Critically evaluate why so many mergers and acquisitions continue to be made when so many fail.

Authors Avatar

Name - Joseph Robinson

Student Number – 0209045

Module – Strategic Management

Code – BS3543

Year – 3rd

Critically evaluate why so many mergers and acquisitions continue to be made when so many fail.

The phenomenon of mergers and acquisitions (M&A’s) triggers an array of opinions and viewpoints. Often it is a strategy that is seen as a perfect way of achieving growth. It is by no means an organic or natural route to success, but has tended to be a quick and easy way of increasing an organisations size and power. However although there has been ‘waves’ of popularity and success since its introduction in the 1960’s it has also suffered criticism due to the amount of failures it has accounted for. Despite the strong suggestion that this strategy has been the architect for many an organisations downfall there still remains a propensity in the current business environment for managers to adopt it. Throughout this essay I am going to examine some of the areas that explain M&A’s volatility and attempt to discover why managers are persevering with the strategy when it is seemingly flawed.

Over the last few decades it has become increasing apparent that the effect of mergers and acquisitions is not as beneficial as once thought. When the growth strategy was pioneered in the middle part of the nineteen hundreds it was looked upon as a way of creating an empire across different sectors and countries. Many experienced managers were sucked into the strategy, only having eyes for the apparent synergistical and positive affects of M&A’s. Although over the following years there has been many success stories concerning M&A’s, when the big picture is examined it displays a more ugly side of the phenomenon. Hodge (1998) discovered that ‘in the go-go ‘80s, 37% of mergers outperformed the average shareholder return in that period; in the first half of the ‘90s, that figure rose to 54%’. Despite the encouraging increase during the early ‘90s there remains a disturbing reality that ‘barely one-half of the m&a deals of recent years delivered shareholder value that outperformed even the relevant industry average, much less provided an adequate return on investment’. Added to this he also highlighted that ‘only a paltry 25% of deals valued at 30% or more of the acquirer’s annual revenues could be counted as success’. These statistics represent the flaws that exist within the strategy of M&A’s and clash with the positive theory that ‘analysts and investors expect the merged enterprises to be greater than the sum of its parts’ (Doitte and Smith 1998). Coopers and Lybrand (1993) along with many other writers have studied and expanded on some of the key factors that limit that usefulness of M&A’s.

Target management attitudes and cultural differences ‘heads the list of impediments to the successful melding of two organisations’ (Davenport 1998). This is appropriate not only in the case of cross-border mergers (Daimler Benz-Chrysler) where there many obvious points of concern such as language and communication, but also within the collaboration of firms based in the same country and even industry. Management often have their own ‘way of working’ that suits both themselves and their employees, which may be generated through national or corporate culture. This is generally characterised by unique and individual working practices amongst different firms nation and worldwide. Therefore when a merger or acquisition takes place the result is the combining of two sets of cultures in an attempt to work together. In most cases the merge looks both safe and profitable in theory, however management frequently underestimate the power of culture. For example when Mellon Bank and the Boston Co merged in 1993 they failed to consider how ‘cultural conflict could drain the combined company of its most important acquired asset of the talents of Boston Co.’s money-management wizards. Offended by Mellon’s cost-conscious management style, a key executive left the organisation. Within the next three months, he had taken 30 of his co-workers with him, along with $3.5 billion assets and many of the firm’s clients’ (Davenport 1998). I think this example emphasizes the risk associated with M&A’s due to their inevitable degree of unpredictability. For this reason alone it is hard to imagine a full proof argument advocating their use in modern business.

Join now!

Another factor that makes M&A’s a high-risk strategy is the fact that management often have limited knowledge of the industry they are entering. This is obviously the case when two firms from unrelated backgrounds merge (conglomerate integration). In this case management are unaware of the way the industry works and are restricted to simply understanding the bare bones of the business. ‘Differences in traditions, expectations, buying and specification practices, packaging, logistics, labelling, and legal customs and issues can have a surprisingly profound impact on the post-acquisition viability of a target company’ (Price and Sloane 1998). These differences along with more ...

This is a preview of the whole essay