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Total Number of Subscribers: 426 |
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Date: 26 April 2008 |
Compiled by Mr. M. Sathya Kumar |
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MERGERS &
ACQUISITION A Case of System
Failure Abstract Corporate mergers and acquisitions (M&As) have become
popular from corner to corner the world during the last two decades thanks to
globalization, liberalization, technological developments and intensely
competitive business environment. The synergistic gains from M&As may
result from more efficient management, economies of scale, more profitable
use of assets, exploitation of market power, the use of complementary
resources, etc. Interestingly, the results of many empirical studies show
that M&As fails to create value for the shareholders of acquirers. In
this article I covered background of merger and acquisition, reasons for
failure of merger and acquisition, and impact of merger on shareholders. Introduction Mergers and acquisitions are almost a daily occurrence in the
life sciences. Competition is fierce, and companies must team up to survive
in an industry where specialized knowledge is king. One of the largest, most
critical, and most difficult parts of a business merger is the successful integration
of the enterprise networks of the merger partners. BPO Systems has the
expertise and skills to make your merger or acquisition a much smoother
process. The prime objective of a firm is to grow profitably. The growth
can be achieved either through the process of introducing or developing new
products or by expanding or enlarging the capacity of existing products.
Mergers and Acquisitions (M&As) are quite important forms of external
growth. The last decade of 20th century has been substantial increase in both
number and volume of M&A activity. In fact, consolidation through
M&As has become a major trend across the globe. This wave was driven by
globalization, liberalization, technological changes, and market deregulation
and liberalization. Almost all industries are going through reorganization
and consolidation. M&A activity has been predominant in sectors like steel,
aluminum, cement, auto, banking and finance, computer software,
pharmaceuticals, consumer durables, food products, agro-chemicals, textiles,
etc. Generally M&As aims at achieving greater efficiency,
diversification, market power, etc. The synergistic gains by M&A activity
accrue from more efficient management, economies of scale and scope, improved
production techniques, combination of complementary resources, redeployment
of assets to more profitable uses, the exploitation of market power or any
number of value enhancing mechanisms that fall under the rubric of corporate
synergy. M&As is a indispensable strategic tool for expanding product
portfolios, entering new markets, acquiring new technologies and building new
generation organization with power and resources to compete on a global
basis. Background When M&As is taking place all over the world irrespective of
the industry, it is necessary to understand the basic concepts pertinent to
this. The term merger involves coming together of two or more concerns
resulting in continuation of one of the existing entities or forming of an
entirely new entity. When one or more concerns merge with an existing
concern, it is the case of absorption. The merger of Global Trust Bank (GTB)
with Oriental Bank of Commerce (OBC) is an example of absorption. After the
merger, the identity of the GTB is lost. But the OBC retains its identity. Amalgamation involves the
fusion of two or more companies and forming of a new company. The merger of
Bank of Punjab and Centurion Bank resulting in formation of Centurion Bank of
When the acquisition is 'forced' or 'unwilling', it is generally
called takeover. Though, the terms 'merger', 'amalgamation', 'acquisition'
and 'takeover' have specific meanings, they are generally used
interchangeably. Mergers may be horizontal, vertical or conglomerate.
Further, they may be friendly or hostile. Generally, mergers are friendly
whereas tender offers are hostile. M&As aim at optimum utilization of all
available resources, exploitation of unutilized and under utilized assets and
resources including human resources, eliminating or limiting the competition,
achieving synergies, achieving economies of scale, forming a strong human
base, installing an integrated research platform, removing sickness,
achieving savings in administrative costs, reducing tax burden and ultimately
improving the profits. Reasons for Failure of Mergers and Acquisitions Though the M&As basically aim at enhancing the shareholders
value or wealth, the results of several empirical studies reveal that
M&As consistently benefit the target company's shareholders but not the
acquirer company shareholders. A majority of corporate mergers fail. Failure
occurs on average, in every sense, acquiring firm stock prices likely to
reduce when mergers are announced; many acquired companies sold off; and
profitability of the acquired company is lower after the merger relative to
comparable non-merged firms. Consulting firms have also estimated that from one 1. Excessive premium In a competitive bidding situation, a company may tend to pay
more. Often highest bidder is one who overestimates value out of ignorance.
Though he emerges as the winner, he happens to be in a way the unfortunate
winner. This is called winners curse hypothesis. When the acquirer fails to
achieve the synergies required compensating the price, the M&As fails.
More you pay for a company, the harder you will have to work to make it
worthwhile for your shareholders. When the price paid is too much, how well
the deal may be executed, the deal may not create value. 2. Size Issues A mismatch in the size between acquirer and target has been
found to lead to poor acquisition performance. Many acquisitions fail either
because of 'acquisition indigestion' through buying too big targets or failed
to give the smaller acquisitions the time and attention it required. 3. Lack of research Acquisition requires gathering a lot of data and information and
analyzing it. It requires extensive research. A carelessly carried out
research about the acquisition causes the destruction of acquirer's wealth. 4. Diversification Very few firms have the ability to successfully manage the
diversified businesses. Unrelated diversification has been associated with lower
financial performance, lower capital productivity and a higher degree of
variance in performance for a variety of reasons including a lack of industry
or geographic knowledge, a lack of focus as well as perceived inability to
gain meaningful synergies. Unrelated acquisitions, which may appear to be
very promising, may turn out to be big disappointment in reality. 5. Previous Acquisition Experience While previous acquisition experience is not necessarily a
requirement for future acquisition success, many unsuccessful acquirers
usually have little previous acquisition experience. Previous experience will
help the acquirers to learn from the previous acquisition mistakes and help
them to make successful acquisitions in future. It may also help them by taking
advice in order to maximize chances of acquisition success. Those serial
acquirers, who possess the in house skills necessary to promote acquisition
success as well trained and competent implementation team, are more likely to
make successful acquisitions. 6. Unwieldy and Inefficient Conglomerate mergers proliferated in 1960s and 1970. Many
conglomerates proved unwieldy and inefficient and were wound up in 1980s and
1990s. The unmanageable conglomerates contributed to the rise of various
types of divestitures in the 1980s and 1990s. 7. Poor Cultural Fits Cultural fit between an acquirer and a target is one of the most
neglected areas of analysis prior to the closing of a deal. However, cultural
due diligence is every bit as important as careful financial analysis.
Without it, the chances are great that M&As will quickly amount to
misunderstanding, confusion and conflict. Cultural due diligence involve
steps like determining the importance of culture, assessing the culture of both
target and acquirer. It is useful to know the target management behavior with respect
to dimensions such as centralized versus decentralized decision making, speed
in decision making, time horizon for decisions, level of team work,
management of conflict, risk orientation, openness to change, etc. It is necessary to assess the cultural fit between the acquirer
and target based on cultural profile. Potential sources of clash must be
managed. It is necessary to identify the impact of cultural gap, and develop
and execute strategies to use the information in the cultural profile to
assess the impact that the differences have. 8. Poor Organization Fit Organizational fit is described as "the match between
administrative practices, cultural practices and personnel characteristics of
the target and acquirer. It influences the ease with which two organizations
can be integrated during implementation. Mismatch of organation fit leads to
failure of mergers. 9. Poor Strategic Fit A Merger will yield the desired result only if there is
strategic fit between the merging companies. Mergers with strategic fit can
improve profitability through reduction in overheads, effective utilization
of facilities, the ability to raise funds at a lower cost, and deployment of
surplus cash for expanding business with higher returns. But many a time lack
of strategic fit between two merging companies especially lack of synergies
results in merger failure. Strategic fit can also include the business philosophies of the
two entities (return on investment v/s market share), the time frame for
achieving these goals (short-term v/s long term) and the way in which assets
are utilized. For example, P&G –Gillette
merger in consumer goods industry is a unique case of acquisition by an innovative
company to expand its product line by acquiring another innovative company,
which was, described analysts as a perfect merger. 10. Striving for Bigness Size no doubt is an important element for success in business.
Therefore there is a strong tendency among managers whose compensation is
significantly influenced by size to build big empires. Size maximizing firms
may engage in activities, which have negative net present value. Therefore
when evaluating an acquisition it is necessary to keep the attention focused
on how it will create value for shareholders and not on how it will increase
the size of the company. 11. Faulty evaluation At times acquirers do not carry out the detailed diligence of
the target company. They make a wrong assessment of the benefits from the
acquisition and land up paying a higher price. 12. Poorly Managed Integration Integration of the companies requires a high quality management.
Integration is very often poorly managed with little planning and design. As a
result implementation fails. The key variable for success is managing the
company better after the acquisition than it was managed before. Even good
deals fail if they are poorly managed after the merger. 13. Failure to Take Immediate Control Control of the new unit should be taken immediately after
signing of the agreement. ITC did so when they took over the BILT unit even
though the consideration was to be paid in 5 yearly installments. ABB put new
management in place on day one and reporting systems in place by three weeks. 14. Failure to Set the Pace for Integration The important task in the merger is to integrate the target with
acquiring company in every respect. All function such as marketing,
commercial; finance, production, design and personnel should be put in place.
In addition to the prominent persons of acquiring company the
key persons from the acquired company should be retained and given sufficient
prominence opportunities in the combined organization. Delay in integration
leads to delay in product shipment, development and slow down in the
company's road map. Acquisition of Scientific Data Corporation by Xerox in 1969 and
AT&T's acquisition of computer maker NCR Corporation in 1991 were
troubled deals, which resulted in large write offs. The speed of integration
is extremely important because uncertainty and ambiguity for longer periods
destabilizes the normal organizational life. 15. Incomplete and Inadequate Due Diligence Lack of due diligence is lack of detailed analysis of all
important features like finance, management, capability, physical assets as
well as intangible assets results in failure. ISPAT Steel is a corporate
acquirer that conducts M&A activities after elaborate due diligence. 16. Ego Clash Ego clash between the top management and subsequently lack of
coordination may lead to collapse of company after merger. The problem is
more prominent in cases of mergers between equals. 17. Merger between Equals Merger between two equals may not work. The Dunlop Pirelli
merger in 1964, which created the world's second largest tier company, ended
in an expensive divorce. Manufacturing plants can be integrated easily, human
beings cannot. Merger of equals may also create ego clash. 18. Over Leverage Cash acquisitions results in the acquirer assuming too much
debt. Future interest cost consumes too great a portion of the acquired
company's earnings (Business India 2005). 19. Incompatibility of Partners 20. Limited Focus If merging companies have entirely different products, markets
systems and cultures, the merger is doomed to failure. Added to that as core
competencies are weakened and the focus gets blurred the fallout on bourses
can be dangerous. Purely financially motivated mergers such as tax driven
mergers on the advice of accountant can be hit by adverse business
consequences. The Tatas for example, sold their soaps business to Hindustan
Lever. 21. Failure to Get Figures Audited It would be serious mistake if the takeovers were concluded
without a proper audit of financial affairs of the target company. Though the
company pays for the assets of the target company, it also assumes
responsibility to pay all the liabilities. Areas to look for are stocks,
salability of finished products, receivables and their collectibles, details
and location of fixed assets, unsecured loans, claims under litigation, loans
from the promoters, etc. When ITC took over the paperboard making unit of
BILT near 22. Failure to Get an Objective Evaluation of the Target
Company' Condition Risk of failure will be minimized if there is a detailed
evaluation of the target company's business conditions carried out by the professionals
in the line of business. Detailed examination of the manufacturing
facilities, product design features, rejection rates, and distribution
systems, profile of key people and productivity of the workers is done.
Acquirer should not be carried away by the state of the art physical
facilities like a good head quarters building, guest house on a beach, plenty
of land for expansion, etc. 23. Failure of Top Management to Follow-Up After signing the M&A agreement the top management should
not sit back and let things happen. First 100 days after the takeover
determine the speed with which the process of tackling the problems can be
achieved. Top management follow-up is essential to go with a clear road map
of actions to be taken and set the pace for implementing once the control is
assumed. 24. Mergers between Lame Ducks Merger between two weak companies does not succeed either. The
example is the Stud backer- Packard merger of 1955 when two ailing carmakers
joined hands. By 1964 both companies were closed down. 25. Lack of Proper Communication Lack of proper communication after the announcement of M&As
will create lot of uncertainties. Apart from getting down to business quickly
companies have to necessarily talk to employees and constantly. Regardless of
how well executives communicate during a merger or an acquisition,
uncertainty will never be completely eliminated. Failure to manage
communication results in inaccurate perceptions, lost trust in management,
morale and productivity problems, safety problems, poor customer service, and
defection of key people and customers. It may lead to the loss of the support
of key stakeholders at a time when that support is needed the most. 26. Failure of Leadership Role Some of the role leadership should take seriously are modeling,
quantifying strategic benefits and building a case for M&A activity and
articulating and establishing high standard for value creation. Walking the
talk also becomes very important during M&As. Not giving sufficient attention to people issues during due
diligence process may prove costly later on. While lot of focus is placed on
the financial and customer capital aspects, not enough attention is given to
aspects of human capital and cultural audit. Well conducted HR due diligence
can provide very accurate estimates and can be very critical to strategy
formulation and implementation. 28. Strategic Another feature of 1990s is the growth in strategic alliances as
a cheaper, less risky route to a strategic goal than takeovers. 30. Loss of Identity Merger should not result in loss of identity, which is a major
strength for the acquiring company. Jaguar's car image dropped drastically
after its merger with British Leyland. 31. Diverging from Core Activity In some cases it reduces buyer's efficiency by diverting it from
its core activity and too much time is spent on new activity neglecting the
core activity. 32. Expecting Results too quickly Immediate results can never be expected except those recorded in
red ink. Whirlpool ran up a loss $100 million in its Philips white goods
purchase. R.P.Goenk's takeovers of Gramaphone Company and Manu Chhabria's
takeover of Gordon Woodroffe and Dunlops fall under this category. Conclusion M&As have become very popular over the years especially
during the last two decades owing to rapid changes that have taken place in
the business environment. Business firms now have to face increased
competition not only from firms within the country but also from
international business giants thanks to globalization, liberalization,
technological changes, etc. Generally the objective of M&As is wealth
maximization of shareholders by seeking gains in terms of synergy, economies
of scale, better financial and marketing advantages, diversification and
reduced earnings volatility, improved inventory management, increase in
domestic market share and also to capture fast growing international markets
abroad. But astonishingly, though the number and value of M&As are
growing rapidly, the results of the studies on the impact of mergers on the
performance from the acquirers' shareholders perspective have been highly
disappointing. In this paper an attempt has been made to draw the results of
only some of the earlier studies while analyzing the causes of failure of
majority of the mergers. Making the mergers work successfully is not that
easy as here we are not only just putting the two organizations together but
also integrating people of two organizations with different cultures,
attitudes and mindsets. Meticulous pre-merger planning including conducting proper due
diligence, effective communication during the integration, committed and
competent leadership, speed with which the integration plan is integrated all
this pave for the success of M&As. While making the merger deals, it is
necessary not only to make analysis of the financial aspects of the acquiring
firm but also the cultural and people issues of both the concerns for proper
post-acquisition integration. |
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