Mergers and Acquisitions: Meaning, Types, Strategies, Advantages, Issues

Mergers and acquisitions strategies are framed at corporate levels. Primary focus of mergers and acquisitions strategies are acquisition, sales, and consolidation of companies for achieving accelerated pace of growth. While framing such strategies at the corporate level, management considers multiple factors, depending on their purpose and motive.

Some of the common factors that influence mergers and acquisitions strategies are present business positions of the companies, more in terms of strengths and weaknesses; market situations, culture, human resources, etc. Effective framing of mergers and acquisitions strategies to a large extent depends on understanding the target company’s business and work systems with a due diligence report.

Motives or reasons for mergers and acquisitions widely vary on case to case basis. IT and Technology companies often acquire failed start-ups not for business synergy but to acquire talents. IBM’s acquisition or Informix was to give a new lease of life to their existing products, i.e., DB2; IOCL’s acquisition of IBP was to strengthen their stand in POL (Petroleum, Oil, and Lubricants) retail business, etc. But all these are cases of exceptions. Here we have listed some of the common motives of mergers and acquisitions.

Learn about:- 1. Meaning of Mergers and Acquisition 2. Genesis and History of Merger and Acquisition 3. Types 4. Stages 5. Strategies 6. Motives 7. Why a Company Acquires or Merges with Another Company? 8. Causes 9. Advantages 10. Problems 11. Major Issues during Merger/Acquisition Transition Phase.

Mergers and Acquisitions: Meaning, Types, Strategies, Advantages, Issues, Stages, History, Motives, Causes, Problems and More…

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Contents:

Meaning of Mergers and Acquisitions
Genesis and History of Mergers and Acquisitions
Types of Mergers and Acquisitions
Stages of Mergers and Acquisitions
Strategies of Merger and Acquisitions
Motives for Merger and Acquisitions
Why a Company Acquires or Merges with Another Company?
Causes of Acquisition or Merger Failure
Advantages of Mergers and Acquisitions
Problem Faced in Mergers and Acquisitions
Major Issues during Merger/Acquisition Transition Phase

Mergers and Acquisitions Meaning

Merger:

In today’s world, rapid changes are taking place in the business environment. The need of the hour is survival of the fastest and therefore, the organizations cannot be run in the traditional way. Mergers and acquisitions provide immense opportunities for consolidation and profitable growth of the organization. A merger usually involves combining two companies into one new company. The combination of two companies involves a transfer of ownership either through share swap or a cash payment between two companies.

In practice both companies surrender their stock and issue new stock as a new company. An acquisition is a corporate action in which a company buys most, if not all of another firm’s ownership stakes to assume control of it. An acquisition occurs when a buying company obtains more than 50% ownership in a target company. A merger occurs when two separate companies combine forces to create a new joint organisation. Acquisition refers to the takeover of one entity by another.

Mergers consolidate two companies, in which process one company acquires the other. Because it is both a process of consolidation and acquisition, we use the term interchangeably. Operationally, both the terms are considered as synonymous. Decisions on acquisitions are taken for the benefit of synergy and in some cases companies can also enjoy tax benefits.

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More appropriately the word merger can give the right signal, at least from human resource management point of view. This is because people from the acquired company will not have any demeaning effect.

Some mergers could be voluntary when two companies voluntarily decide to merge their business for their mutual interest. In such cases these two companies voluntarily decide their new name and the way they distribute their business. For example- with the merger of Dow and DuPont three companies are being formed, specializing in agriculture, specialty products, and material science.

But this may not be the case of hostile acquisitions, as the acquiring company may like to dilute the stocks and the identity of the acquired company, integrating the acquired company with their business. In some cases of hostile acquisitions, the acquiring company even may not integrate the business of the acquired company, but may eliminate the product lines of the acquired company, so that they continue to thrive in the market with their own product lines.

For example- IBM’s acquisition of Informix Corporation in the year 2001 was more intended to promote their DB2 rather than continuing with the database product lines of the acquired Informix. Incidentally, Informix Corporation’s distributed database business was more than double of IBM’s DB2 then.

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Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. Evidence on the success of M&A however is mixed – 50-75% of all M&A deals are found to fail in their aim of adding value.

Usually mergers occur in a consensual (occurring by mutual consent) setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target’s board.

In the United States, business laws vary from state to state whereby some companies have limited protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the “poison pill”.

Historically, mergers have often failed to add significantly to the value of the acquiring firm’s shares. Corporate mergers may be aimed at reducing market competition, cutting costs (for example, laying off employees), reducing taxes, removing management, “empire building” by the acquiring managers, or other purposes which may not be consistent with public policy or public welfare. Thus they can be heavily regulated, for example, in the U.S. requiring approval by both the Federal Trade Commission and the Department of Justice.

Acquisition:

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An acquisition can take the form of a purchase of the stock or other equity interests of the target entity, or the acquisition of all or a substantial amount of its assets.

Types of Acquisition:

1. Jennifer Russell purchases – in a share purchase the buyer buys the shares of the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities.

2. Asset purchases – in an asset purchase the buyer buys the assets of the target company from the target company. In simplest form this leaves the target company as an empty shell, and the cash it receives from the acquisition is then paid back to its shareholders by dividend or through liquidation.

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However, one of the advantages of an asset purchase for the buyer is that it can “cherry-pick” the assets that it wants and leave the assets, and liabilities, that it does not. This leaves the target in a different position after the purchase, but liquidation is nevertheless usually the end result.

The terms “demerger”, “spin-off” or “spin-out” are sometimes used to indicate the effective opposite of a merger, where one company splits into two, the 2nd often being a separately listed stock company if the parent was a stock company.

Classifications of Mergers:

i. Horizontal mergers take place where the two merging companies produce similar product in the same industry.

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ii. Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine.

iii. Conglomerate mergers take place when the two firms operate in different industries.

A unique type of merger called a reverse merger is used as a way of going public without the expense and time required by an IPO.

The contract vehicle for achieving a merger is a “merger sub”.

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The occurrence of a merger often raises concerns in antitrust circles. Devices such as the Herfindahl index can analyze the impact of a merger on a market and what, if any, action could prevent it. Regulatory bodies such as the European Commission and the United States Department of Justice may investigate anti-trust cases for monopolies dangers, and have the power to block mergers.

Accretive mergers are those in which an acquiring company’s earnings per share (EPS) increase. An alternative way of calculating this is if a company with a high price to earnings ratio (P/E) acquires one with a low P/E.

Dilutive mergers are the opposite of above, whereby a company’s EPS decreases. The company will be one with a low P/E acquiring one with a high P/E.

The completion of a merger does not ensure the success of the resulting organisation; indeed, many mergers (in some industries, the majority) result in a net loss of value due to problems. Correcting problems caused by incompatibility—whether of technology, equipment, or corporate culture— diverts resources away from new investment, and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities at one of the partners.

Overlapping subsidiaries or redundant staff may be allowed to continue, creating inefficiency, and conversely the new management may cut too many operations or personnel, losing expertise and disrupting employee culture. These problems are similar to those encountered in takeovers. For the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate, or prevent the deterioration of shareholder value more than if the companies were separate.

Genesis and History of Mergers and Acquisitions in India

Reviewing the theories of mergers and acquisitions, we observed the right from the early phases of industrial revolution, shift of control was evident, which we called the phenomenon of mergers and acquisitions. Although in the initial phase shift of control was from owners to managers, as managers were then considered being prominent in takeovers, later on mergers and acquisition process involved in the transfer of ownership from one company to another.

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This was further authenticated by Goel and Thakor (2010) in their study, through which they could observe mergers waves which are now controlled by CEOs to increase the firm’s size for getting better competitive edge.

Tracing history we find that mergers and acquisitions have evolved in the United States and in European countries more than a century ago. In all these cases of mergers and acquisitions macro-economic factors was the major driver. Yaghoubi et al. (2016) classified the genesis of mergers and acquisitions in to different waves.

During the first wave of mergers and acquisitions (1887-1904) superseding priority of companies was to go for mergers and acquisitions so as to enjoy monopoly. Obviously during this period, trend was large manufacturing companies’ preferred horizontal mergers to enjoy more monopoly through enhanced market share.

However, during the first wave companies faced the challenge of natural business cycle of economic slowdown. Also institutional and legal supports were not conducive, as the social pressure cascaded the wave of anti-competition against the large companies.

The second wave of mergers, i.e., the period between 1916 and 1929, accentuated with the end of First World War when economic boom influenced the need for increased production for readily available markets. This was also supported by the development of infrastructure and technology. During this phase we also find supportive institutional and legal norms in the developed countries.

Characteristically, during this phase mergers were mostly horizontal and also conglomerate in nature. Unlike in the first phase, during this time, apart from manufacturing, mergers were also evident in metals, food processing, petroleum, chemicals, and transportation equipments. The second wave of mergers had to end with great depression.

The third wave of mergers that took place between 1965 and 1969 was accentuated by again favourable economic conditions and institutional support. Characteristically, during this phase mergers were more conglomerate in nature.

Unlike large companies, even relatively smaller organizations ventured for mergers and acquisitions, as equity financing received positive market response, and, therefore, the support from the investment banks were also forthcoming. The third wave of mergers also had its natural death primarily for poor economic performance.

The fourth wave of mergers was evident from 1981, and this came to an end by 1989. During this phase mergers were more in the oil and gas industries, pharmaceutical industries, banking, and airline industries. The phenomena of cross-border mergers and acquisitions were also common during this phase. With unsupportive institutional and legal provisions like anti-takeover laws, etc. the fourth wave of mergers had to come to an end.

The fifth wave of mergers had its beginning from 1992 and continued till 2000. The fifth wave was triggered by globalization, stock market boom and deregulation. Most of the cross-border and mega mergers took place during this phase, and the trend of mergers was mostly in banking and telecommunication industries. With the stock market bubble, this type of mergers came to an end.

With the increased pace of globalization, rise in venture capitalists and private equity investors, and the urge of the shareholders to increase their dividend payouts, the sixth wave of mergers and acquisitions started from 2003. The sixth wave is still continuing, although in between it had experienced considerable slow down, for global economic crisis. Characteristically, during the sixth phase multi-national companies went for cross-border acquisitions to get better market reach globally.

With the emergence of BRICS (Brazil, Russia, India and China), we also see the new phase of mergers and acquisitions from 2011, characterized by more cross-border mergers and acquisitions. Some scholars attribute this trend as the beginning of the seventh wave of mergers, but again we have difference in opinions, and many believe that the sixth wave is still continuing.

Tracing history of mergers and acquisitions in India, we observe that it was very selectively used by the organizations for their inorganic growth and sustenance till 1988. Almost in all cases it was voluntary. Reasons for selective mergers and acquisitions in India are attributed to prohibitive regulations of the then Monopolistic and Restrictive Trade Practices (MRTP) Act, 1969. This, apart from India had host of other regulatory provisions, which dissuaded companies to go for mergers and acquisitions.

Cross-border mergers and acquisitions spree among Indian companies have increased considerably since the opening up of Indian economy after July, 1991. In India, from legal perspective, instead of ‘mergers and acquisitions’ we use the term amalgamation.

Almost 40% of the mergers and acquisitions take place in the United States. European countries together do account for 35% of the total mergers and acquisitions. Account of cross-border mergers both for the United States and European countries together cross little over 40%, which signifies an increased number of cases of cross-border mergers and acquisitions. Many Indian organizations also in the recent past went for cross- border mergers and acquisitions, where we have both the cases of success and failure.

While interpreting different phases of mergers and acquisitions globally, we find that with the beginning of horizontal mergers to become monopolists in the markets, companies today believe in their strategic importance for inorganic growth and sustenance.

Vertical expansion of business, urge to become conglomerates, adding new product lines, global market reach, and even talent acquisition etc. are some of the driving forces for the companies to go for mergers and acquisitions spree. Thomson Reuters (2015) could report substantial increase in the global mergers and acquisitions, putting the figure to USD 4.7 trillion, which is straight 42% rise from the figure of 2014.

Top 3 Types of Mergers and Acquisitions – Horizontal Merger, Vertical Merger and Conglomerate Merger (With Examples)

Types of mergers and acquisitions widely vary with respect to the legal framework of the respective countries. For example- in India some of the types of mergers and acquisitions cannot be possible.

From the global scenario, we can list various types of mergers and acquisitions as mentioned below:

Type # 1. Horizontal Merger:

Horizontal mergers are those in which two companies with similar product lines merge together to emerge as a larger organization with greater market share. Solvay and Rhodia merger and also the merger of DuPont and Dow are two examples of horizontal mergers. Horizontal merger facilitates in getting the advantages of increased volume of production at a reduced cost of operation, obviously for the benefit of economy of scale.

It also benefits companies with the economy of scope, expanding the market share, creating new market opportunities, etc. Although it is seen that horizontal mergers theoretically prefer two small firms in similar lines of business, Weston (1990) observed that this may not always be the case. In other words, achieving economies of scale may not always be the case for horizontal mergers.

Despite the above stated benefits of horizontal merger, we also see some problems. These are adverse effect on the elimination of competition between two merging firms; merged firms may emerge as powerful market player, and thus can control the price and so also the production level with their profit motive, etc.

In the first case merged firms were growing, and were thereby becoming market leaders. Their efficiency and competitiveness became sluggish. In the second case, by becoming a market leader, firms were over focused on their profitability issues, and thus neglected the other stakeholders’ interests. Also, such mergers may create entry barrier for new players in the market.

Type # 2. Vertical Merger:

Vertical merger is merging of two non-competing companies, obviously not in the same line of business, but certainly benefits the companies with improved supply chain, cost efficiency, and increased profitability. Vertical mergers can take place both in the forms of forward integration or backward integration.

Forward integration indicates buying of customer, whereas backward integration indicates buying a supplier. Therefore, vertical mergers facilitate in taking control of both the market and the raw material supply, which substantially benefits the company in terms of getting competitive advantages, like cost leadership, and so also market control.

Facilitating internalization of all outward transactions benefit the companies through such mergers in terms of performance efficiency through effective monitoring and altering dynamics of competition. Such a trend may be anti-competitive, and may even dissuade new players to enter in to similar lines of businesses.

Type # 3. Conglomerate Mergers:

Conglomerate mergers integrate two companies which operate in different markets with different product lines. Through conglomerate merger, acquiring company enjoys diversity in their product and so also in business portfolio. Characteristically, conglomerate mergers can be pure, geographical, or may be in terms of product-line extension.

Only difference in the characteristic of these two firms (which merge) is their existing operation in two different markets. This obviously makes them non-competing in nature. Like other forms of mergers, conglomerate mergers help in enhancing efficiency, cost optimization, including operational, capital, and overhead costs, etc.

Apart from these, we have market-extension merger (companies operate in different markets but the same products), product-extension merger (companies are selling- related products in same market), etc.

Another way of typifying mergers is to consider the way such mergers are financed. For example- we can call purchase mergers, i.e., when acquiring or holding company purchases the acquired company may have cash or debt instrument, or a combination of both. Purchase mergers are preferred by the acquiring company as it can substantially give tax benefits.

Like purchase mergers, we also typify a merger as a consolidation merger when a new company is formed consolidating two companies, i.e., the acquiring company and acquired company. In this process both the companies after merging lose their identity, once the new entity is formed.

We can also classify a merger as Lending Buyouts (LBOs), i.e., the financing of merger through lending; Management Buyouts (MBOs), i.e., when company’s executives and managers buyout shares and establish their stake to demonstrate their commitment for the merger primarily for getting lending support, etc.

In some cases we also see reverse LBOs, which indicates a case of merger between two companies, where the acquiring company is not listed in the stock exchange but the acquired company is listed. The acquiring company to facilitate merger issue rights, taking the benefit of listed acquired company and in the process can draw capital.

3 Main Stages of Mergers and Acquisition activities – Pre-union, In-process union and Post-union Stages

The experience of several companies in merger and acquisition activities suggests a model of M&A activity that has three stages:

1. Pre-union

2. In-process union

3. Post-union

In these three stages, all the business functions such as business strategy, finance, marketing, IT and operations are important but the most important function is the management of human resource which only can get rest of the functions integrated.

The detail HR initiatives to be undertaken in each of the stages are described below:

Stage # 1. Pre-Union:

This is the stage prior to merger and acquisition, during which it is extremely important to understand both the organisations and their people processes.

The first step towards any union is to identify the reasons for which the organisation is interested for merger and acquisition. Once the reasons and priorities are known, a team can be formed to work dedicatedly on due diligence of all areas of M&A. Most companies exercise the diligence in the financial side of things, but fall short when it comes to human capital issues.

M&A should expect significant differences in the human resources function, including its position and key strategic objectives and roles, as well as in approaches to human capital-related programmes and processes. The due diligence process must catalogue all risks and differences and then eliminate the difficulty and expense of rationalizing and aligning these practices to successfully motivate the new workforce. Based on the objectives, potential partners should be selected.

Transition teams are used to study and recommend options for combining the two companies in a merger. To discourage decision-making based on personal agenda or policies, human resource professionals who facilitate transition teams should work with team leaders to rim effective meetings. This will give all team members an opportunity to contribute their viewpoints.

As the cultural mismatch is the most important factor of failure in any merger and acquisition deal, it is essential to carry out a thorough cultural assessment exercise of both the organisations in terms of philosophies, values and practices.

Moreover, a thorough assessment of the human resources issues within the company, including recruitment and manpower planning, employee relations, labour government compliance, compensation and benefit programmes, human resource information systems, training and development, and safety and environmental issues should be undertaken. This audit address areas of potential exposure with recommended action plans once the deal closes.

Stage # 2. In-Process Union:

This is the second stage of M&A activities, which should normally follow just after the completion of the activities of the first stage. In this phase, the basic objective is to have a smooth integration of managing all transitions to address the apprehensions of the people at work. The most critical issue is to select the integration manager who will lead the whole process of implementation. The various roles of the integration manager include serving as a project manager, communicator, advisor, advocate, relationship builder, facilitator, team leader, ombudsman and negotiator.

A new organisational structure must be created considering the business objectives; elimination of redundancy, parallel systems vs merged systems, geographic locations, commitment to the former organisation and market and PR considerations. Once the boxes are drawn, a talent assessment is essential. Candidates for each position should be identified, selections made and offer extended, recognizing that all will not be accepted.

The whole restructuring process should be much faster to manage the transition psychology of people. Here the role of the leader is extremely important to place the structure and strategy, managing the change process, retaining and motivating talents, communication with all the stakeholders of the organisation.

A lesson learnt by the folks at GE Capital, that greatly aided successful integration was – decisions about management structure, key roles, reporting relationships, layoffs, restructuring and other career affecting aspects of the integration should be made, announced and implemented as soon as possible after the deal is signed ideally within few days. Creeping changes, uncertainty and anxiety that last for months are debilitating and immediately start to drain value from an acquisition.

This experience of GE has thrown important light towards quick and successful implementation to achieve success. This also involves changing people at large in a desired direction through drawing a schedule as per the priorities identified and frozen. Kay & Shelton (2000) have identified the people problem in mergers, which were reported in Mckinsey Quarterly. The findings show the percentage of respondents who believe people activity is critical. 76% believe in retention of key talents, 71% in communication, 67% in retention of key managers and 51% in integration of corporate cultures.

Once the organisational chart is in place, there will be vacant positions to fill, either because people have not accepted a position or because there is no qualified internal candidate. The company must create a severance plan and retention-bonus programme to manage through the transitional period. These plans should be fair and equitable enough to do what they are designed to do – retain employees. Likewise, the outplacement strategy should take into account the types of employees being affected and how long it m ay take them to find a suitable position.

Once the structure is in place, communication is the key. It is the first step in assimilating employees into a new organisation and the best chance of making them feel good about it. Both individual and group meetings are appropriate to communicate individual employment status as well as the impact on the new organisation. There should also be extensive planning around logistics for those leaving the organisation on the day of the deal.

To minimize stress and uncertainty in the organisation during the merger process, it is essential to develop and deliver educational seminars to help employees and managers manage stress, low morale and productivity issues in work groups. These seminars should focus on specific issues affecting employees rather than on change management in general.

Stage # 3. Post-Union:

Most of the M&A initiatives are failed because of the lack of seriousness during in- process union stage. Faulty action plans, absence of committed HR professionals, lack of involvement of senior management people lead to mismanagement of change process in the organisation. In the post-union phase, the structure and staffing pattern need to be tested in action in terms of value creation in the organisation.

The culture, which is emerged out of the combination of both the organisations, should be monitored in line with the objectives set in for the new organisation. When the companies with vastly different cultures merge, they help management preserve the best aspects of the old company and carry them into the new company.

It requires understanding of what cultural characteristics and values should be preserved from the respective companies and what new characteristics need to be added in the new organisation. In this activity, the senior management people should involve themselves seriously. Moreover, continuous assessment and reassessment are required to evolve the right kind of culture to make the people comfortable as well as achieve the ultimate business goal of the organisation.

After the merger is implemented, problems may arise as and when new teams are formed. These teams may experience interpersonal conflict, undefined roles and responsibilities and confusing procedures as leaders move ahead on operational tasks. Thus, a process requires to be created for developing newly formed teams. HR professionals should review this process^–, and offer to help launch new teams by providing consultation.

Another important issue is the stake holder’s concern regarding the performance of the new entity wherein their stake is involved. The HR department needs to develop a transparent communication channel in order to disseminate the information to the stakeholders related to the developments and achievements after the M&A activity. Proper assessment of the concern will give input to devise a better intervention strategy to manage the stakeholders’ concerns.

The basic principle in this process to be followed is to make all the stakeholders satisfied with the performance of the organisation. Even the feedback of the stakeholders can be taken for interim alterations wherever required. A solid communication plan can make the difference between instability and independability for the employees who are the important stakeholders.

The new entity should learn from the entire process to build up the strength to avail the competitive advantage. The new company must emerge with a unified approach to human resource issues. Policies should be reviewed, created, implemented and communicated companywide to ensure understanding. Compensation and benefit packages must be reviewed, merged, shopped and communicated.

Staffing and manpower planning must be completed for current and future openings, training and development programmes must be merged and communicated, and employee relations programmes must be communicated and implemented. A clear strategy has to be formulated for communicating changes along every step of the way and managing through it in order to recruit and retain the workforce. Strategies and tools should be created to facilitate blend the cultures of merging companies and minimise the uncertainty during periods of downsizing.

HR department therefore should take initiatives to first identify the core competencies which need to be developed for the growth and development of the business. The identified competencies then have to be nurtured and developed within the organisation.

If the above steps are taken in a professional manner and at the proper time, companies can greatly minimise potential employee-related problems that may occur during a merger or acquisition. Every person reacts differently when his or her job is threatened, but a consistent, equitable approach will minimise the possibility of litigation and reassure the new workforce that the new company is a good place to work.

Mergers and Acquisition Strategies

Such consideration ensures better integration of two companies, avoiding the catastrophic failure, which we see in the corporate world. As mergers and acquisitions have now become the most common way of business growth and sustainability, many companies have their pre-conceived line of enquiry, which they expect to test with due diligence.

All these are strategies for the pre-acquisition stage. Subsequent to acquisition, again a company needs to frame appropriate strategies for integration. Such post acquisition strategies provide a framework based on which companies pace their action plans for achieving their goals.

From HR point of view such strategies could be culture integration, integration of workforces, integration of work systems, calibration of performance management systems, compensation and benefits programme, training and development systems, etc. Companies frame all these strategies in line with their policies.

Pre- and post-mergers and acquisitions strategies widely vary from organizations to organizations for obvious differences in the policies, purposes, and motives. Despite such differences, mergers and acquisitions strategy framing process follow more or less a universal approach. We also call these important drivers for mergers and acquisitions strategy framing.

This strategy framing process is explained below:

1. Deciding on Business Plans:

Strategies for mergers and acquisitions emanate from business plans. This is the prime driver for strategy framing. Belgium’s Solvay and France’s Rhodia, two European Chemical major mergers were primarily intended to strengthen the global market, particularly in emerging South East Asian countries.

After merging Rhodia, Solvay embraced GBU (Global Business Unit) model to strengthen their market position in the South East Asian countries, developing local talents, rather than depending on their traditional headquarter-based control deputing glopats to manage the international operations.

Glopats are especially trained managerial talents who are deputed from headquarter to different countries for managing the business and operations. For example- Unilever still focuses on developing glopats, who are dedicated managers to manage international operations.

Based on the business plans, mergers and acquisitions strategies of companies are framed considering the changing dynamics of future markets, assessing the need for restructuring the product portfolio, assessing the need for redesigning supply chain value stream, designing market share distribution matrix, understanding human resource requirement, etc.

2. Deciding on Potential Target Companies for Acquisition:

This strategic decision again depends on a lot of background information and research work. Pentair’s acquisition of Tyco is not for business synergy or integration, rather to shift their business focus from power tool manufacturing to flow control.

Whereas, IBM’s acquisition of Informix, a leading developer of relational database software, was for achieving business synergy. Similarly, Google’s 1.65 billion USD acquisition of YouTube was again a move to expand the product portfolio. Thus, what should be the Target Company or companies for acquisition is an important strategic decision for the acquiring companies.

3. Deciding on Constraints of Acquisition Financing:

This is another important area that deserves appropriate strategy framing. First strategy here is to decide on the terms of financing the acquisition with the balanced mix of cash, debt, and equities (both public and private). Smart strategies here explore the opportunities for balancing the untapped credit and cash availabilities, exploring untapped equity, if any, and raising of new equity and debts, so that all these can rationalize the cost of capital.

4. Deciding on Valuation:

This strategy helps in rationalizing the price for acquisition. In our opening vignette, we have seen both Mittal and Tata Group did pay premium price for acquiring Arcelor and Corus in 2006, and within a span of less than 10 years even they are now trying to hive off these two acquired companies.

5. Gaining Stakeholders’ Concurrence on Acquisition Strategies:

At this stage acquisition strategies are reviewed and even shared with critical stakeholders (more particularly with investors). On gaining consensus from critical stakeholders, companies go for strategy implementation for making their acquisition process successful.

Vester (2002) suggested some strategies for successful integration after mergers based on the practicing experiences. These strategies are focus, innovation, discipline, excellence, speed, and simplicity. Although it is from his practicing experience, primarily based on the lessons of Xerox’s acquisitions, it has rich process, which can guide in strategy framing process of any organization during the integration phase of mergers.

All these strategic categories have distinct phases of activities, considering which only companies can come out with effective integration strategies. For example- under focus category we consider issues like understanding of strategic rationality, consideration of expected financials, framing of realistic integration time line, and establishment of line ownership for acquisition success. Likewise, for other strategies also he had listed certain phases of activities to ensure that appropriate strategies are framed for successful integration after mergers.

Motives for Mergers and Acquisitions

Motives or reasons for mergers and acquisitions widely vary on case to case basis. IT and Technology companies often acquire failed startups not for business synergy but to acquire talents. IBM’s acquisition or Informix was to give a new lease of life to their existing products, i.e., DB2; IOCL’s acquisition of IBP was to strengthen their stand in POL (Petroleum, Oil, and Lubricants) retail business, etc. But all these are cases of exceptions. Here we have listed some of the common motives of mergers and acquisitions.

Growth:

Achieving business growth is the primary motive behind mergers and acquisitions. Again, business growth can be achieved by strengthening the internal positions of a company by investigation. This is what we call organic growth. But this process of achieving business growth is time consuming. In a competitive market, companies need to pace their movement on real time basis, which may render organic growth strategy as ineffective.

The inorganic way of business growth, i.e., the growth through mergers and acquisition is considered strategically a more important move for companies. This faster way of achieving business growth benefits the acquiring company to acquire the resources of the acquired company for immediate meeting of the competitive needs. Also, this way of achieving business growth is more cost effective than achieving growth through strengthening of internal business.

Synergy:

Achieving business synergy is the other important common motive for mergers and acquisitions. The benefit of synergy indicates that when two companies are merged we get more value than 1 + 1. Here, 1 + 1 becomes more than 2. To illustrate this, let us take the example of two companies X and Y. X and Y independently will not get the benefit of synergy, but together they can get such benefit, i.e., when X acquired Y, we call it XY and we say it can give better value than X + Y.

Symbolically we can represent it as below:

Value (X) + Value (Y) < Value (XY)

Such benefit of synergy of combined business entity (after merger) is achieved because of high operative efficiency, which can substantially reduce fixed costs by avoiding duplication of operations, reduce recurrent costs achieving economies of scale, etc. Also, benefit of synergy can be obtained through business expansion, increased market reach, access to new technology, and visibility.

However, such benefit of synergy is rather a matter of assessment than reality. For example- when primary motive for mergers and acquisitions is to acquire talent (mostly in cases of acquisition of failed start-ups), benefit of synergy would be in terms of an enhanced talent pipeline, which can positively contribute to strengthen a company’s competitiveness.

Like business and operative synergy, companies also enjoy financial synergy when they go for mergers and acquisitions. The acquiring company gets the benefit of improved credit worthiness for becoming more resourceful and bigger in terms of size, and also can substantially reduce the cost of capital, as investors repose their confidence.

In addition to these two primary motives for mergers and acquisitions, there may be various other motives also.

Why a Company Acquires or Merges with Another Company?

Though the purpose of quick acquisition of strategic assets is one of the most sensible reasons why a company acquires another company, yet in practice many other motives have been found to drive a company to acquire another company in the same or in related or unrelated line of business.

Some of the real motives for pursuing an acquisition or merger strategies are described here:

1. Acquiring assets to strengthen its competitive position:

Strengthening its competitive position by acquiring assets is one of the common reasons why a company buys another business. Every business organization banks on certain types of resources of both tangible and intangible types for making its competitive position in the market. The source of competitive advantage can be tangible resources like large size physical plant of a motor car manufacturing company, intangible assets like employee skills for a consultancy firm, or an audit and accounting firm.

When a company uses its physical plant-based strength as the source of its market position, it tries to build a bigger plant so that its operating cost drops further and its market position becomes more unassailable.

2. Getting complementary assets for expanding one’s own business:

While doing business, sometimes a company finds that it needs additional assets, e.g., mining asset for a steel plant or coal mining right for a power plant, or a marketing infrastructure including sales force for a pharmaceutical company. Making such plant or marketing infrastructure takes a good amount of time which the market competition may not allow. The best strategy for a coal-fed power plant is to buy a running coal mine near its power plant.

Similarly, the best strategy for a pharmaceutical major is to acquire a running pharmaceutical company which has well-established marketing network. One of the fastest ways to go for a strategy of backward or forward integration is to acquire a firm with the right complementary assets.

3. Acquisition for quick diversification into unrelated business:

Acquisition and merger is a good strategy which allows a company to diversify into a new business where it finds higher growth and profitability. Availability of such opportunity will allow it to invest its surplus fund in a more profitable business and allow it to get a completely new line of business without devoting the usual time of developing new business from scratch. Return for deposits from commercial banks are usually very low compared to those from investment in profitable companies.

4. Acquisition for quick diversification in a new market in same line of business:

Marketing infrastructure and expertise are important resources for maintaining a competitive position. It is often said that in a global environment, most Indian banks are in weaker position vis-a-vis their international competitors. Most of them do not have businesses in other countries. Some Indian banks have made a few attempts to expand their businesses in other countries through opening of branches in other countries, e.g., middle-eastern and south-east Asian countries.

But most of these overseas operations still do their business only with Indians living and working there. In order to create a global brand name, they need to do business with customers in many other countries.

5. Acquisition to bring down operating cost:

Sometimes a company may find that it has high value assets but due to limited market share it is unable to make full use of these assets. Such unused assets add to its operating cost and hurt its competitive position. In order to compete, it needs to expand its business volume which it could achieve only by bringing its operating cost down. It can bring down its operating cost by sharing its high value assets with another company.

This sharing can be done by entering into an alliance with another company who has a need for such assets or by buying another company who needs such assets but currently does not have them. Thus, it goes out scouting for a partner either for an alliance for a fixed period or for an outright purchase.

6. Acquiring a company for accessing business intelligence:

Sometimes a company acquires another company for the purpose of getting access to business intelligence about a new market.

7. Acquiring a company for killing competition:

A business organization sometimes acquires another company which posed a competitive challenge to it. Business rivalry is severe when there are just a few players in the industry. This rivalry reflects in their frequent actions to change product price, extensive product promotion campaign, and sometimes even employee poaching. All these actions are very costly and at the end of the day hurt both the challenger and the defender.

In order to avoid such protracted and bloody battles companies often resort to full-scale acquisition of a rival firm by offering more than their current share price to the promoter. Sometimes, a firm may go in collusion with stock-brokers for secret acquisition of rival firm’s shares from retail investors also.

Typical Causes for Merger and Acquisition Failure

Historically, mergers and acquisitions have been considered to be the exclusive domain of economists, market strategists and financial experts. Thus the financial and strategic aspects of merger and acquisition activity have been extensively addressed. However, the human aspects of these transactions have received relatively little attention. Around the world, retention of key talent, integration of cultures and communication were most often rated as critical activities in the integration plan.

Yet, only 10 percent of the respondents stated that human resource management received the top priority during integration. And, just five percent of respondents said communication was a priority. Even the most confident employee can feel insecure in a shifting work environment.

Studies shows that those who are responsible for effecting mergers and acquisitions; usually cite a host of economic strategic or financial reasons, when their efforts are proven to be unsuccessful. These reasons include the non-achievement of the intended economies of scale anticipated, poor or ill-matched strategic fit or unexpected changes in market conditions, among others. However, research has proved that these rational economic explanations are not sufficient.

Deliberate initiatives have been taken by the researchers to understand and identify the major reasons of failures in M&A as it is a matter of concern.

Typical causes for failure as quoted by Schuler & Jackson include:

i. Expectations are unrealistic

ii. Hastily constructed strategy, poor planning, unskilled execution

iii. Failure/inability to unify behind a single macro message

iv. Talent is lost or mismanaged.

v. Power and politics are the driving forces, rather than productive objectives

vi. Requires an impossible degree of synergy

vii. Culture clashes between the two entities go unchecked

viii.Transition management fails

ix. The underestimation of transition costs

x. Financial drain

xi. Defensive motivation

xii. Focus of executives is distracted from the core business

xiii. Cultural differences

xiv. Ill-conceived human resource integration strategy.

Out of these reasons, the most important reasons are cultural clashes, gaps or incompatibility and loss of key talents. Generally, it is believed that cultures of two companies could simply be put in a blender and poured out as a new synergistic company. Cultural issues are overlooked and these companies did not realise the implications of cultural differences. Culture concerns the internationalization of a set of values, feelings, attitudes, expectations and the mindsets of the people within an organisation.

This culture provides meaning, order and stability to the employees’ lives and influences their behavior. The merger of two culturally different organisations could result in conflict during the period immediately following the merger or acquisition. This often results in a decrease in employee morale, anger, anxiety, communication problem and a feeling of uncertainty about the future leading to separation.

Normally, when there is a merger, the decision is taken at the top, primarily by the financial personnel, mostly on the basis of financial parameters which invariably overlook the soft issues like individual difference and cultural mismatch. The matching at the top expects the synergy at the bottom also which in reality does not happen. Instead of synergy there is a culture clash. Even when there is no direct clash, it is most likely that the cultures of the two firms will differ.

If not managed properly, these differences can grow easily in aversive diversity, causing productivity problems like low levels of trust and co-operation between groups of employees coming from different firms. Each of the former nuclear firms bears its own cultural values, beliefs and assumptions distinguishing it from others, including the new partner, providing employees with a feeling of collective competence, identity and pride. Somehow, it is being experienced that the integration of both the culture hardly takes place, which leads to a ‘they’ current than ‘we’ feeling.

The pride in the cultural solutions of the old firm, that kept people together, is now partly a function of the distinction towards other firm’s solutions to the same, problems. These them-and us feelings do not disappear without proper management. In fact, when left alone, they tend to grow into aversive feelings giving rise to a situation of direct confrontation, sometimes triggering a vicious cycle to develop that affects the performance of the new organisation in a negative way.

This mechanism, that is highly probable in mergers and acquisitions, is a second way of accounting for the high percentage of failure in these transactions. It is increasingly being realized by progressive organisations that the employees affected by mergers and acquisitions, and the cultures of the combining organisations, are an integral part of the ultimate success or failure of a merger.

The brightest example of cultural clash in Indian set-up is the clash between Proctor & Gamble, Godrej, and BALCO. Godrej being a traditional value based organisation has a strong culture which demands strong values of paying respect to seniors and adopting line of command which is different in P&G and BALCO. As these are multinational organisations are having highly informal work culture.

This results in negative thinking and emotions, coupled with employees experiencing difficulty with reconciling their beliefs with the changes brought about by the merger process. This culture shock compels many talents to quit.

Mergers and acquisitions should, thus, be actively managed and integrated on an ongoing basis. Although the HR professional will generally be responsible for managing the HR issues associated with a merger or acquisition, it is prudent for organisations to create a special position for managing the process of merger for fixing responsibility and accountability for the successful management and integration of the process.

His/her responsibility should include the management of people processes and integration of the merger or acquisition process. Many organisations, however, still do not view human resources as critical to their M&A strategy, particularly in the early stages. This is ironic, since cultural incompatibility, poor communication and loss of key employees are the main factors that have proved to be the biggest stumbling blocks to a successful M&A transition.

It is turning out to be a case study in the case of Zuari Maroe Phosphates Private Limited (a joint venture of K.K. Birla’s Zuari Industrties and Maroe Phosphates S.A., Morocco) taking over of Paradeep Phosphates Limited (PPL). The company’s initiatives in managing the acquisition process have turned out to be a positive one. In eight months’ time, PPL’s losses were pruned to an average of Rs. 3 crores per month.

This success was because of changing people’s mindset and practices as claimed by the Managing Director of the Company. He also highlighted that the changing operational practices, fine tuning badly maintained plants, balancing equipment, importing efficient technology are not too difficult. It is changing people’s thinking and habits that is difficult and makes the difference.

The following steps were taken by the company in the post-acquisition phase to manage the apprehensions of the employees:

i. A clear communication from the new management to the employees regarding their commitment to the organisation in-terms of giving their best performance.

ii. Management’s commitment not to retrench the people of the acquired company and reach an agreement for redeployment.

Advantages of Mergers and Acquisitions – Benefits of Synergy, Cost Efficiency, Competitiveness and Enhancing Business Networks

Mergers and acquisitions have become the most prominent process of business consolidation and restructuring in the corporate world. Primary reasons for such innovative forms of business consolidation and restructuring are attributable to certain advantages.

Some of these advantages are presented below:

1. Benefits of Synergy:

With acquisition, the acquiring company enjoys the benefits of synergy in terms of improved performance and cost efficiency. Obviously, this leads to improved bottom line (profit) and top line (sales revenue). Benefits of synergy ensure long-term sustainability and growth for the acquiring unit also.

2. Cost Efficiency:

With business consolidation, it is often seen that the acquiring unit enjoys both economy of scale and economy of scope. While economy of scale benefits the acquiring company in terms of reduced cost with the increase in the volume of production, economy of scope enables acquiring company to introduce new business verticals, and so also new market place, etc.

3. Competitiveness:

Benefits of synergy and cost efficiency enhance competitive strength of the organization. With acquisition, the acquiring company can also pull best talents of both the organizations, and in terms of human resource capabilities also enjoy the competitiveness.

4. Enhancing Business Networks:

With two companies merged together, business network enhances, which cascades to increased market access, new market development, and overall increase in company’s performance effectiveness. For example- two chemical major’s merged in Europe, i.e., Solvay and Rhodia; also two chemical majors merged in the USA, i.e., DuPont and Dow. These mergers undoubtedly enhanced their business network.

Apart from these mergers and acquisitions also benefit organizations in terms of increased research and development capabilities, increased market share, better return to shareholders, product obsolescence, new inflow of talent, etc.

Mergers and Acquisition Problems

Merger and acquisition is quite a popular and often used strategy for acquiring strategic resources, for diversifying business, for improving one’s competitive position in the market. However, survey of performance of merged companies indicates that as many as two thirds of the merger and acquisition turn out to be failures within five years. Many acquiring companies look for a new buyer after two-three years of their big bang acquisition.

Some of the common pictures that emerge after a big bang acquisition are as follows:

1. Lacklustre post-acquisition performance of acquiring and/or acquired or both companies

2. Pre-acquisition anxiety, uncertainty, and stress among employees

3. Post-acquisition loss of key players

4. Lingering problem of manpower surplus and shortage and toll on senior executive time

1. Lacklustre post-acquisition performance of acquiring and/or acquired or both companies:

An owner of a company often sells its shares with the purpose of bringing on board a strategically stronger partner who will be able to turn around a beleaguered company. But quite often this hope of turning around proves to be a mirage. And, many a time, it brings more problems than profits on the table.

It is not just the acquired company’s performance that frustrates the strategic planners. The acquiring company’s performance also takes a beating. Many of these performance-related problems originate from poor assessment of human resource issues of the two companies and how to come out with a clear policy that is appropriate and acceptable to employees of both the companies.

Though, some of the post-merger performance problems can be on account of poor assessment of tangible assets and their utilities in future years.

2. Pre-acquisition anxiety, uncertainty and stress among employees:

The news of acquisition and merger of a commercial organization can be exciting news to its shareholders but most employees take such news with a lot of trepidation. Much of their fear and anxiety originate from their apprehension of loss of job, displacement, and uncertainty over their career. Their anxieties get multiplied when no one comes with any authentic news and they live on whatever small information available and prepare a mental picture about their life after the bang!

Since much of such mental picture making are heavily influenced by precedents set by similar acquisitions of other companies, in most of these occasions these future scenarios are not that genial to the employees.

As a result, even when a company is yet to place its acquisition plan of another company for approval to its board, the highest decision making body of a firm, much employee energies and times get diverted into gossip mongering with its consequent negative effects on the performance of the organization. And, at worst, some key players quit out of frustration.

The attitude of the management towards employees and some regulatory provisions sometimes contributes to this information blackout and the resultant effects on employee’s anxiety and stress. Some managers hold the view that acquisition and merger is a strategic matter and ordinary employees who work according to an employment contract have no business to ask questions or seek information.

Sometimes, a pre-acquisition anxiety and uncertainty makes the employees worried for their employment and they resort to collective action either to stall the impending acquisition move or to press for more sharing of information and assurance on their employment in post-merger entity.

3. Post-acquisition loss of key players:

Employee turnover in general and loss of key managerial employees are some of the common problems that most companies face after their merger with another company. Many of these turnovers happen because of actual surplus of managerial staff following a merger due to joint activities and sharing of functions and facilities. But many a time such turnover happens due to poor manpower planning and inadequate communication with employees.

Employee turnover as such may not cause problems to a company which is already having surplus but the problem can be serious when such turnover takes place among the “whose who” of the company whose expertise are essential to run the joint entity.

4. Lingering problem of manpower surplus, shortage, and toll on executive time and motivation:

Another problem that a company faces after its big ticket acquisition is the continued problems of manpower surplus and/or shortage even man years after it has completed its acquisition. Such lingering problem of surplus or shortage of expertise can tie down a lot of managerial time and energy which can affect its performance also.

What happens is that unlike problems of other areas, much of the manpower-related problems appear only at a later stage after the two companies have started working under a common management and they have started streamlining their overall business and operational activities under a common policy.

Major Issues Faced during Merger/Acquisition Transition Phase (With Examples)

1. Focus on Cost and Head Count:

Usually the focus is on cost and headcount reduction. It is seen that many companies are able to achieve right-sizing in terms of manpower but fail to achieve projected sales volumes and profits after the merger and one of the reasons is that issues relating to integrating and transitioning of human resource are most often ignored. Of all the “Ms” in management, i.e., money, materials, machine and methods, the most important “M” stands for Men – the manpower working in the organization.

Human resource is the most productive, most versatile asset and human resource can yield an output far greater than the input. Therefore, one of the critical factors for success of M & A is developing an appropriate strategy for dealing with human resources. When technology grows at rapid pace, the importance of people goes up further. Having the right people to work will continue to be the need of the merger situation.

2. Merger Announcement and Uncertainties:

As soon as the merger is announced, the employee faces lot of uncertainties. Several questions come to his mind Will I have a job in the company? What will be my headquarters? Will I be transferred? Who will be my reporting manager? What will be my position in the organizational hierarchy? Whether my monthly salary and benefits will be protected? What will happen to colleagues in my business unit? As a result of uncertainties, very often people are disturbed and the work suffers.

3. Rumours and Speculations:

While the employees in the office and factory have access to information regarding merger related developments, the sales force scattered all over the country are at a disadvantage with regard to flow of information. With rumours and speculations floating around, the innumerable telephone calls between office, factory and the field to know the latest developments in the merger situation compound the problem.

4. Ego Clash:

There emerges as We versus They mentality as soon as the merger is announced. The major partner drives the selection process and the senior managers in this company assume key positions and they establish the sales organization. The employee in the acquired company loses interest and gets demoralized since he has limited choice. Either he can leave the organization or stay in the company with headquarters decided by the company or accept a lower position in the organization hierarchy.

5. Downsizing:

The sales and marketing force contributes to top line and aggressive downsizing result in poor coverage of the territory, inadequate attention to products and customer needs.

6. Long Time Frame:

Employee integration takes a long time. Formation of integration team, finalizing the structure of each department member of people selection process and interviews take a long time. During this period everybody in the company is uncertain about his future and business suffers.

7. Competitive Spirit:

Let us take the case of merger of two competing companies. It is seen that there are opportunities to add to their strengths by way of product portfolio and customer reach. In the process of working out the synergies, there are chances of competitive spirit emerging which leads to poor implementation of the plans. This is because the field force were competing against each other for market share and one fine morning, they have to forget that they were competitors and work as a team with the main objective of promoting the products of the new organization.

Some of the representatives may have been working in the organization for a very long time and many of them are emotionally attached to their respective products. It is difficult for the field force to adapt to the new situation and start the work from day one.

Example:

Mr. Harish Mehta was working as Sales Executive for a Pharma Company at Jamnagar for about ten years. After the merger, the product portfolio enlarged and he had to promote a wide range of products. During infield working, the Regional Manager of the new organization observed that Mr. Mehta continued to promote only products of his old company, neglecting the range of products of the merged company. Though he was working for the new organization, he continued to treat the merger partner’s products as competing products.

8. Poaching:

Competitors try to take advantage of the uncertainties during merger transition period by contacting good performers and offering jobs with better terms and conditions.

Example:

Mr. Ankit Pandey was working in a Consumer durable goods company as HR officer in head office. He was consistently performing well in the job. During the merger transition period he left the organization to join a competitor who offered him better benefits. The company lost a good performer.

9. Distribution Channel:

Distribution is an important element of marketing as it determines the availability of the products at the right time in the right place as and when wanted by the customer. During integration process, the distributors and wholesalers are equally anxious to know the developments taking place since they too have a stake in the business. There are chances that some of the distributors and wholesalers switch loyalty to competitors in this uncertain situation.

10. Resistance to Change:

There are three categories of employees, i.e., those who resist change and cannot adapt to the new situation, those who resist change but can change under proper guidance and those who welcome change.

Example:

Mr. Sunil Singh was working as Assistant Manager (Distribution) in an Agrochemical Company for over ten years. After the interviews, he was nominated to the new organization. He could not adjust to the new ways of working in the organisation. He left the organization to join a Seeds Company.

11. Culture:

There is a tendency to move towards the culture of dominant player rather than developing a unique culture to meet the business requirements.

12. Exit Scheme:

Many companies offer very attractive exit schemes and even good performers are tempted to accept such benefits and leave the organization.

Example:

Mr. Abhijit Bhattacharya was working as Finance Executive in a Fast moving consumer goods company at Mumbai. He had a bright chance to get selected in the new organization. However, he opted out of the interview, availed of the facilities under the exit scheme and joined another organization.