Abstract
This report looks at mergers and acquisitions globally and considers why so many fail. Despite this scenario, management decision-makers still continue to look for opportunities. This study researches both successful and unsuccessful mergers and acquisitions in order to determine the reasons for both successes and failures. Perhaps, historically mergers have occurred between companies that are similar in size and also have similar interests , yet acquisitions tend to facilitate larger organizations and companies acquiring smaller businesses. It is now common for mergers and acquisitions to be enacted across borders, often providing solutions for corporates to extend their influence from national into international markets. However, despite the financial expertize available to ascertain the viability of such business transactions, many of these business ventures fail, or at best do not perform according to expectation; reflected in adversely affected share prices. This report seeks to understand the motivating factors behind the continuing drive by many boards of directors to pursue this type of business transaction, and how this trend of failures can be reversed.
Introduction
In recent times, global competition and the drive to leverage advantage, has resulted in both small and larger companies combining resources. Consolidations of markets are one of the main reasons for M&A’s. Corporates possessing similar products and services are looking to both consolidate and expand; thereby utilizing joint interests to further their goals. Despite extensive ‘due diligence’ and research, there have been and still are many risks to venture into such business transactions.
Although mergers and acquisitions are motivated by different requirements, the end result is to increase their size and capacity for growth. Due to the increasing development of business systems and ‘know how’ coupled with advances in communication technology, speed of growth and efficiency of operational function have become essential to ensuring survival and continued sustainability. Today’s investors often look for quicker returns on investment due to global economic volatility; thereby driving the search for ways to extract optimal profitability. In theory, mergers and acquisitions can assist businesses to increase efficiency by the lowering of overall costs per unit, known as economies of scale. A combination of joint corporate interests should enable greater revenue, with a lower ‘cost of sale’. However, factors such as differences in management styles and continually changing market conditions can negatively impact projected profitability and growth trends; thereby negating the perceived benefits of mergers and acquisitions. This report now turns to the methodology that is utilized in order to conduct the research needed, following which the causation of successes and failures in these business transactions can be determined.
Methodology
The information and data was sourced online looking at auditing company reports, independent articles and dissertations, management consulting firms and media organizations such as ‘Business Week’. Attention was specifically given to motivating factors driving mergers and acquisitions at the beginning of the century to more recent corporate transactions. In addition, a perspective was sought from sources regarding the varying reasons for such transactions being subject to successes and failures. Notwithstanding a significant failure rate, this research looked at the reasons why shareholders and company directors continued to drive the enactment of such business transactions.
Motivating Factors Behind Mergers and Acquisitions
In researching the motivation behind the above mentioned mergers and acquisitions an article published in 2003, ‘Why do firms carry out mergers and acquisitions, and how can the difficulties involved be overcome?’, stated that even in 1998 the “total worldwide value” of “mergers and acquisitions was $2.4 trillion” (Gray 2003, p.1). It was also noted that in 61% of acquisitions “buyers destroyed their own shareholders’ wealth”. Despite this high failure rate back in 1998, consideration is given to why shareholders and corporate management still persist in directing their attention to business transactions of this nature. Assuming that profit and growth are primary considerations when planning such moves, it would seem that the lessons of history have not been learned.
According to Gray, a perception by some business analysts is the belief that “One of the
most common arguments for mergers and acquisitions are the belief that “synergies” may exist between different companies; thereby enabling more efficiency than if they operated independently. These synergies can materialize in the form of removing the duplication of operational functions, and additionally sharing management expertise. Added to this is a stronger and larger financial base from which to access more capital resources. However, this scenario is valid providing the different management structures can integrate not only their day to day operational functions, but also by merging different human resources invariably endowed with different company cultures and practices.
In an article sourced from Business Week titled, ‘Mergers: Why Most Big Deals Don’t Pay Off’, it was suggested that a driving force behind mergers and acquisitions was ‘an affliction known by many financial economists as the “winners’ curse” (Henry 2002, p. 2). This suggests a mindset that incorporates a ‘safety in numbers’ thinking or possibly the fear of ‘losing out’. Resulting from this perhaps irrational pursuit of thinking is the ignoring of basic business considerations that are normal in any such transactions; proactive actions such as due diligence and factoring in differences of corporate cultures and ideologies.
Another motive behind mergers and acquisitions is regarding increased market share and penetration into new markets. According to a study ‘Motives and Effects of Mergers and Acquisitions’ it was noted that “market power can help companies compete more effectively and revenue growth can be achieved by lowering the prices of products which are highly price sensitive” (Wang 2007, p.21). The study goes on further to provide other motives such the combining of resources thereby enabling the creation of new product lines, technologies and opening up additional markets. Increased market share combined with the creation of innovative products and services can enable two companies to exploit opportunities within the marketplace.
Factors Behind the Failures of Mergers and Acquisitions
There are many factors that may be viewed as causation for mergers and acquisitions failures, however simply put, (Henry 2002, p. 2) suggest that it is often because “primarily because the bidders paid too much”. Notwithstanding, if this was the only primary reason, then financial expertize would have determined systems or methodology in order to prevent the re-occurrence of such failures. However, the merging or takeover of companies is both complex and fraught with risks, both tangible and perhaps less able to predict or evaluate. One these less tangible risks is an unexpected traumatic event as experienced in 9/11, 2001, or a natural disaster such as the recent tsunami in Japan; seriously affecting and disrupting their economy. Of course, current global political and economic uncertainty adds the possibility of further risk to any financial transaction; however history has shown that mergers and acquisitions have failed in large numbers even during times of prosperity and global economic growth.
In addition to the above noted global political and economic uncertainties, a study conducted in 2008, suggested that three primary causes are responsible for merger and take-over failures. It first listed a cause in that “too many executives do not understand the importance of achieving appropriate levels of commonality in their processes and systems” (Duncan 2008, p. 1). This further confirms the above previously discussed theory regarding the relevance of merging or blending two existing cultures and ideologies together, and the inherent risks pertaining to cultural and ideological diversity. Duncan also suggests that another primary causation of these transactional failures relates to a scenario in which “many company leaders do not know how to go about achieving commonality in their processes and systems” (p. 3). Here an organization’s internal functions including the utilization of technical and administrative systems are deemed to include the ability to communicate and translate into “divisional goals and objectives”. He notes that this process of achieving commonality starts at the top of the management structure and flows down throughout the entire corporate infrastructure. To achieve this objective, a common and shared implemented. According to Duncan, a third primary reason for failure is that many mergers and acquisitions do not achieve expected performance levels due to “executives are frequently unable to follow through on the difficult decisions related to post-acquisition and post-merger consolidation” (p. 3). Perhaps in the euphoria and excitement of such corporate transactions, attention is diverted from streamlining the combined infrastructures and resources, and in addition ignoring the necessity of effecting efficiency and the integration of both systems and human resources.
In another sourced article commissioned by a daily newspaper, The Telegraph (U.K.) it was clearly stated that, “Poor governance Lack of clarity as to who decides what, and no clear issue resolution process” (Siegenthaler 2010, p. 1). This statement further justifies and confirms Duncan’s third referenced theory regarding the ability of key management personnel to enact decisions in order to resolve issues pertaining to a merger or take-over. He goes on to specify communication issues specifically relating to the receiver of information and data. This is due to most of the communication by key management strategists being focused and targeted at decision-makers on an equal or similar management level rather than allocating attention to those personnel further down the chain of command. Furthermore, failure to communicate the rationale behind the merger or acquisition, leads a breakdown in the free flow of valuable information throughout the corporate structure. He maintains that all personnel want to know why the business transaction took place and in addition, what improvements are planned, how the company will be more viable after the transaction. Included was the ability for the key management personnel to convey or communicate how the new business structure would “feel”, and how the merger or acquisition would change the nature of their work environment; thereby necessitating the need for support during a period of integration and perhaps, a breakdown of operational and administrative functions.
Finally, in a study conducted in 2007, ‘Mergers and Acquisitions – A Case of System Failure’, it was pointed out that when considering an acquisition, it is important to focus on “how it will create value for shareholders and not on how it will increase the size of the company” (Virani 2007, p. 5). Perhaps by key management decision-makers directing their attention more on growth and infrastructural capacity, key investment requirements including enabling a viable return on investment are ignored; thereby leading to the increased risk of the unsustainability of such an acquisition.
Factors Behind the Successes of Mergers and Acquisitions
This study has already found that factors attributing to merger and acquisition losses are not by chance or luck, but rather by failing to allocate close attention to the many necessities needed within all aspects of combining and integrating two business structures. It has also been interesting to note that little reference was given in any of the previously sourced information laying blame on adverse external influences such as political and economic uncertainty. Likewise, it is found that factors attributed to the success of mergers and acquisitions are enabled due to sound business strategies; to which this report now turns.
A study conducted titled ‘Why Mergers Fail and How to Prevent It’, pointed out that mergers and acquisition outcomes are “linked closely to the extent to which management is able to integrate members of organizations and their cultures” (Cartwright 2012, p. 2). This observation is closely parallel to sourced information previously discussed regarding the integration of personnel and cultures by different organizations. However, she also points out the relevance of sensitively addressing ‘individual’ concerns, minimizing the impact on all employees when integrating two different corporate entities into a single cohesive infrastructure. Logic suggests that the ‘human factor’ plays a significant role in the enablement of a successful ‘marriage’ of two companies.
Regarding another factor that can contribute to the successful outcome of a merger or acquisition, a study titled ‘Why Do Mergers Fail? What Can Be Done to Improve their Chances of Success?’ suggest that “one way of ensuring that post-merger integration will run smoothly is to set up a postmerger integration team in all the critical areas of the organization” (Salame 2006, p. 18). Following this suggestion, it would be prudent to not only to enable pre-merger investigation such as due diligence, but also by planning prior to the merger, a task force dedicated to integrating all operational functions within both business entities; including administrative functions, marketing systems and plans, financial systems and human resources.
Moreover, attention has been drawn above to the ‘human factor’, so when considering the employees, further attention should be allocated by this postmerger integration team to look at cultural diversity and issues pertaining to local communities. Such issues can include perceived inequalities of minority and disadvantaged population groups. Acceptance of cultural diversity and minorities can enable a smoother integration of two companies. This is especially applicable in the event that such integration takes place across international borders.
Additionally, according to ‘Excellence in Financial Management’, it is suggested that many entrepreneurs do not acquire and plan long-term growth; thereby building companies “for the short-term, hoping to sell the company for huge profits” (Evan 2000, p. 1). Perhaps this may be perceived by some to be ‘short-sighted’; however, the result can often be the streamlining the companies into an efficient cohesive operation; thereby enabling profitability and perhaps growth so as to add perceived value. A question is raised whether such a short term viewpoint is arguably conducive to long term sustainability. However, by enabling quick solutions to integration challenges, savings and financial viability may be found.
In a report published in 2008, ‘Mergers and acquisitions: opportunities for global growth’, it was noted that more companies are now “recognizing the growing importance of emerging markets” (Grant Thornton 2008, p. 4). This allows a company previously restricted by local or national competition, to combine resources with companies in areas where the return on investment may be higher. Furthermore, growth in many emerging markets such China, India and Brazil has been relatively strong when compared to the stagnant economies of more established major powers.
Furthermore, Grant Thornton’s IBR survey has shown that shareholders and corporate decision-makers in the fast growing BRIC economies are now enthusiastically embracing M&A” (p. 6). This paper suggests that perhaps accessing emerging markets via mergers and acquisitions may be a key strategy for future sustainable growth. Recognizing the energy and vitality of emerging markets can stimulate more established companies and organizations based in ‘Western’ economies that have been subjected to defensive and perhaps negative outlook based on poor economic outlook.
In considering all these factors inherent to the implementation of successful mergers and acquisitions, a report ‘Mergers & Acquisitions: A Global Research Report’ clearly stated that “As ever, it is the delicate balance between financial drivers and people aspects which underpins success. Neither is sufficient in itself to deliver the benefits” (Kelly, Cook & Spitzer 1999, p. 2). Underscoring the importance of both financial expertise and the ability to recognize the validity of the ‘human factor, perhaps encapsulates what this investigation has sourced and evaluated.
Conclusions and Recommendations
Perhaps the measure of why shareholders and directors of companies are still pursuing mergers and acquisitions despite a global trend of a significant failure rate, can be attributed to the motivation for businesses to combine forces and resources so as to ensure sustainability. Notwithstanding the many failures, the economic downturn has perhaps highlighted the need to diversify resources into foreign and emerging markets; thereby potentially enabling higher levels of growth. Henry reasoned that a measurement of successful mergers can be enacted by evaluating stock market returns, one year after a merger (Henry 2002). Perhaps investors and shareholders should be able to influence such future business transactions so that an investment viewpoint incorporating ‘return on investment’ should be equally, or more weighted when evaluating such strategies.