5. Why do companies merge with or acquire other companies?
Companies prefer mergers and acquisitions as a process to gain speedy growth and strategic change (Cumming & Worley, 2015). Cumming & Worley (2015) cited that some of the reasons for companies to undertake mergences and acquisitions include “diversification or vertical integration; gaining access to global markets, technology, or other resources; achieving operational efficiencies; improved innovation; and resource sharing”.
Mergers and Acquisitions (M&A): Definition
? Acquisition is when one company takes over another and clearly establishes itself as the new owner.
? Merger is when two firms agree to go forward as a single new company rather than remain separately owned and operated.
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Types of mergers:
1. Vertical Integration
2. Horizontal Integration
? Micro and Macro Environmental Factors
Figure 5.1. Interrelationships between the organisation and its external environments.
Rob Renaud (updated December 28, 2017) cited some of the reasons why companies merge with or acquire other companies as the following:
? Synergy: The most used word in M&A is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses.
? Diversification / Sharpening Business Focus: These two conflicting goals have been used to describe thousands of M&A transactions. A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry’s performance on its profitability. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations.
? Growth: Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves – instead, they buy a competitor’s business for a price. Usually, these are called horizontal mergers. For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller company to make more beer and sell more to its brand-loyal customers.
? Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product’s market. The downside of this is that a large premium is usually required to convince the target company’s shareholders to accept the offer. It is not uncommon for the acquiring company’s shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.
Mergers and acquisitions take place for many strategic business reasons, but the most common reasons for any business combination are economic at their core. Mergers and acquisitions occur for other reasons, too, but these are some of the most common. Frequently, companies have multiple reasons for combining. Combining companies has some potential downsides for employees, who have to deal with immediate fears about employment or business lines, but more positive sides of merging may include more opportunities for advancement or having access to more resources to do one’s job. Christina Tangora Schlachter, Terry H. Hildebrandt, MA, MA, PCC updated that the following are some of the various economic reasons:
? Increasing capabilities: Increased capabilities may come from expanded research and development opportunities or more robust manufacturing operations (or any range of core competencies a company wants to increase). Similarly, companies may want to combine to leverage costly manufacturing operations. Capability may not just be a particular department; the capability may come from acquiring a unique technology platform rather than trying to build it.
? Gaining a competitive advantage or larger market share: Companies may decide to merge into order to gain a better distribution or marketing network. A company may want to expand into different markets where a similar company is already operating rather than start from ground zero, and so the company may just merge with the other company. This distribution or marketing network gives both companies a wider customer base practically overnight.
? Replacing leadership: In a private company, the company may need to merge or be acquired if the current owners can’t identify someone within the company to succeed them. The owners may also wish to cash out to invest their money in something else, such as retirement!
? Cutting costs: When two companies have similar products or services, combining can create a large opportunity to reduce costs. When companies merge, frequently they have an opportunity to combine locations or reduce operating costs by integrating and streamlining support functions. This economic strategy has to do with economies of scale: When the total cost of production of services or products is lowered as the volume increases, the company therefore maximizes total profits.
? Surviving: It’s never easy for a company to willingly give up its identity to another company, but sometimes it is the only option in order for the company to survive. A number of companies used mergers and acquisitions to grow and survive during the global financial crisis from 2008 to 2012.
6. WHY DO SOME MERGES AND ACQUSITION FAIL
The Merger and Acquisition (M&A) can be seen as a programme with many sub-projects each of these sub-projects will require attention to changes in the external environment that might impact the outcomes of these sub-projects. Furthermore organisational M&A experience, short, medium and long-term strategy, data quality management and selection criteria and timing employed during the initiation, implementation of M&A is critical to failure and success of the M&A programme/project execution.
6.1. Organisational Strategic Leadership Competency
According to Professor Steyn, Dr Erik Schmikl and Dr Pieter van Dyk (Cranefield College, M2: Programme Managing Organisational Performance and Innovative Improvement) module Study Guide). ‘Superior strategic leadership has become an important competitive tool and is the basis on which successful organisations provide services or goods better than their competition can, resulting in enhanced value add’. ‘Leadership is the engine that drives change where changing economic forces will continue to push organisations into reducing costs, focusing on value added, improving the quality of products and services, finding new opportunities for growth, and improving delivery’
6.2 Poor M&A Strategic Planning
‘Managing organisations through projects and programmes has become the integrative implementation link between corporate strategy, business strategy and operations strategy’. An article by Professor Pieter Steyn, published in “Management Today” and “ProjectPro”, April 2001.
Strategic Information Management during M&A planning and execution influences top management, Programme Managers and Project Managers during M&A decision-making, when an organisations planning an acquisition reliable quality data is needed during project planning and execution.
According to Sukand Ramachandran, partner at Boston Consulting “There are a lot more digital interactions today and therefore a lot more vulnerabilities,” Successful integration of IT systems can make or break mergers and acquisitions no matter how good the business prospects (by DAN BARNES – SEPTEMBER 27, 2018: Successful integration of IT systems can make or break mergers and acquisitions, no matter how good the business prospects.)
Cumming & Worley (2015) cited that some of the reasons for the failure of mergers include “inadequate due diligence process; lack of compelling strategic rationale; unrealistic expectations of synergy; paying too much for the transaction; conflicting corporate cultures; and failure to move quickly”.
Shobhit Seth (updated October 12, 2018) cited some of the reasons why companies mergers and acquisitions fail as the following:
? Limited or no involvement from the owners: Appointing M&A advisors at high costs for various services is almost mandatory for any mid to large size deal. But leaving everything to them just because they get a high fee is a clear sign leading to failure. Advisors usually have a limited role, till the deal is done. Following that, the new entity is the onus of the owner. Owners should be involved right from the start and rather drive and structure the deal on their own, letting advisors take the assistance role. Among others, the inherent benefit will be a tremendous knowledge-gaining experience for the owner, which will be a lifelong benefit.
? Theoretical valuation versus practical proposition of future benefits: The numbers and assets that look good on paper may not be the real winning factors once the deal is through.
? Lack of clarity and execution of the integration process: A major challenge for any M&A deal is the post-merger integration. A careful appraisal can help to identified key employees, crucial projects and products, sensitive processes and matters, impacting bottlenecks, etc. Using these identified critical areas, efficient processes for clear integration should be designed, aided by consulting, automation or even outsourcing options being fully explored.
? Cultural integration issues: This factor is also quite evident in global M&A deals, and a proper strategy should be devised either to go for hard-decision forceful integration setting aside cultural differences or allowing the regional/local businesses run their respective units, with clear targets and strategy on profit making.
? Required capacity potential versus current bandwidth: The deals with the purpose of expansion require an assessment of the current firm’s capacity to integrate and build upon the larger business. Are your existing firm’s resources already fully or over-utilized, leaving no bandwidth for the future to make the deal a success? Have you allocated dedicated resources (including yourself) to fill in the necessary gaps, as per the need? Have you accounted for time, effort and money needed for unknown challenges which may be identified in the future?
? Actual cost of a difficult integration and high cost of recovery: Keeping bandwidth and resources ready with correct strategies which can surpass the potential costs and challenges of integration could have helped. Investments today in a difficult integration spread over the next few years may be difficult to recover in the long run.
? Negotiations errors: Cases of overpaying for an acquisition (with high advisory fee) are also rampant in executing M&A deals, leading to financial losses and hence failures.
? External factors and changes to the business environment: External factors may not be fully controllable, and the best approach in such situations is to look forward and cut further losses, which may include completely shutting down the business or taking similar hard decisions.
? Assessment of alternatives: Instead of buying to expand with an aim to surpass competitors, is it worth considering being a sale target and exit with better returns to start something new? It helps to consider extreme options which may prove more profitable, instead of holding onto the traditional thoughts
? Backup plan: With more than 50% of M&A deals failing, it’s always better to keep a backup plan to disengage in a timely manner (with/without a loss), to avoid further losses. The above-mentioned examples although are cited as failed, but they do seem to have executed the de-merger in a timely manner.
The below recommendations are proposed by the authors to be implemented at Bidvest.
7.1 Lifecycle Phases
Organisational strategic leadership competency with regard to short, medium and long-term direction must be clearly defined during M;A programme plan and post implementation/integration plan. The M;A project initiation, planning, execution, closing matrix and negotiation experience plays a major role in executing and closing the deals. Organizations must approach M;A cycle as a programme with sub-projects as per following cycle phases on Figure 7.1
Figure 7.1 Lifecycle Phases