Mergers & Acquisitions and Organisation Fit

Abstract

There is no more dramatic or controversial activity in corporate finance than the acquisition of one firm by another or the merger of two firms. The acquisition of one firm by another occurs as a matter of investment made under uncertainty. The normal and basic ideology behind any scheme of merger or acquisition is that there should be a generation of positive net present value to the shareholders of both the firms involved in the scheme. By using secondary data and through the comparison of the financial position (before and after the merger deals) of five companies involved in merger and acquisition deals, this paper evaluates the impact of the mergers on the respective financial status of the chosen companies, report that in the majority of cases the merger deals have really improved the financial position of the combined entities because of the merger activity. However, the study also observed that the organisational fit or ‘compatibility’ in terms of structure, size and culture of the organisations involved have a definite and determinant role to play in ensuring the success of M&A deals. This is evident from the changes in the financial position of AOL/Time Warner one year after the merger and five years thereafter and the cases of failed mergers of Quaker Oats/Snapple and Daimler/Chrysler examined by the study.

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Introduction

It is possible for a business to grow either internally with its own resources or externally through combining the resources with another firm in the same industry. While in the process of internal expansion, the firm takes a long time to grow in the normal phase of the business by mobilising its own sources of funds through internal accruals to acquire new assets, replace obsolete machinery and equipment and also for adding new lines of production. But in the case of external expansion, it is quite possible that the firm acquires another running business and grows in a short span of time. This process takes place through a combination of different corporate entities. These combinations may take the form of mergers, acquisitions, amalgamations and takeovers. Mergers and acquisitions have been developed as an important feature of corporate restructuring and are being increasingly recognised as an adaptable means of external expansion. With the advent of economic globalisation, the phenomenon of mergers and acquisitions has assumed a prominent position in the corporate growth world over. Mergers and acquisitions have become popular because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalisation of businesses.

Merger and Acquisition activity has been seen as growing at a fast pace in recent times. Mergers and acquisitions, a development which was seen primarily in the United States at one time, are now turning out to be increasingly popular in other parts of the world. Apparently, merger and acquisition activity has turned out to be significant business-level advancement in the recent corporate world (Haspeslagh & Jemison, 1991). This paper is an enquiry into whether the mergers and acquisitions resorted to by industries and business houses all over the world have been successful or unsuccessful in creating value for the shareholders. This paper is also grounded in research on the requirements of successful mergers and the issues faced by companies at the time of a merger or an acquisition.

Regardless of all the advantages of mergers and acquisitions and the vital position which it has in nearly every consideration of business strategy, substantiation on the end results of mergers and acquisitions spot towards one apparent conclusion that mergers and acquisitions are not always successful, and most of them failed to generate value for shareholders and the acquiring company (DePamphilis, 2005). Hay Group found that within five years, more than 30% of all acquired companies were sold off and that 90 per cent of mergers never came up to the acquiring firm’s expectations (Geroski, 1991). One good example of this is the merger of AOL Time Warner, which was announced with great excitement about the “synergy” between new technology and classic content, proved to disappoint on all counts.

Objectives of Mergers and Acquisitions

Corporate mergers and acquisitions have always been used as a strategic measure for achieving the various business objectives of any corporate entity. Penetration into new markets and expansion of activities in several foreign locations, gaining improved skill and expertise in the technical and managerial capabilities or augmenting the financial resources are some of the objectives that the firms aim to garner from mergers and acquisitions. Thus survival and growth are the fundamental themes on which the merger and acquisition schemes are built. However, at least 50 per cent of the mergers and acquisitions have unsuccessful results. (Business Week) Moreover, according to Mercer Management Consulting (Cited in Smith & Hershman, 1997), in the 1990s, the success rate of corporate acquisitions are barely 50 per cent, and in the 1980s, 57 per cent of acquisition deals failed. Despite the lower success rates, mergers and acquisitions are being increasingly used by US corporations as the most favourite vehicle of growth. A proper understanding of the pre-acquisition issues and post-acquisition performance through a systematic review of the research on corporate mergers and acquisitions is of utmost importance on the part of the acquirer before any decision on acquisition is taken. The acquirer should also be clear about the objectives of the acquisition. Sirower (1997) stated that “despite a decade of research, empirically-based academic literature can offer managers no clear understanding of how to maximise the probability of success in acquisition programs.”

Despite the shortcoming of lack of a clear understanding of the merger and acquisition schemes, mergers and acquisitions have been developed as an important feature of corporate restructuring and are being increasingly recognised as an adaptable means of external expansion. With the advent of economic globalisation, the phenomenon of mergers and acquisitions has assumed a prominent position in the corporate growth world over. The objective of this study is to examine the extent of success or otherwise of the mergers and acquisitions and their impact on the process of value creation for shareholders.

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Research Objectives and Questions

The research will seek to demonstrate an understanding of the effects of Mergers and Acquisitions on shareholder’s value creation. It is very obvious that there will be a change in the income of the shareholders, whether it is positive or negative, whenever there is a merger of the concerned firm. A merger or an acquisition deal can only be justified if it adds value to the company and hence to the shareholders. To analyse this effect, several examples of mergers and acquisitions which have taken place in the past will be taken into consideration. Furthermore, this research will stress attention on the factors which are required in order to add value through mergers.

The importance of organisational fit will also be examined in this research. It has been seen that the reason why most of the mergers and acquisitions do not live up to the shareholders’ expectations is due to problems with organisational fit among the companies involved.

In the light of the above, this study will strive to meet the following objectives and aims through its viable findings:

  • To gain an understanding of the success or failure of mergers and acquisitions in terms of value creation for the company and the shareholders.
  • To provide an understanding of the importance of a balance between ‘strategic’ and ‘organisational’ fit in mergers and acquisition schemes.
  • To provide a focus on the critical success factors that make mergers and acquisitions viable in the context of value creation for the shareholders.
  • To provide recommendations as to the appropriate strategies that an organisation should employ when considering mergers and acquisitions.

This study will stress upon the following research questions and will try to find plausible answers for these questions through the research.

  1. What are the factors involved in organisational fit between the two firms which are considering a merger or an acquisition?
  2. What are the consequences of organisational non-fit on mergers and acquisition deals?
  3. What steps need to be taken when the deal is being considered in order to get a good organisational fit?

Significance of the Study

This study will be significant in a number of ways. First, the study will analyse the effects of mergers and acquisitions on wealth creation for the shareholders. The research will also expand the literature in the areas of potential problems associated with mergers and acquisitions and provide information on the required competencies for successful deals in the concerned area. To this extent, this study is expected to add further to the existing knowledge in the field of mergers and acquisitions.

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For a cohesive presentation, this paper is organised into different chapters, with the first chapter on introduction detailing the background of the study along with the objectives and research questions. Chapter Two on literature review presents an analytical account of various literature works on the topic of mergers and acquisitions in general review. Chapter Three covers a brief description of the secondary data collection and research, while chapter Four contains the findings of the study and a detailed analysis thereof. A recap of the issues discussed in the text is presented in chapter five as a conclusion with few recommendations towards the strategic process of mergers and acquisitions.

Literature Review

Though the mergers and acquisitions of the companies are of recent origin, there are quite a number of works of literature available on the subject matter. While the literature works available on the pre and post merger scenarios of different mergers are aplenty, the literature on the impacts of a failed merger is very less in number and content. Moreover, the available literature does not provide enough materials or resources to prove the hypothesis put forth by this paper. However, wider research on domestic and cross-border mergers has lead to the following presentation.

Introduction

Mergers and acquisitions are considered an important strategic option for business growth in recent times. Even though both are similar in nature, a merger is different from an acquisition. A deal in which two companies consent to incorporate on a comparatively equivalent basis is known as a merger. On the other hand, a deal in which one firm purchases either the majority of the shares or all of another business is known as an acquisition (Geroski, 1998). In the case where the majority of the shares, also called the controlling interest, is acquired, the shares of the acquired company are usually kept as a separate subsidiary or operating unit in the portfolio of the acquirer’s company. Conversely, in the case where the whole of a company is acquired, the assets of the purchased company become a part of the overall assets of the acquirer’s firm. (Baldwin 1995) Normally, the purchased firm managers then report to the management team of the acquiring firm. The general underlying principle behind mergers or acquisitions of businesses is to generate additional worth through the new alliance that could be created by the concerned firms’ working as individual units.

Types of Mergers and Acquisitions

A merger can be related, concentric, vertical or horizontal. Mergers that are made within the same industry are known as related mergers. (DePamphilis 2005) Concentric mergers take place when two firms from different but “adjacent” industries merge. For example, if an auto manufacturer and a motorcycle manufacturer merge, the merger is a concentric one. Although both industries serve the transportation needs of their customers, the two are quite unique in their competitive structures. Usually, the merging firms determine some similarities in their technology or marketing. (Frankel, 2005) Vertical mergers are the ones in which a company buys one of its suppliers (backward merger) or merge with one of its customer firms (forward merger). The motivation for buying a supplier can be to guarantee the availability of some scarce resource on which the firm is highly dependent. Another motivation for a backward merger can be to obtain cheaper supplies since no profit margin is added to the products of an internal supplier. On the other hand, the firm may choose to merge forward in order to absorb the margin in its customer’s line of business. Horizontal mergers involve the purchase of as many unrelated businesses as possible. These were the most popular types of mergers in the 1950s and the 1960s. Beatrice Foods and ITT are good examples of firms following this strategy. Although not as popular these days, horizontal mergers are still a very viable option for firms intending to diversify. (Frankel 2005).

In a deal of acquisition, one company can buy another company by paying cash or allotting shares. The company may also use a combination of stock and cash. Another way in which acquisition can take place is by purchasing the assets of another company. In some cases, a company may acquire all of the assets of another company, in which case the latter company may have only cash, which may lead to the liquidation of the latter, or the company may enter into another business. Unlike mergers in acquisitions, there are no exchanges of stocks or consolidation into a new entity. Another type of acquisition is ‘reverse merger,’ in which a private company gets itself publicly listed for a short while. The reverse merger deal occurs when a private company with a substantial potential and strong financial standing purchases a public company that has no business and meagre assets (usually known as a shell company). The private company becomes reverse merged with the public company so purchased, and together they become a new public company with shares listed in a stock exchange and tradeable thereafter (Investopedia, n.d.).

Corporate Mergers and Acquisitions

Two different literary frameworks, one in the sphere of strategic management and the other in the financial-economic field, were identified by Datta et al. (1992). Both of these approaches tried to pinpoint the sources of shareholders’ wealth. The strategic management approach took the direction of analysing the corporate acquisitions from the purview of those factors which are controllable by the management. There are other research studies conducted from different angles taking the bases like kinds of mergers and categorising the mergers on the basis of payment methods. On the other hand, the financial-economic perspective deals with the market control over the mergers. Datta et al. (1992) identified this market control phenomenon as “contests between competing management teams for the control of corporate entities.”

Irrespective of the extent of research undertaken on the basis of the two approaches, it was not possible to find out the precise reason for the disappointments resulting from certain corporate acquisition schemes.

Since Kitching’s (1967) initial notion that the post-acquisition integration process is one of the most important factors for success, it was identified that value creation from acquisitions is gained not only from those strategic factors that cause realisation of synergies as reflected in capital market expectations (Chatterjee, 1992; Seth, 1990), but also the processes that lead to the realisation of anticipated synergistic benefits to be realised (Datta, 1991; Jemison, 1988).

However, it appears from the research studies so far undertaken that it is crucially important that the acquiring and target firms are to be integrated properly in the post-merger management process to ensure the success of such schemes of mergers and acquisitions. Thus the central issue concerning the success of corporate mergers and acquisitions lies in the inquiry as to how this process of integration can be achieved to maximise the synergies of the merger.

Further Studies on Corporate Acquisitions

There had been numerous studies conducted in the area of corporate mergers and acquisitions to strengthen or contradict the earlier views expressed by scholars, economists and academicians. An insight into some of these studies is worthwhile to pursue the discussion on the review of the available literature on the subject of mergers and acquisitions.

Some of the researches were centring around the integration of the management skills of the acquiring and targeting a firm on different schemes of mergers and acquisitions. Goold & Luchs (1993) stated that “The idea that professional managers possessed skills that could be put to good use across different businesses rested on the assumption that different businesses nevertheless required similar managerial skills.” However, during the 1980s, the capacity of the merged firms to create value with the integration of the management skills was viewed with scepticism. According to Goold & Luchs, (1993) “the takeover activity of the 1980s prompted a re-thinking of both the role of corporate management in large companies and of the kinds of strategies which were appropriate for diversified companies.”

During the 1980s, there was a shift in the objective of corporate mergers and acquisitions in that the strategic thinking of ‘core business’ or ‘stick to the knitting’ was given predominance in any thinking of corporate amalgamation schemes. According to Peters & Waterman (1982), there was no tendency among successful firms to go after diversification into various business activities. In fact, the firms tended to focus their attention on specialising in their core business activities with the object of improving their skill and expertise, including the managerial skills which are within their reach. Moreover, Hayes & Abernathy (1980) argue that most.

American companies were being run by professional managers, who specialised in finance and law, but were lacking in technological expertise or in-depth particular industry experience. The authors are of the view that diversification would best suit the investments in shares and securities rather than corporate directions. Mintzberg (1989) also criticised the concept of a portfolio planning matrix by stating the need for “focused corporations that understand their missions, ‘know’ the people they serve, and excite the ones they employ; we should be encouraging thick management, deep knowledge, healthy competition and authentic social responsibility.”

What are Mergers and Acquisitions?

Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today’s dynamic economic environment, companies are often faced with decisions concerning these actions – after all, the job of management is to maximise shareholder value. “Through mergers and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value” (Investopedia, n.d.). Though the terms appear to be synonymous, there exist some fundamental differences between the schemes of merger and acquisition.

  • Merger: Merger implies the complete amalgamation of two already existing corporate entities. In the true sense of merger, both the businesses involved wind up their businesses, liquidate the respective assets and liabilities and create a third entity. Thus merger entails the creation of an altogether new corporate entity.
  • Acquisition: On the other hand, an acquisition implies one business taking control of another one. The term also denotes a ‘takeover’ or a ‘buyout’. An acquisition may take place in the form of acquiring either the shares of another corporation or acquiring the assets thereof. In the case of share purchase, the acquiring company purchases the shares of the target firm from the shareholders of that company. In the other form, the acquiring firm purchases the complete assets of the target company.

In practice, it happens that mergers take the form of acquisitions only. In merger proposals, one business is acquired by another business and incorporates the acquired business into a business model that represents the acquiring firm’s model. Since both the terms are often mingled with each other empirical studies and other statistics always present the figures for a combination of merger and acquisition activities that take place. From this, it is possible to understand the merger market in a wider objective (Kautz, n.d.).

For the maximisation of their growth by expanding the production and marketing capacities, companies often resort to mergers and acquisitions. According to Menon, “Mergers can be defined to mean unification of two players into a single entity; Acquisitions are situations where one player buys out the other to combine the bought entity with itself.” Merger schemes are found popular in a variety of fields of operations and more particularly in information technology, telecommunications and business process outsourcing. Such schemes are also popular in traditional businesses with a view to expand the customer base and derive the other economic advantages of the merger and acquisition schemes. The most common and important objective of mergers and acquisitions is to combine and share the resources of two or more companies (Menon, n.d.)

Reasons for Mergers and Acquisitions

The advantages of the latest technology, pooling of the managerial resources and opportunities for an expanded market base are the important economic objectives that the management of the amalgamated firms expect out of any corporate mergers. There are some vital reasons why mergers and acquisitions are being practised. Some of them are: (i) to take advantage of new and associated product lines by expanding into those areas, (ii) to explore new geographically expanded markets and distribution channels, (iii) to garner the benefits resulting from the economies of scale by expanding the production base, (iv) to acquire and gain knowledge in the latest technological development with a view to either supplement the existing technology or replace them.

The strategic goals of mergers and acquisitions to meet the market challenges include:

  1. consolidating the existing vendors and customers to gain an added market share,
  2. integrating the available resources to mobilise new market areas and acquire enabling technologies,
  3. merging the operating forces with competitors to take advantage of economies of scale,
  4. entering a new business venture by acquiring new product line with the necessary elements to promote overall growth,
  5. integrating vertically to add a new line to existing business,
  6. acquiring the required infrastructural facilities that will support the market environment and the connected supply chain (E-Coach, n.d.).

Economic Advantages of Mergers and Acquisitions

The economic advantages mostly reflect the objectives with which the mergers and acquisitions take place. Some of the most common objectives and advantages resulting from the schemes of mergers and acquisitions are: (i) accelerating the growth of the company is the foremost objective of entering into any scheme of arrangements of mergers. Especially where the chances of internal growth are subject to major constraints, the external options of mergers and acquisitions help to bring the necessary momentum to organisational growth, (ii) enhancing the profitability of the company is the next objective of the schemes of mergers. This is made possible by combining the resources and thereby taking advantage of the cost economies and an improvement in the efficiency of the utilisation of resources. The resultant profitability may arise due to economies of scale, operating economies and synergies emerging out of the scheme of acquisitions. “Synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarity of resources and skills and a widened horizon of opportunities.” (India Business), (iii) the mergers may result in diversification of the risks of the company; this happens more so in the case of mergers where companies with unconnected activities are acquired. The withstanding capabilities of the companies against any economic downturn are greatly enhanced by combining the managerial and other resources of companies, (iv) financial synergies in the form of reduction of financial constraints, enhancing the debt capacity, and reduction in the financial costs can be expected out of a successful scheme of mergers and acquisitions, and (v) there will be a great improvement in the market potential of the company which will have the effect of limiting the competition. A merger will undoubtedly increase the market share of the firm and thereby result in the increase of profitability of the firm due to additional sources of distribution channels and wider market exposure. The company can acquire greater bargaining power in terms of its negotiations with the labour, suppliers and other external stakeholders.

Agreed Mergers and Hostile Mergers

Corporate mergers usually occur when two corporations combine their activities. In some cases, there is an agreement between the companies that want to merge with each other. In this case, this scheme is called an ‘agreed merger’. In a situation where one company wants to acquire control of another company without the other’s agreement, the scheme is known as ‘hostile takeover.’

A hostile bid occurs when a proposed acquirer launches a bid that was not solicited by the target firm. This implies that the merger scheme was not in agreement with the target firm. In those cases where there are more competing rival bidders, one of them might turn to be hostile, while one is successful in completing the scheme of merger. Hostility may also result from the complaints of those external stakeholders who feel that they are likely to be aggrieved by the proposed scheme of merger. There are three fundamental aspects of hostility:

  • Merger control has the character of being used as a strategic instrument of bid defence.This has been witnessed in a number of merger schemes in the UK. For instance, “an antitrust defense was notably employed by Abbey National against Lloyds TSB, whose hostile bid lapsed after the UK Competition Commission found that the merger was against the public interest on competition grounds” (NERA, n.d.)
  • While in the case of an agreed merger, both the entities involved may push forward the process, in the case of a hostile merger, one of the parties involved may delay the process to gain time with the hope that some other bidder with a better offer may emerge. Here the term ‘White Knight’ is being used to denote another company with which the target company would like to merge rather than the original bidder.
  • There is likely to be an impact of the hostile merger on the set of data and information to be provided to the regulators for completion of the process. For example, in a hostile takeover bid, at least one of the affected parties would have a natural tendency to resort to posing different arguments based on economic and competition policies that have the effect of challenging the merger scheme. The affected party would also try to defend their case with the backing of market information and connected theories.

Domestic Mergers

The subject of mergers and acquisitions has been researched by many scholars with a view to making the influence such mergers and acquisitions have on the promotion and sustenance of the economic wealth of business activities and its distribution known to businessmen and the general public. There had been substantial numbers of studies that have been conducted on merger activities since the early 1980s. In the early years, domestic mergers alone were the subject matter of most research studies.

According to Parkinson and Dobbins (1993), those studies were focused on three different aspects: (i) the first aspect was to study whether merger activities, on average, create wealth based on accounting variables, (ii) the second aspect was to examine the financial characteristics of acquiring and acquired companies, (iii) the other aspect was whether merger activities lead to gains or losses to shareholders of bidding and target companies. Early researchers in the US, Jensen & Ruback (1983) and Jensen (1989), showed merger activities were “wealth-creating” in the sense that shareholders in both bidding and target companies gain from a merger.

Sudarsanam (1995) also commented that merger activities are a “positive-sum game even if most of the gains do go to the target shareholders”. This view was increasingly challenged by other researchers. The UK’s prospective (Firth, 1980) showed that shareholders’ wealth of acquiring companies experienced losses during the bidding period, and total shareholders’ gain in an acquired company was offset by a corresponding loss to the acquiring company.

Limmack (1991) conducted a study of 552 merger bids in the UK during the period 1977-1986. The results found significant losses, of -5.5%, to bidder companies in the bidding month. However, another more comprehensive study done by (Franks & Harris, 1989) showed the result differently. The study surveyed over 1800 merger bids in the UK over the period of 1955-1985. They found significant gains up to 1 per cent in shareholders’ wealth in bidder companies and 7.9 per cent gains when applied a four-month event window. The general consensus built among researchers of a merger bid was that while positive gains accrued to target companies, the returns for the shareholders of the bidding companies, however, remain mixed.

Halpern (1983) found a consistent trend in target companies experiencing large and positive abnormal returns, despite the use of different methodologies and event test periods. (Agrawal et al., 1992) argued that the differences in results are specific to the time period selected by re-examining. Franks et al.’s (1991) finding suggested the concept that the post-merger returns were not significantly negative. The selection of return calculation models also led to different results in researchers’ findings. A recent researcher, Gregory, (1997), pointed out that “the market model, market-adjusted returns, and size-decile adjusted returns have all been used in the UK studies, whilst in the US, the Dimson & Marsh (1986) and multi-factor models have been employed in more recent studies”. In his study, six different models were employed, while five of them controlled the company size factor. The result showed that, on average, the post-merger performance of large UK domestic mergers was significantly negative regardless of the kind of benchmark employed.

Scholars concluded the reason why most of the studies showed negative or no significant returns to bidder companies is to be that the acquiring companies might have enhanced the premium amount in the urge to conclude the merger deal and overpaid the target companies. According to Roll (1986), excessive optimism towards the evaluation of merger activities led to an overpayment for the target companies. He argued that there were two reasons why managers might overpay for target companies. They are:

  • one was that managers of bidding companies were infected by ‘hubris’, taken from the Greek language and meant over-pursuit and arrogance, and they overestimate their ability to operate the companies,
  • the other reason suggested was that managers were not maximising shareholders’ wealth but, instead, were pursuing their personal interests.

A more recent study by Eccles et al. (1999) suggested managers of acquiring companies needed “to be sure that there are enough cost savings and revenue generators – synergy value – to justify the premium so that the target company’s shareholders don’t get all the value the deal creates”. Other researchers claimed the returns of merger activities were influenced by the mode of payment. Huang & Walkling (1987) and Loughran & Vijh (1997) argued that in the long run, bidding companies experienced losses in shareholders’ wealth if the merger payments were made in equity, but, in contrast, experienced positive returns with payments involved cash.

Cross-Border Mergers

The present day corporate strategy is to use cross-border mergers as an effective tool for fostering the growth of the organisation and create sustainable value through those cross-border deals. With this strategic view, the companies are on the lookout for compatible and synergistic businesses to consolidate their core strengths and to do a thorough business re-engineering to strip down the costs being incurred on uneconomical projects and plants.

Accenture, the consultant firm, says globally, the number and size of merger and acquisition deals are heading towards record levels, with cross-border deals taking centre stage as companies take advantage of cheap financing to pursue their merger and acquisition strategies. According to the study, though domestic acquisitions are easy to execute with lesser risk factors, cross-border acquisitions are increasing in number, with 58 per cent of the recent acquisitions are cross-border ones.

Numerous studies that measured the economic impact of cross-border mergers on the wealth of the bidding firms have presented mixed and conflicting decisions. Such differences may be the result of inconsistencies of data and information on cross-border mergers and acquisitions. While there is an abundance of literature available on domestic mergers, there does not appear to be more conclusive evidence to show the effect of cross-border mergers on the wealth of the bidding or target companies or their respective shareholders. In cross-border acquisitions, because of different geographical locations and different market conditions, the results on the returns to the companies and shareholders do vary from study to study.

Doukas & Travlos (1988) report that the US bidding firms do not gain from cross border acquisitions. But Morck & Yeung (1992) find a statistically significant and positive return of 0.29 per cent on the event day. Another study (Conn & Connell, 1990) find that the wealth effect of acquisitions between the UK and the US are highly sensitive to the method used to estimate the market model’s parameters and render no conclusive evidence on gains or losses to bidders.

As the literature goes, it is observed that much of the researches have been conducted on the cross-border acquisitions involving the bidding firms from the US. Fatemi & Furtado (1988) support the view that the US bidding firms do not result in positive returns. Similarly, Datta & Puia (1995) derived negative abnormal returns. Dewenter (1995) identified that the gains on domestic merger deals in respect of chemical and retail industries are more than that derived by cross-border acquisitions. Results of the studies conducted by (Marr et al., 1993; Cebenoyan et al. (1992) Kang, (1993) Swenson, (1993) and Harris & Ravenscraft (1991) were contradicted by Dewenter (1995).

Kang (1993), Eun et al. (1996), and Cakici et al. (1991) proved that the investments by Japanese firms were able to create more wealth by cross-border mergers in the US than their US and UK counterparts. Cakici et al. (1991) report positive abnormal returns from cross-border acquisitions for Dutch firms, while Corthay and Rad (2000) did not find any evidence for the Dutch firms’ ability to create wealth.

There are inconsistencies with the results of various studies conducted by different scholars on the effect of cross-border mergers on the wealth of the shareholders of target and bidding companies. However, the fact remains that because of the operational differences in the capital markets between domestic and international ones, there should arise higher returns to the bidders.

Harris & Ravenscraft (1991) denotes three different hypotheses as to the causes for increased foreign direct investments through cross-border acquisitions. They are:

  1. the presence of imperfections and costs involved in the product or factor markets,
  2. the existence of biases and differences in the various regulations and governmental policies,
  3. the presence of imperfections and asymmetric information in capital markets.

Another reason that may contribute to negative returns to cross border acquisitions in the absence of the auction-style bidding contests that is prevalent in the US markets, Jarrell et al. (1988) report on the apparent decline in the gains to successful bidders in tender offers: positive excess returns of 5 per cent during the 1960s, and a lower, but still statistically significant, positive average of 2.2 per cent over the 1970s, but statistically insignificant losses during the 1980s.

Finkelstein (1999) opines that in spite of the huge volume of activity in the cross border mergers and acquisitions take place, the majority of such mergers are not successful.

Reasons for Failure of Mergers

Even with their attractiveness and significance, research shows that a lot of mergers and acquisitions do not produce the economic benefits predicted or preferred for the acquiring firm. Despite the fact that several studies indicate the lack of strategic fit and poor management of the integrative process as the central grounds for disappointing performance (Gaughan, 2007), the organisational fit is another important aspect of these failures, which is usually not stressed upon when the deal is being considered. According to Paul Temple, the organisational fit is “the match between administrative practices, cultural practices and personnel characteristics of the target and acquirer. It influences the ease with which two organisations can be integrated during implementation” (Temple, 2002). It is believed that the major reason for the failure of mergers and acquisitions is the clash between corporate cultures (Baldwin, 1995). Corporate culture is the way an organisation views itself or its written and unwritten policies and procedures. Experts urge that in order to get a good organisational fit, one should look at its own corporate culture and try to acquire similar companies. One thing that can tear a merger apart is the attitude of “us versus them”. This attitude is the reason for failure for most mergers. It is believed that if culture is the problem in a merger, it can have overwhelming effects on the newly formed company. (Buono and Bowditch 1989).

There have been more than a few acquisitions which did not come up to the mark due to the conflict of the corporate culture of the firms involved. For instance, in the year 1994, Quaker Oats purchased Snapple Beverage Co. for a total cost of $1.7 billion, but the Snapple business was sold off after a period of three years for a loss of $1.4 billion. The main reason for this failure was the conflict between the corporate cultures. Quaker had an extremely focused, mass-market working approach, and on the other hand, Snapple’s style was eccentric, commercial and tilted towards its distributors (Dana, 2007).

Another example of the failure of the merger due to problems with cultural integration can be seen in the case of Daimler-Chrysler. The merger of Daimler-Benz and Chrysler became a straight out clash between the business cultures of the two firms. The differentiation in the corporate culture of the firms involved was the main reason for the non-success of this alliance. While the management style of Daimler-Benz’s was more of a formal and planned out sort, Chrysler’s management was more tilted towards a stress-free, unrestrictive style. Additionally, the views of both the firms on key factors, for instance, pay scales, benefits and travel expenditure, were completely different from each other. As a result, the company’s shareholders had to bear the burden of the collision (Buono & Bowditch, 1989).

According to a recent study conducted by KPMG, the percentage of mergers and acquisitions which were not able to produce satisfactory results for the shareholders was 83%, and more than half of these deals, in fact, damaged the value. It was found out after interviewing more than a hundred management executives involved in these deals that the devastating grounds for these failures was the clash of corporate cultures. These cultural clashes are even bigger in the case of cross-border mergers and acquisitions, where the concerned firms belong to two or more different nations (KPMG, 2008).

Mergers and Organisational Fit

The studies on mergers and acquisitions have focused on three distinct categories of organisational performance; (i) the financial performance such as abnormal return in share price at the time of announcement of the merger deals (e.g., Lubatkin, 1987), (ii) the longevity of the expansion after the merger and acquisition takes place and (iii) the third one on the performance of mergers and acquisitions, job satisfaction and employee turnover rate (Greenwood et al., 1994).

Research on post merger performance has investigated the complementarity of the merging firms dwelling on the financial performance of the firms (Singh & Montgomery, 1987). Some other studies focus on the compatibility of firms involved in the merger. In a nutshell, researchers and academics have used ‘strategic fit or complementarity’ to describe the possibilities of synergy out of the mergers and ‘organisational fit or compatibility’ to denote the similarities in the organisational cultures and management practices (e.g., Shelton, 1988; Greenwood et al., 1994). Organisational fit being the central theme of the study, this section explores the literature on the compatibility in connection with the mergers.

Mergers and Organisational Cultures

There are a number of studies that have worked on the relation between the compatibility of the organisation and the performance of mergers and acquisitions. For example study by Chatterjee et al. (1992) on the relationship between the perceptions of the top management teams on the cultural aspects of the firms and the stock market returns of the acquiring firm revealed that there had been a positive impact on the shareholders’ gains due to the presence of cultural similarity between the firms involved in the merger activity.

Buono & Bowditch (1989) identified the integration of employees as one of the critical factors for smooth organisational transition. The integration of employees has been found to be critical, especially in knowledge intensive and technology based firms. According to Grandstrand & Sjolander (1990), in the case of more than 60% of the firms where the key research and development personnel left the merged firms, the merger activity resulted in failure. Therefore the success of mergers largely depends on the structural and cultural similarities of the firms involved since firms with like cultures are likely to get low resistance from the organisational members. Compatibility arises in the case of two firms having similar cultures and routines, and as a result of mergers and acquisitions, more internal diversity is created, which quite often leads to a collision of different cultures (Buono et al., 1985); (Greenwood et al., 1994); (Philips, 1994).

Age Similarity of Organisations and Impact on Mergers

Organisations founded at the same time have similar organisational practices. This is due to the reason that the contemporary founders usually tend to adopt the best organisational practices prevailing at the time of founding the organisations (Stinchcombe, 1965). In a similar vein study by Eisenhardt (1988) reported that the age of a store chain could predict the compensation system used by the organisations founded at the same time. Therefore it is deduced that firms with similar ages are expected to have similar organisational practices which are more compatible.

Size Similarity of Organisations and Mergers

The organisational theory has presented more studies on the relationship between organisational size and structure. Organisational size has been identified to be a key driver of bureaucratic features like greater formalisation. Another factor is an extensive division of labour that is generated by the size of the organisation. Usually, smaller firms possess the characters of entrepreneurial and participative cultures; on the other hand, larger firms tend to have more rigid and bureaucratic characters (Sales & Mirvis, 1984). The combined returns of the firms involved in the merger activities are positively related to the size similarity, and this is suggested by the correlation between size and bureaucratisation of firms. However, inconsistent results have been produced by various studies with Shelton (1988) suggesting a positive correlation with the combined abnormal returns. (Singh & Montgomery, 1987) have found a positive correlation between the size similarities of the firms and success of mergers in the case of related mergers and a negative correlation in the case of unrelated mergers. According to Cheng et al. (1989), the asset size differential of the target and bidder firms has a positive association with respect to the merger premium. However. Bruton et al. (1994) have found no significant correlation between size similarities and the performance of merged firms.

Structural Similarity of Organisations and Mergers

Along with the size similarities, structural similarities also have an impact on the success or otherwise of the mergers. An organisational structure defines the role and responsibilities of organisational members. When the organisations prior to the merger have the same structures, there is not likely to be any difficulty experienced by the organisational members in working under the reconstituted structure. This is due to the fact that the reconstituted structure would represent more or less the structures that existed prior to the merger. It is important that a newly formed organisation, as a result of the merger of two organisations having dissimilar structures, has to establish a coherent structure for ensuring efficient operations of the new firm. The new structure adopted by the reconstituted firm would pose some challenges to at least some of the organisational members. As a consequence, these members may have to adjust their activities, and some of the members may feel that this readjustment is not that easy to adopt. Therefore, it follows that mergers and acquisitions of firms having similar structures are more likely to outperform other firms on a comparative basis (Lee & Pennings, 1996).

Familiarity of Organisations and Mergers

Familiarity developed through the network of members can have a positive influence on the post-merger integration process of the combined firms. This is evident from the fact that two firms merging with each other having members densely tied to each other through networks are more likely to have similar cultures and routines before the firms merge with each other. There are different reasons for the presence of such familiarity. Firstly the firms will have a similar frame of reference and culture. It is the argument of many scholars and researchers that people tend to influence or get influenced in forming their opinions or attitudes by the behaviour and culture of the people with whom they are likely to interact (Salancik & Pfeffer, 1978). The second reason is that the firms are likely to have similar managerial practices even during the period before the merger. It is highly likely that the transfer of information through network ties will have the effect of increasing the similarity between networked firms. The managerial practices between the firms are also likely to have similarities due to the reason that the information transfers between the firms that are tied to each other will have the facility of having the same information on viable routines (Lee & Pennings, 1996).

Summary

The review of the available literature made in this chapter presented an overview of mergers and acquisitions, different types of mergers and acquisitions, economic advantages of mergers and the possible reasons for the failure of the merger activities. The chapter also contained a discussion on the relationship between the organisational fit and the outcome of mergers, which is the central theme of the current research.

Research Methodology

The methodology process of this study entails the collection, organisation and integration of the collected data. Data collection will be the most important step in the success of this paper since it will lead to viable and credible findings. This study will be based on the research on several firms in a number of industries and will describe multiple examples of successful and less successful mergers and acquisitions. For this purpose, five merger and acquisition deals, which took place within the last decades, will be selected, and their financial position, before and after the merger or the acquisition, will be analysed. Though the primary data through a sponsored study by contacting various subjects through personal interviews and questionnaires will be ideal for the sake of hands-on or firsthand experience, due to the paucity of time and limited scope of this opportunity, the secondary data alone will be relied upon for the study. Nevertheless, this type of study, as many scholars do, is no less reliable as they are invariably supported by their own primary data.

Review of Secondary Data and Analysis

Secondary research consists of the analysis of information and data gathered previously by other people like researchers, institutions and other non-governmental organisations. The data are usually collected for some other purposes other than one which is being presently attempted, or it may help both the collection of data for both the studies (Cnossen, 1997). When undertaken with proper care and diligence, secondary research can prove to be a cost-effective method in gaining a better understanding of the specific issue being studied and conducting assessments of issues that do not need the collection of primary data. The main advantage of secondary data is that it provides the basis for designing the primary research. It is possible to compare the results of the primary research with secondary research results (Novak 1996).

Research Design and Purpose

Data analysis and review in the secondary research method involves the collection and analysis of a wide range of information. In order to conduct efficient research, it is important that a statement of purpose is developed first and a detailed definition of the purpose of the research is arrived at. It is also necessary that a proper research design is evolved. The statement of purpose is to have a clear understanding of the reasons for collecting the kind of data and the type of data the researcher wants to collect and analyse. This will help the researcher to stay focused on the topic under study and prevent from becoming overwhelmed with a large volume of data. Research design can be defined as a step-by-step plan which shows the researcher the direction of data collection and analysis. The secondary data review normally involves designing the outline of what the researcher wants to study, the format of the final report, al ist of type of data and a list of data sources that may be used for the collection of data.

Sources of Secondary Data

There are different sources from which secondary data may be collected for the purpose of conducting any social research. The sources include:

  1. Official statistics – include the official statistics collected by government departments and various other agencies, trade associations, information bureaus and other institutions like World Bank and International Monetary Fund (IMF). These statistics are particularly useful for the researchers since these data can be obtained more easily and comprehensive source of information that extends to longer periods of time. It is important that the official statistics collected as a part of the official statistics need to be verified for accuracy and reliability because, according to Gill (1993), the official statistics are “characterized by unreliability, data gaps, over-aggregation, inaccuracies, mutual inconsistencies, and lack of timely reporting”.
  2. Technical reports – these reports represent the research works previously carried out. They are made out to provide the results of the research to different research institutions, governments and other interested research scholars. The report may be generated either out of research already completed or from research that is presently ongoing.
  3. Scholarly journals – these sources generally contain reports generated out of original research or results of experiments conducted by scholarly people in the field. Articles in the secondary journals are subjected to a peer review where other knowledgeable people will make a critical analysis of the contents of the journal articles for the qualities of “accuracy, originality and relevance”.
  4. Literature Review Articles – review of literature gather and review articles of original research that deals with the topic under study. The reviews are normally presented by scholars and academics in the field of study, and the reviews represent the overviews written for the first time on the topic. The review articles normally contain the list and details of all relevant publications and articles which formed the basis of the review.
  5. Trade Journals and Review Books – While trade journals provide practical information on the field under study, the reference books form the secondary source where the researcher can find specific facts or summary of a topic discussed in detail. Handbooks, manuals, encyclopedias, and dictionaries are considered reference books (University of Cincinnati Library 1996; Pritchard and Scott 1996).

Merits and Demerits of Secondary Sources

The main advantage of secondary data analysis is that it can be carried out more quickly as compared to the formal primary data collection and analysis procedure. If the quality of the secondary data available is relatively better, the researchers can make the best use of the secondary data rather than spending valuable time on the collection of primary data, which will save a considerable effort on the part of the researcher. Using secondary data comparatively involves a lower cost of gathering. However, there is the element of variations in the collection of data between different researchers, countries and settings, which needs to be considered while making use of the secondary data for analysis as the different methods may impair the comparability. Based on the level of data disaggregation, the secondary data analysis can lead to trend analysis to monitor changes in the values of attributes over a period of time. Secondary data can often be used to complement the primary data collection and thus will prove to save considerable time for the researcher in collecting the primary data. Secondary data facilitates the work of a researcher who lacks training in the collection and analysis of primary data (Beaulieu, 1992)

The main demerit of secondary sources of data is that they are considered imperfect in nature as compared with primary data. Since there will be differences in the settings and purposes for which the data were collected, a proper interpretation and analysis are required to understand the data presented and to use them for other purposes precisely. It is also necessary to apply selectivity, without which there will be an overwhelming volume of data that will impact the work of the researcher. It may be difficult to determine to judge the quality of some data which are being considered. Secondary data sources often conflict with each other. The original purpose for which the data was collected may bias the purpose of the secondary researcher.

Justification of the Secondary Research for Current Study

Though the gathering and analysis of primary data would add value to the reliability of the results of the research, in the chosen topic of study of the impact of the organisational fit on the success of mergers and acquisitions, there are not enough opportunities within the time and reach of the researcher to resort to research methods of interviews or survey through questionnaires, since the firms involved in the mergers were fairly large and the executives of these large organisations may not be easily be contacted for interview. It is also not possible to follow them for responding to the survey questionnaire as in their busy schedule; they may not have time to devote to supplement this research. Moreover, since the study proposed to derive the financial information to be obtained from the published annual reports of the companies, the secondary data become more liable to be used for the purpose of the research. Since there is an abundance of literature on the subject and most of them can be considered reliable sources, the research has drawn the necessary information and data from secondary sources. Therefore the secondary research has been considered suitable for completing the study.

Summary

This chapter presented a review of the secondary research method. It is observed that secondary data is found to be a valuable source of information for gaining knowledge and an in-depth idea on the broad range of issues and phenomena. It is also found, though secondary research cannot replace primary research, it is found to be useful in aiding primary data collection. In view of the difficulties involved in using primary data collection methods and since the reliability of secondary sources of data is more, it is justified to use secondary research for accomplishing the objectives of this study.

Findings and Analysis

The post-merger performance analysis of the merged companies include finding out the answers to questions like:

  1. whether the mergers were effective in achieving the objectives set out by the executives involved in the deal,
  2. whether the deals enhanced the shareholder value as compared to the industry standards; in other words, whether the mergers resulted in financial success,
  3. what were the characteristics of successful merger deals as compared to those of less successful deals.

This chapter presents the findings out of the secondary research conducted on the financial status of five different mergers. The analysis was based on the balance sheets of the combined entities for the first year of the merger and the fifth year after the merger/acquisition.

Introduction

As the basis for presenting the case for the analysis of post-merger financial status, this study contemplates studying the financial position of the following mergers. The financial analysis will be based on the study of the balance sheets of these companies one year after the merger/acquisition and five years after the deal. The study proposes to examine the impact of the merger on the financial growth of the companies listed in the table below. The merger of Exxon with Mobil, Vodafone with Mannesmann, AOL with Time Warner, Glaxo Wellcome with SmithKline and acquisition of Amoco by British Petroleum are considered. The observations are made from the published accounts of the companies, and the comparable figures for the two years under study are taken into account for arriving at the ratios. The analysis will also cover the organisational fit, and its impact on the combined entities resulted from the merger.

Year Purchaser Target Transaction
Value $ Million
1999 Exxon Mobil 77,200
1999 Vodafone Airtouch Plc Mannesmann 183,000
1999 BP Amoco 53,000
2000 America Online (AOL) Time Warner 164,747
2000 Glaxo Wellcome Plc SmithKline Beecham 75,961

Findings

The findings of this study are based on the information gathered from the annual reports of the companies published. In order to examine and report on the financial performance of the combined companies, this research considered the financial status of the chosen companies one year after the merger as well as five years after the merger took place.

Financial Implications of Mergers

The financial status of the companies with respect to growth and addition to shareholders wealth has been assessed on the basis of the turnover and profitability to assess the growth in the profitability of the companies after the merger took place. For assessing the improvement in the short term liquidity position of the company, this study considered the current ratio in the periods immediately after the merger. The long term liquidity and the addition to shareholders’ wealth are considered on the basis of changes in the debt to equity ratio and the earnings per share of the respective companies during the years considered. In four out of the five merger deals analysed, it is observed that the merger has really improved the financial standing of the combined companies after the merger. In the case of AOL/Time Warner, the financial position deteriorated badly in the year immediately after the merger, though the company improved its position in the subsequent years. The findings on the basis of the annual reports of the companies are presented in the following section.

Exxon Mobil:

Particulars Year 2001 Year 2004
Gross Revenue $ million 213,488 291,252
Net Margin Percentage 7.17% 8.50%
Current Ratio 1.18 1.41
Long-term Debt to Equity Ratio 9.70% 4.92%
Earnings Per Share (EPS) 2.18 3.91

In the case of Exxon Mobil, there has been a constant growth in the operations of the company, which is evident from the table shown above. The growth can be seen in all the areas like profitability, liquidity and return to shareholders. The analysis of the financial information is presented in section 4.2.

Vodafone Group Plc:

Particulars Year 2001 Year 2004
Gross Revenue £ Million 15,004 33,559
Net Loss Percentage 62.55% 24.43%
Current Ratio 1.42 (1.14)
Long-term Debt to Equity Ratio 7.72% 11.59%
Earnings/(Loss) Per Share (EPS) (15.90)p (13.24)p

In the case of Exxon Mobil, the combined entity has contributed to an increased turnover over the five year periods, and the losses have also been reduced. Though the merger with Mannesmann had some organisational issues in the beginning immediately after the merger, the earnings of the combined operations have evidenced the contribution to the successful growth of the company.

From the published annual reports of BP Amoco, much information could not be derived to compare the short term liquidity and earnings per share over the periods.

BPAmoco:

Particulars Year 2001 Year 2004
Gross Revenue NOK Million 8,028 7,334
Profit After Tax Percentage 18.62% 18.51%
Long-term Debt to Equity Ratio 11% 8%

Since both the companies shared a common European culture, there has not been much adverse impact on the operations of the combined company due to organisational fit. Though there is a reduction in the turnover, the debt to equity ratio has been reduced from11% in the year 2001 to 8% in the year 2004.

AOL Time Warner:

Particulars Year 2002 Year 2005
Gross Revenue $ Million 40,961 43,652
Net Margin/(Loss) Percentage (129.77%) 6.69%
Current Ratio 0.83 1.06
Long-term Debt to Equity Ratio 51.79% 32.28%
Earnings/(Loss) Per Share (EPS) $ (10.01) 0.62

The situation with AOL/Time Warner was totally different from the other mergers/acquisitions considered in this study. There was a chaotic condition that prevailed immediately after the merger due to the speed with which the merger was planned and the lack of organisational fit in terms of size and structure. This has resulted in increased losses in the first year after the merger, which have been wiped off over the period, with the company earning a profit of 6.69% in the fifth year after the merger.

Glaxo SmithKline:

Particulars Year 2002 Year 2005
Gross Revenue £ Million 21,212 21,660
Net Margin Percentage 22.42% 22.23%
Current Ratio 1.22 1.39
Long-term Debt to Equity Ratio 46.98% 69.63%
Earnings Per Share (EPS) 66.2p 82.06p

The merger of the two pharmaceutical giants has proved to be the merger of equals, and the combined operations have contributed to the development and growth of the company over the period. The synergies of the merger due to combined R&D facilities and the globally expanded market due to the merger have improved the financial position of the company, as exhibited in the table.

Analysis

This part of the paper analyses the findings of the study. The analysis of financial performance as a result of the M&A activities and the impact of the organisational fit are presented in this section.

Analysis of Financial Performance

From the analysis of the financial position of the companies involved in the five merger deals examined by this study, it is observed that in most of the cases, the mergers have enabled the company to progress much in terms of their financial success. But apart from the strategic fit and organisational fit considerations, the industry in which the firm proposed to merge acts and the trend of that industry does matter in furthering the objectives of M&A deals. For instance, in the five merger deals discussed within this study, two merger deals emanated from the energy sector, one from pharmaceuticals, one from telecommunication and one from the media sector. It may be observed that in industries like energy and pharmaceuticals, the firms already were doing financially well at the time when the mergers took place, and the mergers proposed can be considered to have proposed to enhance the size and gain economies of scale and to expand various geographic locations un-served so far. Therefore there is no wonder when these companies combined their resources, the results in terms of their financial success were phenomenal. However, the influence of organisational fit cannot be completely ruled out, though it can be concluded that such factors can be controlled by intelligent organisational strategies. But in the case of AOL, it can be seen that the failure of the merger to bring financial is mainly due to the size and culture of the organisation. Though these can be considered as vital causes, the researcher is of the opinion that there was a clear lacking in the process that was followed in the merger of these companies that contributed to the failure of the combined company to bring any financial success out of the merger.

Exxon/Mobil. Although the Exxon-Mobil merger took place in the year 1999, the financial results for the year 2001 have been taken into consideration since the merger took place towards the end of 1999. Therefore, the year 2001 has been counted as the first year after the merger for this analysis. Return of Equity (ROE) is one of the important financial performance ratios, and an analysis of this ratio is presented from the available secondary sources.

In the year 1999, after the successful completion of the merger, the combined ExxonMobil has performed to produce an ROE of 12.46 higher than the industry average of 7.53. Since the industry made heavy losses in 1998, both the firms made losses, and the average ROE was 14.50. Compared to this average, the ROE for the combined firm for the year 1999 was only 12.46. Therefore, it can be said that the firm after the merger has not performed well in the first year. Similarly, in the year, the ROE of ExxonMobil was 22.60. Though it was increased from the 1999 level, it was much lower than the industry average of 26.48 (Zhang et al., n.d.). Therefore it can be stated that ExxonMobil has underperformed in the first two years after the merger in so far as the ROE is concerned. New investments made by the company in respect of the resources of Mobil and the repayment of debts might be cited as the reason for the lower ROE. The cost of the merger and the cost involved in settling the organisation structures might also have caused a reduction in the ROE. However, in the following years, the company has performed well above the industry average. The gross revenues have increased to $ 291 billion in the year 2004 as compared to $ 213 billion in the year 2001. The net margin has increased to 8.5% from 7.17% and the earnings per share from $ 2.18 in 2001 to $ 3.91 in 2004. This shows that the merger between Exxon and Mobil has been a successful one from a financial angle.

Vodafone Airtouch Plc/ Mannesmann Merger. According to the interim results for the six months up to 30th September 2000 of the Vodafone Group Plc “Excellent progress following the acquisition of Mannesmann and formation of Verizon Wireless in the United States, reflected in substantial increases in mobile pro forma proportionate turnover (up 32%), EBITDA (up 24%), operating profit (up 19%) and customer numbers (up 55%)” (Vodafone Group Plc, 2000). The report further states that after the completion of the merger deal, the group mobile telecommunication business in Europe has increased tremendously with the large number of customers of Mannesmann integrated into the new company representing pro forma growth of 70% on the comparable period last year. Continuing this trend the gross turnover of the company increased from £ 15,004 in the year 2001 to £ 33,559 in the year 2004. This increase in the turnover has reduced the net loss from 62.55% in the first year after the merger to 24.43% in the fifth year after the merger. The earnings per share also registered growth, reducing the loss per share from 15,90p to 13.24p. However, there is a reduction in the current ratio from 1.42 in the year 2001 to 0.88 in the year 2004.

British Petroleum (BP)/Amoco Acquisition. Since BP has had the previous experience of managing few mergers, the company lost no time in putting the merged organisation together within a short period of time to garner the synergies of the combined unit. With the synergies of both successful companies, the company was able to better financial performance over the period. In the absence of detailed financial information in the secondary sources, the financial analysis has been done on the basis of the available information. The profit after tax percentage has slightly come down from 18.62% in the year 2001 to 18.51% in the year 2004. However, the company had improved performance in respect of long-term debt from 11% in 2001 to 8% in 2004.

AOL/Time Warner Merger. The preliminary results for the year 2001 for the combined AOL Time Warner has indicated that the EBITDA has grown by 18% as compared to the year 2000, with the amount of profit rising to $ 10 billion. The revenues for the year were over $ 38 billion. As reported by the CEO, “In 2001, AOL Time Warner achieved important goals in all of its divisions despite a difficult economic environment that included the weakest advertising market in memory.” Despite the reduction in advertising revenues, the company could achieve a gross turnover of over $ 40.96 billion for the year 2002. This has increased to $ 43.65 billion for the year 2005. Though the company suffered initial setbacks after the merger over the years, the company could make good progress in the financial areas. The company could achieve a net margin of 6.69% in 2005 as against the reported loss of 129.77% in the year 2002. The company also had improvements in the current ratio from 0.83 in 2002 to 1.06 in 2005. The long-term debt ratio had also decreased from 51.79% in 2002 to 32.28% in 2005. The company has also improved on the earnings per share.

Glaxo Welcome/SmithKline Beecham Merger. Though the merger between the companies fell off in the first instance in the year 1998, later on, the merger was completed. The synergies of the combined firm and the growth and success of the pharmaceutical industry have helped the company to enhance its financial performance in the period immediately after the merger. The combined Research and Development efforts have contributed to an increase in the gross revenue from £ 21.12 billion in 2002 to £ 21.66 billion in the year 2005. The financial performance of the company has been consistent over the years to ensure the earnings per share increase from 66.2p per share in the year 2002 to 82.06p in the year 2005. The current ratio had also improved from 1.22 in the year 2002 to 1.39 in 2005. This proves that the merger of Glaxo Wellcome Plc with SmithKline has been a financially successful one.

Analysis of Organisational Fit

The founding of an organisation and its capabilities are associated basically with the skills and experts of the entrepreneur in the case of those entities formed anew. While in the case of the combined firms formed as a result of a merger or acquisition, the skills and capabilities originate from the parent organisations. Whether new firms formed by the merger of the existing firms benefit from the assets and skills of the companies that previously existed depends on several strategic considerations in the form of compatibility of the organisations represented by the ‘organisational fit’ and complementary or strategic fit of the organisation. In line with the literature reviewed, the study has found several organisational factors like size and structure of the firms and individual and organisational culture have definite impacts on the inheritance of the skills and expertise from the parent firms. Such factors determine the course of performance of the combined firms in the aftermath of merger incidents. It has been observed in the cases of merger deals examined in this study the phenomena of organisational fit has played a determinant role in making the mergers a financial success and enable the leaders to accomplish the organisational objectives envisaged by them on the basis of merging the firms. The following sections discuss the implications of organisational fit on the success or failure of the merger deals taken for analysis by this study.

Exxon/Mobil. Exxon/Mobil has been successful in terms of realising the synergies of the combined entities. In order to achieve this, the combined company formed a new organisational structure that was built on the eleven corporate global businesses of both companies. This was intended to allow the new company to have a competitive edge in the global energy industry. At the time of the merger, it was announced that the synergies of the new company are expected to be in the order of $ 2.8 billion annual levels. However, by adopting the strategy of launching a new organisation structure, the company could far exceed the expected level of synergies. According to Lee Raymond, the then Chairman and CEO of the Exxon Mobil Corporation,

“At that time, we announced an expectation that the near-term benefits would total $2.8 billion annually, on a pre-tax basis. Since that time, our business transition teams have done a lot more planning and analysis around how to combine the two companies and, at the same time, reorganise how we manage the business — with a clear goal of maximising the company’s overall performance. We are convinced that the combined company will achieve a higher return on capital than either company could have done alone.” (PRNewswire, n.d.)

This clearly shows that since the company has taken note of the impact of the organisational culture, both the companies took the precaution of revising the organisational structure so that the compatibility between the organisations in terms of organisational structure is maintained, and this enabled the combined company to surpass the expected level of synergies.

Vodafone Airtouch Plc/ Mannesmann Merger. In the case of the Vodafone and Mannesmann merger, there were two prominent cultures involved in the merger; German and British cultures. While both German and British cultures may be described as Western cultures with the characters individualist and masculinity, there are some bottom-line differences in which German culture is a little more masculine and rigid than that of British. “While the British, despite their class society and utmost respect (veneration) for history, is more individualistic and fondly enough service industry-oriented.” However, both cultures have developed in the same direction and therefore cannot be said to be far off from each other.

However, as far as the organisational culture is concerned, this mega-merger has been considered only partially successful. The nature of the merger and corporate cultures have contributed to this viewpoint. The German corporate structure is characterised by bureaucracy, organisational hierarchy and rigidity in approach. On the other hand, Vodafone has, over the years, become an organisation having a corporate structure resembling a free lifestyle (Kaub et al., 2003).

Although both the companies had a similar corporate mission, strategy and goals and Vodafone formulated a post-merger integration Management Team the combined entity could not prevent a mass reorganisation of the structure and Mannesmann employees leaving the service immediately after the hostile takeover deal was finalised. Despite these organisational hurdles, the merger turned out to be financially successful and enabled Vodafone Airtouch Plc to:

  1. achieve a larger scale of operations which would ensure cost reduction,
  2. achieve technological leadership,
  3. achieve a significant presence in Continental Europe (Kaub et al., 2003).

British Petroleum (BP)/Amoco Acquisition. The acquisition of Amoco by British Petroleum was expected to go through smoothly without any clashes in the organisational cultures. However, there was disagreement among the industry experts on this point as the management of both the companies had different cultures. In BP, those executives who were aggressive and took the initiative were rewarded. However, Amoco had the practice of encouraging the managers who were cautious and contemplative. In that sense, Amoco was more conservative in approach and adopted traditional solutions to the issues. Though the merger was claimed to be one of the equals when the merger was actually completed, the BP executive took most of the top positions in the new company. This made the new company adopt the organisational culture of BP rather than that of Amoco. However, since the culture of BP was in line with the industry environment prevailed, then the deculturation of Amoco did not give rise to any large issues relating to the organisational fit. One of the industry consultants commented, “[BP] is arguably the role model for the industry in terms of creating a culture that is intensely focused on generating returns for the shareholder and demanding the level of performance from their people to achieve that.” (Funigraz, n.d.)

AOL/Time Warner Merger. The AOL/Time Warner merger failed because of the process adopted for carrying out the merger and the organisational fit. In any case of merger deals, there needs to be due diligence, a good length process that enables a clear assessment of the benefits and the evaluation of risks involved that may affect the basic assumptions and the details on how the new combined entity will deliver more value to the stockholders. This is the normal process that needs to be followed to make the merger a successful one. But in the case of AOL/Time Warner, the merger was carried out in a hurried fashion without looking into the fact of the organisational fit. The cultures and sizes were totally different. “When the firms announced their intention to merge, on 10th January 2000, Time Warner was generating five times more revenue than AOL. But AOL was buying Time Warner and retaining 55 per cent of the ownership” (Bock, 2003); there was absolutely no match between the two companies that wanted to merge.

Another biggest reason for the failure was the organisational culture. Both companies represented entirely different cultures; while AOL represented a new economy company with a lot of freedom to the employees, Time Warner was following the old school of the corporate culture. There was a clash of personalities, especially at the top, and when there were problems in realising the estimated advertising revenues, there was no loyalty among the senior leaders.

Glaxo Welcome/SmithKline Beecham Merger. The merger between the two pharmaceutical giants was expected to combine the skills and resources of the two groups, and the combination would create the leading research-based pharmaceutical company in the world. The merger was believed to improve the ability of the two companies to generate sustainable long-term growth and enhance shareholder value. Though the merger between the companies had to be considered as a domestic merger, there have been a number of organisational issues to be considered as if it was a cross-border merger, and most of them were issues relating to people. The merger was once called off for the first time in the year 1998. The reason cited for calling off the merger by one of the companies, SmithKline, was that the top management of both companies could not agree on issues relating to corporate culture. However, in the year 2000, the merger was carried out successfully. In the case of these two pharmaceutical companies, since there was a perfect alignment of the organisational fit in terms of size, structure and culture (since both the companies were located in the same geographic region), the merger was proved to be a success.

Case Studies on Failed Mergers

The case of failed mergers can be considered from two perspectives. A merger can be considered a failure when the companies that merged with each other could not accomplish the objectives intended to be met through the merger. This is the qualitative aspect of a failed merger. Secondly, when the shareholders of the resultant company suffer due to deterioration in the operating results in the post-merger period, that situation will also denote the case of a failed merger. There are major mergers that turned to be failures in corporate history. Examples may be found in AOL/Time Warner, Daimler Benz/Chrysler, Novel/Word Perfect and Quaker Oats/Snapple.

According to (Tobak, 2007) “some failed so spectacularly that the combined company went down the tubes, others resulted in the demise of the executive(s) that masterminded them, some later reversed themselves, and others were just plain dumb ideas that were doomed from the start” There are different reasons that contribute to the failure of mergers. In general, reasons like (i) flaws in the corporate strategy of either or both of the companies, (ii) no proper integration strategy for the post-merger scenario, (iii) cultural misfit among the organisations, (iv) inexperience of the acquiring company in merger and acquisition activity, (v) mistakes in the synergy calculations of the merger, (vi) ineffective corporate governance, (vii) the desperation on the part of both the companies to form another big, desperate organisation, (viii) an impulse buy or panic sell characterising the merger (Tobak, 2007).

Irrespective of the causes for the failure, failed attempts of merger activity affect the financial standing and growth prospects of the acquiring firm in the case of acquisition or the newly constituted firm in the case of a merger. As a part of the research, this study examined the takeover of Snapple by Quaker Oats and the merger of Daimler-Benz with Chrysler, both cases representing failed mergers. The objective of the study was to ascertain the extent of the impact of organisational fit that led to the failure of the merger.

Acquisition of Snapple by Quaker Oats

Snapple, formerly known as Unadulterated Food Products Inc., was found in the year 1972, entered the ‘ready to drink’ iced tea market in the year 1986. The company was acquired in the year 1992 by Thomas H Lee Company of Boston and renamed Snapple. Snapple soon became a successful beverage marketer with an aggressive distribution and employee loyalty strategy. “Snapple had an extensive and dependable network of independent co-packers and distributors to prepare, bottle, warehouse, and sell its products. Not only did these distributors generate high margins carrying Snapple, but they also had the option of delivering other beverages to chain stores, further boosting profitability.” Because of its position as an early mover into the ready to drink tea division, the company could acquire substantial market share within a short time. Although during the 1992 period, the two beverage giants Pepsi and Coca-Cola entered the iced tea market, Snapple remained still a strong competitor.

By the year 1994, Snapple became the second-largest seller of iced tea and other single-serving juices. Towards the end of the year, the iced tea market slowed down to a large extent. Coupled with this the aggressive marketing strategies of Pepsi/Lipton and the entry of new firms, the market share of Snapple went down drastically. In 1994 the company was facing severe inventory management problems due to lower sales and other seasonal factors affecting the sales. The stock price of Snapple went down by more than 50% in the meantime.

Quaker identified a strategy that pairing its Gatorade brand with Snapple would raise the chances of Quaker gaining more synergies. Quaker believed though Snapple did not have the power to compete against the giants Coca-Cola and Pepsi, Quaker, with its financial strength and leadership abilities, would be able to expand Snapple to higher levels. The immediate benefit to Quaker was that it would be placed as the third-largest player in the US beverages market. Based on these considerations, Quaker acquired Snapple in the year 1994 for a consideration of $ 1.7 billion, representing a premium of 28.6 times of the earnings and 330% of the revenues (QuakerOatsandSnapple, n.d.). Soon after, in order to liquidate the debts contracted for the takeover, Quaker had to divest a number of its other business lines that were giving constant returns to the company. The company had to further suffer financial struggles in the form of tax on capital gains on the sale of those businesses. Soon it was found out that investment in Snapple was a wrong move from the side of Quaker as the company found it difficult to improve its profitability in the post-acquisition scenario. Quaker had to face the challenges of the loose manufacturing process of Snapple running into weeks, leaving of the two of the founders of the company, mounting unusable raw materials and above all integrating the distribution system. Eventually, Snapple was sold to Trirac company for $ 300 million, and Quaker netted a loss of $ 1to 1.5 billion in the transaction. Quaker itself was acquired by PepsiCo in the year 2000 (Quaker Oat sand Snapple, n.d.).An analysis of the causes for the problems faced by Quakes and the situation to which the company was left due to the acquisition move will be discussed in the subsequent section on the analysis of findings under this chapter.

Merger of Daimler-Benz with Chrysler

It has been a clear case of a cultural mismatch that describes the failed merger of Daimler-Benz of Germany with Chrysler of the United States. In May 1998, Daimler-Benz and Chrysler Corporation agreed to combine their businesses in what was claimed to be a ‘merger of equals’ by the companies concerned. The merger was completed in November 1998. The merger resulted in the formation of a large automobile company ranking third in the world in terms of revenues, market capitalisation and earnings. The merged entity took the fifth position globally in terms of the number of automobiles sold. With the company generating revenue of $ 155.3 billion, selling 4 million cars and trucks in the year 1998 was expected to reap the benefits of the synergies from the merger and exploit the growth opportunities present in the wide global automotive market. However, since there was a vast difference in the German and American management styles, it was expected that there would be a large incompatibility in the organisational cultures that may hinder the realisation of the synergies of the merger. To obviate this difficulty, it was decided that the organisations would retain the existing cultures. In this arrangement, the former Chrysler Group took the manufacture of mass-market cars and trucks, while Daimler continued to produce luxury, Mercedes. Still, it was felt by the analysts that this strategy might not work out for a longer period. When there was a poor performance in the year 2000 by Chrysler, the American president of the company was replaced by a senior leader from Germany as CEO. Another senior executive from Germany was appointed as COO. It was the case that both the CEO and COO were not having any real exposure to the US market. This has led to a complete demoralisation of the workers of Chrysler. With mounting losses of close to a billion in the third quarter of 2000 and first quarter 2001, the German management of Chrysler decided to cut down 26,000 jobs (ICMR, 2001). Chrysler faced further problems of the exodus of labour and reported a loss of $ 512 million for the period ending September 2000. The share price of the company came down to less than $ 40 from the high of $ 108. Daimler Chrysler tried to make the merger work with all the possible efforts like financial support, staff-swapping between the companies and even product sharing to no avail. In the year 2005, Jurgen Schrempp, the then CEO of Daimler-Benz, was forced to resign from the position of Chairman of DaimlerChrysler. Finally, the deal came to a close with Daimler-Benz getting $ 8.9 billion from a private equity group against 80.1% of its holding acquired by shelling out $ 43 billion in the year 1998 and the money to be used to liquidate the debts of the newly formed Chrysler Holding Company. Daimler-Benz will further contribute $ 810 million for a 19.9% share in Chrysler (Butler, 2007). The reasons for the failure of the merged entity are discussed in detail in the following analysis section of this chapter.

Analysis of Failed Mergers

The analysis of the cases of failed mergers is discussed in the following sections. It is observed that the lack of organisational fit in terms of structure, size and culture have caused the failure of these mergers. The analysis below further elaborates on the issues involved.

Causes for Failure of Acquisition of Snapple by Quaker Oats

There was a fundamental difference in the management ideologies of both Snapple and Quaker. Snapple’s distribution channels were totally unconventional, and its sales promotions also did not follow any conventional pattern. With great efforts of the small distributors serving a large number of customers through counters, the product achieved its sales growth of up to $ 674 million in the year 1994 from a mere $ 4 million ten years ago. This has made the brand develop beyond its limited expertise. The owners of Snapple comprehended that they could not take the brand to a level higher. The management of Snapple had clear limitations here. In contrast, Quakers had an impressive growth in their marketing by adopting various marketing techniques and made Quakers a national brand. Quaker introduced Gatorade into twenty-six foreign markets and made the sales increased from $ 100 million to $ 1 billion in the ten-year span of time. Therefore they approached the acquisition of Snapple with the same strategy in mind. Another reason for Quaker to acquire Snapple was at that point in time, Quakers had only one brand in their beverage portfolio, and the company was facing serious disadvantages in terms of economies of scale against their larger competitors who would like to take over Quakers. It was a question of corporate survival that Quakers had to decide in favour of acquiring Snapple (Deighton, 2002).

However, the case of acquisition of Snapple by Quaker and the failure thereof is a clear case of mismatch between brand challenge and managerial temperament. If the Snapple brand is about playing a game, Gatorade, the original brand of Quakers, was about winning the game. The management of Quakers did not have any problem with the marketing of Gatorade, as they were tuned temperamentally with the achievement-oriented brand of Gatorade. On the other hand, Snapple is not about accomplishing any objective but a mere addition to the normal routines. Given the difference between the two brand identities, there was no surprise that both of them could not thrive under one management. The managerial temperament goes a long way in explaining why a brand that flourishes under one does not do so when it is destined to another.

Therefore the case of acquisition of Snapple by Quaker proves to be one of the incompatible management cultures that caused the failure of the acquisition (Deighton, 2002).

Causes for Failure of Merger of Daimler with Chrysler

The main cause for the failure of the Daimler-Chrysler deal was a mismatch of organisational cultures. This was evident from the course of events that took place in the years of progress of the business of the combined entity. The success of the merged entity depended largely on integrating the cultures of the two companies involved. The organisational cultures were totally different from each other. It is to be noted that Daimler was characterised by methodical decision making while it was creativity that was admired in Chrysler. Adaptability and resilience were at the root of the running of Chrysler. The organisation has a great affinity towards the qualities of efficiency, empowerment and fairly egalitarian relations with the staff, which guided the day to day operations of the company. On the other hand, respect for authority, bureaucratic precision and centralised decision making formed the central values in the management of Daimler. These diagonally opposite cultures in managing the organisations got manifested soon after the merger took place, and that started affecting the day to day activities of the combined entity. For example in one of the instances of the excessive intervention of the Daimler executives in sending the pamphlets to the customers frustrated the executives of Chrysler (ICMR, 2001).

The executives of Daimler were also not comfortable with the naïve qualities of the executives of Chrysler. Fundamentally there was a vast difference between both the organisations. While Daimler represented the “epitome of German industrial might”, Chrysler was regarded as one of the nimblest and leanest car companies in the world.

Yet another key issue that came in the way to the success of the merger was the differences in the pay structures of both the companies in the pre-merger context. While Germans were not in favour of large differences in pay structures and large revisions in the pay of top management executives, the CEOs in the United States were given handsome compensation and benefits. For instance, Eaton, the then CEO of Chrysler, was paid a total remuneration package of $ 10.9 million for the year 1997 (ICMR, 2001).

Daimler Chrysler took a lot of initiatives to bring the cultures of the organisations closer to each other. At one point in time, the more formal Germans even practised using casual dressing to attend the office. The Germans were also attending classes for improving their cultural awareness. While the Americans at DaimlerChrysler were encouraged to embark on specific plans for bringing the gap in the culture, the Germans were advised to do experiments in mingling with the Americans. However, none of these efforts proved to be helpful in making the merger a successful affair.

Therefore it can be reasonably concluded from the evidence of the case of DaimlerChrysler failed merger that the lack of organisational fit represented by incompatibility in cultural and structural fits was mainly responsible for the failure of the merger deal between the two companies. This goes to prove the literature reviewed by this study, and this also accomplishes one of the objectives of the research.

Research Questions

The answers to the research questions formed at the beginning of the study are detailed in this section.

What are the factors involved in organisational fit between the two firms which are considering a merger or an acquisition?

As reviewed by the literature, age similarity, size similarity, structural similarity between the organisations, and familiarity of the organisations and individual and organisational cultures being followed by the companies are the factors that have a definite impact on the success or failure of the merger and acquisition deals. This was evident from the analysis of the five merger deals discussed within this paper and the causes for the failed merger in the cases of Quaker Oats/Snapple and Daimler/Chrysler discussed.

What are the consequences of organisational non-fit on mergers and acquisition deals?

The consequences of organisational non-fit have been considered by several studies reported in the literature. The consequences of a merger between the firms that are unfit to combine with each other have been exhibited by the AOL/Time Warner merger where the shareholders in the combined firm were made to lose up to 80 per cent of the value of the shares as it was standing at the time of the merger. The important effect of a merger, therefore, is a significant reduction in the shareholder value.

What steps need to be taken when the deal is being considered in order to get a good organisational fit?

In order to derive the full advantage of M&A deals, it is important that the firms involved give due considerations to the efficient and intelligent transition of the business functions and processes to the newly formed combined entity. By an analysis of the relative positions of both the companies involved in the merger, the top management can identify the thrust areas where there is the need for an agreement among the concerned organisational members. By arranging joint meetings and having vivid and open communication, the organisational fit issues can be brought to the minimum so that they do not adversely affect the progress of the combined company.

Summary

This chapter presented a detailed analysis of the impact of the M&A deals on the improvement of the financial status of the companies. It is also observed out of the discussion in this chapter that issues like organisational size and culture have a definite and strong impact on promoting the success of M&A deals.

Conclusion and Recommendations

Conclusion

It is observed that there can be no ‘one-size-fits-all’ formula or an organizational concept that can be adopted in respect of merger/acquisition deals that would be able to contribute to the maintenance of the organizational structures and devise a common structure and culture for the new entity formed. However, experience with successful mergers has identified certain success factors that will provide help in situations of organizational mergers. The prominent success factors are; clear communication, cultural openness, leadership continuity, retention of key people, no intrusion, learning from past experiences and the core competencies of the organizations involved. The factors that caused the failure or identified to be obstacles in the successful post-merger integration are; loss of key employees, different organizational structures and management philosophies, different R& D strategies, different cultures and suspiciousness and problems with technology integration. In general, the possibility of a successful post-merger integration is enhanced when the merger proposal involves a target company which is having a similar culture with an appropriate size and proximity. Many scholars and academics have stressed the importance of cultural compatibility or organizational fit as one of the major determinants of the success of M&A deals. It is the general presumption that cultural similarity can contribute to ease the post-merger integration. However, there is the distinct possibility that the differences in the culture can be ironed out with a proper organizational atmosphere that would be made prevalent during acculturation. The success factors that contribute to the ease of integration quite often include the ‘common task or common objective’, which has the capacity to unite managers belonging to different cultural orientations. Studies have not explicitly mentioned the organizational form of cooperation as a necessary element for the success of M&A deals.

There are other success factors that also have a role to play in successfully integrating the companies in the post-merger scenario like clear and open communication with the employees, the speed with which the integration is attempted and the positive role of the leaders involved in the deal. Candid and clear communication will have the effect of allying to the unnecessary fears of the employees. Similarly, if the integration process is accomplished at a faster pace, the disturbances caused by the changes in the organization can be overcome quickly. However, clear communication and the speed of the integration process largely depend on the ability and the role being played by the leader. If the leader does not possess the ability to communicate effectively with the employees and complete the integration at a faster pace, the organizational progress may take the wrong course in the post-merger period.

However, the role of organizational fit cannot be ignored in attaining the intended organizational goals of any merger scheme. For instance, when SmithKline Beecham and Glaxo Wellcome called off the merger deal the first time in the year 1998, SmithKline announced that great differences in the management philosophies and corporate culture were the main reason for the merger to be put off. However, this statement was interpreted to imply that both the companies could not come to a certain understanding of the power-sharing at the top in the new pharmaceutical giant that was to evolve. But the experts who have studied the causes for the failure of the mergers point out that it is much more than the power struggle between the executives that had caused failures, and therefore organizational culture has to be considered in a wider perspective than merely the power struggle at the top. A KPMG study reported that more than fifty per cent of the mergers fail to produce the desired synergies and destroy all the shareholder value, and more than one-third of them do not have any impact on increasing the shareholder wealth. Mostly the reason for this kind of results from the mergers can be identified to be the lack of organizational fit represented by the structure, size and culture of the organizations involved in the merger. A Business Week study has identified the failure rate of mergers to be a whooping 61%. Because of the improper process and lack of organizational fit, AOL /Time Warner merger caused the loss of more than 80 per cent of the value of the combined entity from what it stood on the day of the merger. Towers Perrin conducted a survey of 447 human resources executives in the year 2000 on the issue of the role of peoples’ issues in the success of mergers. The study concluded that the organizational culture and the related issues had been found to be the top seven results why the mergers have failed to produce the anticipated synergies. Based on the analysis of the mergers dealt with by the study, it can reasonably be concluded that people issues have more impact on the success of the mergers though the size and structure also matter as far as the organizational fit is concerned. If the issues relating to the people in the organization are not given enough thought before, during and after a merger, culture issues can become the rock against which the marriage of merger founders and fails to succeed.

Recommendations

Nothing new can be added towards the recommendations for an effective transition during the post-merger period, which is not dealt with by the literature. However, it appears seemingly important that one or two issues need to be reiterated to gain the fullest advantage of the synergies of the merger. As evidenced by the literature, the speed with which the transition is completed in the post-merger period reduces the impact of the lack of organizational fit on the success of mergers in one or two areas. Therefore it is vitally important that the management of the newly-formed combined company should strive to complete the transition as quickly as possible. It is also important that before, during and after the merger, all the organizational members are continuously informed through open communications on what changes are expected and are happening in the organization. This will remove the unnecessary fears of the employees, which will increase the efficiency of completing the transition effectively. The formation of a transition management team comprising of executives of both companies will also add momentum to the progress of the transition.

Limitations

Since the study was based on secondary sources of data, no serious limitation was experienced by the researcher except that there was an overwhelming volume of information and data that was available from the previous researches and studies which needed to be assimilated and organized for a proper presentation.

Learning Statement

The research has given a deep insight into the world of corporate mergers and acquisitions. It was possible for the researcher to identify and appreciate the different factors that could easily influence the progress of the merger of two successful commercial enterprises. It was new to the comprehension of the researcher that pure power struggles at the top management levels could even jeopardize the likely chances of a merger that otherwise could have been successful from the very beginning, as it happened in the case of Glaxo/Smith Kline case where the merger was called off in the first instance in the year 1998.

As a part of the research, the researcher studied the reasons due to which a number of mergers failed in order to present a case study on the failed mergers. It had come to the knowledge and understanding of the researcher that in most cases, peoples’ issues had a dominant role to play in causing the failure of mergers. The author also found that in a number of instances, there had been a mass exodus from the companies immediately after the merger due to the unfounded fears of employees. It was also understood that effective communication with the employees before, during and after the incidence of M&A deals make a significant difference in the attitudes of employees, and the effectiveness of communication makes the transition process easy and simple. People become afraid and get panicky, thinking that the mergers would bring an end to their long services with the company. It was understood that, therefore, the employees should be reassured that whatever decisions the management is taking will definitely take into account the welfare and future of the employees.

It was also new learning that in the case of failed mergers where the combined entity could not do well, it does not have any impact on the very individual top leaders who brought about the merger except that in some cases, the CEO loses his job. The entire impact and burden of failed mergers in the form of loss in stock values are to be borne by the stockholders of the combined entity. The loss, in this case, would be very heavy, especially in the case of the stockholders of the company, which paid the consideration for acquiring the control in another. It is also a matter of knowledge gained that unless the firms are more or less of equal size and structure, there is the likelihood of the merger resulting in a negative growth as far as the wealth of the shareholders is concerned. Though the companies merge with a view to taking advantage of the synergies of the combined assets and other resources, the expected synergies do not materialize in the case of companies that do not possess the organizational fit or compatibility.

Away from the scope of the research, the researcher, while reviewing the literature on the topic, could gain additional knowledge on the steps involved in carrying out a merger deal successfully and the likely obstacles that may come in the way of executing the M&A deals to the satisfaction of the shareholders of both sides. The study revealed the importance of following all the steps involved in merger deals. If the required time is not taken to conduct a serious and realistic due diligence test, there is every possibility that the merger deal may result in significant losses to all concerned. This was evident from the case of AOL/Time Warner merger case where the deal was carried out in a hurry, which resulted in a considerable loss of shareholder value due to the merger undertaken by the companies.

It has been learnt that the relatedness between the firms has constituted an important aspect of determining the post-merger performance of the companies formed out of M&A deals. If there is a higher degree of relatedness, it results in a better performance. An example is found in the case of the merger of BP and Amoco and the two pharmaceutical giants Glaxo Wellcome and SmithKline. The researcher could identify the underlying theoretical reasoning behind this phenomenon as such overlapping synergies between the firms result in higher economies of scale and expanded opportunities in R&D which are very important for improvements in sales growth as well as the profitability of the business. It is also learnt that such mergers between firms in the same industry can arise from multiple utilization of content, cross-product promotions and umbrella branding of the products.

The investigation into the annual reports of the companies considered under the study enhanced the knowledge of the researcher on the financial ratios and their implications on the growth aspects of the companies concerned. Financial ratios like the current ratio and debt-equity ratio have thrown light on the short term and long-term liquidity of the companies and how the merger activities have impacted these ratios.

Apart from the implications of mergers on the financial status of the companies, the study revealed the importance of the involvement of top management in the transition process. The researcher could very well see this point in the case of the BP/Amoco merger where since BP had the experience of merger deals previously with a number of other companies, it was possible for the company to take steps necessary to conduct the post-merger transition in an organized way by involving teams of people from both the companies in such a way that there were no peoples issues in the transition. The post-acquisition success of mergers and acquisitions, therefore, depends largely on the way the messages are being conveyed to the employees by the teams responsible for bringing out the changes in the combined organization. Key people who have concerns and apprehensions about the merger process and its impact on their work should be individually called and addressed. The study revealed that such personal communication would go a long way in making the merger a grand success.

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