Literature Review On Mergers And Acquisitions Management Essay
Mergers and acquisition are commonly identified as three types in the world market, they are vertical integration where two companies in diferent of supply chain merge together, horizontal integration where two same cindustry companies merge together and diversification where two companies of two different industry merge together (The Economist, 2006) (Morrison and Floyd, 2000). Merger is nothing but the combination of two firms where one survives and the other lose its corporate existence. The company which is acquiring will pay for all the assets and liabilities of the acquired company (Varma, 1997).
Mergers and acquisitions are the companies mainly targeting the globalization and changing the market environment. This is the fastest and more effective way to expand the business in to the new market in the new country (Papadakis, 2005). According to the author, one company thinks to develop its business globally the only way is to go for mergers and acquisition and in the case of Tata motors, it is known as the motor company in India but after the acquisition of the Jaguar (UK company) it is known to all over the world that Indian company first time in the history acquired the British company. According to the auhor, throudh the Mergers and Acquisition only one company can create an image in the world market and develop its business. According to Ravenscraft and Scherer (1989), the profitability of target companies are decline after an acquisition. Rovit et al. (2004) prove their argument after deep anlayses of 724 Unites States based firms over a fifteen years of research from 1986 to 2001, that most of the successful companies creating long term shareholders value to be frequent strong acquirers that maintain a stable programme of transaction throughout economic busts and boom. According to the author, the mergers and acquisitions are not always success sometimes it results in loss to both the acquiring company and the acquired company. Many researches had proved that the opportunity for mergers to fail is high only during the integration process (Simpson, 2000. Cited in Nguyen and Kleiner, 2003). They argue that improper management, strategy, inefficient communication, no clear vision about the company and the culture diffeence is the only reason for the failure of the Mergers and Acquisitions. According to Schuler and Jackson 2001), the failure for the M&A are isentified as poor planning, cultural clash, changing environmental conditions, out of reach expectations, poor communication, poor management, talent loss, integration difficulties etc.According to Flowler and Schmidt (1998), the only way to gloablize the business, to make good profit and growth is the Mergers and Acquisition. According to Bellou (2007), most of the mergers end up in failure in the global market. Calculations prove that 50% to 80% of the mergers and acquisition are failure because they are performing low than the expected according to different industry and measures. There are many example can show the history of failure of mergers and acquisition. The Ford motors acquired Jaguar before Tata but it was not a profitable acquisition so the Ford motors sold it to the Tata motors but now Tata motors is struggling to pay the bridge loan taken to buy the Jaguar company (Businessweek, 2010).
According to Fraclicx and Bolster (1997), the main factor in making or breaking the merger equation is the culture. Moreover, culture is described as a unique solution for both internal and external problems (Schein, 1985a. Cited in Schraeder and self, 2003). The term “Culture Clash” will descibe about the function of two companies such as values, missions, style and philosophies. These are all the factors considered to be dangerous factors when two companies decide to combine (Bijilsma-Frankema, 2001; Cited in Nguyen and Kleiner, 2003). According to Beer et al 91993), the company which is going for mergers and acquisition need to change the culture to fit the strategy. According to Drennan (1992), every organizations has got its own culture. The Larson and Gonedes (1969) model holds that the exchange ratio will be determined by each firm’s assessment of the post merger price / earnings multiple and postulates that each firms requires that its equivalent price per share be at least maintained as a result of the merger. According to the author, they developed a model to to know the price or earnings which will show the profit and loss in that model. In order to check whether the M&A actually increases the market value of the companies so Conn and Nielson (1997) developed the Larson and Gonedes model.
In order to cover the share price movement, synergy and cost reductions, most of the firms including the banks are announcing for immediate pre merger strateigies (Lowe, 1998). The recent studies argued that there is a differnce between the acquired and acquiring employees. The research proves that the acquired employees are the most affected people in the mergers and acquisition (Panchal and Cartwright, 2001). The shareholders value not only depends on the market valuation of the target firm but also depends on the actual acquisition price that the acquiring company pays compared with the selling company’s cash flow contribution to the combined company (Rappaport, 1979).
In the 1960’s most of the acquisitions will be made on the package of securities but now most of the acquisitions are completed with the cash (Rappaport, 1979). According to Gupta and Roos (2001), in the Mergers and Acquisition process only the intangible assets are assumed as the key elements that perform behind the merger and acquisition. Furthermore, this is a good opportunity to make some process involving the transfer of knowledge, technology introduction, strategic implementation and this is a unique experience to study about the outside global market. According to Fishbrook (2007), cross border merger and acquisition activities are increased in today’s global world.
According to Granlund (2003), the Mergers and Acquisition is specially focused on the study of understanding the human and social aspects and it is rarely been analysed from the management accounting point of view. According to Camara and Renjen (2004), if only the senior manager knows about the goal of the Mergers and Acquisition will not make the Merger and Acquisition process success, it’s need to be communicated to the lower level managers and also it needs to be communicated to the lower levels as well because successful merger is starting with a clear understanding of the merger purpose. According to Camara and Renien (2004), the successful merger needs to motivate how the merged company is going to perform differently than the individual company work on its own. According to the author, the goal of the Merger and Acquisition needs to be communicated to all levels of management because poor communication is the main reason for the failure of Merger and Acquisition. According to the author, the main reason for the merger is to make some changes. By making changes only the new merged company can give better service good price so the resources being well used and changing to new systems from the fundamental systems (Hackett, 1996). According to the author, as it is been discussed in the previous paragraph that the main reasons for the Merger and Acquisition are to increase the market value of the share and increase shareholder value by cutting costs and improve the servies (Nguyen and Kleiner, 2003). According to Nguyen and Kleiner (2003), both the companies shareholder will enjoy the “merger of equal” where strength and capabilities will be share qually between the company’s shareholders. According to the mergerstat.com (Cited in Nguyen and Kleiner, 2003) for the date of 2002, there were 4363 Merger and Acquisition woth of $291.7 billion taken in to account and the as a result the industry was broken in to five different categories such as healthcare, telecommunications, internet, semiconductors, and banking.
2.1 WHY MERGERS AND ACQUISITIONS IS NEEDED?
For the organizational growth the Merger and Acquisition activity is considered as the chief method for the last twenty years. The goal of Merger and Acquisition activity is to improve the margins and to increase the market share.according to Lynch and Lind (2002), the merger success rate is very low but also the companies have turned increasingly to mergers and acquisitions. According to Appelbaum (2000), Merger and Acquisition are a formidable challenge for change management. According to Demers et al 92003), the joined organizations are often radically transformed and major reorganizations including streamlining and lay-offs can occur. Legitimisation is particularly needed in that context to explain and justify change, to entice employees to contribute to its implementation, and give them a new version of the organization with which they can identify. According to Lubatkin (1983), improving the overall performance is the only motive for Merger and Acquisition process. According to Cartwright and Cooper (1993), by achieving synergy in the Merger and Acquisition process only will increase the competitive advantage between two business units. According to Cartwright and Cooper (1993), generally the Merger and Acquisition process have the negative impact on the economic performance. According to Testa and Morosini (2001), recent research shows that the merger goes beyond the bounds of the company performance, showing that success or failure can often be bound up with strategic fit, pre and post merger inter firm relations.
According to Early (2004), the mergers and acquisition can be categorise into four basic types,
Acquisition of new skills or products
Market roll-up, as in the banking case with a series of geographic expansions.
Consolidating a mature industry. For example: BP acquisition of Amoco.
Transformation acquisition. For example: AOL’s acquisition of time warner.
2.2 TERMINOLOGIES IN RELATION TO MERGER AND ACQUISITION:
According to Dyer (2005), there are some common terminologies which is used very frequently in today’s business world and it is very important to know.
Mergers create a new organization out of two or more organizations of more or less equal stature, pooling all resources.
Acquisitions are very risky and it usually aims to enter into the new market to increase the sales, shareholder value and mainly aims to decrease the costs. Acquisitions add a small firm onto the existing structure of a larger organization.
Alliances are entirely diffeent from acquisitions because it is very less risky and it is negotiable, co-operative and easier to walk away from. Alliances bring the two firms together with mutual interest but different strengths to work on particular projects that offer benefit to both.
Conglomerates bring large firms together but each maintains its seperate identity. They might share some resources, but benefit from decentralization and don not aim to combine strategy.
2.3 MERGERS ANDS ACQUISITION AND STRATEGIC THINKING:
The mergers and acquisition effects produced by the MNE (Multi National Enterprise) are ambiguous since they depend upon the nature of the post merger organization. According to Williams (1999), the joint venture effect is very difficult to judge since their organizational manifestation may take a range of forms from equity sharing to some form of loose collaborative arrangement. According to William (1999), the licensing and franchising are considered as the contractual entry modes and it is unlikely to produce such pronounced effects since they do not involve the transfer of productive capability. According to the author, nowadays the companies started to see that the Merger and Acquisition as a strategic tool and they try to expect benefit from synergies – customer value, improvements in competitiveness, product innovation this can be achieved by integrating two entities. According to the author, successful buyers are the people who deal the approach proactively and are driven by the strategic indent. According to the author, the successful buyers needs to develop an understating as early as possible of about what value the acquisition will add and how it will do so and they are able to explain this to the investors. According to Gadiesh et al (2001), successful buyers also understand the perspectives of competing bidders and the negotiating stance of all players involved.
2.4 MERGER AND ACQUISITION AND ITS EFFECT ON TOTAL VALUE CREATION:
All the most of the Mergers and Acquisitions will go well and if it is done so badly it can be enormous. A shareholder will lose hundreds of millions fo dollars value when there is a one percent loss in the return on investment. According to Chanmugam (2005), a new way of thinking about the most of the Mergers and Acquisitions process is needed because which will result in synergy, valuations, planning and estimation that are specific and unique to the acquirer and that will result in a increase on the return on invetment which will result in good shareholder value. According to Chanmugam (2005), many companies organize their post merger integration activities on a functional basis rather than the value added basis.
According to Donnelly (2005), in the total value of cross border mergers, there are some technical problems which need to be taken into consideration in order to make it success such as taxation, differences in market conditions, accounting systems, and stakeholder and shareholder expectations as well as cultural differences. According to the author, among these problems cultural difference is the biggest problems in the Mergers and Acquisitions process.
As per McNish research indicate that acquirers who are relatively strong performers compared to their targets do better than average in the acquisition game. However, acquirers rarely succeed when their intention in pursuing a well performing acquisition is to fix their own, poorly performing business. Research also suggests that industry-relatedness seem to matter. Acquirers who buy companies in their own industry do appear to receive more market approval, at least initially, than those that reach far outside of their existing industry. This reflects the market’s estimation of the ability of the management team to understand that acquisition and also of the steepness of the learning curve necessary to drive the integration (Early’2004).
2.5 MERGER AND ACQUIITION A STRATEGIC INDENT: IMPLICATION AND IMPLEMENTATION:
According to Dyer (2005), any company before they start their Merger and Acquisition activity needs to focus on the internal factors and the external factors of the company because internally the organization needs to focus on the resources that are to be combined and the extend of redundant resources and the type of synergy the firms seek to create and in the external factors that the company should be taken into question are the degree of market uncertainty and level of competition. According to the author, one common questions are faced by today’s executives is what kind of acquisition policy makes sense in an environment so that the shareholders will get their money back without any loss and the investors claim that major diversifying acquisitions have little credibility. According to the Mamdani and Noah (2005), different people will see the acquisition in the different angle like the organization may see the acquisitions as a way of spreading risks and shareholders may see the acquisitions differently and different people may see the acquisitions will see in the different angle.
According to Mamdani and Noah (2005), for accomplishing major corporate objective Merger and Acquisition is the effective tool and it can be calssified into five different categories:
Rolling up competitors in geographically fragmented markets;
Removing overcapacity in mature industries;
Purchasing research and development and new technology platforms;
Exploiting eroding industry boundaries through industry convergence;
Extending into new products of markets;
According to Nguyen and Kleiner (2003), the success of the merger is solely related to the level and quality of planning involved and if the company is not spending enough time in anlayzing and anticipating the current and future market trends as well as the integration issues and it will result in failure only.
According to Dyer (2005), Epstein suggests five key drivers for success are listed below:
Communication between senior management on both sides, as well as a
constant supply of information to customers and staff.
Coherent integration strategy with decisions based on a neutral, objective
ground be they about staff, resources or technologies.
Strong integration team with a strong leader, which works to integrate
Aligned measurements, which relate closely to merger strategy and can be used as targets for customer satisfaction, employee retention, risk management and so on.
Speed in implementation, whereby the post-merger integration is planned
from the outset and initiated at the first available opportunity.
The reasons for the success of the merger of British Petroleum (BP) and US based Amoco (Sala,a et al, 2004):
Team merges the operating divisions such as computing systems, accounting and human resource management.
The team called integration team was set up between two companies and it has been led by the senior line manager who report to the chief executive of the company.
Culture assessment helps the two companies to identify the major differences and similarities between the values, attitudes, beliefs and the management style between the two companies.
Top executives strong commitment leads to the new entities into the future which helped to minimize uncertainity.
Integration strategies – which helped to overcome culture diversity and avoided clashes which is simply called “Cultural Clash”.
Employees are motivated to come with new ideas and the opportunities by the proper training and support which increased the individual satisfaction and organizational effectiveness.
The integration team checking regularly by surveying the staff every four weeks for the first eighteen months to see how people felt about this merger process. And the feedback of these surveys helped the top management to target their communication more effectively.
According to the Nguyen and Kleiner (2003), KPMG has developed the best practice guidelines to help managers successfully deliver value from mergers. These golden rules include the following main keys to successful integration.
Directors must get out of the boardroom;
Set direction for the new business;
Understand the emotional political and rational issues;
Focus on communication
Provide clarity around roles and decision lines;
Continue to focus on customers; and
According to Cartwright and Cooper (1998), the mergers and acquisition result in success because if the Japanese company decides to take over an organization it will usually learn about its culture through working with them in some sort of temporary partnering arrangement like a joint venture. This will increase the level of trust about the organizations before making decision to merge eith other organizations.
2.6 MERGER AND ACQUISITION AND FINANCIAL BENEFITS:
Increasing cash flow in the form of increased share holder value is considered as the Mergers and Acquisitions success. According to the author, that is not the real success because in the recent survey of senior executives about how they measure Mergers and Acquisitions success, in that only nine percent of them defined success as the increase in the share holder value. Nearly forty percent defined that Mergers and Acquisitions success is in non financial terms such as market share or portfolio expansion. According to Chanmugam (2005), these are importan goals but even if the company was successful on these measures but still the deal can destroy value. These non-financial strategic definitions are only valid if they have a financial basis and can be clearly translated into financial outcomes.
According to Appellbaum et al (2000), one company needs to manage both the implication positive and negative of the integration process by maximizing the cost efficency while minimising organizational disruptions, for this they require managerial improvisation as well as experience.
Harris and Winston (1983) provided analysis of the erger benefits in the rail sector; Tremblay and tremblay (1988) attempt to establish the determinants of horizontal acquisitions in the US brewing industry; and Knapp (1990) undertook an event analysis of the air carrier mergers. Rhoades and Yeats (1974) studied the impact of Mergers and Acquisitions activity on shareholder calue in banking; The findings of these sector-contained studies were often contradictory (eg. Consolidations in the brewing industry were found as not being driven by the motive to gain market share whereas such motive featured as the primary factor in the air carrier mergers), although findings consistent across the sectors were also observed(eg. Consolidation is principally driven by large companies). On the whole, the studies generally showed that sector specifics played an important role in determining the financial outcome of the consolidation (Dragun & Howard,2003). The number of researchers (Hirschey,1986;Morck etal., 1990;Hanson and Song,1996)has investigated the agency problem in Merger & Acquisition process and concluded that management of consolidation companies may have incentives divergent from those required to pursue the task of shareholder wealth maximisation. The effect of consolidation on concentration and market share was studied by Muller(1985) , George and Jacquemin(1992); the results confirmed that companies acquired in conglomerate mergers experienced substantial losses in market shares relative to control group companies.
According to Shelton (2003), Mergers and acquisitions are extremely risky when they try to involve in the other organizations in the other countries. According to the author, most of the Mergers and Acquisitions fails to deliver their intended benefits. According to Shelton (2003), research shows that less than a fifth of international most of the Mergers and Acquisitions add value to shareholder value.
According to Galpin and Herndon (2000), after the mergers and acquisitions process many organizations face very lower sales and the increased number of customer complaints about the products and service. When there is a increased number of complaints on sales and service it is easy for the custome to look for the same product in other company. According to author, it is the managers responsibility to ensure and maintain the specific standard for the sales and service provided to the customer according to their expectation. According to Galpin and Herndon (2000), in order to increase the sale and service the company needs to plan and execute within the short period of time.
Acording to Early (2004), whenever the company is trying to merge or trying to acquire other company it needs to have an integration program heading towards a particular goal. According to Early (2004), for the organization the average return on shareholders is much greater than the market overall. Their returns are much greater than companies that lack the discipline of a formal program or that are just making occasional acquisition.
According to Cartwright and Cooper (1998), for a organization revenue synergies is the hardest part for them to estimate because most of the times the organizations can think that it is doing better post merger in terms of volume and price but they forget to estimate that how their customers and competitors will react. According to Cartwright and cooper (1998), for the organization the one of the main causes of miscalculating the revenue synergy is underestimating the negative impact that mergers can have on the combined volume of the two companies.
TIME DIMENSIONS IN MERGER AND ACQUISITION PROCESS:
Business needs speed or in other words speed is very important for the business. Some people used to say that in the integration process needs to move slowly in order to minimise mistakes and in practical world that is wrong even though it sounds like logical. In today’s competitive and technology driven world the organizations needs to act and respond quickly. A timely Merger and Acquisition is the most important development response to market based change. According to the author, if the companies are not faster then they will loose their opportunity with the competitors. Feldman has said, “Companies that win are those that learn faster, act quicker and adapt sooner” (Huang and Kleiner, 2004). A slow mergers and acquisition process can decrease the profit and cash flow and increases the cost.
2.7 EFFECT ON COST:
In the mergers and acquisitions process the management only pursue the shor term objectives like cost reduction, overhead consolidation or disinvestment on non-core business units. According to Gadiesh (2003), cost reductions can provide funding for longer-term strategic objectives.
According to Raymond (1996), studies showing that between sixty percent and eighty percent of all the mergers are not successful because of the pre merger predictions of cost savings are incorrect for most mergers. According to Raymond (1996), the main reasons are the overestimation of benefits and underestimation of difficulties in integrating the merged firms.
“You must act fast”, says Tony Johnston, Regional Director of British American Tobacco (BAT) Asia Pacific if you are trying to merger to capture the benefits of scale. According to Gadiesh (2003), “The longer you take to make decisions, the more risk you take”.
The one explanation of the cost savings are not materialize as expected is the lack of competitive pressure when merger produce companies with greater market power and monopoly like stature. Businesses begin to tolerate “x-inefficiency” or costs that are higher than necessary because a firm is operating inefficiently, when there are no competitive pressures. As Adam Smith noted, “monopoly… is a great enemy to good management” (American Public power Association, 2005).
According to Cartwright and Cooper (1998), whenever the companies are doing transactions they talk about the cost based synergies as hear dollar synergies and the revenue base synergies as the soft dollar synergies. The cost based synergies tend to keep the things under control and the cost based synergies are relatively easier using the information to the acquirer during the deal. The cost based synergies gives good information to the acquirer about the target’s cost structure and with that it is easy for the acquirer to compare it to the cost structure of similar business inside your company. This gives the acquirer some rough estimates of the potential for improvement.
2.8 CORPORATE CULTURE:
According to Ernst and Young (1994), culture incompatibility is the largest cause for the lack of projected performance, departure of key executives and time consuming conflicts in the consolidation of the business. According to Denison (1996), “culture refers to the deep structure of organizations which is rooted in the beliefs, values, and assumptions held by the organizational members”. According to Schein (1985), organizational culture is a stable notion. According to Hatch (1993), culture is a pattern of basic assumptions that given a group has invented, discovered, or developed in learning to cope with its problems of external adaptation and internal integration and that have worked well enough to be considered valid and therefore to be taught to new members as the correct way to perceive, think, and fell in relation to these problems. According to Weber 91996), the greater number of cultural differences in the organizations in combining top management teams the lower the effectiveness and the lower the financial performance of the finalized merger.
According to Gill (Head of Organizational Development at ASDA) Never let the people in the organization to get offside is the most important element of the successful change.
According to Pollit (2004), it needs five to seven years for the employees to feel truly assimilated into a merger entity because the merger can change the nature, oreientation and character of one or both of the merger partners. According to Mirvis and Marks (1992), due to theh multitude of these changes the post merger period witnesses many problems of adjustments. The failure of Chrysler and Daimler-Benz merger is because of the difference in culture because the operations and management were not successful integrated as “equals” because of the different ways in which Germans and Americans operated. The Daimler-Benz’s stressed a more formal and structures management style but whereas Chrysler operated a more relaxed and freewheeling style. The two companies have different views on different matters and mostly on the important matter like pay scales and travel expenses. As a result of these differences and the Germans units increasing dominance, performance and employee satisfaction at Chrysler took downturn (Nguyen and Kleiner, 2003).
2.9 IMPORTANCE OF COMMUNICATION IN MERGER AND ACQUISITION PROCESS:
According to Bastien (1987), a research shows that 21 managers been interviewed from three different organization involved in Merger and Acquisition process and though that it has been concluded that communication will increase the performance and reduce uncertainity. According to Pollitt (2004), a business will be successful if there is a employee commitment and motivation. According to the author, the business will not be successful if the employees are not committed to the organizations and also the business will not be successful if the employees are not properly motivated by the top management. According to Pollitt (2004), people must be kept informed of fundamental changes throughout the process. According to the author, top level management needs to communicate small fundamental changes in the process to the employees. Clear and open communication is very important for the business and it is the essential part of any change take place in the organization. According to pollitt (2004), without the communication there is a higher risk that people will not embrace change.
According to porter (1980), the top management needs to communicate the inter country factor cost differences, specific environmental threats and opportunities and the motives and the moves of the competitors to the employees in order to make profit and it is very important for the corporations which is operating in the real time communication environment.
Information is very important and it plays a major role in the formation of organizational alignments, transition strategies and the discernment of threats. According to Toffler and Toffler (1993), it is now possible to do anything and it is possible to get any information. It is possible to track global sales via designed software and to monitor foreign radio and television broadcasts. Database for everthing is available and especially to identify locations where particular groups or individuals congregate, with accompanying investigate background profiles on suspected individuals.
If there is no good communication and it can result in severe loss because poor communication can result from understandable desires to delay public announcement of mergers in order to retain customer confidence and maintain stock values. According to the author, this can definitely lead to an atmosphere with full of rumours and suspicious with severe internal and external consequences. According to Nguyen and Kleiner (2003), the frequent and honest dissemination of essential information will give employees ownership of the process. It will help them to feel that they have contributed significantly to make it a success.
According to Rifkin (1997), the top level management has to tell the information to the employees as early as possible so it does not betray their trust later. “Communication early, often, and, honestly” is one of the principles of Cisco’s Successful integration. According to Wyatt (1999), the failure of the Mergers and Acquisition could have been easily avoided if more attention had been paid to elements defined in the literature as “soft issues”. These so called soft issues comprise, amongst othe things, the communication of information to the various stakeholders in the company.
2.9.1 FINANCIAL COMMUNICATION:
According to Heldenbergh etal (2006), for the good comapany’s identity among the public there are events which the company’s needs to go for that is Mergers, Acquisitions and the restructuring. The customers, shareholders and the suppliers may wonder whether these changes will effect on the company’s mission, quality of the product, the company’s commitments, corporate results and the climate of confidence surrounding its operations. According to Heldenbergh et al (2006), in today’s world there is a lot Mergers and Acquisitions is taking place and for these kind of Mergers and Acquisitions the financial communication has become a very important strategic tool directed at all stakeholders. So before and after the Mergers or Acquisitions, the ins and outs of the company operation need to be communicated to the stakeholders as a whole. According to Balmer and Dinnie (1999), there are seven categories of actors identified who would constitute the most important target audiences to whom financial communication has to be intensified. The seven categories are the investors, the staff, the government, the suppliers, the clients, the local authorities. According to the author, as we seen earlier that most of the Mergers and Acquisitions will not give the expected profits because of this reason the various stakeholders in the organizations begins to worry before going for the Mergers and Acquisitions
Among these stakeholders, Balmer and Dinnie (1999) identify seven categories of actors who would constitute the most important target audiences to whom financial communication has to be intensified. These seven main categories are: the staff, the investors (shareholders + bankers + bondholders), the clients, the suppliers, the local authorities, the media and the government. As stated earlier, mergers and acquisitions operations do not invariably produce the expected profits. For this reason, it is not surprising that the various stakeholders in companies planning to undertake a merger begin to worry about the outcome of the deal. Of course, this anxiety is mainly felt by those such as investors and employees, who could incur financial losses because of the transaction and it is necessary to communicate about the risky initiative (Heldenbergh etal,2006).
2.10 CAUSES FOR FAILURE OF MERGER AND ACQUISITION:
To all the organizations whoever is doing Mergers and Acquisitions needs to consist of the multiple steps and the mistakes that are made in the integration process both in the pre-deal planning and the post deal. According to Lynch and Lind (2002), the mistake will happen in three areas during the pre-deal planning period.
Lack of Compelling Strategy: an organization is doing more than one merger in order to increase the shareholder value. The other motives that drives the Mergers and Acquisitions activity is the pressure in the environment or organization stagnation ic the clearly understandable but questionable motive.
Overly optimistic expectations of synergies: There is a desire in the Mergers and Acquisitions process. The desire for the mergers is to acquire one particular business of the target. The lack of synergies and the negative impact of the integration process are the other pieces of the business may be overlooked as a result.
Inadequate due diligence on the part of buyer and/or seller: only few organizations going for the Mergers and Acquisitions activity will do a comprehensive risk assessment and the management profile. According to the author, by doing this one organization will come to know about the risk factors involved in the Mergers and Acquisition process.
According to Marks (1997), lack of experience of the acquirer’s management time with the mergers in the major cause for the failure of the merger. According to the author, it is true all the organizations needs to have a good experience in the merging process or else it will results in failure. According to Lawrence (2002), the main objective of the successful acquisition is the value creation but the empirical and the other studies still indicating the lower success rate for the acquisitions. According to Salama et al (2003), value will not be created until the capabilities are transferred, and the people from both organizations collaborate in order to create the ecpected benefits and the unpredicted opportunities.
2.11 MERGER AND ACQUISITION AND ITS EFFECTS ON EMPLOYEES:
According to Davy et al. (1989), whenever the organization is merges with the other other organization the employees feel that they lost the control over the important aspects of their lives which actually results in employee been stressed as a result lower productivity and reduced job satisfaction. According to Marks and Mirvis (1985), rhe combination of uncertainity and the likelihood of change, both favourable and unfavourable, produces stress and ultimately affects perceptions and jedgements, interpersonal relationships and the dynamics of the business combination itself.
According to Schweiger et al (1987), there are five major issues regarding reactions by employees involved in an acquisition.
Loss of talent;
Loss of identity;
Lack of information and anxiety;
Family repercussions; and
Survival becomes an obsession;
According to Marks (1999), if employees no longer see the potential for future growth within the organization will result in loss in production. According to the author, if the employees no longer see the potential for future growth like job advancement, progressive culture within the organization the employee will feel stress and which results in the loss of production so it is the top management duty to keep the employees happy in order to make profit. According to Levinson (1972), the chief executive officer of the target firm will be most affected by the merger process. These people are often the most innovative and creative people in their company. The resultant loss of control and autonomy during a merger could be devastating to these individuals.
In an organization during the integration process sometimes the poor management and the strategic planning will happen because once the merger deal is signed and sealed the top level managers will remove from the equation. According to Nguyen and Kleiner (2003), a leadership vacuum then results at the precise moment when the employees will be feeling uncertain about their future and looking for the reassurance from powerful figure.
According to Yunker (1983), managers tend to ignore the most sensitive area frequently during the Mergers and Acquisition process because if a company has a good environment to work by employees, as reasonable in relations with labour unions, are critical attributes in attracting good workers.
2.12 MERGER AND ACQUISITION AND ITS EFFECTS ON CUSTOMERS:
Communication delays with the customers about the Mergers and Acquisitions also results in failure. The organization will get a negative outcome if it delays to communicate with the customers about the Mergers and Acquisitions. According to the author, the organization can think why they need to communicate the Mergers and Acquisitions process to the customers but in practical without customer there is no business and the customer will feel unsure about their purchasing decisions because they think which product is going to survive in the market and which product is going to discontinue. The customers also feel afraid that the support personnel that they are dealing with will not be at the new company after the merger. According to the author, the customer has got the shifting power so they can easily shift to the other company product if they are not satisfied with the current product. In order to avoid and also to retain the customer confidence the new company has to share the future product roadmaps with the customers as soon as possible this will make them to feel secure about their purchasing decisions. According to Nguyen and Kleiner (2003), the companys communication with the customer is very important and also it is very important for the organization to assure its customers that the service, support personnel and the sale people will continue to serve without any interruption.
2.13 MERGER AND ACQUISITION AND ORGANIZATIONAL CULTURE:
The Mergers and Acquisitions are generally driven by the financial and strategic consideration but still many of the organizations alliances fail to meet the expectations because of the difficulties in the acculturation process which would compromise the knowledge transfer and the learning to occur. According to Salama et al (2003), the difficulties in the acculturation process could be a function of either or both of the integration strategies or the incompatibility of the partner’s cultures.
The main source for the merger failure is because of the culture differences. According to Nguyen and Kleiner (2003), a company can acquire a small or informally run company if it has a strict hierarchy and rigid reporting and decision making process. According to Nguyen and Kleiner (2003), culture difference is the only problem for the acquired staff and this can create a dissatisfaction and a insecure feeling which will result in loss of productivity.
2.14 KNOWLEDGE CREATION:
According to Simpson (2000), IBM merger professionals says that looking after employees from both sides of the merger can help mitigate losses of intellectual capital that creates exposure, of loss of talent that flee to the competition, or even become the competition.
2.15 MERGERS & ACQUISITIONS IN AUTOMOBILE INDUSTRY:
International mergers are by no means unique in the automotive industry (Capron, 1999). According to Donnelly (2005), the relationship between the Nissan and Renault needs to be contextualised within the expansion of international markets, regional market integration, the internsification of competition and the reduction in tariff barriers to the extent that Mergers and Acquisitions have become the most widely used method of achieving growth particularly in ologopolistically structured industries. According to Capron (2999), the horizontal mergers success rate is good when compare to the other classification of mergers because in the horizontal type where two company which produce same goods will merger together.
According to Capron (1999), merger rationale entails the potentialities in future market development and access to a range of technologies. The success story of Renault and Nissan merger when the merger took place between these two companies Nissan enjoyed strong market presence in the United States and Asia whereas Renault was buoyant in Europe and Mercosur markets. They merger was undoubtedly be of mutual benefit. Nissan’s main strength lay in its engineering technology whereas Renault offered condiserable expertise in research and development. Additionally Renault’s product range was complemented by Nissan’s reputation in pickups and off-road vehicles as well as in top of the range models (Schweitzer, 1999).
Fifty to eighty percent of the mergers will fail not for strategic reasons but because of the poor management of the integration process.
Conflicting corporate culture: The culture that makes one company great may be at direct odds with the core values of the acquired business. New understanding by the acquirers and the acquires, new relationship and new ways of working are all necessary, but not easy to achieve.
No risk management strategies in place: organization must prepare for multiple “what if” scenarios. For changing conditions and the players the integration process needs to incorporate back-up plans in order to achieve it.
Slow post-merger integration: what happen in the first 100 days after the close of deal is critical; it sets the tone for the integration process. Moving too slowly allows natural inertia to set in.
The example of Chrysler corporation and Daimler-Benz merger. Their aim is to create 421,000 employees with a market value of $92 billion and the revenues of $130 billion. In the first year of the post merger operation their revenues grew by 12% and the operating profits increased by 33%, their net income rose by 30% and 19000 new jobs were created because of the good profit (Shelton, 2003).
The primary reason for any Mergers and Acquisition is to increase the market share and also to increase the shareholder market value by cutting costs and initiating new, expanded and improved services. According to the author, in most of the case it is happening totally opposite because most of the Mergers and Acquisition results in failure. For example, initially the Daimler- and the Chrysler merger were performing quite well and the people in both the organizations expected that their “merger of equal” would allow each unit to benefit the other’s strengths and capabilities. In both the organizations the shareholders overwhelmingly approved the merger and the stock prices and analyst predictions reflected the optimism. But after the merger the Chrysler divisions performance was entirely different and as a result the stock price fell by one half since the immediate post-merger high. Since then the Chrysler division began to lose money and there were a significant layoffs in the Chrysler division after the merger(Nguyen and Kleiner, 2003).
2.16 EFFECTS ON BRANDS IN AUTOMOBILE INDUSTRY:
According to Kim and Lavack (1996), brand extensions is needed for all new car models, capitalizing on current consumer perceptions and positioning the new model within the brand family. According to the author, in some cases the established model names have been continued for essentially new products like Toyota Corolla, Ford Mustang and Volkswagen Golf which have been marked for more than two decades with substantial changes. According to Chen and Chen (2000), brand dilution caused by overextension of models and production quantities which have been observed in more prestigious brands including automobiles. according to Leong (1997), although the same effect was not confirmed in the case of master brands. The focus group and the market have researched the experiments of negative impact of the extensions on brand dilution in the FMCG (fast-moving consumer goods) (Glynn and Brodie, 1998).
The fragmentation of the market is increasing is the major dynamic in the merger activity. Accorfing to Donnelly & Morris (2003), the emergence of a growing market for premium brands at the luxury end of the trade has encouraged the big firms to bys the small and high quality companies to add to their brand portfolio and so gain a presence in areas where they had been previously absent. According to Tully and Donnelly (2001), the brand acquisition is more cheaper than the organiza growth and is financially less risky and it saves the development costs.
According to Johnson et al (2005), it is impossible for the competitor to obtain the intangible assets of the company such as brand, image and reputation. For example, if the competitor acquires the company to use the brand but the reputation of the brand may not readily transfer to the new company.Order Now