Stages of mergers and acquisitions
According to Sudarsanam, P., (1995), the three stages involved in the complex process of mergers and acquisitions are:
Stage 1: Preparation
Stage 2: Negotiation
Stage 3: Integration
The various steps involved within these above mentioned stages are demonstrated below.
Stages in mergers and acquisitions
Sources: Sudarasanam, P., (1995)
The stages in the acquisition process provide a framework for strategic analysis of mergers and acquisitions. Though it is an agreed fact that mergers and acquisitions are difficult, disruptive and highly unpredictable, companies are still allured towards it owing to its essence and the benefits obtained from such strategic moves. Some mergers succeed but surveys and research outcomes demonstrate the failure rate to be very high. This puts companies looking at mergers and acquisitions as a strategic choice in jeopardy.
According to Mercer Management Survey, large deals are more likely to fail. Consultancy firm, KPMG’s global survey (2001) reports that 70% of the mergers and acquisitions failed. As per Harvard Business review (June 2000), most senior managers are of the view that majority of the mergers end up being failures. So what is the motive behind adopting such a risky strategy for expansion inspite of the failure rates being so high? This brings about the need for determining the motives behind mergers and acquisitions.
Motives for mergers and acquisitions
In the quest for bigness, in order to gain greater market share and outstrip the competitors, companies enter into the merger mania. The immediate objective of such a strategic leap is growth and expansion of assets, sales and market share with maximization of shareholders’ wealth as suggested by White, B., (2000). However, a more fundamental objective may be enhancement of shareholder wealth through the process of mergers and acquisitions aimed at adding value and creating wealth. Based on the study of experts, following are some of the reasons for mergers and acquisitions to be the preferred option for companies.
The most obvious reason for mergers to happen is corporate growth and expansion. Companies enter into a merger spree to grow, sometimes both locally and globally.
Large scale operations due to mergers and acquisitions reduce per unit cost and enhance profit margins of companies and enable them enjoy economies of scale
Mergers and acquisitions often widen the product portfolio through diversification. Diversified merger and acquisitions have been successful as revealed by a survey undertaken by Mckinsey. The survey covered 800 companies of US and UK who were all successful at growing through diversified mergers and acquisitions.
- Gain access to new markets and new products/technologies
Mergers and acquisitions bring about pooling of resources which enables to spread risks and enter new markets and venture into new technology and innovating new products.
- Add value through synergies
Mergers result in creation of synergies as they connect assets and convert the existing assets to add value and block rivals through acquiring assets to block new market entrants.
Mergers and acquisitions help to strike balance between global advantages and local responsiveness according to Devine, M., (2002). For example - CRH’s strategy is to use acquisitions to establish a base in a new country to build a local presence.
According to Sudarsanam, P., (1995), the fundamental objective of mergers is enhancement of shareholders’ wealth. Shareholder wealth maximization may, however be replaced by the self interest pursuit of managers seeking power and desire for empire building or perquisites which may impact the net outcome of mergers. Many a times, companies, in the fear of lagging behind in the corporate race, want to expand and acquire smaller companies and gain an edge over the other smaller players in the market. Thus, companies, in pursuit of the above benefits consider mergers and acquisitions as a plea to success.
Mergers and acquisitions – a success or failure
‘Mergers and acquisitions are like atomic reactions, they release bursts of energy within companies, some of which are creative, some of which can be destructive. Some mergers and acquisitions are successful in creating a stronger and more capable company. Others buckle under the stresses involved’ (Devine, M., 2002).
Studies from all around the world show that it is difficult to ensure if mergers and acquisitions will generate any lasting financial value (give a website address).
Meeks, G., (1977), is of the opinion that mergers and acquisitions could be a disappointing marriage. Goldberg, W., (1983), on the basis of his study in this area, suggests that mergers and acquisitions have the potential to disrupt business performance, often damage profits over the short term, distract the management and ultimately add little or no value to the new business.
Evidence from the corporate world shows that companies take the risk and choose to go for mergers and acquisitions. WPP, a global advertising company, has a spectacular track record of mergers and acquisitions. They believe in filling the gap for growth in the company through acquisitions and they have been reaping super success (Harvard business review, 2001). Yet another massive merger success story is that of AOL Time Warner who have benefited immensely through their combination of intellectual and intangible assets. But mergers of companies such as Chrysler and Daimler-Benz have failed miserably. So why do mergers fail?
Reasons for failure of mergers
Mergers fail when companies fail to identify their reason for coming together. Mergers and acquisitions expert Mitchell Lee Marks and Philip Mirvis, are of the opinion that such events result in a climate of indistinctness followed by low level of trust and dipping morale of the employees, even in the case of a friendly merger.
Some of the reasons for failure as identified by Devine, M., (2002) are:
- Problems in post merger activities;
- Lack of proper communication among the employees and suppliers of the company;
- Lack of adequate commitment among the staff of the merging company;
- Dipping levels of productivity and efficiency in case of improper match;
- Climate of uncertainty, anxiety and suspicion in the work place;
- Lack of leadership in the merged entity;
- Lack of appropriate co-ordination and positive approach;
- Low morale of the personnel due to loss of talent as a result of frequent retrenchment; and
- Subsequent failure in the market place
Merger success is clearly linked to effective integration planning even before the merger takes place. Mergers and acquisitions provide opportunity to add value through innovation and specialization process. But it indeed depends upon the merging entities to effectively undertake the integration process by giving due weightage to one of the most important elements of merger who apparently are often ignored – personnel.
In this section, a critical review of theories, views and opinions of various experts has been undertaken. The motives for adopting risky but interesting strategy of mergers have been discussed. This research has also designed the path for primary search to study and find out the strategic options of mergers availed by companies for seeking growth.
Research Methodology
This section provides an introduction to the research methodology to be used in order to answer the research question ‘Are mergers and acquisitions the preferred option for businesses seeking rapid growth and success?’
In this section, the nature of data required and the sources of data collection for the purpose of answering the research question has been determined. Further, the reason for the choice of the methodology over the others and its suitability has been explained.
Nature of data
Collection of suitable, reliable and valid data lays the foundation for a sound research proposal. Therefore, it is important to identify the nature of data required to answer the research question. There are different ways in which data can be classified. One way of data classification would be classifying data as quantitative data and qualitative data. Yet another way of data classification would be classifying it as primary data and secondary data.
Quantitative data deals with numbers and is popularly viewed as ‘systematic’, ‘scientific’ and ‘objective’ than qualitative data and it aims to seek the facts and causes of social phenomena (Blaxter, 2001). Qualitative data provides information in different non-numeric forms and is widely. To analyse and answer this research question, quantitative data and qualitative data would need to be obtained through primary and secondary source of data collection.
Primary data are mainly first hand data collected directly to be used in a specific project. The main advantage of this data source is its validity, reliability and dependability to tackle the research question as this data is colleted for the research purpose only. However, it is subject to shortcomings like difficulty in accessibility,
time-consuming and costly as compared to secondary data source. To answer the research question, questionnaire method of data collection has been adopted to be sent to various organizations to obtain data and draw analysis from the same. The design of the questionnaire (Appendix) would be descriptive and consist of different levels to satisfactorily obtain the relevant data to answer the research question.
Secondary research data is what has already been collected for some other purpose and contains both raw and published data summaries (Saunders et al, 2000). Secondary data would be used to collect relevant raw and published summaries as this method is superior over the other methods of data collection in some ways. Secondary data is cheaper and faster to collect data vis-a-vis primary data.
However, there are certain limitations as well. Secondary data has been collected by a person for his/her purpose and hence may not be apt for others research. Besides, the relevance, reliability and validity of the data are jeopardized as information regarding the time frame as to when the research was undertaken is not known. Also, such data may have been obtained under restrictive conditions and may not hold true on all situations.
To determine if merged companies are happy with the decision of merger and if mergers and acquisitions are the right formula for growth and success in today’s complex and dynamic corporate world, case study methodology has been adopted. Few cases would be examined to answer the research question in the light of relevant theories of strategies for growth and expansion; and data from secondary research which has been listed below.
Sources of secondary research
Journal articles
Bower, J. (2001) Not All M&As are alike. Harvard Business Review, March, Volume 79, Issue 3, pp92-101.
Bridgeman, J. (2002) International mergers and acquisitions. European Business Journal , 2nd quarter, Volume 14, Issue 2, pp58-62.
Greenberg, H. (2002) The buy –‘em-up boondoggle. Fortune, 22nd July, 2002, Volume 146 Issue 2, p210. e
Lopez, E. (2001) New Anti-Merger Theories: A Critique. CATO Journal,Winter 2001, Volume 20, Issue 3, pp359-378.
Managing Merger Madness (2002), Strategic Direction, Volume 18 Number 11, pp15-17.
Pills Gain More Corporate Adherents (2000) Mergers & Acquisitions: The Dealermaker’s Journal, July, Volume 35, Issue 7, p17.
Schraeder, M. & Self, D. (2003), Enhancing the success of mergers and acquisitions: an organizational culture perspective. Management Decision, Volume 41 Number 5,
pp511-522.
Tips to make that merger work (2002) Journal of accountancy, Nov 2002, Volume 194 Issue 5,p28.
Vos, E. & Kelleher, B. (2001) Mergers and takeovers: A Memetic Approach. Journal of Memetics – Evolutionary Models of Information Transmission, Volume 5 Issue 2,
pp10-23.
Wall Street Journal, Harvard Business Review, Forbes and Fortunes.
Books
Devine, M. (2002), Successful Mergers – Getting the people issues right , Great Britain, Profile Books Ltd
Goldberg, W. (1983), Mergers: Motives, Modes Methods, Great Britain, Gower Publishing
Johnson, G. and Scholes, K. (2003) Exploring Corporate Strategy: Texts and cases, 6th edition, New Delhi, Prentice Hall of India
Meeks, G. (1977), Disappointing marriage - A Study of the gains from mergers, Great Britain, Cambridge University Press
Mintzberg, H., Quinn, J.B. and Ghosal, S. (1998) The Strategy Process, Revised European Edition, London: Prentice Hall
Pearson, B. (1983), Successful acquisition of unquoted companies, Great Britain, Gower Publishing
Singh, A.(1971), Take-Overs: Their relevance to the stock market and the theory of the firm, Great Britain, Cambridge University Press
Sudarsanam, P. (1995), The Essence of Mergers and Acquisitions, Great Britain, Prentice Hall
Newspapers
Access to The Financial times, The Guardian, The independent, The Economist and other business magazines.
Data from the internet - Access to databases like Emerald , ABI, EBSCO and university library. Access to company websites for companies which would be examined under case study methodology as well as data from following sites
The above sources would be accessed for obtaining data and making analysis of the growth strategies of companies in present days which will help examine the research question and tackle it successfully.
Data Analysis and Interpretation
Identifying the methodology to be applied for data collection facilitates the next stage in solving the research question – Data analysis and interpretation.
Data analysis and interpretation needs to be undertaken for both quantitative and qualitative data. Analysis is about the search for understanding and explanation, in the course of which concepts and theories are likely to be advanced, considered and applied (Research Methods - Lecture notes).
Analysis of Quantitative data
Analysis of questionnaires and framing a statistical representation (percentages, graphs) of the numerical data obtained will be helpful in answering the research question. Questionnaires will be coded and translated into numbers to make graphical representations with the help of MS Excel and SPSS packages on computer.
Analysis of Qualitative data
Analysis of empirical evidence on mergers and acquisitions involves analysis of case studies and considering range of related questions such as the entities involved in the merger, the key issues and motives for such mergers, adoption of merger process and the net outcome. Besides, analysis of relevant theories and concepts, position of the author and the authenticity of his opinion, the arguments in favour of and against mergers and the evidence supporting their stands will help in drawing conclusions to satisfactorily answer the research question.
Limitations of methodology
Every research methodology has its own set of limitations as there is no one best methodology to be followed. The key limitations for the methodology to be used are as follows:
- Case study methodology restricts the research to a few case studies and deduction of the conclusion from such methodology may be subject to bias of the author.
- Questionnaire method suffers from following problems:
- Low rate of response;
- Problem of incomplete responses
- Difficulty in analyzing responses due to lack of clarity
Appendix 1 - Design of questionnaire
Are mergers and acquisitions the preferred option for businesses seeking rapid growth and success?
Name –
Job title –
(Tick as appropriate)
- Mergers and acquisitions are a key to success in the corporate world
- Strongly agree
- Agree
- Neither agree nor disagree
- Disagree
- Strongly disagree
- Mergers and acquisitions are an appropriate strategy to enhance growth
- Strongly agree
- Agree
- Neither agree nor disagree
- Disagree
- Strongly disagree
- Mergers and acquisitions help companies to gain greater market share and profits
- Strongly agree
- Agree
- Neither agree nor disagree
- Disagree
- Strongly disagree
- Mergers and acquisitions are undertaken to maximise shareholder wealth
- Strongly agree
- Agree
- Neither agree nor disagree
- Disagree
- Strongly disagree
- Mergers and acquisitions fail more than succeed in present days
- Strongly agree
- Agree
- Neither agree nor disagree
- Disagree
- Strongly disagree
- Mergers and acquisitions fail if the people involved are not consulted before the process
- Strongly agree
- Agree
- Neither agree nor disagree
- Disagree
- Strongly disagree
- Companies can be destroyed if mergers fail
- Strongly agree
- Agree
- Neither agree nor disagree
- Disagree
- Strongly disagree
- Mergers and acquisitions help to acquire new markets
- Strongly agree
- Agree
- Neither agree nor disagree
- Disagree
- Strongly disagree
Bibliography
Bleeke, J. and Isono, J.A., ‘Succeeding at cross border mergers and acquisitions’, Mckinsey Report Quarterly, 3, 1990
‘Creating shareholder value through mergers and acquisitions’, survey by KPMG 2001
Dealogic Mergers & Acquisition Review, 2002
Devine, M. (2002), Successful Mergers – Getting the people issues right , Great Britain, Profile Books Ltd
Gilman, R. & Chan, P.S., (1990), Mergers and takeovers, Management Decision, Volume 28, Issue 7, pp26-37
Goldberg, W. (1983), Mergers: Motives, Modes Methods, Great Britain, Gower Publishing
‘Lessons from master acquires: a CEO roundtable on making mergers succeed’ Harvard Review Business, June 2000
‘Making mergers work for profitable growth’, Report by Mercer Management Consulting
Meeks, G. (1977), Disappointing marriage - A Study of the gains from mergers, Great Britain, Cambridge University Press
Saunders, M. et al (1997), Research Methods for Business Students, Great Britain, Pitman Publishing
Singh, A.(1971), Take-Overs: Their relevance to the stock market and the theory of the firm, Great Britain, Cambridge University Press
Sudarsanam, P. (1995), The Essence of Mergers and Acquisitions, Great Britain, Prentice Hall
‘Unleashing value in the new economy’, Report published by Andersen 2000
White, B. (2000), Strategies for Successful Merger, Great Britain, Gower publishing
