The incidence of M&A has continued to increase significantly during the last decade, both domestically and internationally. The sectors most affected by M&A activity have been service- and knowledge-based industries such as banking, insurance, pharmaceuticals, and leisure. Although M&A is a popular means of increasing or protecting market share, the strategy does not always deliver what is expected in terms of increased profitability or economies of scale.
While the motives for merger can variously be described as practical, psychological, or opportunist, the objectives of all related M&A is to achieve synergy, or what is commonly referred to as the 2+2=5 effect. (The “2+2=5 effect,” also known as synergy, refers to the phenomenon where the combined output or effectiveness of a group is greater than the simple sum of its individual parts. For example, when two companies merge, their combined performance can exceed what each could achieve separately, illustrating that synergy can lead to enhanced results). However, as many organizations learn to their cost, the mere recognition of potential synergy is no guarantee that the combination will actually realize that potential.
Merger Failure Rates
The burning question remains – why do so many mergers fail to live up to stakeholder expectation? In the short-term, many seemingly successful acquisitions look good, but disappointing productivity levels are often masked by onetime cost savings, asset disposals, or astute tax maneuvers that inflate balance-sheet figures during the first few years.
Merger gains are notoriously difficult to assess. There are problems in selecting appropriate indices to make any assessment, as well as difficulties in deciding on a suitable measurement period. Typically, the criteria selected by analysts are:
- Profit-to-earnings ratios;
- Stock-price fluctuations;
- Managerial assessments
Irrespective of the evaluation method selected, the evidence on M&A performance is consistent in suggesting that a high proportion of M&As are financially unsuccessful. In a country like the United States of America, merger failure rates are ,as high as 80%, with evidence indicating that around half of mergers fail to meet financial expectations. A study presents evidence arguing that most organizations would have received a better return on their investment if they had merely banked their money instead of buying another company. Consequently many commentators have concluded that the true beneficiaries of M&A activity are those who sell their shares when deals are announced and the marriage brokers – the bankers, lawyers, and accountants – who arrange, advice, and execute the deals.
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Traditional Reasons for Merger Failure
M&A is still regarded by many decision makers as an exclusively rational, financial, and strategic activity, and not as a human collaboration. Financial and strategic considerations, along with price and availability, therefore dominate target selection, overriding the soft issues such as people and cultural fit. Explanations of merger failure or underperformance tend to focus on reexamining the factors that prompted the initial selection decision, for example:
- Payment of an overinflated price for the acquired company;
- Poor strategic fit;
- Failure to achieve potential economies of scale because of financial management or incompetence;
- Sudden and unpredicted changes in market conditions.
This ground has been well trodden, yet the rate of merger, acquisition, and joint-venture success has improved little. Clearly these factors may contribute to disappointing M&A outcomes, but this conventional wisdom only part explains what goes wrong in M&A management.
The Forgotten Factor In M&A
The false distinction that has developed between hard and soft merger issues has been extremely unhelpful in extending our understanding of merger failure, as it separates the impact of the merger on the individual from the financial impact on the organization. Successful M&A outcomes are linked closely to the extent to which management is able to integrate organizational members and their cultures and sensitively address and minimize individuals’ concerns.
By representing sudden and major change, mergers generate considerable uncertainty and feelings of powerlessness. This can lead to reduced morale, job and career dissatisfaction, employee stress and uncertainty. Rather than increased profitability, mergers have become associated with a range of negative behavioral outcomes such as:
- Acts of sabotage and theft;
- Increased staff turnover, with rates reported as high as 60%;
- Increased sickness and absenteeism.
Ironically, this occurs at the very time when organizations need and expect greater employee loyalty, flexibility, cooperation, and productivity.
People Factor Associated With M&A Failure
Studies have identified a variety of people factors associated with unsuccessful M&A. These include:
- Underestimating the difficulties of merging two cultures;
- Underestimating the problem of skills transfer;
- Demotivation of employees;
- Departure of key people;
- Expenditure of too much energy on doing the deal at the expense of post-merger planning;
- Lack of clear responsibilities, leading to post-merger conflicts;
- Â Too narrow a focus on internal issues to the neglect of the customers. and the external environment;
- Insufficient research about the merger partner or acquired organization.
Differences Between Mergers and Acquisitions
In terms of employee response, whether the transaction is described as a merger or acquisition, the event will trigger uncertainty and fears of job losses. However, there are important differences. In an acquisition, power is substantially assumed by the new parent. Change is usually swift and often brutal as the acquirer imposes his own control systems and financial restraints.
Parties to a merger are likely to be more evenly matched in terms of size and the power and cultural dynamics of the combination are more ambiguous. Integration is a more drawn-out process. This has implications for the individual. During an acquisition, there is often more overt conflict and resistance and absence of powerlessness. In mergers, however, because of the prolonged period between the initial announcement and actual integration, uncertainty and anxiety continue for a much longer time as the organization remains in a state of limbo.
Cultural Compatibility
The process of the merger is often likened to marriage. In the same way that clashes of personality and misunderstanding lead to difficulties in personal relationships, differences in organizational cultures, communication problems, and mistaken assumptions lead to conflicts in organizational partnerships.
Mergers are rarely a marriage of equals, and it’s still the case that most acquirers or dominant merger partners pursue a strategy of cultural absorption; the acquired company or smaller merger partner is expected to assimilate or adopt the culture of the other. Whether the outcome is successful depends upon the willingness of the organizational members to surrender their own culture and at the same time perceive that the other culture is attractive and therefore worth adopting.
Cultural similarity may make absorption easier than when the two cultures are very different, yet the process of due diligence rarely extends to evaluating the degree of cultural fit. Furthermore, few organizations bother to try to understand the cultural values and strengths of the acquiring workforce or their merger partners in order to inform and guide the way in which they should go about introducing change.
Conclusion
Despite thorough pre-merger procedures, mergers continue to fall far short of financial expectations. The single biggest cause of this failure rate is poor integration following the acquisition. The identification of the target company, the subsequent and often drawn-out negotiation, and attending to the myriad of financial, technical, and legal details are all exhausting activities. Once the target company has been acquired, little energy or motivation is left to plan and implement the integration of the people and cultures following the merger.
It seems nonsensical to waste all the resources and energy that has gone into the merger, through inadequate planning of the integration stage of the process, yet all too often organizations do just that. Without properly planned integration process or its effective implementation, mergers will not be able achieve the full potential of the acquisition.
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