acquired firm
Beside culture dissonance it is the uncertainty surrounding acquisition
events that causes executives and employees to defend positions they
may have taken years to build. If employees feel uncertain about their
personal situation, corporate goals may not matter so much to them
(Jöns). M&As are “surrounded in an aura of conquest” where
employees and managers eventually have to break their bond with the
way things were and conform to the culture of the buying firm:
“Once a big fish in a small pond, acquired key people may feel
a strong sense of alienation with their new proximate group,
inferior in status to the acquiring top managers, and/or
unappreciated by them […] known as the ‘superiority
syndrome’.” (Veiga)
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6.7 What can be learned for practice to anticipate
culture dissonance?
6.7.1 Avoid insurmountable integration problems
In terms of selecting a compatible target, Larsson and Risberg note
that organizations tend to prefer to invest in neighboring territories or
those with which they have the closest economic, linguistic and
cultural ties (‘more like us’ tendency). While differences can lead to
greater acculturation stress and integration difficulties, cultural
differences do not necessarily result in negative outcomes. Cartwright
et al. argue that cultural differences at the national level do not have
such a negative impact as differences at the organizational level in
domestic M&As, because there is a greater awareness and
appreciation of national cultural differences and a greater tolerance for
multi-culturalism.
Larsson and Risberg (in Barmeyer) even show that M&A transactions
where companies face both corporate and national culture differences
have a higher degree of acculturation (creation of a joint corporate
culture) than domestic firms with similar corporate cultures.
The objective fact that cultural differences exist, however, does not
necessarily imply that the acquired employees will resist any post-
merger consolidation attempts.
Many investigators agree that culture dissonance is likely to be more
pronounced in cross-national M&As than in domestic ones since such
M&A deals bring together not only two firms that may have different
organizational cultures, but also two firms whose organizational
cultures are rooted in different national cultures (Duncan). Researchers
studying M&A have proposed the selection of similar partners for the
merger to avoid culture dissonance. However, many studies show that
although merging similar organizations does not in general reduce
resistance and integration problems (Liu
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6.7.2 Be aware of potential cultural dissonance
The awareness of national and organizational culture issues is seen as
being fundamental already in the target screening phase for potential
M&A projects. An underestimation of the cultural factor in pre-M&A
phase is fatal, because the merging of companies is a merging
between different human beings. It is humans that create follow or
divert rules and structures of companies, and that make sure that
companies live, function and make benefits. It is their ideas, strategies,
thoughts and decisions that are transformed into action and they
contribute to the success or failure of a company.
For practice, Irrmann suggests that investing in the development of
intercultural communication skills, language skills and cultural
intelligence could be a more fruitful approach for managers than the
quest for cultural fit between merging organizations.
Research shows that the perception of the partner’s credibility and
trustworthiness are central success factors from the very beginning of
M&A projects, while perception is largely rooted in the interpretation of
the repeated interactions between the partners.
The importance of creating “a climate of mutual trust by anticipating
problems and discussing them early with the other company” is
reported by Paine. Mutual respect and communication is, for example,
enhanced by two-way transfer of knowledge having a
positive motivational and early acceptance effect on the employees of
both firms
(Duncan).
7. Success factors, reasons for failure and risks
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The success factors, reasons for failure and risks presented here is
according to the topics discussed so far. Additionally, results from
direct interviews and surveys of key informants are presented.
A firm that takes over another firm makes two assumptions. The first is
that the acquiring firm can extract more value from the same assets
than the current owners. The second assumption is that the value
extracted will be more than the market price paid for the assets. The
fact that this assumption is often erroneous is the core reason why
many acquisitions fail as profit enhancing tool. Consequently, the price
premium, the realization of synergies and the strategic logic are in the
focus here.
7.1 Financial overextension and price premium
An acquisition premium is the amount the acquiring firm pays for an
acquisition that is above the pre-acquisition price of the target
company. Or in other words, it is the price pre-acquisition shareholders
would not have to pay when investing in the firm to be acquired.
In the M&A literature, the acquisition premium represents the
expectation of synergy in a corporate combination. The acquirer needs
to value the improvements when they are reasonably expected to
occur.
Warren Buffett in the Berkshire Hathaway 1982 Annual Report
summarizes the problematic in a few words:
“A too high purchase price for the stock of an excellent company can
undo the effects of a subsequent decade of favorable business
developments.”
Or, as Sirower declares in his book ‘The Synergy Trap’ in a more sloppy
way
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“The acquisition game is best described as a game with some
distribution of payoffs and an up-front price to play the game.”
According to a KPMG study (2000), 83% of recent deals failed to deliver
shareholder value and an alarming 53% actually destroyed value.
While this study was already cited when discussing post-M&A
performance (refer to chapter 3) the more important result in this
context is that the report concludes that underperformance is the
outcome of excessive focus on “closing the deal” at the expense of
focusing on factors that will ensure its success and that the pricing
decision becomes completely detached from any synergies that may
be realizable.
Garrette in his study argues already in 2000 on the Daimler-Chrysler
deal:
“Daimler Benz is said to have acquired Chrysler in order to strengthen
its presence in North America and to enter lower segments of the
automobile market. […] This move was justified by the fact that earlier
attempts […] to expand their product lines through internal growth had
proved extremely difficult. However, […] the price paid by the
acquiring firm is such that it is unlikely that […] this acquisition will
ever become profitable.”
7.2 Realization of synergies
From a traditional synergy motive perspective managers in
acquisitions have to accomplish what shareholders cannot accomplish
on their own. This means that synergies must be realized to an amount
that lies above the price premium paid for that synergy potential. But
history shows that expectations rarely reflect realizations (Cartwright).
When one considers that the acquisition premium implies certain
requirements of performance improvements and calculate the
probability of achieving these improvements, one can predict the
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probable losses to shareholders of acquiring firms (Sirower). One has
to recall that realized synergies are actual improvements in combined
performance above what the two firms were already expected to
accomplish independently (Cullinan).
A study by Sirower, summarized in his book, ‘The Synergy Trap’, found
that of 168 deals analyzed, roughly two-third of all companies studied
too often think they can generate synergy faster and in greater
amounts than is really possible. In the M&A literature, authors widely
agree that the most frequently encountered causes for insufficient
synergy realization are (Palmatier; Schweiger):
Synergies that is either not present or exaggerated by the buyer.
Synergies that cannot be effectively realized due to integration
difficulties
7.3 Negative synergies
While the term ‘negative synergies’ often is related to an internal firm
perspective considering integration, culture and communication
difficulties (refer to chapter 6) the outside perspective is mostly
neglected (Epstein). Questions how integration difficulties or
endangered synergy realization might impact customers and other
stakeholders arise in this context:
What is the influence on customer satisfaction and long-term
innovation capabilities when closing factories or subsidiaries or
lying off of redundant employees?
How can a firm anticipate customers’ uncertainty about future
quality, support and service and general relationship?
With which means can a firm prevent confusion of customers
through a product offering that cannot longer be overseen?
What dangers arise when channel partners are changed?
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Critical to synergy in general is to leverage the realization potential
without additional costs. As an example, costs of managing an external
relationship to a supplier may be replaced by internal coordination
costs. Or the gains from a more complete product portfolio might be
offset by the dilution of the sales force.
Summarizing, while synergy sometimes is explained as one plus one
equals three, it seems that a much better explanation is one plus one
equals 2.1 (Sirower).
7.4 An example on the difficulties of synergy
assessment and realization
Cloodt in his studies argues that technological learning is expected to
be a key determinant in creating and sustaining a competitive
advantage for industries that are mainly knowledge driven. These
opportunities increase when a firm is exposed to new ideas based on
differences in technological capabilities between the acquiring and the
acquired firm. The unification of two related knowledge bases can
provide opportunities for synergies in future innovation and shorter
innovation lead-time while reducing redundant R&D efforts.
However, a few difficulties can rapidly be identified even with very
obvious synergy potentials:
Some degree of differentiation in technological capabilities
between the two firms may enrich the acquiring firm’s
knowledge base and create opportunities for learning. However,
technological knowledge and engineering capabilities that are
too similar to the already existing knowledge of the acquiring
company will contribute little to the post-M&A innovation
performance (James).
The challenge for companies is not just to acquire knowledge
bases but also to transfer and integrate them in order to improve
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the post-M&A innovation performance. The integration of a
knowledge base that is of a relatively large size can disrupt
existing innovative activities and render the different integration
stages more complex, more time consuming and full of risks
(DiGuarda).As a result synergies are often overestimated while in
fact an M&A leaves fewer resources for the actual innovative
endeavor until the knowledge base is integrated.
Knowledge depreciates and loses its value over time. The rate at
which the value of knowledge depreciates is likely to vary across
industries but it is especially high in technology intensive
industries. For companies in high-tech industries even quite
recent knowledge dating a couple of years or months already
becomes less valuable or obsolete and thus this knowledge plays
a positive role only a limited period of time after an M&A has
taken place.
Concluding, a firm’s absorptive capacity for knowledge transfer and
integration and the right degree of differentiation in technological
capabilities put severe limitations onto synergy realization. The
valuation of intangible assets as knowledge and technology in the light
of synergy potential might prove to be even more difficult.
7.5 Strategic logic
‘Bad motives’ (e.g. excessive confidence, agency and hubris, external
pressure) are obvious reasons why a firm might not reach performance
targets. A prominent reason reported by Epstein for M&A failure in this
context is that the availability of target firms determines the strategy
of the acquiring company. Such illegitimate strategic logic might be
induced by a competitor’s action spreading the fear of no suitable
targets being left for an M&A deal.
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Thus, the strategic vision of a company should clearly articulate an
M&A rationale that is centered on the creation of long-term
competitive advantage. Whether and how much synergy exists in a
particular acquisition is likely to be a function of the strategic
objectives driving a deal.
While ‘integration’ or ‘culture issues’ often are reported as the main
reason for an M&A project to fail or not to reach the required
performance, insufficient strategic logic interestingly is hardly
considered as a reason for failure (Epstein). Thus, a central question
arises here: To which extent does an insufficient strategic logic
endanger M&A success or to which extent difficulties can be attributed
to the integration problematic itself?
At first glance, rather simple questions like the following might be
straightforward to answer:
How big is the overlap in products and territories with the target
firm?
How similar are the markets between the combined firms based
on their customer groups?
How complementary are the production processes between the
combined firms based on their required resources?
However, according to Palmatier and Ghauri an acquiring firm has only
a partial knowledge of customers, products, and channels and has a
biased perspective (asymmetric information). As a result, estimation of
strategic fit and synergy potential, choice of integration level and
anticipation of negative synergies based on uncertain or even incorrect
information can subsequently cause major integration difficulties and
can indeed cultivate culture dissonance.
A study on post-M&A integration by Ravenscraft and Scherer (in Datta)
supports these findings. They conclude that, on average, acquiring
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firms have not been able to maintain the pre-merger levels of
profitability of the targets. They argue that an acquiring firm does not
know enough about the potential of the company it is buying and
consequently can unconsciously destroy success factors of the target
firm.
7.6 Interview studies
Beside these most prominent reasons for M&A failure discussed above
Lucks in his interview studies reports various other reasons for failure
or dangers for synergy realization that were reported by management
and key employees (in no particular order):
1) Management, key people and employee departure
2) No participation of middle management during strategic
planning, due diligence and integration
3) Double burden of managers, dilution of management attention
onto the main business
4) Underestimation of acquisition (legal, advisory, due diligence)
and integration (conflict resolution, standardization, IT) costs
5) Missing internal and external dedicated people
6) No consideration of expectation of partner firm
7) No clear assignment of competencies
8) Unprofessional communication (partners, employees,
shareholders, media, customers etc.)
9) Bounded rationality (M&A being an overly complex task that
cannot be fully captured anymore)
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8) Alternatives to mergers and acquisitions
In order to pool assets, combine resources and exploit synergies, firms
can either permanently merge their operations within a new legal
entity through an M&A project or they can choose to collaborate on
well defined and limited areas of business while retaining their
strategic and legal autonomy through forming an alliance, a co-
operation or a joint venture. Both strategies make it possible to
capture business opportunities that neither partner could pursue alone.
Alliances, co-operations and joint ventures are very different in nature.
However, they are all feasible alternatives to industry concentration
through mergers and acquisitions since they can produce some of the
effects that could also be obtained from merging partner firms. They
can be an attractive move to expand and capture valuable capabilities
without running the high risk of failure and without having to pay the
premium attached to an acquisition. These alternatives make it
possible to avoid the culture and organization shock to a certain extent
by proceeding step-by-step and by gradually adapt to the partner.
From such a perspective, they provide not only an alternative to M&A
deals but also can be a first step toward a merger during which
partners can learn about each other and uncertainty can be reduced.
Alliances, co-operations and joint ventures also share a similar set of
motives as do mergers and acquisitions projects (refer to chapter 4).
However, the literature indentifies a few additional specific motives for
such common business activities, in particular the possibility to:
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spread costs and risks across partner firms,
collaborate with a less rigid arrangement allowing for fast
formation and break up (e.g. to react to highly volatile demand
or to react to rapid changes in product technology),
Collaborate in a project- or business-specific manner with the
option for an enduring business relationship.
Beside these evident advantages of such alternative business activities
there are also some shortcomings due to the inherent setup of those.
Any rationalization pursued with those alternatives will be limited in
scope and effectiveness because of some characteristics that
distinguish them from mergers and acquisitions:
All decisions must be made by consensus among
the partner firms.
One of the parties cannot force the other to accept any particular
solution. And even if one of the partners dominates the alliance, it
would be unwise for it to enforce too many of its own decisions
against the wishes of the partner. Such a behavior would very likely
lead to the collapse of the alliance. This ‘multiplication of decision-
making centers’ (Garrette) makes it considerably longer and more
complex (if not paralyzing) to decide on controversial issues as e.g.
innovation and product development, eliminating redundant assets,
rationalizing product lines etc.
Alliances and co-operations are temporary in
nature and must remain reversible.
By definition it has to be possible to terminate alliances without
putting both partner firms at risk. One of the basic justifications
for choosing alliances over more permanent forms of
organization is exactly that they can be undone relatively easily.
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As a result achieving economies of scale is rather difficult
because it makes terminating the alliance practically impossible.
Risk of learning and skill/technology transfer
A study by Garrette et al. shows that a vast majority (75%) of
inter-continental alliances are formed mainly to benefit from
complementarily, while intra- European alliances, on the
contrary, predominantly seek to benefit from increased
economies of scale (84%). If one of the partners uses the
alliance or co-operation to progressively capture the knowledge
contributed by the other the initial complementarily of the
alliance is eroded away by the learning taking place between
the firms. Then, the entire ‘raison d’être’ of the partnership
disappears. As learning is usually not simultaneous and
reciprocal one of the partners becomes able to operate on its
own while the other continuously depends heavily on the
partnership.
In such cases, it is not unusual that the partner that has
succeeded in acquiring all the necessary skills terminates the
partnership while keeping the formerly common business
running on his own. Such learning phenomenon is unusual with
scale alliances since both partners have very similar skills and
little to learn from each other such that no major competencies
are transferred
Alliance fate Scale alliance
(%)
Complementary alliance
(%)
Continues with no
skill transfer
57 31
Terminated with no 22 16
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skill transfer
Continues with skill
transfer
20 25
Taken over by one
partner
100 100
Fig. 8.1: The outcomes of scale and complementary alliance
regarding skill transfer (Garrette).
Some countries, such as the People's Republic of China and to some
extent India, require foreign companies to form joint ventures with
domestic firms in order to enter a market. This requirement often
forces technology and knowledge transfers to the domestic partner.
Summarizing, managers should consciously balance the reasons for
and against an M&A deal and consider alternatives. Beside alliances,
co-operations and joint ventures, a strategy’s objectives eventually can
be achieved by internal investments. As an example, Dickerson et al.
(in Ghauri) show that company growth through acquisition yielded a
lower rate of return than growth through internal investment.
However, starting a new business from scratch does not impose the
disadvantages of M&A projects on a firm but brings with its own
difficulties.
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9) Reasoning of M&A activity in an early project phase
Independent of the motives for an M&A project, the acquiring company
must evaluate whether both firms are proper choices as merger
partners and the right fit to fulfill the strategic vision. No set of
questions could fully capture a phenomenon as complex as M&A.
However, as a summary, the following guideline shall represent all
merger and acquisition matters discussed throughout this work in a
condensed form to prevent managers from one-sided and poorly
thought-through decisions and common dangers putting a high risk to
the M&A project.
Without plausible response to these fundamental questions on
strategic logic and some preliminary integration matters, acquirers are
on their way to losing the acquisition game from the beginning even
before the due diligence or even the integration starts to happen:
9.1 The acquiring company’s strategy
What are your company’s competitive gaps (weaknesses,
strengths) and challenges (threats, opportunities) in a given
market?
Is your company’s strategy independent of M&A as a strategic
option and independent of acquisition candidates available on
the market?
9.2 M&A motives
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
How can a merger and acquisition support your company’s
strategy?
Which types of motive are considered: exploitation, exploration,
preservation or survival? Rational or irrational?
What is the relevance of an M&A for the implementation of the
overall strategy?
To which class of M&As does the project belong: horizontal,
vertical, conglomerate or concentric?
9.3 Strategic fit between target and acquiring firm
Does the target company improve the acquiring firm’s
competitive advantage?
Which attributes does a target company need to fit into the
strategy?
What is the degree of diversification: focus-increasing or focus-
decreasing?
9.4 Sources of synergies and price premium
What are the stand-alone expectations of acquirer and target?
What types of synergy potential exist?
Modular, reciprocal or sequential?
Complementarily or similarity?
cost, revenue, intangibles?
M&A (Fig. 9.1):
Strategic objective
Consolidate
With a
geographic
area
Extend or
add new
products,
services, or
technologies
Enter a
new
market
Vertically
integrate
Enter a
new line
business
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
Type of Synergy
Cost High Low Low Moderate Low
Revenue Low High High Low None
Market
Pow.
High Moderate Low High None
Intangible Moderate Moderate Moderat
e
Low Low
Fig. 9.1: Linking strategic objectives and synergies (Schweiger).
Value assessment:
Where will performance gains emerge in detail as a result of the
M&A?
How big are these gains?
What is the time-frame for realization? Does the value of
synergies depend on time?
Risk assessment:
What is the severity of non-achievement to M&A objectives?
What is the probability of non-achievement?
What is the degree of control and delectability to these risks?
Measurement:
How is the progression of the project measured?
How is M&A project ‘successes and ‘failure’ defined?
9.5 Integration, transformation and culture
What are the major integration necessities in the target and in
the acquiring firm?
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Which integration efforts are required: consolidation,
standardization or coordination?
What is an appropriate level of integration to realize the
synergies defined?
Which integration scenarios do exist?
What are the milestones of the implementation plan?
Who are the key managers and employees responsible for the
implementation?
Which are the critical success factors of the target company? Are
they preserved or diminished by the pursuit strategy? Which
actions are taken to prevent destroying these success factors?
What incentives exist to foster M&A integration for acquiring and
acquired firm management and employees?
Does the target company fit the national and corporate culture of
the acquiring company?
9.6 Costs and negative synergies
How big are the efforts and investments needed for synergy
realization and integration?
What are the impacts of the M&A project on internal and external
stakeholders and on the core business?
Which strategic considerations and integration processes might
undermine synergy realization or even create negative
synergies?
Does cultural difference between target and acquiring firm foster
or hinder post- M&A integration?
What additional investments will be required to anticipate
negative synergies or resolve conflicts?
9.7 Competition’s reaction
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Which competitors are affected by the pursuit M&A?
How will those competitors respond?
How will the response concern the M&A project’s objectives?
9.8 Alternative business collaborations
Which objectives and performance gains cannot be realized with
alternative investments?
Which risks and costs could be prevented by alternative business
collaboration?
What are the ratios between gains and risks, gains and costs for
M&A and feasible alternatives?
Dyer evaluates alternatives according to five criteria: type of synergy
potential, ratio between intangible and tangible resources, amount of
redundancy, market uncertainty, and intensity of competition for
resources
Taking into account all these matters the all-dominant questions are:
Can the acquiring firm extract more value from the target firm
than the current owners?
The value extracted will be more than the price paid for the
assets?
Picot illustrates in a qualitative and simple example how managers
should see their merger and acquisition evaluation in a summary
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10) A CASE STUDY: HP COMPAQ MERGER DEAL
Brief Description
The following is a brief description of the two companies:
HP
It all began in the year 1938 when two electrical engineering graduates
from Stanford University called William Hewlett and David Packard
started their business in a garage in Palo Alto. In a year's time, the
partnership called Hewlett-Packard was made and by the year 1947,
HP was incorporated. The company has been prospering ever since as
its profits grew from five and half million dollars in 1951 to about 3
billion dollars in 1981. The pace of growth knew no bounds as HP's net
revenue went up to 42 billion dollars in 1997. Starting with
manufacturing audio oscillators, the company made its first computer
in the year 1966 and it was by 1972 that it introduced the concept of
personal computing by a calculator first which was further advanced
into a personal computer in the year 1980. The company is also known
for the laser-printer which it introduced in the year 1985.
Compaq
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The company is better known as Compaq Computer Corporation. This
was company that started itself as a personal computer company in
the year 1982. It had the charm of being called the largest
manufacturers of personal computing devices worldwide. The company
was formed by two senior managers at Texas Instruments. The name
of the company had come from-"Compatibility and Quality". The
company introduced its first computer in the year 1983 after at a price
of 2995 dollars. In spite of being portable, the problem with the
computer was that it seemed to be a suitcase. Nevertheless, there
were huge commercial benefits from the computer as it sold more than
53,000 units in the first year with a revenue generation of 111 million
dollars.
Reasons for the Merger
A very simple question that arises here is that, if HP was progressing at
such a tremendous pace, what was the reason that the company had
to merge with Compaq? Carly Fiorina, who became the CEO of HP in
the year 1999, had a key role to play in the merger that took place in
2001. She was the first woman to have taken over as CEO of such a big
company and the first outsider too. She worked very efficiently as she
travelled more than 250,000 miles in the first year as a CEO. Her basic
aim was to modernize the culture of operation of HP. She laid great
emphasis on the profitable sides of the business. This shows that she
was very extravagant in her approach as a CEO. In spite of the growth
in the market value of HP's share from 54.43 to 74.48 dollars, the
company was still inefficient. This was because it could not meet the
targets due to a failure of both company and industry. HP was forced
to cut down on jobs and also be eluded from the privilege of having
Price Water House Cooper's to take care of its audit. So, even the job
of Fiorina was under threat. This meant that improvement in the
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internal strategies of the company was not going to be sufficient for
the company's success. Ultimately, the company had to certainly plan
out something different. So, it was decided that the company would be
acquiring Compaq in a stock transaction whose net worth was 25
billion dollars. Initially, this merger was not planned. It started with a
telephonic conversation between CEO HP, Fiorina and Chairman and
CEO Compaq, Capellas. The idea behind the conversation was to
discuss on a licensing agreement but it continued as a discussion on
competitive strategy and finally a merger. It took two months for
further studies and by September, 2001, the boards of the two
companies approved of the merger. In spite of the decision coming
from the CEO of HP, the merger was strongly opposed in the company.
The two CEOs believed that the only way to fight the growing
competition in terms of prices was to have a merger. But the investors
and the other stakeholders thought that the company would never be
able to have the loyalty of the Compaq customers, if products are sold
with an HP logo on it. Other than this, there were questions on the
synchronization of the organization's members with each other. This
was because of the change in the organization culture as well. Even
though these were supposed to serious problems with respect to the
merger, the CEO of HP, Fiorina justified the same with the fact that the
merger would remove one serious competitor in the over-supplied PC
market of those days. She said that the market share of the company
is bound to increase with the merger and also the working unit would
double.
Advantages of the Merger
Even though it seemed to be advantageous to very few people in the
beginning, it was the strong determination of Fiorina that she was able
to stand by her decision. Wall Street and all her investors had gone
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against the company lampooning her ideas with the saying that she
has made 1+1=1.5 by her extravagant ways of expansion. Fiorina had
put it this way that after the company's merger, not only would it have
a larger share in the market but also the units of production would
double. This would mean that the company would grow tremendously
in volume. Her dream of competing with the giants in the field, IBM
would also come true. She was of the view that much of the
redundancy in the two companies would decrease as the internal costs
on promotion, marketing and shipping would come down with the
merger. This would produce the slightest harm to the collection of
revenue. She used the ideas of competitive positioning to justify her
plans of the merger. She said that the merger is based on the
ideologies of consolidation and not on diversification. She could also
defend allegations against the change in the HP was. She was of the
view that the HP has always encouraged changes as it is about
innovating and taking bold steps. She said that the company requires
being consistent with creativity, improvement and modification. This
merger had the capability of providing exactly the same.
Advantages to the Shareholders
The following are the ways in which the company can be advantageous
to its shareholders:
Unique Opportunity: The position of the enterprise is bound to
better with the merger. The reason for the same was that now the
value creation would be fresh, leadership qualities would improve,
capabilities would improve and so would the sales and also the
company's strategic differentiation would be better than the existing
competitors. Other than this, one can also access the capabilities of
Compaq directly hence reducing the cost structure in becoming the
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largest in the industry. Finally, one could also see an opportunity in
reinvesting.
Stronger Company: The profitability is bound to increase in the
enterprise, access and services sectors in high degrees. The company
can also see a better opportunity in its research and development. The
financial conditions of the company with respect to its EBIT and net
cash are also on the incremental side.
Compelling Economics : The expected accumulation in IIP gains
would be 13% in the first financial year. The company could also
conduct a better segmentation of the market to forecast its revenues
generation. This would go to as much as 2 and a half billion dollars of
annual synergy.
Ability to Execute: As there would be integration in the planning
procedures of the company, the chances of value creation would also
be huge. Along with that the experience of leading a diversified
employee structure would also be there.
Opposition to the Merger
In fact, it was only CEO Fiorina who was in favor of going with the
merger. This is a practical application of Agency problem that arises
because of change in financial strategies of the company owners and
the management. Fiorina was certain to lose her job if the merger
didn't take effect. The reason was that HP was not able to meet the
demand targets under her leadership. But the owners were against the
merger due to the following beliefs of the owners:
The new portfolio would be less preferable : The position of the
company as a larger supplier of PCs would certainly increase the
amount of risk and involve a lot of investment as well. Another
important reason in this context is that HP's prime interest in Imaging
and Printing would not exist anymore as a result diluting the interest of
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the stockholders. In fact the company owners also feel that there
would be a lower margin and ROI
Strategic Problems would remain Unsolved : The market position
in high-end servers and services would still remain in spite of the
merger. The price of the PCS would not come down to be affordable by
all. The requisite change in material for imaging and printing also
would not exist. This merger would have no effect on the low end
servers as Dell would be there in the lead and high-end servers either
where IBM and Sun would have the lead. The company would also be
eluded from the advantages of outsourcing because of the surplus
labor it would have. So, the quality is not guaranteed to improve.
Finally, the merger would not equal IBM under any condition as
thought by Fiorina.
Huge Integrated Risks : There have been no examples of success
with such huge mergers. Generally when the market doesn't support
such mergers, don't do well as is the case here. When HP could not
manage its organization properly, integration would only add on to the
difficulties. It would be even more difficult under the conditions
because of the existing competitions between HP and Compaq. Being
prone to such risky conditions, the company would also have to vary
its costs causing greater trouble for the owner. The biggest factor of all
is that to integrate the culture existing in the two companies would be
a very difficult job.
Financial Impact : This is mostly because the market reactions are
negative. On the other hand, the position of Compaq was totally
different from HP. As the company would have a greater contribution
to the revenue and HP being diluted at the same time, the problems
are bound to develop. This would mean that drawing money from the
equity market would also be difficult for HP. In fact this might not seem
to be a very profitable merger for Compaq as well in the future.
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The basic problem that the owners of the company had with this
merger was that it would hamper the core values of HP. They felt that
it is better to preserve wealth rather than to risk it with extravagant
risk taking. This high risk profile of Fiorina was a little unacceptable for
the owners of the company in light of its prospects.
So, as far as this merger between HP and Compaq is concerned, on
side there was this strong determination of the CEO, Fiorina and on the
other side was the strong opposition from the company owners. This
opposition continued from the market including all the investors of the
company. So, this practical Agency problem was very famous
considering the fact that it contained two of the most powerful
hardware companies in the world. There were a number of options like
Change Management, Economic wise Management, and Organizational
Management which could be considered to analyze the issue. But this
case study can be solved best by a strategy wise analysis. (HP-Compaq
merger faces stiff opposition from shareholders stock prices fall again,
2001)
Strategic Analysis of the Case
Positive Aspects
A CEO will always consider such a merger to be an occasion to take a
competitive advantage over its rivals like IBM as in this case and also
be of some interest to the shareholders as well. The following are the
strategies that are related to this merger between HP and Compaq:
1) Having an eye over shareholders' value: If one sees this merger
from the eyes of Fiorina, it would be certain that the shareholders
have a lot to gain from it. The reason for the same is the increment
in the control of the market. So, even of the conditions were not
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suitable from the financial perspective, this truth would certainly
make a lot of profits for the company in the future.
2) Development of Markets: Two organizations get involved in
mergers as they want to expand their market both on the domestic
and the international level. Integration with a domestic company
doesn't need much effort but when a company merges
internationally as in this case, a challenging task is on head. A
thorough situation scanning is significant before putting your feet in
International arena. Here, the competitor for HP was Compaq to a
large degree, so this merger certainly required a lot of thinking.
Organizations merge with the international companies in order to set
up their brands first and let people know about what they are
capable of and also what they eye in the future. This is the reason
that after this merger the products of Compaq would also have the
logo of HP. Once the market is well-known, then HP would not have
to suffer the branding created by Compaq. They would be able to
draw all the customers of Compaq as well.
3) Propagated Efficiencies: Any company by acquiring another or by
merging makes an attempt to add to its efficiencies by increasing
the operations and also having control over it to the maximum
extent. We can see that HP would now have an increased set of
employees. The only factor is that they would have to be controlled
properly as they are of different organizational cultures.
4) Allowances to use more resources: An improvised organization
of
Monetary resources, intellectual capital and raw materials offer a
competitive advantage to the companies. When such companies
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merge, many of the intellects come together and work towards a
common mission to excel with financial profits to the company. Here,
one can't deny the fact that even the top brains of Compaq would be
taking part in forming the strategies of the company in the future.
5) Management of risks: If we particularly take an example of this
case, HP and Compaq entering into this merger can decrease the
risk level they would have diversified business opportunities. The
options for making choice of the supply chain also increase. Now
even though HP is a pioneer in inkjet orienting, it would not have to
use the Product based Facility layout which is more expensive. It can
manage the risk of taking process based facility layout and make
things cheaper. Manufacturing and Processing can now be done in
various nations according to the cost viability as the major issue.
6) Listing potential: Even though Wall Street and all the investors of
the company are against the merger, when IPOs are offered, a
development will definitely be there because of the flourishing
earnings and turnover value which HP would be making with this
merger.
7) Necessary political regulations: When organizations take a leap
into other nations, they need to consider the different regulations in
that country which administer the policies of the place. As HP is
already a pioneer in all the countries that Compaq used to do its
business, this would not be of much difficulty for the company. The
company would only need to make certain minor regulations with
the political parties of some countries where Compaq was flourishing
more than HP.
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8) Better Opportunities: When companies merge with another
company, later they can put up for sale as per as the needs of the
company. This could also be done partially. If HP feels that it would
not need much of warehouse space it can sell the same at increased
profits. It depends on whether the company would now be regarded
a s a make to stock or a make to order company.
9) Extra products, services, and facilities: Services get copyrights
which enhances the level of trade. Additional Warehouse services
and distribution channels offer business values. Here HP can use all
such values integrated with Compaq so as to increase its prospects.
Negative Aspects
There are a number of mergers and acquisitions that fail before they
actually start to function. In the critical phase of implementation itself,
the companies come to know that it would not be beneficial if they
continue as a merger. This can occur in this merger between HP and
Compaq due to the following reasons.
1) Conversations are not implemented: Because of unlike cultures,
ambitions and risk profiles; many of the deals are cancelled. As per as
the reactions of the owners of HP, this seems to be extremely likely.
So, motivation amongst the employees is an extremely important
consideration in this case. This requires an extra effort by the CEO,
Fiorina. This could also help her maintain her position in the company.
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2)Legal Contemplations: Anti-competitive deals are often limited by
the rules presiding over the competition rules in a country. This leads
to out of order functioning of one company and they try to separate
from each other. A lot of unnecessary marketing failures get attached
to these conditions. If this happens in this case, then all that money
which went in publicizing the venture would go to be a waste.
Moreover, even more would be required to re-promote as a single
entity. Even the packaging where the entire inventory from Compaq
had the logo of HP would have to be re-done, thus hampering the
finance even further.
3) Compatibility problems: Every company runs on different
platforms and ideas. Compatibility problems often occur because of
synchronization issues. In IT companies such as HP and Compaq, many
problems can take place because both the companies have worked on
different strategies in the past. Now, it might not seem necessary for
the HP management to make changes as per as those from Compaq.
Thus such problems have become of greatest concern these days.
4) Fiscal catastrophes: Both the companies after signing an
agreement hope to have some return on the money they have put in to
make this merger happen and also desire profitability and turnovers. If
due to any reason, they are not able to attain that position, then they
develop a abhorrence sense towards each other and also start
charging each other for the failure.
5) Human Resource Differences: Problems as a result of cultural
dissimilarities, hospitality and hostility issues, and also other behavior
related issues can take apart the origin of the merger.
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6) Lack of Determination: When organizations involve, they have
plans in their minds, they have a vision set; but because of a variety of
problems as mentioned above, development of the combined company
to accomplish its mission is delayed. Merged companies set the goal
and when the goal is not accomplished due to some faults of any of the
two; then both of them develop a certain degree of hatred for each
other. Also clashes can occur because of bias reactions. (William,
2008)
7) Risk management failure : Companies that are involved in
mergers and acquisitions, become over confident that they are going
to make a profit out of this decision. This can be seen as with Fiorina.
In fact she can fight the whole world for that. When their self-
confidence turns out into over-confidence then they fail. Adequate risk
management methods should be adopted which would take care of the
effects if the decision takes a downturn. These risk policies should rule
fiscal, productions, marketing, manufacturing, and inventory and HR
risks associated with the merger.
Strategic Sharing
Marketing
Hp and Compaq would now have common channels as far as their
buying is concerned. So, the benefits in this concern is that even for
those materials which were initially of high cost for HP would now be
available at a cheaper price. The end users are also likely to increase.
Now, the company can re frame its competitive strategy where the
greatest concern can be given to all time rivals IBM. The advantages of
this merger in the field of marketing can be seen in the case of shared
branding, sales and service. Even the distribution procedure is likely to
be enhanced with Compaq playing its part
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Operations
The foremost advantage in this area is that in the location of raw
material. Even the processing style would be same making the
products and services synchronized with the ideas and also in making
a decent operational strategy. As the philosophical and mechanical
control would also be in common, the operational strategy would now
be to become the top most in the market. In this respect, the two
companies would now have co-production, design and also location of
staff. So, the operational strategy of HP would now be to use the
process based facility layout and function with the mentioned shared
values.
Technology
The technical strategy of the company can also be designed in
common now. There is a disadvantage from the perspective of the
differentiation that HP had in the field of inkjet printers but the
advantages are also plentiful. With a common product and process
technology, the technological strategy of the merged company would
promote highly economical functioning. This can be done through a
common research and development and designing team.
Buying
The buying strategy of the company would also follow a common
mechanism. Here, the raw materials, machinery, and power would be
common hence decreasing the cost once again. This can be done
through a centralized mechanism with a lead purchaser keeping
common policies in mind. Now Hp would have to think with a similar
attitude for both inkjet printers as well as personal computers.
Infrastructure
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This is the most important part of the strategies that would be made
after the merger. The companies would have common shareholders for
providing the requisite infrastructure. The capital source, management
style, and legislation would also be in common. So, the infrastructure
strategies would have to take these things into account. This can be
done by having a common accounting system. So, the infrastructural
benefits can be made through a common accounting, legal and human
resource system. This would ensure that the investment relations of
the company would improve.
HP would now have to ensure another fact that with this merger they
would be able to prove competitors to the present target and those of
competitors like IBM as well. The degree of diversification needs to be
managed thoroughly as well. This is because; the products from the
two companies have performed exceptionally well in the past. So, the
most optimum degree of diversification is required under the context
so that the company is able to meet the demands of the customers.
This has been challenged by the owners of HP but needs to be carried
by the CEO Fiorina.
11 Conclusions
The overall conclusion from hundreds of studies is that most mergers
and acquisitions fail to achieve superior financial performance but have
a modest negative effect on the long-term performance of acquiring
firms. According to a KPMG study in 2000, 83% of deals failed to
deliver shareholder value and an alarming 53% even destroyed value.
Sirower in his book ‘The Synergy Trap’ argues: “So many mergers fail
to deliver what they promise that there should be a presumption of
failure.”
Despite decades of research, what impacts the financial performance
of firms engaging in M&A activity remains largely vague, unexplained
or full of contradicting evidence – in particular from a strategic
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management perspective. A research stream is best characterized to
be mature when
1) A substantial number of empirical studies have been conducted.
2) These studies have generated reasonably consistent and
interpretable findings.
3) The research has led to a general consensus concerning the
nature of key relationships (Palich).
The M&A performance literature fails to satisfy the last two criteria.
That fact is troubling since no significant and generally valid success
factors for M&A deals that drive the success can be extracted.
Haspeslagh and Jemison in their studies have argued that “nothing can
be said or learned about acquisitions in general”.
It would be unfortunate if this were the only wisdom one could offer
managers gambling with shareholder resources. Altogether it seems
that managers must still suffer from an overdependence on intuition
due to missing significant results from research on M&As and the many
conflicting findings reported in the literature.
The present work uncovers two major shortcomings of most and even
today’s M&A performance studies that might reason the widely
reported vagueness and lacking evidence: methodology of the studies
and their M&A motive assumption. Regarding methodology, most
researchers have studied M&A performance on populations of deals
with little regard to the characteristics of those deals, for example
vertical vs. horizontal M&As, level of integration, size of deal, culture
concerns etc. In particular, strategic logic and insufficiencies thereof
have been widely neglected. However, context is important since
specific matters of dissimilar types of deals may not generalize very
well. As a consequence, it does not astonish that these studies could
not extract significant success factors and argue on downsides of
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mergers and acquisitions being of value for practitioners. Concerning
motives, the vast majority of studies assume that M&A deals must
improve returns to shareholders. However, this ignores many other
‘legitimate’ and ‘illegitimate’ motives for M&A activities beside synergy
realization and that managerial actions could be in the best interest of
the firm and still may not result in improved firm value from that
transaction.
Based on the deficiencies of performance studies on generally valid
strategic success factors, the present work offers then a more
complete overview on M&A motives in an early project stage reviewing
the research literature and consultant surveys and incorporating
expert interviews and manager surveys. The broad set of rational and
irrational motivations presented, first, allows a much more subtle
assessment of post-
M&A firm performance, second, simplifies a sound review of strategic
logic and reasoning for M&A activity and, third, opens a much broader
view on upcoming integration and transformation difficulties like
negative synergies and culture concerns. A framework is presented
then to assess an M&A project and its characteristics on an individual
basis to increase the likelihood of success. No guide or checklist could
fully capture a phenomenon as complex as M&As since they involve
the interaction of a large number of target and acquiring firm
variables. However, the sporadic nature of M&As and their dissimilarity
from mangers’ regular experience make a condensed framework as
presented throughout this work a valuable tool that shall prevent
managers from one sided and poorly thought-through decisions and
common dangers putting a high risk to the M&A project and the
acquiring firm. Without plausible response to fundamental questions on
strategic logic and some preliminary integration matters, acquirers are
on their way to lose the acquisition game from the beginning even
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“Fundamentals of Strategic Integration for Merger and Acquisition ”
before the due diligence or even the integration starts to happen. It is
not that mergers and acquisitions cannot succeed - but there are many
barriers to be overcome and pitfalls to be avoided:
A firm that takes over another firm makes two assumptions. The first is
that the acquiring firm can extract more value from the same assets
than the current owners. The second assumption is that the value
extracted will be more than the price paid for the assets.
The fact that these assumptions are often incorrect is the core reason
why many merger and acquisition projects fail as profit enhancing tool.
Insufficient synergy realization is mainly caused by synergies that are
either not present or exaggerated by the buyer, or, by synergies that
cannot be effectively realized due to integration difficulties. A study by
Sirower found that of 168 deals analyzed, roughly twothird of all
companies studied too often think they can generate synergy faster, in
greater amounts and with less additional costs than is really possible.
In particular, management fails to think through integration and
synergy realization at the very beginning of an M&A project having no
detailed conception and action plan on how value should be generated.
Independent of the underlying motives for an M&A project, during post
merger integration many different matters must be carefully blended
such as for example different strategies, brands, product portfolios,
production processes, knowledge and technology, pricing policy,
support functions, sourcing and distribution partners, administrative
policies and processes including the management of human resources,
technical operations, marketing activities and customer relationships.
Depending on the level of integration such a blending imposes many
difficulties and pitfalls for synergy realization and for reaching other
M&A objectives.
Formal considerations in a pre-M&A phase on the other hand still begin
and end far too often with the analysis of financial indices only instead
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of reviewing also strategic logic of target firm selection, valuation of
synergy potential and detailed planning of synergy realization,
anticipation of negative synergies, considerations of additional human
and monetary resources required for implementation, knowhow
management, assessment of organizational fit between target and
acquiring firm, preservation of the target firm’s success factors, the
ability to merge two organizational or national cultures and the
consideration of feasible alternative business collaborations beside
M&A.
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