Insights from Mergers and Acquisitions “Article #2: Factors affect the success / failure of M&A

In this article, I will go through different perspectives and points of views about what makes mergers and acquisitions succeed or fail and will try to relate all arguments and points of views to real cases from different industries and different countries.

Bouno and Bowditch (2003) emphasized on the huge effect of human feelings and perceptions on the success of merger and acquisition. They started their book; The human side of mergers and acquisitions with examples of people who live a big fear from acquisitions thinking that it will affect their career stability and consequently their lives & families. Buono and Bowditch see these feelings as threat for the merger and acquisition as it led to the sense of loss, low performance and disengagement. This will indeed have a negative impact on the integration management and increase the cost of human retention and performance.

?One of the prospect mergers failed in the united states in 2000 was the merger between AOL (America On Line) and Time Warner (Anon, 2000). They called it a marriage between the old message represented by Time Warner and the new media represented by America On Line. The results of this merger were catastrophic and both companies lost huge values. The main reason as per Anon (2000) in the economist article “Mew Media, Old Message” is the business and cultural mismatch. Although both companies are operating for entertainment targets, but in totally different ways. The time, cost, accessibility and speed of both services providers are totally different.

Another one of the promised mergers that was suicided before getting alive was the merger between American Home Products; one of the leading pharmaceutical companies in the united states and a promising biotechnology company called Monsanto (Carey & Ogden, 2004), the main reason of this failed merger was the incompatibility and cultural mismatch between the 2 companies. The economical and frugal strategy of American Home Products company accomplished with a solid and conservative operations was totally different than Monsanto which is more audacious and high spending company (Carey & Ogden, 2004)

As the culture of organizations shape the behavior of its employees (Kotter and Heskett, 1992) there were a lot of disagreements between the top management of both companies on the critical roles and strategic decisions and accordingly the deal failed and both companies lost some of its share value.

Another 2 examples from the Japanese automotive industry are Nissan and its successful acquisition by Renault and Mitsubishi and its failed acquisition by DaimlerChrysler (Goeritz, 2007)

Both; Nissan and Mitsubishi are affected by the Japanese culture which focus on the strong quality management systems and employee’s hierarchical cultures. The challenge of the 2 acquisitions was the mismatch of the cultures of the other 2 companies resulted from the different national cultures (Gill, 2012).

DaimlerChrysler as a German organization with assertive, dominant, rigid, and low human orientation culture was looking for dominance and control which totally contradict with the Japanese culture. Its CEO; Eckrodt failed to make this human and cultural alignment by ignoring the effect of both organizational cultures, his extreme dominant behavior led to disengagement of Mitsubishi human capital (Goeritz, 2007).

On the other side, Renault as a French company with relatively more flexible characteristics and better culture adaptation represented by its CEO; Carlos Ghosn succeeded to make a cultural and human alignment by building strong bonds between both companies and gained the loyalty and engagement of Nisan management and employees (Gill, 2012)

?(Shukla, 2014) showed the case of Hewlett Packard (HP) and Compaq computer corporation as an example of the effect of human and cultural mismatch on the success / failure of mergers and acquisitions. In 2001, the 2 big organizations officially announced their merger in one of the biggest bargains in the computer industry with an estimated value of 24 Billion USD, however, experts considered this as a stupid deal, as the result of this merger was a loss of 13 Billion USD in few days. They considered the lack of clear strategy and cultural mismatch as the main reasons for this catastrophic result. The engineering culture of HP was not matching with the commercial culture of Compaq and although these 2 cultures were ideal and complimentary, the management failed to make this synergy and integration (Evan, 2001)

?Another example from the telecommunication industry is the failed merger between Telia–Telenor merger in 1999. Telia was the sole Sweden telecom operators for decades, while Telenor was leading the Norwayan telecom market. Both were governmental owned companies with strong positions and political influence powers in their countries (Fang, Fridh and Schultzberg, 2004).

Although all factors in this merger were considered as success factors; similar culture of the 2 countries, similar language, acceptance and optimism of the end users of both operators, the result of the merger was disappointed (Shukla, 2014)

One of the reasons was the misalignment between the strategic intensions of both companies or precisely both governments. The Swedish government representing Telia intended to turn Telia into a private sector and utilize this move to improve its stock market, while, the Norwegian government representing Telenor intended to increase the power of national telecommunication sector in Norway (Fang, Fridh and Schultzberg, 2004).

In a nutshell, there was a big failure in the strategic alignments between the 2 companies, led to difficulties in the integration of both top managements and organizational structures (Shukla, 2014)

?Balmer and Dinnie (1999) did a research on varies no. of organizations and observed some reasons of mergers and acquisitions failures, one of these reasons is the focus on short-term legal and financials topics to enforce the success of the merger or acquisition and secure the deal while omitting the long term and strategic issues. A clear example of this is the failed acquisition of Daimler-Chrysler (Appelbaum, Roberts and Shapiro, 2013)

Another reason is ignoring the effect of leadership role in the integration between both identities during the merger and acquisition process (Balmer and Dinnie, 1999). A good example is the successful merger between British Petroleum and Amoco in 1998 where the leadership succeeded to utilize and synergize between the high-performance culture of British Petroleum and the strong financial management of Amoco.

Another example on the effect of leadership is the failure of merger between Southern Pacific Rail and Union Pacific Corporation in 1994 (Appelbaum, Roberts and Shapiro, 2013), the leadership style of both companies was totally different and no alignment was done by the merger’s leadership.

One of the reasons concluded by Nguyen and Kleiner (2003) is related to the delayed or wrong communication of the merger or acquisition internally in both companies and externally to their customers. His argument about the negative effect of the communication delay is based on the uncertain expectations that might be raised when the rumors started to arise and the negative expected impact on both, behaviors and performances. Appelbaum, Roberts and Shapiro (2013) made a research on 10 mergers and acquisitions cases and concluded that most of the successful cases were accomplished with a strong commination plans and actions. Examples of these cases (not limited to) are Renault / Nissan where a very strong and close communication was done during and post-acquisition (Gill, 2012) Ace / Care banks, Deutsche Bank/Bankers, Cisco-StrataCom & Cerent in the computer networking industry and many other examples.

Furthermore, early communication is also not right as it might destroy the whole project (Nguyen and Kleiner, 2013) and the results could be catastrophic like what happened during the merger between American Home Products and Monsanto in 1999 (Carey & Ogden, 2004) and although the deal was not closed, the share value of both companies dropped by 27% for Monsato and 10% for American Home products due to the early communication.

Other reasons for unsuccessful mergers and acquisitions were highlighted by (Gadiesh and Ormiston, 2002) in their article “Six rationales to guide merger success”. They highlighted poor strategies and plans that led to over expectations, ambitious and unrealistic objectives and cultures shocks (KOI-AKROFI, G., 2016)

In some cases, the assumptions and business plans belt upon the acquisitions are unrealistic and incorrect, like the acquisition of Skype by Ebay in 2005 ([email protected], 2009), the decision makers of ebay didn’t realize that their users (buyers or sellers) are happy with the emailing services and are not looking for additional video conferencing services, and accordingly are not willing to pay more for what they don’t really need. Another reason of the failure is the cultural mismatch between both organizations; ebay is a traditional conservative organization while Skype is bold and risk taker ([email protected], 2009).

In some other cases, the merger or acquisition deal is failed because of laws and regulations like what happened in the merger of Pfizer from the United States and Allergan plc from the Republic of Ireland in 2015 when the deal failed because of the US government decisions regarding the tax legalization (Uwire, 2016)

When it comes to labors regulations Alimov (2015) sees that the impact on the mergers and acquisition is positive. He conducted a research and found that countries with restricted and tighten employment regulations are more attractive to investors than countries with less restricted employment regulations. The main reason of that is also related to Human stability, productivity and the ability to retain talents which as highlighted in a previous part are main reasons of mergers and acquisitions failures. This makes a country like China changed its labors law in 2008 to increase the protection of labors after decades of being a very low employment protected country. This increased massively the attractiveness of China to FDI (Foreign direct investment)

This happened also after the announcement of General Electric and Honeywell $42 billion merger in 2000. This time it was not the labors or local regulations, it was the European anti-trust authorities (Anon, 2001) and (Shukla, 2014)

The European Union Merger Regulation prohibits any merger or acquisition that creates unfair competition, when 2 strong and dominant players in a certain market make any sort of combination that affects significantly the other players in the same market (Grant and Neven, 2005)

Ulrich Steger and Christopher Kummer (2007) in their book; Why Merger and Acquisition (M & A) summarized the reasons of mergers and acquisitions failure in the following:

- Unrealistic expectations especially when using the NPV (net price value) as an element in the valuation process, because it is built on a business plan that most probably will be very ambitious by the seller to increase the prices and will consider also ambitious unrealistic synergies. If the buyer didn’t realize these facts in the due diligence and valuation process, most probably the M & A will fail.

?- (Over) Confidence: The management confident is good catalyst for the success of the merger / acquisition, but what is very dangerous is the overconfidence because it leads to wrong decisions and less efforts.

?- Promoters and external advice: In almost all mergers and acquisitions there are external consultants and specialized advisors especially in legal and finance. The intention of these consultants is to close the deal to promote their added-values and maybe follow up services even if the merger or acquisition is not a right decision for both; buyer and seller.

?- Distrust: This is the contrary of overconfident and normally happened with the employees due to the ambiguity and the uncertain future and the risk of losing their jobs post-merger / acquisition (Bouno and Bowditch, 2003)

There are many factors that affect the success or failure of mergers and acquisitions. I will summarize these factors in the following 4 categories and this what will be tackled and assessed in the coming articles:

References

(Alimov, 2015) ALIMOV, A., 2015. Labor market regulations and cross-border mergers and acquisitions.?Journal of International Business Studies,?46(8), pp. 984-1009.

(Anon, 2000) Anon, 2000. New media, old message. (Time Warner/AOL merger may be destined for failure) (Brief Article).?The Economist (US), 357(8191), p.24.

(Anon, 2001) Anon, 2001. Engine failure; GE/Honeywell; GE and Honeywell part ways. (Business) (European Commission rejects proposed acquisition) (Brief Article).?The Economist (US), p.3.

(Appelbaum, Roberts and Shapiro, 2013) Appelbaum, Steven H.; Roberts, Jessie; and Shapiro, Barabara T. (2013) "Cultural Strategies in M&As: Investigating Ten Case Studies,"?Journal of Executive Education: Vol. 8: Iss. 1, Article 3.?

(Balmer and Dinnie, 1999) Balmer, J.M.T. & Dinnie, K., 1999. Corporate identity and corporate communications: the antidote to merger madness.?Corporate Communications: An International Journal, 4(4), pp.182–192.

(Buono & Bowditch, 2003) Buono, A. and Bowditch, J, 2003. The Human Side of Mergers and Acquisitions. Beard Books

(Carey & Ogden, 2004) Sánchez, C.M., 2004. The Human Side of M&A: How CEOs Leverage the Most Important Asset in Deal Making.?Academy of Management Executive, 18(2), pp.160–162.

(Evan, 2001) Evans, Robert, 2001. HP Compaq = ??InformationWeek, p.78.

(Fang, Fridh and Schultzberg, 2004) Fang, Fridh & Schultzberg, 2004. Corrigendum to "Why did the Telia–Telenor merger fail?" [International Business Review 13 (5) (2004)]☆?International Business Review, 13(6), p.805.

(Gadiesh and Ormiston, 2002) Gadiesh, O. & Ormiston, C., 2002. Six rationales to guide merger success.?Strategy & Leadership, 30(4), pp.38–40.

(Grant & Neven, 2005) Jeremy Grant, Damien Neven, 2005. The attempted merger between General Electric and Honeywell - A case study of transatlantic conflict. IDEAS Working Paper Series from RePEc, pp. IDEAS Working Paper Series from RePEc, 2005.

([email protected], 2009) [email protected], 2009. Skype, eBay Divorce: What went wrong.?Network World Middle East, pp. Network World Middle East, Sept 2, 2009.

(KOI-AKROFI, G., 2016) KOI-AKROFI, G., 2016. Mergers And Acquisitions Failure Rates And Perspectives On Why They Fail. International Journal of Innovation and Applied Studies, 17(1), pp. 150-158.

(Nguyen and Kleiner 2003) Nguyen, H. & Kleiner, B., 2003. The effective management of mergers.?Leadership & Organization Development Journal, 24(7/8), pp.447–454.

(Shukla, 2014) Shukla, R., 2014. Review of major companies merger failures in the first decade of the 21st century.?International Journal of Enhanced Research in Management & Computer Applications.

(Steger and Kummer, 2007) Steger, U. and Kummer, C., 2007.?Why Merger and Acquisition (M & A) Waves Reoccur: The Vicious Circle from Pressure to Failure. Lausanne, Switzerland: IMD.

(Uwire, 2016) "New tax regulations seek to end inversions."?UWIRE Text, 14 Apr. 2016, p. 1.?Academic OneFile,?https://link.galegroup.com/apps/doc/A449444913/AONE?u=nene_uk&sid=AONE&xid=ef301446. Accessed 4 Sept. 2018.