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Mergers & acquisitions - Do they contribute to further expansion and success when two different companies cooperate?
The process of effecting mergers and acquisitions requires a synergy of strategy and effort in order to ensure that the integrating corporate entities are able to harness their relative strengths and fulfil the anticipated potential of the amalgamation.
There are ample rules and regulations in the United Kingdom relating to mergers, acquisitions and the attendant processes. However, the long term success of any ‘corporate marriage’ will not necessarily be a function of strict adherence to procedures but will be a product of several key factors.
Indeed it has been said that too much mergers and acquisitions activity is driven by the wrong motives. Sometimes the decision seems to be based on little more than a whim.
It is important that a successful merger be predicated on a firm foundation – this will occur if all parties understand the true nature of their business.
In this regard, the starting point should be a SWOT analysis by both parties taking into consideration the –
- Strengths of the business, assessing those positives that the company will bring to the merger or acquisition
- Weaknesses which the company may have that hopefully will be addressed
- Opportunities such as the synergies and new markets that will become available
- Threats such as new competitors and the resultant upheaval that will arise post merger
Change Drivers
There are usually change drivers which encourage businesses to contemplate growing and strengthening their businesses through acquisitions or mergers.
Such drivers would include the following: -
- The need to improve a business which is underperforming or not fulfilling its potential
- Easier access to capital – finance, manpower, expertise
- A desire to tap into a wider customer base and increase market share
- Diversification of products and services
It is also important that there be strong, focussed leadership of the merger process as a whole. The importance of this cannot be over emphasised particularly as leadership has become a neglected role in successful mergers and acquisitions.
As companies strive to conquer new markets and competition becomes more significant, mergers as options for consolidation will continue to grow in importance. Nevertheless it is now patently clear that for a number of reasons mergers are not necessarily a doorway to profitability. Studies have concluded that more than half of global mergers fail to achieve their expected results.
Factors Which Affect The Success of Mergers and Acquisitions
There are several identifiable factors which more often than not lead to the failure of mergers or constitute hindrance to the growth of the emergent entity.
Where the initial due diligence undertaken is not as thorough as it should be and the planning/research that informs decision making at this stage is weak, the whole merger process will thereafter rest on an unstable bedrock of assumptions.
Where merged businesses will be consolidating resources to venture into a new marketplace there must be a full understanding of the nature of that marketplace. This is not always fully appreciated and it invariably leads to unachievable growth and profit projections along with a myriad of other problems.
It is also an inescapable fact that ‘…..a number of factors which can commonly be embraced within the word ‘culture’ have been seen as reasons why mergers or acquisitions have failed to live up to expectations”. The internal corporate cultures of each entity are often different. One entity may be used to prompt and decentralised decision making whereas another may be more conservative and bureaucratic. Marrying two such organisations is never an easy or straightforward prospect and there are invariably inefficiencies which such mergers throw up.
It has even been suggested that up to 65% of failed mergers and acquisitions are due to ‘people issues’, i.e. intercultural differences causing communication breakdowns that result in poor productivity.
In companies with a well educated workforce it tends to be easier for rapid change to be understood and embraced. This may not be so with a company that has a less well educated staff complement. Invariably integrating staff from both companies leads to problems where there is resistance or inability to fully embrace change in some sections of the workforce.
Mergers or acquisitions will bring together top level management structures of the component entities and they may have to adjust to new ways of working and decision-making. Very often a clash between the different management styles occurs and this affects the fortunes of the new entity negatively.
In conclusion, despite the obvious benefits that derive from successful corporate restructuring, there is no doubt that there remains a high level of failure in respect of such transactions. Even where there is not outright failure of the process companies often find that their optimistic projections become increasingly unachievable. Mergers or acquisitions do not therefore always contribute to further expansion and success when two different companies integrate.
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BIBLIOGRAPHY
Disappointing Marriage: A study of the gains from mergers – G. Meeks (1977), Cambridge University Press
Mergers, growth and concentration – S. Aaronovitch and M.C. Sawyer (1975), Oxford Economic Papers, 27: 136-155
An industry study of the profitability of mergers in the UK – J.R. Franks, J.E. Broyles and M.J. Hecht (1977), Journal of Finance, 32: 1513-1525
‘When do firms go in for growth by acquisition?’ – D.A. Hay and G.S. Liu (1996), Discussion Paper N.24, Middlesex University School of Economics
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