Abstract
Mergers and acquisitions have gained more ground in the business world in the past two decades. Blockbuster mergers and acquisitions are seemingly the trend since the 1990s with companies like at and t, Exxon and Mobil, BankAmerica and Nations Bankcorp, Worldcorp, WorldCom and MCI, Citicorp and Travelers group among others joining together assets and transactions to form big companies. This trend is deemed to continue in the coming years as the world becomes a global economy. Mergers and acquisitions are more common in large industries like rail transportation, Airline industry, steel and aluminums, automotive, textile, pharmaceuticals and such like. It is also expected that the mergers and acquisitions will become bigger than the past rendering the previous small time deals. However despite this increased desire by companies to marry transactions or swallow smaller companies into unit mega companies, analysts still hold that the mergers and acquisitions have failed to capture the benefits of financial proficiency or rather, they have faired poorly in delivering the anticipated financial benefits. The intention of this paper is to give an account of possible explanations behind the poor performance of mergers and acquisitions.
Introduction
Mergers and acquisitions in the business world confirm the simple rule of thumb, ‘grow or die’ that dictates the company’s survival. This is because business or companies are profit oriented and in order to retain the company’s profit margin then competition for market share has to be eliminated and mergers and acquisitions provide a chance to do exactly that. The theory behind mergers and acquisitions suggest that by commanding a greater market share then economic profits are automatically generated thus translating into attractive returns to the shareholders. Mergers and acquisitions affect both the companies engaging in the deal. For instance the larger company benefits from getting a larger market share and more bonuses for the shareholders. On the other side of the coin, the smaller company benefits from better technology or leadership. Mergers and acquisitions form large companies that render the small competitors insignificant by eroding the greatest share of the market. Ultimately, mergers and acquisitions cripple small upcoming businesses. (Wulf, 2004).
It may therefore be argued that mergers and acquisitions are the driving force of an economy. This is seen in the liquidity that companies have after mergers, which in effect means that fewer companies target initial public offers to achieve liquidity. Entrepreneurs realize greater returns to their investments when companies merge.
The rise in the number of mergers and Acquisitions (consolidations have been attributed in port by the inefficacy of downsizing sow growth and other cost cutting approaches (Ang & Kohers, 2001). Company’s executive find that greater market share and profitability only through mergers and acquisitions.
Before proceeding further it may be worthwhile to distinguish between mergers and acquisition so as to get a feel of what they entail. Mergers are sort of selling a business firm to a large company. That is the smaller company gets absorbed by the bigger company by absorbing the assets. The distinction here is that the company’s retains their names for instance in the Shell and BP merger, both companies retained their names although they were one company. On the other hand acquisitions entails whole purchase of a plant, firm or other major assets by a larger company and essentially, the swallowed company seizes it exist for instance the Procter & Gamble of acquisition of Gillette Company back in 2005. While on the superficial sight these two strategies seem to mean the same thing, the impacts they bring sets out a distinction. Regardless of the fact that two or more companies merging or acquiring another means that operations take place under one umbrella. The impacts will mostly be on the financial, and managerial as well as cultural aspects. (Jamison, 1998).
Other factors that contributed to the apparent trend in mergers and acquisitions is reduced demand for company’s product or service, change in technology, intense competition among forms especially in the dominant industries like communication, banking, oil change in customers demand and tastes and preference among others.
In addition some mergers and acquisitions are not profit driven but rather they occur to change a company’s identity. This is especially when a company is pursuing brand recognition as its strategic plan.
Deviating from those basics that underlie mergers and acquisition, the question of interest is why mergers and acquisitions fail to yield substantial financial benefits despite their importance to large and small companies? According to Michael Jensen a famous economist in US, shareholders in the acquiring firms report minimal returns following an acquisition whilst those in the acquired firms report handsome returns and go smiling all the way to the bank. This is because mergers and acquisitions usually carry negative reactions the employee’s suppliers, creditors among other stakeholders.
Apparently, mergers and acquisitions tend to have an effect on employee morale which in turn affects productivity. This is one reason that has inhibited mergers and acquisitions companies from realizing financial benefits.
In addition, the process of merging and acquisition is usually long and strenuous. This is especially because of the time consuming procedures of conducting assessment on companies in questions, verification of their accounts preparation of legal documents which are also very costly. Normally, the whole process can take about 6 to 12 months to successfully complete the processes. Before the companies which have merged or been acquired recover from the expenses and the time lost then financial benefits are rarely realized.
It also takes time to access the product lifecycles of a company to determine whether it adds any value to the company or whether it increases the competitive advantage of the company with nearly absolute products or services would be useless to a merger or acquiring company. Perhaps this is where mergers and acquisitions companies fail to plan for hence they end up bringing in a company that is more of a liability than an asset. (Walker, 2005).
The financial aspects of two or more companies in the process of mergers and acquisitions are fundamental to the future standing of the newly formed company. Failure to pay close attention to these aspects is probably another reason why mergers and acquisitions perform poorly. This is because the magnitude of financial loss owing to lack of clear understanding of the policies hat finance of the companies is usually significant.
Other reasons behind the numerous mergers and acquisitions have been linked to increased liberalization, deregulation and increased ranks of gauging company’s success. Now day’s a company is said to be successful if it commands a large market share, makes obscene amount of profits and erases competition from the industry it operates. Indeed mergers do have accrued to them, what with the complimentary aspect of two companies in terms of resources, better managerial efficiency advantages of economies of scale exploitation of market command among others.
Main Objectives
Ultimately, companies that consolidate with better performing companies also benefit from improved production techniques as well as higher advanced technology.
It will be therefore safe to assume that mergers and acquisitions are part and parcel of any company’s rubric of strategic expansion. This tool compliments other strategies used by the company’s to expand its market share, resources, and assets, production portfolio or whether it is pursuing mergers and acquisitions to enter new markets or acquire better intangible assets without jeopardizing it’s intellectual property rights, for the purpose of retaining the company’s recognition as a new generation firm with ability to survive in the global economy. Some companies agree to mergers and acquisitions for the simple reason of attaining prestige.
Empirical studies conducted on the many companies that merged during the 1980s (about 50 companies) revealed that above half of them realized how productivity and decline in profit margins. This they attributed to the fact that the shareholder value declined considerably after a merger hence poor performance, contrary to the aims of mergers and acquisitions which are to increase market share hence profits. The incurred costs during mergers and acquisitions especially those involving huge companies is usually so massive that 10 years down the line the costs are not recovered. Those that recover within a shorter time span do so under tight budgeting, an approach that requires stringent policies and implementers to achieve. More to that, new mergers and acquisitions fail in the market because in most cases the individuals who champion the whole process, only hang around to ensure that the deal sails through after which they exit the company leaving the company devoid of their much needed expertise in managing the company’s initial stages after the mergers and acquisitions. Often, the inexperienced executives left behind in the companies tend to derail or mismanage the assets and finances of the company hence failure.
Another reason behind the failure of mergers and acquisitions is the mismatch in the companies that consolidate. For instance, an acquirer company may be too big for the acquired company or vice versa which essentially means that enough time is not given for the smaller company to adjust on a different perspective two companies merging may result in too large a company for the organization to handle (acquisition indigestion). Additionally, when a targeted company is too small in comparison to the acquiring firm, then the acquiring firms gains minimal benefits from the latter. This is because its assets, technology, market share and other variables are almost insignificant to the bigger company. On the other hand, the target company benefits greatly from the mergers and acquisitions with a larger company since its profit gains, product recognition and shareholders return on investments are ultimately boosted. It is thus no wonder that of the many acquisitions and mergers that happened in the 1980, small companies faired well in the stock markets during the periods of 1980 and 2001.
What’s more, mergers and acquisitions fail because of choosing the wrong partner who is incompatible. Think of it as a court of courtship or marriage successful mergers and Acquisition come after periods of flexible communication and understanding between two companies. If the values of the company don’t tally then the productivity of the company is indirectly affected then leads to financial loss. This is also due to culture shock. When companies consolidate either through or mergers and acquisitions then it means that new management takes over and the organization culture values priorities also change with it. Employees begin to think about other things besides their work and their time and energy is redirected to these thoughts. Ultimately the company reports financial drops. The productive and industrious culture is quickly replaced with idle gossip and unhealthy competition among the workforce. This has adverse effects on the company’s overall productivity and profit turnout. (Gunther, 2001).
In this information age where knowledge is of utmost importance for competitive advantage, a well integrated information system is paramount. This is another area that causes mergers and acquisitions to fail. Soon after merger or acquisition, companies report failure rate and profit declines. The reason being, it becomes a major hurdle to integrate technologies and information systems of the two companies.
Customers are a volatile entity in any business organization and it is this very aspect that is affected after any merger or acquisition. The customers worry about their previous relationship with the company and whether it will change for the worst. Mergers that are not well selected tend to loose many customers to other competitors since it destabilizes the customer service of the two companies i.e. at least before the dust settles. This is a reason that contributes to the decline in profit margin and financial standing of company’s after mergers and acquisitions.
Mergers and acquisitions are similar to other projects. They have characteristics such as objectives, time schedules, targets, challenges, and more importantly they involve people and costs. The size of two companies intending to merge or follow through an acquisition matters greatly where the companies involved are large, then so are the cost, as well as other variables for instance the staff, timeless, objectives will need to be well organized longer durations and more comprehensive objectives. In this case the financial disposition of the company’s tends to be put on the line. This is because very big organizations tend to be mismanaged and are marred with problems of pilferage, poor motivation among employees, lack of coordination with other equally important functions of the organization, hence leading to mergers and acquisitions failure.
Mergers and Acquisitions fail not because of lack of attention to the hard issues of due diligence or negotiation. As a matter of fact, most mergers and acquisitions do a really good job during this face and with commendable intensity. The mood within the organizations often exists although some element of anxiety and confusion may set in when companies do not institutionalize the process. The most persuasive reason behind poor performance in mergers and acquisitions is the insufficient attention given to the apparently ‘less technical’ issues in the mergers and acquisitions. However, these soft issues are not as insignificant as they are made to appear. Indeed, they are the reason why mergers and acquisitions fail. These issues range from leadership of the organization and new governance (Hennessey, 2000). An organization leadership plays a crucial role in determining the future direction of the new company. It also plays a role of earning the trust and confidence of current and future investors (shareholders of the company. This issue of leadership is often ignored in the due diligence phase leading to power struggles between board of directors and management often the mergers has been finalized. This issue has led many companies to achieving poor performance and low financial gains. Notably, maintaining objectivity in this process is often difficult as self interest often prevails. Nonetheless, such ulterior motives should be kept at minimal and perhaps a neutral consultant may be involved in this crucial process.
The other reason behind failed mergers and acquisitions is flawed intentions. Most times mergers come up as a reaction to another previous big merger where executives feel presumed to follow suit. This is especially true in the pharmaceutical and banking industries. Alternatively it may be due to fast selling stocks in the stock market which encourages, mergers and acquisitions. Additionally, some mergers are intended for glory seeking purposes, and management feel proud to buy of a competitor. This motives lack foundation and often they lead to failure. These reasons are insufficient to warrant big projects like mergers and acquisitions. Yet these intentions continue to be fueled by influences of the attractive remuneration accorded to executives who steer the process regardless of what later happens to share price of the company. In addition, the blend of bankers and legal advisors hungry for a quick kill lead organizations to poorly think out mergers hence high failure rates.
The business world is a peculiar one and defensive mechanism is fast catching on to CEOs in organizations at an unprecedented rate. Globalization and the advent of technological developments
Conclusion
By and large, mergers and acquisitions fail due to the volatile aspects of the organizations which it touches. Nonetheless, it continues to lure more business entities. Even so, it would be unfair to write off mergers and acquisitions as a worthless effort because where mergers and acquisitions have succeeded the results have been remarkable. The way two companies handle the entire process is what sets out the difference between a successful merger and one that fails.
Bibliography
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Ang, J. & Kohers, N. (2001) The take-over market for privately held companies: the US experience Cambridge. J. Econ. 25: 723 – 748.
Jamison, M. (1998). Emerging Patterns in Global Telecommunications Alliances and Mergers Ind. Corp. Change. 7: 695 – 713.
Walker, M. (2005). The Potential For Significant Inaccuracies In Merger Simulation Models. Journal of Competition Law and Economics.1: 473 – 496.
Gunther, T. (2001). What do we know about success and failure of mergers? 1:4.
Hennessey D. A (2000). Cournot oligopoly conditions under which horizontal mergers is profitable. Review of industrial organization. 17.3.