Mergers and acquisitions are terms almost always used together in business to refer to two or more business entities participating in a business. More often than not is a merger where two companies of roughly the same size and strength meet to form a single entity. The shares of both companies are merged into one. A profession is usually a larger company that buys a smaller one. This takes the form of a takeover or a buyout and can either be a friendly trade union or the result of a hostile bid where the smaller company has very little to say in the matter. The smaller target company ceases to exist, while the acquiring company continues to trade its stock. One example is where a number of smaller UK companies ceased to exist when taken over by the Spanish bank Santander. The exception to this is when both parties agree, regardless of the relative strength and size, to present themselves as a merger rather than a profession. An example of a true merger would be Glaxo Wellcome joining SmithKline Beecham in 1999 when both companies became GlaxoSmithKline. An example of a profession that appeared as a merger for apparent reasons was the acquisition of Chrysler by Daimler-Benz that same year. As already seen, since mergers and acquisitions are not easily categorized, it is not easy to analyze and explain the many variables that underlie the success and failure of M & As.
Historically, a distinction has been made between congeners and conglomerate mergers. Broadly speaking, congeneric companies are those in the same industry and at a similar level of economic activity, while conglomerates are mergers from unrelated industries or companies. Congenarian can also be seen as (a) horizontal mergers and (b) vertical mergers depending on whether the products and services are of the same type or mutually supportive. Horizontal mergers may come under scrutiny of antitrust laws if the result is seen as a monopoly. One example is the UK Competition Commission, which prevents the country’s largest supermarket chains from buying retail Safeway. Vertical mergers occur when a customer in a business and business merges, or when a supplier to a business and business merges. The classic example given is an ice cream vendor merging with an ice cream maker.
The ‘first wave’ of horizontal mergers occurred in the United States between 1899 and 1904 during a period called the Great Merger Movement. Between 1916 and 1929, the ‘second wave’ was more of vertical mergers. After the Great Depression and World War II, the ‘third wave’ of conglomerate mergers occurred between 1965 and 1989. The ‘fourth wave’ between 1992 and 1998 saw congeneric mergers and even more hostile takeovers. Since 2000, globalization has encouraged cross-border mergers, resulting in a ‘fifth wave’. The total worldwide value of mergers and acquisitions in 1998 alone was $ 2.4 trillion, up 50% from the previous year (andrewgray.com). The entry of developing countries into Asia to the M&A stage has resulted in what is described as the “sixth wave”. The number of mergers and acquisitions in the United States alone amounted to $ 376 in 2004 at a cost of $ 22.64 billion, while the previous year (2003) cost only $ 12.92 billion. The growth of M & As worldwide seems to be unstoppable.
What is the raison d’etre for spreading mergers and acquisitions? In short, the intention is to increase shareholder value beyond the sum of two companies. The main goal of any business is to grow with profit. The term used to denote the process by which this is performed is ‘synergy’. Most analysts come up with a list of synergies such as economies of scale, eliminating duplicate functions, which in this case often results in staff reductions, acquisition of new technology, expansion of market reach, greater industry visibility and improved capacity to raise capital. Others have emphasized, even more ambitiously, the importance of M & As as “indispensable … to expanding product portfolios, entering new markets, acquiring new technologies and building a new generation of organizations with the power and resources to compete on a global basis. “(Virani). However, as Hughes (1989) noted “the expected efficiency gains are often not realized”. Statistics reveal that the error rate for M & As is somewhere between 40-80%. Even more damning is the observation that “If you define ‘failure’ as a lack of increased shareholder value, statistics show that these are at the higher end of the 83% scale.
Despite the reported high incidence of its failure rate “Corporate mergers and acquisitions (M & As) (continuing to be) popular … over the past two decades thanks to globalization, liberalization, technological development and (one) intense competitive business environment ”(Virani 2009). Even after the ‘credit crisis’, Europe (both Western and Eastern) is attracting strategic and financial investors, according to a recent M&A study (Deloitte 2007). The reasons for the few successes and the many failures remain unclear (Stahl, Mendenhall, and Weber, 2005). King, Dalton, Daily, and Covin (2004) conducted a meta-analysis of M&A performance studies and concluded that “despite decades of research, affecting the financial performance of firms engaging in M&A activity remains largely inexplicable” (p.198 ). Mercer Management Consulting (1997) concluded that “an alarming 48% of mergers underperform their business after three years” and Business Week recently reported that in 61% of acquisitions, buyers “destroyed their own shareholders’ wealth”. It is impossible to see such comments either as an explanation or an endorsement of the continued popularity of M & As.
Traditionally, explanations for M&A results have been analyzed within the theoretical framework of economic and strategic factors. For example, there is the so-called ‘winner’s curse’, where the parent company is supposed to have paid the odds of the company being acquired. Even when the agreement is financially sound, it can fail because of ‘human factors’. Job loss and the associated uncertainty, anxiety and resentment among employees at all levels can demoralize the workforce to such an extent that a company’s productivity could fall between 25 to 50 percent (Tetenbaum 1999). Personality conflicts that result in senior executives quitting acquired companies (‘50% within a year ‘) are not a healthy outcome. A paper titled ‘Mergers and Acquisitions Leads to Long-Term Leadership Unrest’ in Journal of Business Strategy (July / August 2008) suggests that M & As ‘destroys leadership continuity’ with target companies losing 21% of their executives each year for at least 10 year, which is double the turnover of other companies.
Problems described as ‘ego collisions’ in top management have been seen more frequently in mergers between equals. The 1964 Dunlop – Pirelli Association, which became the world’s second largest tire company, ended in an expensive split. There is also a merger between two weak or underperforming companies that pull each other down. An example is the 1955 merger of automakers Studebaker and Packard. By 1964, they had ceased to exist. There is also the ever present danger that CEOs want to build an empire that acquires asset will. This is often the case when the remuneration of top executives is tied to the size of the company. Remuneration for business attorneys and investment bank greed are also factors that influence the spread of M & As. Some companies may target tax benefits of a merger or acquisition, but this can be seen as a secondary benefit. Another cause of M&A failure has been identified as ‘over leverage’ when the main company pays cash for the subsidiary assuming too much debt for service in the future.
M & As are usually unique events, perhaps once in a lifetime for most top performers. Therefore, there is virtually no opportunity to learn from experience and improve one’s performance next time. However, there are a few exceptions, such as the conglomerate GE Capital services, with over 100 acquisitions over a five-year period. As Virani (2009) states, “… serial acquirers who possess the internal skills needed to promote acquisition success as (a) well-trained and competent implementation team are more likely to make successful acquisitions”. What GE Capital has learned over the years is summarized below.
1. Long before the agreement is concluded, the integration strategy and process should be initiated between the two sets of top managers. If incompatibilities are detected at this early stage, such as differences in management style and culture, either a compromise can be reached or the agreement abandoned.
2. The integration process is recognized as a distinct management function attributed to a hand-picked person selected for his / her interpersonal and cross-cultural sensitivity between the parent company and the subsidiary.
3. If there are to be layoffs due to restructuring, these must be notified as soon as possible with any exit remuneration packages.
4. People and not just procedures are important. As early as possible, it is necessary to form problem-solving groups with members from both companies that hopefully result in a bonding process.
These measures are not without their critics. Problems may still come up long after the merger or acquisition. Whether or not one should aim for total integration between two very different cultures is questionable. That there could be an optimal strategy out of four possible modes of: integration, assimilation, separation or deculturation.
A paper by Robert Heller and Edward de Bono titled ‘Mergers and Acquisitions and Acquisitions: It’s Easy to Buy Another Business, But Making the Merger a Success is Full of Pitfalls’ (07/08/2006) looks at examples of failed mergers from the relatively recent past and make recommendations to avoid their mistakes. Their findings could be generalized to other M & As, and so it is worth noting.
They begin with the BMW – Rover merger, where they have identified strategic failures. BMW invested $ 2.8 billion Pound in the acquisition of Rover and lost 360,000 pounds annually. The strategic goal had been to expand the buyer’s product line. However, the first combined product was the Rover 75, which competed directly with existing BMW mid-range models. The other existing Rover cars were outdated and competitive and the job of replacing them was abandoned late.
Another fly in the ointment was that the stated profits that Rover allegedly made were subsequently considered illusory. Subject to BMW’s accounting principles, they were turned into losses. Naturally, BMW had failed in the practice of ‘due diligence’. (Due diligence is described as the detailed analysis of all important functions such as finance, governance, physical assets and other less tangible assets (Virani 2009). Interestingly, the authors point to instances of mergers being more successful than mergers. For example, Vodafone, the mobile phone retailer now owned by Racal is now valued at $ 33.6 billion, 33 times greater in value than the parent company Racal, the second instance being ICI and Zeneca, where spin-off is worth £ 25 billion as against the parent company valued at £ 4 billion.
The authors refer to the fact that the leadership tension at the peak after a merger becomes broader and this can cause new stresses. Due to difficulties in adapting to the new realities, the need for positive action tends to be put on the back burner. Delay is dangerous, as BMW executives realized. While BMW set goals and expected 100% accession, Rover was in the habit of achieving only 80% of the goals set. Walter Hasselkus, the German manager of the Rover after the merger, respected Rover’s current culture that he failed to impose the much more stringent BMW ethos and ultimately lost his position.
Another failure in BMW’s strategy implementation that was recognized by the authors was investing in the wrong assets. BMW paid just £ 800 million for Rover, but invested £ 2 billion in factories and businesses, but not in product development. BMW has so far concentrated quite successfully on executing cars produced in smaller numbers. They felt blatantly vulnerable in an industry dominated by large, large volumes of cars. It is not always the case that bigger is better. In fragmented markets, even transnational companies are losing their customers to niche, more attractive, small players.
There was an earlier reference in this essay to the success of giant drugs like SmithKline Beecham. But they are now losing large sums to dispose of the drug distribution companies they have acquired at great cost; clearly a strategic mistake, as the author’s’ label ‘jumps on the bandwagon’. They quote a top US manager bidding on a smaller financial company in 1998 who is asked why they say ‘Aw, shucks, fellers, all the other kids have one …’ The right strategy they suggest is to reorganize around core businesses eliminating irrelevance and strengthening the core. They provide the example of Nokia that disposed of paper, tires, metals, electronics, cables and TVs to concentrate on mobile phones. Here is a case of successful reverse merger. On the other hand, top executives should have the vision of transforming a business by imaginatively mixing different activities to appeal to the market.
Ultimately, it is up to the visionary CEO to steer the course of the new merged business. The authors give the example of Silicon Valley, where ‘new ideas are the central currency and visionaries dominate’. They say the Silicon Valley mergers succeeded because the targets were small and were purchased, while existing businesses themselves experienced dynamic growth.
What has not been addressed so far in this essay is the phenomenon of cross-border or cross-cultural mergers and acquisitions that are gaining in importance in the 21st century. This fact is recognized as the “sixth wave” in which China, India and Brazil emerge as global players in trade and industry. Cross-cultural negotiation skills are central to success in cross-border M & As. Transnational corporations (TNCs) are very actively involved in these negotiations, with their annual value-added business being larger than some nation-states. A detailed account of the dynamics of cross-cultural negotiations in M & As can be found in Jayasinghe 2009 (pp. 169 – 176). The ‘cultural dynamics of M&A’ has been studied by Cartwright and Schoenberg, 2006. Other researchers in this area use terms such as ‘cultural distance’ ‘cultural compatibility’, ‘cultural fit’ and ‘sociocultural integration’ as determining M&A success.
It is agreed that the M&A activity is at its peak after an economic downturn. All five historical ‘waves’ of M&A business bear witness to this. One of the main reasons for this could be the rapid decline in the target companies’ share value. A significant factor in the rise in the global foreign direct foreign investment (FDI) stock, which was $ 14 billion in 1970 to $ 2,000 billion in 2007, was due to ‘mergers and acquisitions (M & As) of existing entities as opposed to establishing a brand new entity (i.e. ‘Greenfield’ investment ’)’ (Rajan and Hattari 2009). Increasing global economic activity alone may have accounted for this increase. In the early 1990s, M&A deals were worth $ 150 billion, while in the year 2000 they peaked at $ 1,200 billion, most of them due to cross-border agreements. By 2006, however, it had dropped to $ 880 billion. Rajan and Hattari (op cit) attribute this growth to the growing importance of cross-border integration of Asian economies.
During 2003-06, the share of developed economies (EU, Japan and USA) in M&A procurement had decreased. From 96.5 percent in 1987, 87 percent had failed in 2006. This is said to be due to the rise of Asian economies both in terms of value as well as the number of M & As. Sales plunged after the economic downturn appears to increase M&A activity, plunged after the Asian crisis of 1997-98. While sales in 1994-96 were set at $ 7 billion, it had increased threefold to $ 21 billion between 1997 and 1999. Rajan and Hittari (2009) attribute this increase to the ‘depressed asset values compared to the pre-crisis period’. Indonesia, Korea and Thailand, most affected by the crisis, reported the highest M&A activity.
China is one of the countries that does not suffer from the effects of the global recession to the same extent as most Western economies. China has bought assets from Hong Kong, and in 2007, purchases accounted for 17 percent of total M&A deals in Asia (excluding Japan). Rajan and Hattari looked at investors from Singapore, Malaysia, India, Korea and Taiwan. This led to the hypothesis that the larger size of the host country and its distance from the target country is a determining factor for cross-border M&A activity. They also found that exchange rate variability and credit availability are factors affecting M & As, and have generalized this to conclude that ‘financial variables (liquidity and risk) affect global M&A transactions … especially intra-Asian ‘.
On the other hand, it is reported that overall M & As were hit by the global recession and had lost valuation by 76% in 2009. While 54 deals worth $ 15.5 billion took place in 2008 between April and August, during the same period, 72 M&A deals were worth only $ 3.73 billion in 2009. The industries that dominated in the M&A sectors were IT, pharmaceuticals, telecommunications and power. There were also agreements involving metal, banking / finance, chemical, petrochemical, construction, engineering, healthcare, manufacturing, media, real estate and textiles.
The influential Chinese consulting firm, China Center for Information Industry Development (CCID), has concluded that while some companies are on the brink of bankruptcy during the global recession, it has’ significantly reduced corporate M&A costs. As industry investment opportunities decrease, investment uncertainties increase, M & As show greater values …. As was proven in the previous 5 high tides of global industrial capital M & As, each recession period that results from (a) global financial crisis , been a period of active M & As’.
Most commentators believe that in addition to the empirical research cited above, research from a broader perspective is needed to include the disciplines of psychology, sociology, anthropology, organizational behavior, and international leadership in order to continually improve our understanding of the dynamics of success or failure with mergers and acquisitions that are increasingly becoming the most popular form of industrial and economic growth across the globe. The evidence of how the current global financial crisis is affecting the spread of M & As has not been directly negative or positive. Many intermediate variables have been suggested in this essay, but more systematic work is required for an exhaustive analysis.