Mergers and Acquisitions Research Paper
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Table of Contents
MERGERS & ACQUISITIONS DEFINED
CULTURE AND EMPLOYEES
VEBLEN AND GOODWILL
MAKING M&A SUCCESSFUL
IDENTIFICATION OF OPPORTUNITIES
SPEED OF INTEGRATION
COMMUNICATION AND CULTURE
This paper presents the issues with mergers and acquisitions and discusses the methods to make M&As more successful in an attempt to determine if they are helpful or harmful to the companies, their shareholders, and the economy as a whole.
Mergers & Acquisitions Defined
Acquisitions are the absorption of a smaller firm by a larger firm, while a merger is the combination of two firms to form a single entity. In a merger, there is often an exchange of stock between the companies where one company issues shares to the shareholders of the other company at a certain ratio. The firm whose shares continue to exist is generally referred to as the acquiring firm while the other is the target firm.
Except for synergies, the post-merger value of the two firms is equal to the pre-merger value. The target firms shareholders, however, often benefit because they are paid a premium for their shares. Synergies are revenue enhancements and cost savings gained through the merger/acquisition.
To measure the success of a merger/acquisition, one must determine if the value of the acquiring firm is enhanced by it.
Firms conduct mergers and acquisitions for a variety of reasons. There are performance factors, market factors, and agency (management) factors. Mergers also occur in a variety of ways; from pre-planned executions to last-minute opportunities.
Mergers are often undertaken to improve some measure of performance. These can include cost savings opportunities, increased revenue and improved efficiency. Mergers can also fuel overall growth and provide competitive advantages to the merged firm. (Segil 2004). Some studies have shown that mergers can positively affect returns for the shareholders of the acquiring firm (Stahl 2004).
There can also be market factors that contribute to merger decisions. A firm in a slow-growing industry may make an acquisition to achieve growth through a new market. Firms may also react to changes in the market by integrating vertically or horizontally to capture a larger portion of revenues. Mergers and acquisitions can also allow firms to more quickly respond to market trends than organic growth would allow. (Gulati 2004)
Market share is also widely used as a rationalization for mergers. However, the evidence suggests that, although market share may be an incidental motivation, the primary motivation in this regard is revenue growth. Additionally, increased market share does not necessarily translate into increase market power. (Sudarsanam 2004)
Mergers and acquisitions also occur in a number of ways. A firm may identify a target in advance and then either approach it or wait for it to become available. On the other hand, a firm may make an acquisition just because the opportunity presents itself and is determined to be helpful to the firm. (McNaught 2004) Pre-planned mergers tend to be more successful, as will be discussed later.
There are many potential issues with a merger or acquisition. In fact, the Synergy Trap reports that sixty-five percent of strategic acquisitions and mergers result in failure; meaning negative returns in shareholder value and market share (Marcum 2003). Differences in culture between the two organizations, leadership problems, keeping customers happy, and keeping employees happy are all issues that can arise.
Culture and Employees
When two organizations merge there is a period of adjustment as both firms settle into a new overall corporate culture. Meta-analytic findings indicate that cultural differences have a negative effect on the integration of the merging firms (Stahl 2004).
Many merger decisions are made without regard to differences in culture between firms, especially in international mergers. However, there is much evidence to suggest that cultural differences are a major reason why many mergers eventually fail. (Pooley 2005)
People are often resistant to change and the merging of corporate cultures can often mean great deals of change and upheaval. This can cause employees to become stressed and angry which can lead to underperformance, bad behavior, and attrition. (Moyer 2004)
Before a merger, there is a set of management personnel at both the acquiring and target firm. This can cause significant problems during and after the merger if no clear leadership emerges. Having two CEOs is not generally effective because decisions must often be made quickly and decisively. (Signorovitch 2004) There can also be many disagreements among the two sets of management on how best to integrate the companies.
Often during a merger, the needs of the customer can be overlooked. Kenneth D. Lewis, CEO at Bank of America, discussed an issue his company had in merging with another bank. The target bank locations were rapidly re-branded with the acquiring banks logo, etc., which confused and irritated many of the target banks customers who did not recognize the logo as their own bank. (Gulati 2004).
Veblen and Goodwill
Thorstein Veblen introduced a theory of finance