the fundamentals of strategic logic and integration for merger and acquisition projects

“Fundamentals of Strategic Integration for Merger and Acquisition ”

Fundamentals of Strategic Integration for Merger and Acquisition”.

PREPARED BY

SHASHANK MITTAL

ROLL NO. 581117084

UNDER THE GUIDANCE OF

Dr. Sanjna Jain

IN PARTIAL FULFILLMENT OF THE REQUIREMENTFOR THE AWARD OF

DEGREE OF

MBA (FINANCE)NIMACT INSTITUTE

(2011 – 2013)L.C. CODE:-01802

1


ABSTRACT

‘Mergers and Acquisitions’ (M&As) are strategically planned

transactions between two or more companies in which the target and

the acquiring firm jointly create a new entity to gain competitive

advantage in the market place. In other words, mergers and

acquisitions allow the purchase of assets that would be difficult, risky,

time-consuming or even impossible to obtain by other alternative

business collaborations or organic growth. ‘Merger and acquisition’, or

‘M&A’ is a field of study in which the definitions often vary in different

publications. The traditional framework how to distinguish between

‘mergers’ and ‘acquisitions’ is the perspective on the legal

independence of the business entities

There is lacking evidence on the correlation between the relative size

of the merging firms and long-term performance. Some researchers

have suggested that small mergers (mergers where the two firms are

very different in size) tend to produce higher performance than larger

mergers (mergers where the two firms are similar in size). They

attribute these performance differences to the ease of combining

operations. With smaller mergers the integration of the new entity is

more easily controlled and the disruption to the organization as a

whole is minimized. With a large merger, the integration problems are

multiplied and disruption can occur throughout the whole organization.

On the other hand, those researchers neglect the fact that a small

merger often provides also less significant gains to the large

organization.

A comprehensive introduction for practitioners to assess merger and

acquisition activity from an acquiring firm perspective – motives,

synergy realization, integration planning.

2


ACKNOWLEDGEMENT

IT IS THE MATTER OF GREAT PLEASURE AND PRIVILEGE TO BE ABLE

TO PRESENT THIS PROJECT REPORT ON FUNDAMENTAL OF STRATEGIC

INTEGRATION FOR MERGER AND ACQUISITION.

THE COMPILATION OF THE PROJECT IS A MILESTONE IN THE LIFE OF

THE MANAGEMENT STUDENT AND ITS EXECUTION IS INEVITABLE WITH THE

CO-OPERATION OF THE PROJECT GUIDE. I WISH TO RECORD A DEEP SENSE

OF RESPECT AND GRATITUDE TO MY PROJECT GUIDE, DR.. SANJNA JAIN FOR

HER ENCOURAGEMENT TO COURSE OF MY WORK. IT IS DUE TO THE

ENDURING EFFORT AND GUIDANCE OF MY GUIDE THAT ULTIMATELY MADE

IT SUCCESS.

I ALSO TAKE THIS OPPORTUNITY TO EXPRESS MY DEEP REGARDS AND

GRATITUDE AND WOULD LIKE TO THANK THE HEAD OF S.M.U. DEPARTMENT

WHO GAVE US GUIDANCE TO TAKE UP AND PURSUE THE PROJECT

I CANNOT JUST CONDONE THE VALUABLE OPPORTUNITY GIVE TO ME

BY THE SMU UNIVERSITY FOR COMPILING AND SUBMITTING THE PROJECT,

WHICH I FEEL IS AN OPPORTUNITY TO EXPRESS MY VIEWS ABOUT EXPORT

PROCEDURE AND DOCUMENTATION.

I ACKNOWLEDGE MY INDEBTNESS TO VARIOUS AUTHORS FOR

MAKING USE OF VALUABLE INFORMATION LIBERALLY.

IT IS MY PROUD PRIVILEGE TO EXPRESS MY DEEP SENSE OF

APPRECIATION AND GRATITUDE TO MY PARENTS AND FRIENDS FOR THEIR

SUPPORT AND CO-OPERATION IN THE COURSE OF THE PROJECT EITHER

DIRECTLY OR INDIRECTLY INVOLVED IN TIME WITH THEIR VALUABLE

CONTRIBUTION.

3


Table of content

Abstract……………………………………………………………………………02

Acknowledgment…………………………………………………………….....03

1) Introduction.................................................................................07

1.1Motivation...................................................................................07

1.2 Objectives, perspective and limitations of this work....................08

1.2.1

Objectives ...................................................................................08

1.2.2

Perspective .................................................................................09

1.2.3Limitations...................................................................................09

1.3 Content description....................................................................09

2) Classification of mergers and

acquisitions..............................12

2.1 The merger ................................................................................13

2.2 The acquisition...........................................................................13

2.3 Classification according to companies’ relatedness ....................14

2.4 Other classifications...................................................................14

2.5 ‘Merger and acquisition’ as used throughout this work...............16

3) Post-M&A firm performance

studies........................................17

3.1 Motivation to consider performance studies ................................17

3.2 How is post-M&A firm performance measured? ..........................17

3.3 What is failure and success? ......................................................18

3.4 Factors with and without relationship to post-M&A performance.18

3.4.1 Positive or negative relationship to

performance .........................19

4


3.4.2 No significant relatedness to performance or conflicting

evidence21

3.5 M&A performance........................................................................23

3.6 Diversification .............................................................................24

3.7 Degree of integration ...................................................................26

3.8 Criticism on performance study methodology...............................26

4)Motives for merger and acquisition

activity..............................29

4.1 Exploitation (synergy motives) .....................................................30

4.1.1 What is

‘synergy’? .......................................................................30

4.1.2 Classification of

synergies ...........................................................31

4.1.3 Cost synergies

(‘rationalization’)...................................................32

4.1.4 Revenue

synergies........................................................................33

4.1.5 Synergies from

intangibles ..........................................................34

4.2 Exploration..................................................................................35

4.3 Preservation and survival.............................................................35

4.4 Managers’ self-interest and prestige ............................................37

4.5 Finance motives...........................................................................38

5) Post-M&A integration and

transformation................................40

5.1 What is an adequate level of integration? .....................................41

5.2 What are the difficulties and dangers during integration …..........41

5


5.2.1 Under- and

overintegration...........................................................42

5.2.2 Post-merger management of positive and negative

synergies......43

5.2.3 Speed of integration ....................................................................

43

5.2.4 Communication to internal and external

stakeholders ................44

5.2.5 Cultural fit and anticipation of culture dissonance......................45

6) National and organizational culture and culture

clashes .........46

6.1 What is culture in the M&A context? ...........................................46

6.2 Which forms of acculturation exist……………………………………...47

6.3 Are cultural stereotypes a real assist or just convenience? ..........47

6.4 Can culture be ‘measured’? .........................................................48

6.5 What is the result of perceived culture dissonance…………….......50

6.6 How can one understand culture dissonance……………………......51

6.7 What can be learned for practice to anticipate culture……………..52

6.7.1 Avoid insurmountable integration

problems................................52

6.7.2 be aware of potential cultural dissonance ..................................53

7) Success factors, reasons for failure and

risks...........................54

7.1 Financial overextension and price premium.................................54

7.2 Realization of synergies................................................................55

7.3 Negative synergies .......................................................................56

7.4 An example on the difficulties of synergy

assessment………..........57

6


7.5 Strategic logic ..............................................................................58

7.6 Interview studies .........................................................................60

8) Alternatives to mergers and

acquisitions.................................61

9) Reasoning of M&A activity in an early project

phase ..............65

9.1 The acquiring company’s strategy................................................65

9.2 M&A motives...............................................................................65

9.3 Strategic fit between target and acquiring firm ............................66

9.4 Sources of synergies and price premium......................................66

9.5 Integration, transformation and culture.......................................67

9.6 Costs and negative synergies ......................................................68

9.7 Competition’s reaction ................................................................68

9.8 Alternative business collaborations .............................................69

10) A case study : HP COMPAQ Merger deal……………………………

70

11)

Conclusions...........................................................................8

3

Literature ..............................................................................

.....87

1) Introduction

7


‘Mergers and Acquisitions’ (M&As) are strategically planned

transactions between two or more companies in which the target and

the acquiring firm jointly create a new entity to gain competitive

advantage in the market place. The motives and objectives for M&A

activity are various. Competitive advantage could arise from synergies

due to economies of scale, an increase in market share, better access

to a customer base, ownership of distribution channels and access to

knowledge and technology to mention just a few. In other words,

mergers and acquisitions allow the purchase of assets that would be

difficult, risky, time-consuming or even impossible to obtain by other

alternative business collaborations or organic growth.

While strategic logic for M&A projects seems to be straightforward,

however, most empirical studies reveal that a majority of M&A projects

fails to reach their objectives

“[…] mangers generally want a company that is fully staffed, with a

general manager and all functional heads and, since it takes three to

five years to develop a good operating team, they want assurance that

these key people will stay on the job.” (Paine)

1.1 Motivation

The present work is conceptualized around the set of questions raised

above. The work is motivated by the recent necessity of the author’s

employer to obtain a comprehensive introduction to the field of

mergers and acquisitions that is of practical relevance in the

employer’s current economic context.

The Strategic Business Unit (SBU) Mat Char (Materials

Characterization)

Of METTLER TOLEDO AG faces a worldwide consolidation phase in the

field of Thermal Analysis and neighboring analytical lab techniques.

8


Competitors’ mergers and acquisitions and the limited organic growth

potential due to harsh competition make it necessary to consider M&A

as a feasible mechanism for growth and protection. However, beside

financial analysis a systematic assessment concept and the

corresponding knowledge required in a pre-M&A phase are largely

missing.

Considering the fact that an M&A deal can be one of the biggest

decisions a company or business unit ever makes, missing

fundamentals for a proper decision put a high risk to the acquiring

company. Many managers however do not have adequate time and

knowledge to carefully evaluate merger and acquisition projects. Such

time pressure increases the chance of rushing headless into

unqualified decisions of poorly planned M&As, leaving important areas

of uncertainty unresolved and resulting in the widely reported

disappointing outcomes.

1.2 Objectives, perspective and limitations of this

work

1.2.1 Objectives

Indeed, research on M&A consists of two distinct categories: the

empirical performance literature and the post-merger integration and

culture literature. While these two very extensive areas of research

dominate the whole M&A literature, they are highly specialized

focusing mostly on very distinct subjects. As a consequence they

provide little guidance for managers due to their very fragment-like

research questions.

Interestingly, there is even very little literature on strategic concerns of

mergers and acquisitions not to mention a comprehensive (but still

trustworthy) introduction for practitioners.

9


As a consequence, the overall objective of this work is to

Provide a comprehensive introduction to subjects being relevant

in an early stage of a merger and acquisition project (before due

diligence) to increase the likelihood of M&A success.

Allow an informed decision on strategic logic and integration

matters of merger and acquisition projects and to sensitize to the

profound interdependence of these to subjects.

Introduce the prerequisites for a systematic assessment and

more objective comparison of potential target firms.

Evaluate alternative business collaborations.

Be a guide for practitioners enabling them to cope with the many

difficulties attached to M&A projects and to build awareness of

common pitfalls.

1.2.2 Perspective

The addressed readers of this work are managers of acquiring firms

and consultants that need to evaluate, advice on, decide on and

conduct merger and acquisition projects.

1.2.3 Limitations

Although the following matters find their reflection in this work it is not

a guide on how to:

Conduct a due diligence

Define and review a company’s strategy

Perform a market or company analysis

1.3 Content description

The first step towards the objectives defined above is to present

various definitions and categorizations of mergers and acquisitions

10


emphasizing the multifaceted and complex nature of such

undertakings (refer to chapter 2).

On this basis, the most often reported findings of empirical post-M&A

firm performance studies are reviewed to gain insight into why certain

M&A projects fail and others succeed and to discover universally valid

performance-enhancing key success factors that do not depend on the

specific characteristics of an M&A project (refer to chapter 3).

From the results of these performance studies and the critical review

of their methodology, a broader set of motives and objectives for

mergers and acquisition activity emerges and is discussed in the light

of multiple motive M&As. In particular, an extensive overview on the

manifold classical strategic motives like synergy is presented and

illustrated with a few examples. While considering a number of motives

that receive far less attention also irrational and illegitimate motives

find their reflection (refer to chapter 4). Once this basic framework is

established, various integration and transformation concerns are

discussed like the adequate level of target firm integration, generic

scenarios and the parameters determining the level of integration. In

particular, it is illustrated how M&A projects can be compromised to

reach their objectives, if post merger management fails to realize

positive synergies and does not foresee negative synergies. Beside

strategic considerations of the integration and transformation period,

determining national and corporate cultural fit between target and

acquiring firm, results of cultural dissonance and means of anticipation

for culture clashes and are deduce d from a group of surveys (refer to

chapters 5 and 6).

From all these areas under discussion, success factors, reasons for

failure and risks of an M&A project are figured out (refer to chapter 7).

As an addition, feasible alternative business collaborations are

11


contrasted with mergers and acquisitions in terms of strategic motives

and objectives to be realized (refer to chapter 8).

As a summary, a guide to reason M&A activity in an early project phase

is developed.

Without credible answers to these basic questions, acquirers are on

their way to losing the acquisition game from the beginning even

before the due diligence or even the integration starts to happen (refer

to chapter 9).

12


2 Classification of mergers and acquisitions

‘Merger and acquisition’, or ‘M&A’ is a field of study in which the

definitions often vary in different publications. The traditional

framework how to distinguish between ‘mergers’ and ‘acquisitions’ is

the perspective on the legal independence of the business entities

(Fig. 2.1):

Collaboration between business entities

Effects on the legal independence Of the involved companyNo effect on the At least one company Legal independence losses its legal independence

Cooperation Merger &

Acquisition

Number of companies that lose their legal independence All involved companies At least one but

not all involved companies

Merger

Acquisition

Organizational integration Of the required firm Closely integrated into Remains relatively The acquiring company independent subsidiary Of the acquiring firm

13


Absorption Subsidiary company

In Corporate Group

Fig. 2.1: Types of collaboration between business entities categorized

by effect on legal independence (Metzenthin).

2.1 The merger

A ‘merger’ is a combination of assets of two previously separate firms

into a single new legal entity. All involved companies lose their legal

independence as all their assets become the pieces of a new firm. A

‘merger’ may be characterized by an equal rank of the involved firms

with respect to their sizes, resources and power. In this context, the

phrase ‘merger of equals’ is frequently used to refer to the equality of

the formerly independent companies. However, even when

theoretically and officially ‘mergers’ are supposed to be between equal

partners, most result in one partner dominating the other (Ghauri).

Terming the combination a ‘merger’ rather than an ‘acquisition’ thus

can be done purely for political or marketing reasons. The number of

‘real’ mergers in M&As is either way almost vanishingly small. Less

than 3% of cross border M&As by number are mergers (Ghauri).

2.2 The acquisition

‘Acquisition’ (or ‘takeover’) usually refers to a purchase of a smaller

firm or a part of a firm by a larger one. In an ‘acquisition’, the control

of assets is transferred from one company to another. The acquired

firm (target) loses its legal independence, while the acquiring firm is

not affected in that respect.

‘Acquisitions’ can be subdivided into full absorption or a subsidiary

status within a corporate group depending on the level of

organizational integration of the acquired firm (refer to chapter 5.1).

14


Sometimes, however, a smaller firm acquires management control of a

larger or longer established company and keeps its name for the

combined firm. This is known as a ‘reverse takeover’.

2.3 Classification according to companies’ relatedness

While the traditional distinction between ‘mergers’ and ‘acquisitions’ is

mainly based on their differences in legal structure there exist many

other ways how to categorize M&As. One is to group M&As into four

categories with respect to the companies’ relatedness (Ghauri):

1) Horizontal: takes place where the two combining companies

produce similar Products in the same industry and/or are competitors.

2) Vertical: occur when two firms, each working at different stages in

the production of the same good (value chain), combine (e.g. buyer-

seller, client-supplier).

3) Conglomerate: takes place when the two combining firms operate

in unrelated businesses (unrelated diversification).

4) Concentric: occurs where two combining firms are in the same

industry (related diversification), but they have no customer or supplier

relationship (e.g. a merger between a bank and a leasing company).

2.4 Other classifications

Depending on the perspective on M&As other criteria for classification

are discussed in the literature. These perspectives are reflected in the

field of M&A performance studies (refer to chapter 3) to conclude on

the key success factors for mergers and acquisitions projects. Here, list

of some alternative classifications is given (Metzenthin; Ghauri):

15


Management cooperation perspective:

M&As can be friendly or hostile. In the former case, the companies

cooperate in negotiations, finally agree to the transaction and ensure

that the deal is beneficial to both parties. In the latter case, the

acquiring company purchases the majority of outstanding shares of a

company in the open market while the takeover target is unwilling to

be bought or the target's board has no prior knowledge of the offer.

Stock market perspective:

‘Accretive’ mergers are those in which an acquiring company's

earnings per share (EPS) increase and/or in which a company with a

high price to earnings ratio (P/E) acquires one with a low P/E. ‘Dilutive’

mergers are the opposite of above, whereby a company's EPS

decreases. The company will be one with a low P/E acquiring one with

a high P/E.

Financing perspective:

Stock-financed versus cash-financed (self-finance or borrowed)

Collaboration between business entities

No Exchange of capital shares capital shares exchange

Minority position majority position 100%

share

Fig. 2.2: Types of collaboration categorized on the basis of involved

capital investments (Metzenthin).

Market perspective:

16


Both partners focus onto the same or different target customers,

distribution channels, technologies, products and services.

Motives perspective:

Similarity M&A versus complementary M&A

Geographic perspective:

Domestic versus cross-border M&As

Technology perspective:

Technology oriented enterprises versus non-technology firms

Strategic perspective:

Diversification (cross-industry, focus decreasing) versus concentration

(focus increasing)

Integration perspective:

Degree of loss of control or degree of integration of the target firm

2.5 ‘Merger and acquisition’ as used throughout this

work

The various perspectives on the field of M&A emphasize how

multifaceted and complex such an undertaking is. Since most of the

perspectives given above will find their discussion throughout this work

the terms ‘merger’ and ‘acquisition’ are not assigned to an specific

type of deal. In fact, the term ‘merger’ and ‘acquisition’ or ‘M&A’ is

generally used for a project where two firms (the target and the

acquiring company) combine to one legal entity or one or several parts

of a firm (target) change their belonging to the entity of the acquiring

17


firm. However, ‘merger and acquisition’ is clearly set apart from

collaborations as ‘alliance’, ‘co-operation’ or ‘joint venture’ (refer to

chapter 8).

3 Post-M&A firm performance studies

The most often researched and reported findings of post-M&A firm

performance studies are described here focusing on those being of

strategic importance in a pre-M&A stage. A critical review on

performance study’s methodology is given and other sources of

evidence are discussed.

3.1 Motivation to consider performance studies

The surveys on acquiring firms’ post-M&A performance build the vast

majority of all research studies beside those focusing on M&A

integration matters (Paine). Thus, one could assume that performance

studies provide, first, insight into why certain M&A projects fail and

others succeed and, second, present universally valid performance

enhancing key success factors that do not depend on the specific

characteristics of an M&A project.

3.2 How is post-M&A firm performance measured?

In the literature manifold ways can be found how an acquiring firm’s

post-M&A performance is measured relative to its pre-M&A

performance:

Turnover and profit growth

Relative firm value

18


Short- and long-term stock price (event study methodology)

Abnormal stock return (difference between actual returns and

the previously

Expected returns)

Present value of the post-M&A incremental cash flows

For a more complete understanding of different types of performance

studies and their characteristics (data collection, time horizon

considered, statistical evaluation, relative performance vs. absolute

performance methodology, definition of failure and success etc.) refer

to the corresponding literature. Beside the many performance studies

also a large number of reviews can be found of which those by Sirower

and Agrawal are the most complete and most recent.

3.3 What is failure and success?

Failure has been understood in terms as extreme as ‘resale’,

‘liquidation’ or ‘divestment’, or as conservative as “failing to reach

certain projected growth or profit” in benchmarking. As a result, the

definition of failure and success depends on the performance

measures applied and thus is exceedingly broad and almost a

peculiarity of every single performance study.

3.4 Factors with and without relationship to post-M&A

performance

This work distinguishes between factors having a positive/negative

impact and factors having no significant or a highly controversial

impact on a firm’s performance. Since there is mostly no agreement on

the extent of positive or negative impact no concrete figures are given

here.

19


The findings on the factors ‘M&A activity’, ‘Diversification’ and ‘Degree

of Integration’ have biggest significance for the validation of potential

firms to be acquired and thus are discussed in more detail

subsequently to the list below.

3.4.1 Factors for which a majority of empirical studies

found a positive or negative relationship to

performance of the acquiring firm:

1. M&A activity (e.g. Dyer)

Most studies report, on average, a negative long-run performance

following

M&A deals (see a more detailed discussion subsequent to this list).

2. Acquisition premium (e.g. Epstein)

The level of the acquisition premium (price paid) has a strong negative

effect on performance across most measures of shareholder

performance. The higher the premium is, the larger the subsequent

loss. Alberts and Varaiya (in Datta) conclude that post-acquisition gains

to most bidding firms were not adequate to cover the premiums paid

to acquire the targets.

Epstein reports that even if the price paid is not public, acquiring

companies experience a decrease in stock price when the market is

anxious that the bidder will overpay for growth opportunities of the

acquired firm.

3. Multiple bidders (e.g. Datta; Goergen)

The presence of multiple bidders has a negative impact on short- and

long-term acquiring firm performance. As a result, bidding firms should

20


avoid getting involved in tender offers. The vast majority of worldwide

M&As are single-bidder auctions (more than 72%). The increased

competitiveness in such cases tends to drive up acquisition premiums.

4. Means of payment (e.g. Loughran; Goergen)

An all-cash offer for acquisitions results in better performance than an

all-equity or a combination of cash and equity. The fact the takeover

will be paid with equity might signal to the market that the bidding

managers believe that their firm’s shares are overpriced or already

expect a subsequent long-term underperformance of the combined

firms.

5. Percentage of the target firm shares acquired (e.g. Sirower)

Majority holdings in the target firm correlate positively with the

acquiring firm’s long-term performance.

6. Managerial ownership (e.g. Goergen)

The fraction of managerial ownership (e.g. through equity stakes) in

the acquiring firm is found to be strongly significant for long-term

performance. This suggests that managers are more likely to

undertake value-destroying M&A deals, if they do not own equity in

their firm.

7. Type of takeover (e.g. Loughran; Goergen)

In comparison to friendly M&A offers, hostile bids trigger large positive

abnormal returns for the target shareholders but significant, negative

returns for the bidder.

21


The overwhelming proportion of M&As are friendly. In 1999, there were

only 30 hostile takeovers out of 17’000 friendly M&As.

8. Industry phase

A study by Kröger evaluating 30’000 firms over 15 years reports

successful M&A deals in almost 60 per cent of the cases across various

industries in their opening phase (Öffnungs phase) and accumulation

phase (Kumluations phase) of his model. In the subsequent focusing

phase (Fokussie rungs phase) the success rate diminishes to 30 per

cent and even less in the balance phase (Balance phase). The reason

for this decline in success rate is seen in the decreasing realizable

synergy potential due to the raising price premiums paid for target

firms and, when the industry matures, the value chains that are

already substantially optimized in the later phases of the model.

3.4.2 Factors for which no significant relatedness to

the acquiring firm’s performance or heavy conflicting

evidence is found:

1. Stock market behavior at announcement (e.g.

Goergen)

There is little consensus about the announcement effects for the

bidding firms. About half of the studies report small value-destructive

effects for the acquirers’ shareholders (Sirower) whereas the other half

finds zero or small positive abnormal returns. Considering that the

average target is much smaller than the average acquirer, the

combined net economic gain or loss at the announcement is expected

to be rather small. However, the literature findings for target firms’

returns are much more consistent. Goergen et al. in their extensive

22


empirical study across various industries find large announcement

effects of 9% for target firms, but the cumulative abnormal return that

includes the price run-up over the two-weekn period prior to the event

rises to 20%.

2. Acquisition experience

According to Straub the number of acquisitions in the years prior to the

relevant acquisition is not significantly related to performance while

Duncan identifies a company’s previous acquisition experience as a

factor for success.

Selden et al. (in Sirower) on the other hand find that most companies

outperforming the S&P500 have low M&A activity, and if, rather small

firms are acquired.

3. Diversification (e.g. King)

Strategic relatedness does not generally outperform strategic

unrelated M&As (see a more detailed discussion subsequent to this

list).

4. Size of merging firms

There is lacking evidence on the correlation between the relative size

of the merging firms and long-term performance. Some researchers

have suggested that small mergers (mergers where the two firms are

very different in size) tend to produce higher performance than larger

mergers (mergers where the two firms are similar in size). They

attribute these performance differences to the ease of combining

operations. With smaller mergers the integration of the new entity is

more easily controlled and the disruption to the organization as a

23


whole is minimized. With a large merger, the integration problems are

multiplied and disruption can occur throughout the whole organization.

On the other hand, those researchers neglect the fact that a small

merger often provides also less significant gains to the large

organization. However, as Lubatkin and Seth point out, the few studies

that have examined this size issue have found that larger mergers, on

average, tend to be more successful than smaller ones.

5. Degree of integration

The post-merger integration level (i.e. fully integrated versus not or

partially integrated) has no relationship with a firm’s performance (see

a more detailed discussion subsequent to this list).

Many other factors exist being reported in a smaller number of

studies, as for example the pre-merger book-to-market ratio (e.g. Rau

and Vermaelen in Megginson), the premerger financial performance

(e.g. Kruse), the net cash held by the target and growth potential of

target as central factors influencing long-term firm performance of the

merged firms.

3.5 M&A performance

Success and failure with M&A deals has been studied in the vast

majority of all surveys in terms of narrow measures as given in chapter

3.2 leading to the claims that most M&As fail. Acquiring firms loose, on

average, 10 per cent of stock value in a five years period as found by

Dyer in his study across various industries. Only about 35% of

acquisitions are met with positive stock market return. According to a

KPMG study (2000), 83% of recent deals failed to deliver shareholder

value and 53% actually destroyed value. Also Porter (in Datta), based

on an analysis of acquisitions made by 33 Fortune-500 firms, concludes

that acquisitions have been largely unsuccessful when one considers

that over half were subsequently divested.

24


When gains to targets and bidders are combined, most acquisitions are

wealth creating. Although Seth et al. (in Ghauri) find that positive total

gains occur in 74% of the acquisitions they estimate in their review

that total gains are only 7.6% of the pre acquisition value of the

combined firm. From a macroeconomic point of view one can argue

that acquisitions transfer resources from less to more productive

sectors of the economy. However, bidders have only minimal or no

incentives at all to be a participant in such transactions (Datta). Ghauri

claims that more than 50% of the mergers so far have led to a

decrease in share value of the bidder firm and another 25% have

shown no significant increase. Ghauri reports that targets realize the

majority of the gains, while acquirers appear to experience positive

effects on shareholder value only in about onethird of M&As and gain

nothing on average.

In summary, the aggregate evidence from the performance literature

is toward negative performance for acquiring firms in M&A deals.

Results indicate that while the target firm’s shareholders gain

significantly from M&As, those of the bidding firm do not. Moreover,

historical evidence documents that the returns to acquirers have

gotten progressively worse, on average, for acquisitions occurring in

the 1960s, 70s, 80s and 90s, respectively (Sirower). As a conclusion

one is tempted to claim that the M&A activity itself inherently is a

reason for under-performance or failure of M&A deals. Clearly this

negative evidence raises serious doubts over the massive and still

increasing size and number of M&A deals over the last 40 years (refer

to chapter 3.8).

3.6 Diversification

There is considerable disagreement in the literature about whether

strategically related acquisitions are more beneficial than strategically

25


unrelated acquisitions. However, most publications suggest from a

theoretical point of view that corporate focus is the primary

determinant of long-term M&A performance. Continuing to focus on the

acquiring firm’s core business should help to maintain its strengths and

to minimize the risks associated with acquiring a business in an

industry of which the firm may have only limited knowledge. However,

many studies document that relatedness (focus-preserving or focus-

increasing, FPI mergers) had a marginal positive effect on long-term

performance.

On the other hand, unrelatedness (focus-decreasing, FD mergers) is

often reported to result in significantly negative long-term performance

(e.g. Megginson; Duncan). To classify corporate diversification

Megginson uses the ‘Herfindahl Index’ (HI), which describes the

merger-related degree of change in corporate focus (Megginson). He

finds that every 10% reduction in focus results in a 9% loss in

stockholder wealth, a 4% discount in firm value, and a more than 1%

decline in operating performance. These results suggest that

companies should not attempt to do what investors can do better

them, i.e. creating a diversified portfolio.

However, several authors have found no significant effect of

relatedness on performance. Some researchers even have found that

acquiring firms making conglomerate (i.e. unrelated) acquisitions

outperform those making non-conglomerate acquisitions (Sirower;

Kruse; review in Megginson). They report advantages of unrelated M&A

to be improved cash management, more efficient allocation of

investment capital and reduced cost of debt capital.

In summary, although a majority of studies have found

overperformance of related M&A deals, the evidence is very vague.

Boutellier reminds that the decision for relatedness or un relatedness

26


is very dependent on the industry within which the firms operate. This

matter of fact is visualized by Palich et al. (Fig. 3.2):

(A)

Performance

Single Related unrelated

(b)

Performance


(c)

Performance


Fig. 3.2: Performance versus degree of diversification: (a) the linear

model; (b) the inverted-U model; (c) the intermediate model (Palich).

An excellent summary on various studies (with conflicting findings)

regarding diversification and relatedness can be found in Sirower and

Agrawal.

3.7 Degree of integration

27


The finding that the degree of integration of the acquired into the

acquiring firm is a particularly interesting result because performance

gains presumably should be driven by some type of synergy realization

through integration. On the other hand, the level of integration is

assumed to be related to the number of integration difficulties limiting

the realization of the synergy potential. As a result one could conclude

that the advantages of a full or moderate integration are diminished by

the disadvantages such integration creates.

3.8 Criticism on performance study methodology

Empirical performance studies have almost exclusively concentrated

on whether M&A projects create abnormal shareholder value or

profitability for the acquiring and the target company and whether

strategically related acquisitions are more beneficial than strategically

unrelated acquisitions. The overall conclusion from hundreds of studies

is that most M&A fail. The vast majority of studies on M&A performance

in the last 40 years show failure rates for acquirers of between 40%

and 85% with an average of approximately 2/3 on a wide variety of

measures (Angwin). Despite considerable research effort being

devoted to assess M&A performance the findings of strategic

importance in a pre-M&A stage are mainly vague or inconsistent. That

fact is troubling since first, no significant success factors for M&A deals

that drive the returns can be extracted and second, a reasoning of the

findings in these studies seems to be inappropriate in the view of such

lacking evidence:

“[…] M&As’ influence on post-acquisition firm performance remains

inconclusive.

28


[…] the existing empirical post-acquisition performance studies have

not recognized any prerequisites that would be useful in forecasting

post-acquisition performance.” (Straub)

These findings raise a paradox: Why do managers continue to transact

M&A deals on such a massive scale in both number and monetary

terms, when there is little economic justification for M&As from the

bidding shareholders’ point of view? This difference between action

(the continued pursuit of mergers) and performance (the low rate of

successful mergers) are caused by:

Managers being overly optimistic, continuing to make estimation

errors in valuing target firms, thinking that they have learned

from past merger mistakes and that the next merger will be

successful (while in fact they continue to make the same merger

mistakes).

Past empirical studies being inaccurate because of data

collection, time-periods covered, statistical errors or aggregation

of different deal structures (e.g. size of merger, cross-industry

comparison etc.). Angwin states that too often M&A projects are

considered as whole homogeneous entity not taking into account

project-specific characteristics.

Managers pursuing goals other than shareholder wealth

maximization and, thus, empirical research is using an

inaccurate measure of performance (e.g. Angwin).

Some researchers raise the fundamental issue of whether the financial

markets are always best placed to value the actions of management.

For instance, a CEO embedded in an industrial context may be more of

an expert on how firms should be run and necessary investment

decisions which should be made (such as M&A) than financial analysts

and shareholders eventually far away from that context. The CEO may

take actions which may not result in positive shareholder returns in the

29


short run but could be of vital importance to the long-term success of

the firm.

Evaluation of long-term changes in stock price must be done with care

since merger strategies often require years of integration efforts

before potential benefits are reflected in stock price. And, changes in

stock price often tells little about the M&A and its motives but more

about the company overall and the economic context. If the existence

of multiple merger motives and motives other than share holder

wealth creation is correct, then past merger studies that attempt to

measure merger success by examining single financial indicators of

performance (most commonly profitability and share value) tend to

undervalue the achievement of other goals and may fail to provide an

accurate picture of M&A success. Thus, the results from performance

studies may be biased since many deals are being assessed on

motives which were never the main intention of management.

4. Motives for merger and acquisition activity

Categorization of mergers and acquisitions according to the

management’s motives is fairly generic since motives can have

manifold facets, overlapping each other or even belong to several

categories. While it is attractive to categorize M&A deals into single

motives research studies show that this would be an oversimplification.

A survey from Angwin in 2000 involving CEOs of 100 domestic

acquirers in the UK about their motivations for carrying out a specific

M&A transaction reveals up to seven reasons in some instances, 45%

gave three or more reasons and 71% of CEOs gave two or more

reasons.

30


Angwin in his survey groups motives into four categories:

Exploitation of the target through synergies to increase acquirer

value with a high degree of certainty (classical motivation)

Exploration of new territories of latent value and for future

opportunities with low certainty of improving returns to the

acquirer but with a big potential

Preservation (‘stasis’) attempting to defend the acquirer’s

competitive situation through control of potential new competitors

Survival attempting to prevent the acquirer’s end through being

acquired itself

The payoffs for these different types of motives are different. From

‘exploitation’ deals there should be reasonable certainty about value

created. ‘Exploration’ deals may have the potential for much greater

returns than exploitation deals as well as much higher risk about

whether those returns will be achieved and how far into the future. For

‘preservation’ deals the acquirer may not receive any direct benefit,

with neutral or even mildly negative returns but the negative threat of

severe future change may be reduced.

‘Survival’ deals are not so much about increasing value as to survive

potential takeover threat or current demise of the firm. For

‘preservation’ and ‘survival’ type deals, value creation maybe an

inappropriate way of viewing performance. Instead ‘worse off test’

should be applied answering the questions “would the acquirer be

substantially worse off if it did not transact a particular acquisition?”

4.1 Exploitation (synergy motives)

Synergy motives are widely seen as the most frequently mentioned

motives when managers argue for an M&A project (Schweiger).

Synergies are accepted as a legitimate reason for such undertakings

31


since their realization appears to directly correlate with the

enhancement of economic performance of a firm.

4.1.1 What is ‘synergy’?

A target firm has an intrinsic value that is based on what a firm is

worth as a stand-alone entity. This value is typically based on the

expected stream of cash flows it can produce as a going concern. If an

acquirer pays more than this value (price premium), value is likely to

be destroyed. However, a buyer can utilize the acquisition to improve

cash flows of either the target, itself or both such that value still can be

created. This concept is known as ‘synergy realization’.

Kuhn in his publication gives a few examples of synergy realization,

however, not without closing his illustration with an ironic undertone:

‘Synergy’ is the increase in performance of the combined firm above

what the two firms are already expected to accomplish as independent

firms through gains in competitive advantage. Thus, the synergy

hypothesis proposes that M&As take place when the value of the

combined firm is greater than the sum of the values of the individual

firms.

The relationship between price, synergy and value is illustrated in Fig.

4.1.

The figure illustrates that value can be created when the price paid for

a target is below its stand-alone value. When the price exceeds the

stand alone value, synergies must be captured for value to be realized.

When the price exceeds all synergies, there is no chance that value

can be created.

32


Overpaid price 3

Must capture

Some or all Price 2

Synergies

No Synergies

Required Price 1

Price Paid for Target

Fig. 4.1: The relationship between price, synergy and value

(Schweiger).

4.1.2 Classification of synergies

Dyer proposes the following classification of synergies:

Modular synergy: if firms manage their resources

independently but their final outcomes combine to potential

synergy realization (e.g. common usage of distribution channels)

Sequential synergy: if one firm completes its activities first

and transfers the outcome to the partner firm (e.g. after-sales

offering)

Reciprocal synergy: if firms jointly work together in activities

and mutually share resources along the value chain (e.g.

common R&D activities)

Other authors divide synergy according to the types ‘cost’, ‘revenue’

and ‘intangibles’ (Angwin; Weber; Schweiger; Ghauri; Cullinan):

4.1.3 Cost synergies (‘rationalization’)

Reducing costs is one clear way to increase cash flows and has been

the most common form of synergy. If synergies are expected to come

from cost savings for price and/or cost structure competitiveness, they

33

Range of Synergy valve

Stand Alone Value


must emerge from eliminating duplication due to similarities between

the firms. Synergistic benefits from potential duplicated resources can

come as fixed or variable cost synergies:

Economies of scale i.e. increasing volume of production/sales

reduces costs per unit

Economies of scope i.e. spreading or shearing resources

across more business activities

Examples: sharing of products/services, marketing/advertising and

brand development efforts

Bargaining power along the value chain i.e. increasing

power over suppliers

(Purchasing efficiency) and distributors to reduce transaction

costs

Elimination of redundant functions i.e. reduction of

overlapping work force (administration, overhead, corporate staff

like finance, IT, human resources etc.) and rationalization of

processes

Control over value chain i.e. vertical integration Such moves

are made to increase value added into the business, to gain

control over more aspects of the business (supply, distribution)

and to reduce transaction costs in the value chain.

Examples: Lower variable costs of raw material through control

over raw materials, lower overall costs through improved product

development and manufacturing interfaces.

Flexibility of capacity i.e. using excess capacity of one firm to

fill the other firm’s excess demand (improved agility).

4.1.4 Revenue synergies

34


Typically, revenue synergies are associated with complementary (i.e.

non-overlapping) activities resulting in higher volume and revenue

sales:

New customer base i.e. increase sales coverage or acquire

new distribution network or new sales channel that can result, for

example, in more profitable or loyal customers.

Cross-selling of products or services through complementary

sales organizations or distribution channels that serve different

geographic regions, customer groups or technologies (increased

sales productivity by selling more volume with the same number

of sales people).

Broadening a company’s products and services portfolio

to provide needed bundling or a more complete/full offering.

Internationalization i.e. increase sales volume and market

share through geographic extension and access to new

customers M&As are means to expand internationally more

rapidly or they make it possible to enter new markets using the

distribution network and the specific knowledge of local partners.

Thanks to the contributions of these partners, the foreign

company is offered a geographic presence, less effort and time

has to be put into learning how to succeed in very different local

environments (Garrette).

Internationalization can also foster a company’s responsiveness

by moving production processes, distribution, warehousing,

and after-sales activities closer to customers. This can result in

increased competitiveness by being better able to serve

customers with needs for broader geographic coverage.

4.1.5 Synergies from intangibles

This type of synergy results from the acquisition of immaterial goods or

goods that hardly can be acquired in the market:

35


Access to brands, reputation and intellectual property

Example: increase appeal to more and better distributors,

suppliers and employees.

Access to human resources i.e. people, knowledge, experience,

skills, brainpower (talent-based M&A).

Access to technology and the attached knowledge,

innovation and product development efforts i.e. create new

business opportunities or enhance a firm’s core business.

Knowledge often cannot be acquired in the market as it is

bundled with other assets. Due to the asymmetric information

regarding knowledge and technology the valuation of this asset

is extremely difficult however important as it the key reason for

an acquisition is very often.

Access to superior managerial practices, business models and

operational excellence (e.g. quality control system, delivery

concepts, after-sales service…).

The reverse is ‘victim infusion’ (Ghauri): a firm can infuse the

‘victim’ with better management, organization skills, or superior

marketing.

4.2 Exploration

There are motives other than synergy realization which receive far less

attention:

Greenfield entry

As new markets and knowledge emerge there will always be a

need to engage in these areas. By definition there will be

significant uncertainty since acquirers cannot know the future.

They can form views about whether the potential of an M&A deal

maybe high, but in new unfamiliar areas (geographic,

36


technological etc.) the information available maybe extremely

unreliable or difficult to interpret.

Learning prologue i.e. sequential M&A to learn about a sector as

a prologue to a later larger M&A deal (e.g. a common practice

amongst Japanese firms in cross-border M&As) (Ghauri).

4.3 Preservation and survival

This type of synergy results from the elimination of competitors from a

market and to gain a more dominant position in an industry:

Affecting competitive dynamics

M&A deals can be used as a weapon to harm the actions of

competitor firms. Here performance is less about the

contribution of the target firm to the new parent, but more in

terms of the damage done to the competitor and prevention of

unpleasant challenges in an industry (e.g. Angwin; Ghauri).

Overcapacity reduction i.e. purchasing competitors and closing

them down to gain market share or critical mass

Pricing flexibility i.e. elimination of capacity from the market

place allowing an acquirer to maintain or increase prices in the

market thereby improving margins and cash flows.

Innovation quenching (Angwin)

The acquisition is intended to suppress rather than develop the

competitive potential of the acquired firm (Ghauri). For instance,

buying infant firms and closing them down prevents any possible

takeoff of that firm which could change industry dynamics. An

alternative to closure is to purchase infant firms so that the

acquirer can control the rate of innovation leakage into an

industry. Such acquisitions itself may not result in positive

returns, but may be less damaging than allowing the firm to

emerge.

37


Competitor actions

The actions of a competitor may induce a firm into engaging in

M&A. It is known that when an industry begins to consolidate

there is a rush of other firms to follow. The motive here is the

fear of being taken over (M&A as a defense mechanism) or the

fear of no suitable targets being left for an M&A deal.

Customer / supplier pressure

Powerful customers or suppliers can force firms making M&A

deals. For instance, in the IT industry Nokia brought pressure on

one of its suppliers to purchase a high tech firm as they wanted

aspects of this technology integrated into the components they

were sourcing, but they did not want to purchase the firm

themselves. The supplier, wanting to keep its main client had no

choice. It may not have benefited from the actual M&A but to

lose Nokia as its primary customer would have been a far worse

outcome.

Political persuasion

Governments can bring substantial pressure upon top

management to act in a way which would further the national

interest. For instance, in France there has repeatedly been

pressure upon firms to merge rather than accept approaches

from Italian, Spanish and Swiss firms.

4.4 Managers’ self-interest and prestige

All of the above motives for M&A assume rational managerial

motivation based upon improving firm performance. However, not all

motives can be considered rational from the business perspective:

‘Agency’ motive (self-interest, greed motive)

38


In the context of M&A the agency motive suggests that

takeovers occur because they enhance the acquirer

management’s welfare at the expense of acquirer shareholders

(e.g. Angwin; Brouthers).

Hubris motive (prestige motive)

The hubris hypothesis suggests that managers make mistakes in

evaluating target firms (excess confidence) and engage in M&As

even when there is no synergy potential or other legitimate

motive (Berkovitch). Diversification of management’s personal

portfolio, managerial challenge, the increase of the firm size and

prestige, the increase of the firm’s dependence on the

management (empire building) and fashion (Ghauri) are

manager motives summarized under the hubris hypothesis.

The agency problem and hubris motive receive support from studies

reporting that acquirer returns from M&A deals are positively related to

the level of management ownership in the acquiring firm (Berkovitch;

refer to chapter 3.4.1).

Considering the increase in shareholder wealth as the primary reason

for any M&A and taking into account that most M&As fail, Berkovitch

jumps to the conclusion that many M&A deals are motivated by agency

and hubris. However, the huge variety of motives different from

shareholder wealth creation as the primary motivation for M&A puts

some doubt on that straight conclusion. “If all takeovers were

motivated by synergy only, one would never observe negative gains.”

Here, Berkovitch does not take into account that there are many other

issues except the motivation that decide upon M&A financial success.

4.5 Finance motives

The main motives cited in the finance literature:

39


Improving stock market measures (classical motive referred as

‘exploitation’ or ‘synergy’ motive)

Reducing cost of capital (e.g. through reducing firm risk by

stabilizing earnings due to diversification or buying a listed

company)

Reduction of tax liabilities (e.g. through benefits achieved in

cross-border M&As)

Adjusting the debt profile of the company

Accessing cash or other financial resources in the target

company

Generate cash flow from the break-up of the target firm (e.g.

Megginson)

Move capital to higher valued uses / Reinvestment of financial

resources (e.g. firms with poor investment opportunities acquire

firms with outstanding growth opportunities; Goergen), in the

extreme case: Replace a business with a new one (respond to

market failures)

Asset stripping

Speculative transactions driven by the intention to buy shares in

companies solely to resell them at a profit in future.

The vast majority of M&A literature assumes that M&A deals must

improve returns to shareholders. However, this ignores many other

‘legitimate’ and ‘illegitimate’ motives for M&A activities and ownership

structures other than public companies. The broad set of\ motivations

presented here now, first, allows a much more subtle assessment of

post-

M&A firm performance while the lack thereof was criticized in the

chapter ‘Performance studies’ (refer to chapter 3), second, simplifies a

sound review of strategic logic and reasoning for M&A activity and,

40


third, opens a much broader view on upcoming integration and

transformation difficulties like negative synergies and culture issues.

5 Post-M&A integration and transformation

Independent of the underlying motives for an M&A project, during post-

merger integration many different matters must be carefully blended

such as for example different strategies, brands, product portfolios,

production processes, knowledge and technology, pricing policy,

support functions, sourcing and distribution partners, administrative

policies and processes including the management of human resources,

technical operations, marketing activities and customer relationships.

Depending on the level of integration such a blending imposes many

difficulties and pitfalls for synergy realization and for reaching other

M&A objectives. The lacking awareness of those difficulties (fostering

positive synergy realization and anticipating negative synergies) are

seen as prominent reasons why M&A projects can be compromised to

41


reach their goals, in particular when not considered at a very early

stage in the M&A project (e.g.Datta; Haspeslagh). Mace and

Montgomery already noted in 1964:

„The values to be derived from an acquisition depend largely upon the

skill with which the […] problems of integration are handled. Many

potentially valuable acquired corporate assets have been lost by

neglect and poor handling during the integration process. “

As a consequence, besides recognizing the strategic logic that predicts

value creation the processes through which the M&A’s objectives come

to be realized must be taken into account and planned in detail.

Management must find the appropriate integration practice (e.g.

procedural, physical, and socio-cultural) given the motives and

characteristics of the acquiring and acquired firms (Marks).

5.1 What is an adequate level of integration?

There are several possible generic scenarios how a company can be

integrated in the post-M&A phase (Sirower; Duncan), although, hybrid

and intermediate forms may exist:

1. The company is acquired as a stand-alone (total autonomy).

2. The company is acquired as stand-alone but with a change in

strategy (e.g. restructuring followed by financial control).

3. The target company is to become part of the acquirer’s operations

(e.g. centralization of key functions).

4. The target and acquirer are to be completely integrated (full

integration).

5. The target takes over the acquirer’s existing business and the

acquirer is integrated into the target’s operations (reverse integration).

42


5.2 What are the difficulties and dangers during

integration?

Difficulties and dangers during the integration process are manifold

and widely discussed not only in the M&A literature but generally in the

transformation literature. Here the most often cited issues in the M&A

context and those of major relevance for the pre-M&A phase are

discussed. To foster a positive attitude in an often negatively charged

environment success factors are presented instead of a list with

frequent reasons for integration failure (no particular order):

a. Choice of appropriate level of integration

(2)Post-merger management of projected positive and negative

synergies

(3)Speed of integration

(4)Communication to internal and external stakeholders

(5)Cultural fit and anticipation of culture dissonance

(6)Experience with transition structures and transformation

management (Reimus)

(7)Avoidance of leadership vacuum (Duncan)

(8)Choice of top management positions reflecting the values being

applied in the merged firm and the true distribution of power

between the former firms (Trauth).

(9)All parts of the organization have the knowledge and resources,

and give their commitment for the integration efforts (Epstein).

5.2.1 under- and overintegration – or the appropriate level

of integration

An acquired firm must be aligned to a certain extent to the

requirements of the acquiring company. The accomplishment of

43


integration, however, requires that target-specific bases of critical

resources and skills be kept intact. The organizational task therefore is

the preservation of any unique characteristics of an acquired firm that

are a source of key strategic capabilities. Pablo advises against “fixing

things that aren’t broken”.

However, under- or overintegration has been cited as one of the

leading causes of M&A failure (Pablo). The realization of potential

synergies can be short-circuited given an insufficient level of

integration, but excessive integration (reconfiguration) can hinder the

development of fruitful conditions (e.g. when executives depart,

expertise is lost etc.).

Management of the acquiring firm has the tendency to over-integrate

the target firm, means to completely change the whole setup and the

processes. These practices (besides demotivating the employees) can

result in the loss of the firm’s success factors before the M&A deal

5.2.2 Post-merger management of projected positive

and negative synergies

Acquiring companies must view potential synergies in the light of

realization problems:

“When two previously sovereign organizations come together under a

common corporate umbrella, the result is a hybrid organization in

which value creation depends on the management of

interdependencies through the facilitation of firm interactions and the

development of mechanisms promoting stability.” (Pablo)

Specifically, management should:

44


Have an integration plan in considerable detail on how to

implement the strategy (e.g. integration of sales force,

distribution system, information systems, R&D processes,

marketing efforts, reward and incentive systems).

Examine how different issues impact the success of changes

needed in the acquirer, the target, or both firms and the impact

they can have on positive potential but also negative synergies

(value leakage e.g. through reduction in cash flows and earning

during integration period).

Develop different integration scenarios leading to a series of

realistic M&A evaluation.

5.2.3 Speed of integration

Angwin in his studies argues:

“[…] the first 100 days is when all the critical actions should be

launched, as this is the outer limit of employee enthusiasm, customer

tolerance and Wall Street patience”.

Early wins to convince internal and external stakeholders keep the

momentum of positive attitude while sustained uncertainty, not only

amongst employees, is seen as one of the most corrosive elements of

the soundness of post-acquisition integration.

Faster integration may reduce the length of time to experience

uncertainty as well as reduce the effects of the rumor mill.

An organization, Angwin then argues, benefits from well planned and

thus shorter integration periods in several ways:

Spending less time in a sub-optimal condition

Less costly readjustments and iterations

Cuts time for competitors’ reactions to the new organization

Favorable response of financial markets to quick wins

45


5.2.4 Communication to internal and external

stakeholders

The preparation during the period leading up to the merger

announcement is vital to success since it is critical to present the

merger to key constituencies with confidence.

During this period, the integration process is formulated and key

decisions should be made in the areas of leadership, structure, and

timeline. Unprofessional communication to employees, clients,

shareholders, suppliers and the media fosters uncertainty, mistrust

and rumors. Thus, it is necessary that the companies and their

stakeholders involved understand the advantages associated with the

merger.

The communication should generate a culture where employees see

the merger as enabling them to develop the business rather than

inhibiting them from progress.

Employees then can concentrate on reaching the objectives of the

whole M&A project or the integration process in particular.

Management must define the necessary changes that will bring a

successful transaction. It is important to establish clarity in roles and

responsibilities for those involved in the integration process, versus

those in operating businesses. And, the final authority and

responsibility should be communicated on all levels.

This chapter on ‘communication’ passes into to the subject of ‘culture

dissonance’ since Communication is an inherent part of culture and

lacking or unprofessional Communication shares the same set of

human reactions to culture dissonance.

46


5.2.5 Cultural fit and anticipation of culture

dissonance

For Ansoff citing Machiavelli “[…] resistance to change is proportional

to the degree of discontinuity in the culture and power structure

introduced by the change”. Resistance comprises cultural and social

aspects, at both the individual and collective level.

Culture dissonance, which might be real or just perceived, is a major

risk for M&A integration success and thus is widely discussed in the

literature and is treated in a separate but complementary chapter in

this work (refer to chapter 6).

6 National and organizational culture and culture

clashes

Numerous authors have discussed the potential troubles of culture

dissonance (culture clashes) between merging organizations and

report culture dissonance to be one major source of conflict that can

undermine potential synergistic effects and endanger a whole

M&A project. Duncan found that 65 per cent of those acquirers who

had experienced serious problems with post-acquisition integration

said that these difficulties had been due to cultural differences.

Cultural fit is therefore a vital success factor for international and

domestic M&As. The interesting point is that many studies show that

47


culture is an important issue even when the firms come from the same

country and the same industry Ghauri). On the other hand, culture

issues are worth to shed light into them since they can be used as

almost uncontroversial alibi for anything that goes wrong with M&As

(Sirower).

6.1 What is culture in the M&A context?

There exist various definitions of ‘culture’, but a classic definition is a

“shared set of norms, values, beliefs, and expectations” which are

translated into behaviors. A ‘corporate culture’ includes this shared set

but also implies incentive and reward systems, performance

evaluation, chain of command, leadership styles, information and

decision processes, operating procedures etc. (Veiga).

However defined, organizational culture is seen as being important in

determining an individual’s commitment, satisfaction, productivity, and

permanence within an organization. This is because individuals tend to

select groups that they perceive as having values similar to their own

while trying to avoid dissimilar others (Veiga).

6.2 Which forms of acculturation exist?

Similarly to the possible integration scenarios (refer to chapter 5.1)

Jöns defines different degrees of acculturation between the acquiring

and acquired firm while the degree of integration and degree of

acculturation do not necessarily correspond to each other. This is due

to the fact that the acculturation depends on the way companies

manage the formal (organizational aspects) and informal (socialization

aspects) integration process:

48


1. Integration is characterized by cultural and structural changes on

the part of both partners without a dominant culture.

2. Assimilation is a one-sided process where the acquiring company

fully absorbs the acquired one.

3. Separation means minimal cultural exchange; the acquired

company therefore remains almost unchanged.

4. Enculturation leads to completely new organizational practices and

systems that are different from those of both previous cultures.

6.3 Are cultural stereotypes a real assist or just

convenience?

Two statements reflect the conventional understanding of culture we

have and how we normally think about it:

“Surprisingly, the monolithic vision of organizational and national

cultures is still dominant in the strategy field and has tended to use

organization-wide or nationwide classifications (one organization – one

culture; one country – one culture).” (Irrmann)

“Cultural stereotypes are a condensation of reality in that they simplify

and overgeneralize the characteristics of a societal group. In the

absence of detailed knowledge and direct experience of a potential

merger partner or acquisition target, stereotypes offer a means of

reducing the cognitive complexity of a decision.” (Cartwright)

Thus, culture should not be considered as something objective and

given which a nation or an organization has. For instance, companies

can be characterized by subcultures linked to departments, professions

and other communities. Although some scholars define national and

organizational cultures as separate constructs, others agree that these

two constructs are interrelated and have a strong influence on each

other.

49


6.4 Can culture be ‘measured’?

As culture is intangible, it is a very difficult concept to evaluate.

Although the concept of ‘culture clash’ has been widely discussed in

the context of M&A, the literature has been relatively quiet about how

to empirically measure this phenomenon:

Hofstede (1980, in Veiga) introduced a classification concept

based on country indices for ‘Power Distance’, ‘Uncertainty

Avoidance’, ‘Individualism’ and

‘Masculinity’ as a way of representing cultural distance between

collaborating companies.

Veiga et al. present a ‘perceived cultural compatibility’ index

(PCC) as a tool for assessing culture based on interviews with

various people “…who live in the organization and […] could help

to uncover the basic cultural essence”. Different to Hofstede,

Veiga et al. focus on the cultures of the single organizations and

do not measure the level of compatibility of two merging national

cultures only. They present 23 items to be considered for their

congruence index within and across national and organizational

contexts:

The organization:

1) Encourages creativity and innovation

2) Cares about health and welfare of employees

3) Is receptive to new ways of doing things

4) Is an organization people can identify with

5) Stresses team work among all departments

6) Measures individual performance in a clear, understandable

manner

50


7) Bases promotion primarily on performance

8) Gives high responsibilities to mangers

9) Acts in responsible manner towards environment, discrimination,

etc.

10) Explains reasons for decisions to subordinates

11) Has managers who give attention to individual’s personal

problems

12) Allows individuals to adopt their own approach to job

13) Is always ready to take risks

14) Tries to improve communication between departments

15) Delegates decision-making to lowest possible level

16) Encourages competition among members as a way to advance

17) Gives recognition when deserved

18) Encourages cooperation more than competition

19) Takes a long-term view even at expense of short-term

performance

20) Challenges persons to give their best effort

21) Communicates how each persons’ work contributes to firm’s

big picture

22) Values effectiveness more than adherence to rules and

procedures

23) Provides life-time job security

A respondent’s overall compatibility score can range from -20 to

+20, where -20 signifies the highest degree of unattractiveness. A

zero suggests neutrality, i.e. the respondent perceives no

differences between the buying firm’s culture and the acquired

firm’s culture. The calculation customizes each respondent’s

assessment on each item by using their response to the respective

value item’s ‘ought to be’ question as a weight.

51


6.5 What is the result of perceived culture

dissonance?

The impact of culture dissonance on the M&A project, the

organizational structure and the employees’ behavior is frequently

discussed in the literature. “Lack of trust, lack of competence,

unwillingness to cooperate, unacceptable behavior, bureaucratic

system

…” are just a few attributes often named when ‘partners’ interact in

M&A projects. Such phenomena are not exclusively restricted to M&A

projects but to any sort of cultural interaction in business contexts

such as team building, buyer-seller interaction and transformation

projects in general. Irrmann and Jöns report in their extensive study

the most often perceived consequences of cultural dissonance in M&A

projects cited by employees:

Non-cooperation

Information retention

Lack of competence

Organizational silence

Competitive atmosphere within the company

Mistrust among employees

Increased bureaucracy

Higher degree of hierarchy, bureaucracy and authority

Avoidance of responsibility

Bypass of hierarchy

Stress and uncertainty due to potential layoffs

6.6 How can one understand culture dissonance?

52


Considerable differences in corporate cultures as, for example,

according to Veiga’s congruence index might impose serious culture

clashes during and even after the M&A integration process. Irrmann

argues that the often cited ‘culture clashes’ mainly arise from

communication dissonance and communication absence between

acquiring firm and target as a result of two types of failures: the

‘linguistic pragmatic failure’ and the ‘business pragmatic failure’.

The first one is grounded in differences in:

Accepted cultural forms of discourse

Message content and medium of communication

The second one is grounded in different interpretations of:

The appropriate decision-making process

The divergent vision of the appropriate business strategy to

adopt

The economic role of the acquired firm

Beside culture dissonance it is the uncertainty surrounding acquisition

events that causes executives and employees to defend positions they

may have taken years to build. If employees feel uncertain about their

personal situation, corporate goals may not matter so much to them

(Jöns). M&As are “surrounded in an aura of conquest” where

employees and managers eventually have to break their bond with the

way things were and conform to the culture of the buying firm:

“Once a big fish in a small pond, acquired key people may feel

a strong sense of alienation with their new proximate group,

inferior in status to the acquiring top managers, and/or

unappreciated by them […] known as the ‘superiority

syndrome’.” (Veiga)

53


6.7 What can be learned for practice to anticipate

culture dissonance?

6.7.1 Avoid insurmountable integration problems

In terms of selecting a compatible target, Larsson and Risberg note

that organizations tend to prefer to invest in neighboring territories or

those with which they have the closest economic, linguistic and

cultural ties (‘more like us’ tendency). While differences can lead to

greater acculturation stress and integration difficulties, cultural

differences do not necessarily result in negative outcomes. Cartwright

et al. argue that cultural differences at the national level do not have

such a negative impact as differences at the organizational level in

domestic M&As, because there is a greater awareness and

appreciation of national cultural differences and a greater tolerance for

multi-culturalism.

Larsson and Risberg (in Barmeyer) even show that M&A transactions

where companies face both corporate and national culture differences

have a higher degree of acculturation (creation of a joint corporate

culture) than domestic firms with similar corporate cultures.

The objective fact that cultural differences exist, however, does not

necessarily imply that the acquired employees will resist any post-

merger consolidation attempts.

Many investigators agree that culture dissonance is likely to be more

pronounced in cross-national M&As than in domestic ones since such

M&A deals bring together not only two firms that may have different

organizational cultures, but also two firms whose organizational

cultures are rooted in different national cultures (Duncan). Researchers

studying M&A have proposed the selection of similar partners for the

merger to avoid culture dissonance. However, many studies show that

although merging similar organizations does not in general reduce

resistance and integration problems (Liu

54


6.7.2 Be aware of potential cultural dissonance

The awareness of national and organizational culture issues is seen as

being fundamental already in the target screening phase for potential

M&A projects. An underestimation of the cultural factor in pre-M&A

phase is fatal, because the merging of companies is a merging

between different human beings. It is humans that create follow or

divert rules and structures of companies, and that make sure that

companies live, function and make benefits. It is their ideas, strategies,

thoughts and decisions that are transformed into action and they

contribute to the success or failure of a company.

For practice, Irrmann suggests that investing in the development of

intercultural communication skills, language skills and cultural

intelligence could be a more fruitful approach for managers than the

quest for cultural fit between merging organizations.

Research shows that the perception of the partner’s credibility and

trustworthiness are central success factors from the very beginning of

M&A projects, while perception is largely rooted in the interpretation of

the repeated interactions between the partners.

The importance of creating “a climate of mutual trust by anticipating

problems and discussing them early with the other company” is

reported by Paine. Mutual respect and communication is, for example,

enhanced by two-way transfer of knowledge having a

positive motivational and early acceptance effect on the employees of

both firms

(Duncan).

7. Success factors, reasons for failure and risks

55


The success factors, reasons for failure and risks presented here is

according to the topics discussed so far. Additionally, results from

direct interviews and surveys of key informants are presented.

A firm that takes over another firm makes two assumptions. The first is

that the acquiring firm can extract more value from the same assets

than the current owners. The second assumption is that the value

extracted will be more than the market price paid for the assets. The

fact that this assumption is often erroneous is the core reason why

many acquisitions fail as profit enhancing tool. Consequently, the price

premium, the realization of synergies and the strategic logic are in the

focus here.

7.1 Financial overextension and price premium

An acquisition premium is the amount the acquiring firm pays for an

acquisition that is above the pre-acquisition price of the target

company. Or in other words, it is the price pre-acquisition shareholders

would not have to pay when investing in the firm to be acquired.

In the M&A literature, the acquisition premium represents the

expectation of synergy in a corporate combination. The acquirer needs

to value the improvements when they are reasonably expected to

occur.

Warren Buffett in the Berkshire Hathaway 1982 Annual Report

summarizes the problematic in a few words:

“A too high purchase price for the stock of an excellent company can

undo the effects of a subsequent decade of favorable business

developments.”

Or, as Sirower declares in his book ‘The Synergy Trap’ in a more sloppy

way

56


“The acquisition game is best described as a game with some

distribution of payoffs and an up-front price to play the game.”

According to a KPMG study (2000), 83% of recent deals failed to deliver

shareholder value and an alarming 53% actually destroyed value.

While this study was already cited when discussing post-M&A

performance (refer to chapter 3) the more important result in this

context is that the report concludes that underperformance is the

outcome of excessive focus on “closing the deal” at the expense of

focusing on factors that will ensure its success and that the pricing

decision becomes completely detached from any synergies that may

be realizable.

Garrette in his study argues already in 2000 on the Daimler-Chrysler

deal:

“Daimler Benz is said to have acquired Chrysler in order to strengthen

its presence in North America and to enter lower segments of the

automobile market. […] This move was justified by the fact that earlier

attempts […] to expand their product lines through internal growth had

proved extremely difficult. However, […] the price paid by the

acquiring firm is such that it is unlikely that […] this acquisition will

ever become profitable.”

7.2 Realization of synergies

From a traditional synergy motive perspective managers in

acquisitions have to accomplish what shareholders cannot accomplish

on their own. This means that synergies must be realized to an amount

that lies above the price premium paid for that synergy potential. But

history shows that expectations rarely reflect realizations (Cartwright).

When one considers that the acquisition premium implies certain

requirements of performance improvements and calculate the

probability of achieving these improvements, one can predict the

57


probable losses to shareholders of acquiring firms (Sirower). One has

to recall that realized synergies are actual improvements in combined

performance above what the two firms were already expected to

accomplish independently (Cullinan).

A study by Sirower, summarized in his book, ‘The Synergy Trap’, found

that of 168 deals analyzed, roughly two-third of all companies studied

too often think they can generate synergy faster and in greater

amounts than is really possible. In the M&A literature, authors widely

agree that the most frequently encountered causes for insufficient

synergy realization are (Palmatier; Schweiger):

Synergies that is either not present or exaggerated by the buyer.

Synergies that cannot be effectively realized due to integration

difficulties

7.3 Negative synergies

While the term ‘negative synergies’ often is related to an internal firm

perspective considering integration, culture and communication

difficulties (refer to chapter 6) the outside perspective is mostly

neglected (Epstein). Questions how integration difficulties or

endangered synergy realization might impact customers and other

stakeholders arise in this context:

What is the influence on customer satisfaction and long-term

innovation capabilities when closing factories or subsidiaries or

lying off of redundant employees?

How can a firm anticipate customers’ uncertainty about future

quality, support and service and general relationship?

With which means can a firm prevent confusion of customers

through a product offering that cannot longer be overseen?

What dangers arise when channel partners are changed?

58


Critical to synergy in general is to leverage the realization potential

without additional costs. As an example, costs of managing an external

relationship to a supplier may be replaced by internal coordination

costs. Or the gains from a more complete product portfolio might be

offset by the dilution of the sales force.

Summarizing, while synergy sometimes is explained as one plus one

equals three, it seems that a much better explanation is one plus one

equals 2.1 (Sirower).

7.4 An example on the difficulties of synergy

assessment and realization

Cloodt in his studies argues that technological learning is expected to

be a key determinant in creating and sustaining a competitive

advantage for industries that are mainly knowledge driven. These

opportunities increase when a firm is exposed to new ideas based on

differences in technological capabilities between the acquiring and the

acquired firm. The unification of two related knowledge bases can

provide opportunities for synergies in future innovation and shorter

innovation lead-time while reducing redundant R&D efforts.

However, a few difficulties can rapidly be identified even with very

obvious synergy potentials:

Some degree of differentiation in technological capabilities

between the two firms may enrich the acquiring firm’s

knowledge base and create opportunities for learning. However,

technological knowledge and engineering capabilities that are

too similar to the already existing knowledge of the acquiring

company will contribute little to the post-M&A innovation

performance (James).

The challenge for companies is not just to acquire knowledge

bases but also to transfer and integrate them in order to improve

59


the post-M&A innovation performance. The integration of a

knowledge base that is of a relatively large size can disrupt

existing innovative activities and render the different integration

stages more complex, more time consuming and full of risks

(DiGuarda).As a result synergies are often overestimated while in

fact an M&A leaves fewer resources for the actual innovative

endeavor until the knowledge base is integrated.

Knowledge depreciates and loses its value over time. The rate at

which the value of knowledge depreciates is likely to vary across

industries but it is especially high in technology intensive

industries. For companies in high-tech industries even quite

recent knowledge dating a couple of years or months already

becomes less valuable or obsolete and thus this knowledge plays

a positive role only a limited period of time after an M&A has

taken place.

Concluding, a firm’s absorptive capacity for knowledge transfer and

integration and the right degree of differentiation in technological

capabilities put severe limitations onto synergy realization. The

valuation of intangible assets as knowledge and technology in the light

of synergy potential might prove to be even more difficult.

7.5 Strategic logic

‘Bad motives’ (e.g. excessive confidence, agency and hubris, external

pressure) are obvious reasons why a firm might not reach performance

targets. A prominent reason reported by Epstein for M&A failure in this

context is that the availability of target firms determines the strategy

of the acquiring company. Such illegitimate strategic logic might be

induced by a competitor’s action spreading the fear of no suitable

targets being left for an M&A deal.

60


Thus, the strategic vision of a company should clearly articulate an

M&A rationale that is centered on the creation of long-term

competitive advantage. Whether and how much synergy exists in a

particular acquisition is likely to be a function of the strategic

objectives driving a deal.

While ‘integration’ or ‘culture issues’ often are reported as the main

reason for an M&A project to fail or not to reach the required

performance, insufficient strategic logic interestingly is hardly

considered as a reason for failure (Epstein). Thus, a central question

arises here: To which extent does an insufficient strategic logic

endanger M&A success or to which extent difficulties can be attributed

to the integration problematic itself?

At first glance, rather simple questions like the following might be

straightforward to answer:

How big is the overlap in products and territories with the target

firm?

How similar are the markets between the combined firms based

on their customer groups?

How complementary are the production processes between the

combined firms based on their required resources?

However, according to Palmatier and Ghauri an acquiring firm has only

a partial knowledge of customers, products, and channels and has a

biased perspective (asymmetric information). As a result, estimation of

strategic fit and synergy potential, choice of integration level and

anticipation of negative synergies based on uncertain or even incorrect

information can subsequently cause major integration difficulties and

can indeed cultivate culture dissonance.

A study on post-M&A integration by Ravenscraft and Scherer (in Datta)

supports these findings. They conclude that, on average, acquiring

61


firms have not been able to maintain the pre-merger levels of

profitability of the targets. They argue that an acquiring firm does not

know enough about the potential of the company it is buying and

consequently can unconsciously destroy success factors of the target

firm.

7.6 Interview studies

Beside these most prominent reasons for M&A failure discussed above

Lucks in his interview studies reports various other reasons for failure

or dangers for synergy realization that were reported by management

and key employees (in no particular order):

1) Management, key people and employee departure

2) No participation of middle management during strategic

planning, due diligence and integration

3) Double burden of managers, dilution of management attention

onto the main business

4) Underestimation of acquisition (legal, advisory, due diligence)

and integration (conflict resolution, standardization, IT) costs

5) Missing internal and external dedicated people

6) No consideration of expectation of partner firm

7) No clear assignment of competencies

8) Unprofessional communication (partners, employees,

shareholders, media, customers etc.)

9) Bounded rationality (M&A being an overly complex task that

cannot be fully captured anymore)

62


8) Alternatives to mergers and acquisitions

In order to pool assets, combine resources and exploit synergies, firms

can either permanently merge their operations within a new legal

entity through an M&A project or they can choose to collaborate on

well defined and limited areas of business while retaining their

strategic and legal autonomy through forming an alliance, a co-

operation or a joint venture. Both strategies make it possible to

capture business opportunities that neither partner could pursue alone.

Alliances, co-operations and joint ventures are very different in nature.

However, they are all feasible alternatives to industry concentration

through mergers and acquisitions since they can produce some of the

effects that could also be obtained from merging partner firms. They

can be an attractive move to expand and capture valuable capabilities

without running the high risk of failure and without having to pay the

premium attached to an acquisition. These alternatives make it

possible to avoid the culture and organization shock to a certain extent

by proceeding step-by-step and by gradually adapt to the partner.

From such a perspective, they provide not only an alternative to M&A

deals but also can be a first step toward a merger during which

partners can learn about each other and uncertainty can be reduced.

Alliances, co-operations and joint ventures also share a similar set of

motives as do mergers and acquisitions projects (refer to chapter 4).

However, the literature indentifies a few additional specific motives for

such common business activities, in particular the possibility to:

63


spread costs and risks across partner firms,

collaborate with a less rigid arrangement allowing for fast

formation and break up (e.g. to react to highly volatile demand

or to react to rapid changes in product technology),

Collaborate in a project- or business-specific manner with the

option for an enduring business relationship.

Beside these evident advantages of such alternative business activities

there are also some shortcomings due to the inherent setup of those.

Any rationalization pursued with those alternatives will be limited in

scope and effectiveness because of some characteristics that

distinguish them from mergers and acquisitions:

All decisions must be made by consensus among

the partner firms.

One of the parties cannot force the other to accept any particular

solution. And even if one of the partners dominates the alliance, it

would be unwise for it to enforce too many of its own decisions

against the wishes of the partner. Such a behavior would very likely

lead to the collapse of the alliance. This ‘multiplication of decision-

making centers’ (Garrette) makes it considerably longer and more

complex (if not paralyzing) to decide on controversial issues as e.g.

innovation and product development, eliminating redundant assets,

rationalizing product lines etc.

Alliances and co-operations are temporary in

nature and must remain reversible.

By definition it has to be possible to terminate alliances without

putting both partner firms at risk. One of the basic justifications

for choosing alliances over more permanent forms of

organization is exactly that they can be undone relatively easily.

64


As a result achieving economies of scale is rather difficult

because it makes terminating the alliance practically impossible.

Risk of learning and skill/technology transfer

A study by Garrette et al. shows that a vast majority (75%) of

inter-continental alliances are formed mainly to benefit from

complementarily, while intra- European alliances, on the

contrary, predominantly seek to benefit from increased

economies of scale (84%). If one of the partners uses the

alliance or co-operation to progressively capture the knowledge

contributed by the other the initial complementarily of the

alliance is eroded away by the learning taking place between

the firms. Then, the entire ‘raison d’être’ of the partnership

disappears. As learning is usually not simultaneous and

reciprocal one of the partners becomes able to operate on its

own while the other continuously depends heavily on the

partnership.

In such cases, it is not unusual that the partner that has

succeeded in acquiring all the necessary skills terminates the

partnership while keeping the formerly common business

running on his own. Such learning phenomenon is unusual with

scale alliances since both partners have very similar skills and

little to learn from each other such that no major competencies

are transferred

Alliance fate Scale alliance

(%)

Complementary alliance

(%)

Continues with no

skill transfer

57 31

Terminated with no 22 16

65


skill transfer

Continues with skill

transfer

20 25

Taken over by one

partner

100 100

Fig. 8.1: The outcomes of scale and complementary alliance

regarding skill transfer (Garrette).

Some countries, such as the People's Republic of China and to some

extent India, require foreign companies to form joint ventures with

domestic firms in order to enter a market. This requirement often

forces technology and knowledge transfers to the domestic partner.

Summarizing, managers should consciously balance the reasons for

and against an M&A deal and consider alternatives. Beside alliances,

co-operations and joint ventures, a strategy’s objectives eventually can

be achieved by internal investments. As an example, Dickerson et al.

(in Ghauri) show that company growth through acquisition yielded a

lower rate of return than growth through internal investment.

However, starting a new business from scratch does not impose the

disadvantages of M&A projects on a firm but brings with its own

difficulties.

66


9) Reasoning of M&A activity in an early project phase

Independent of the motives for an M&A project, the acquiring company

must evaluate whether both firms are proper choices as merger

partners and the right fit to fulfill the strategic vision. No set of

questions could fully capture a phenomenon as complex as M&A.

However, as a summary, the following guideline shall represent all

merger and acquisition matters discussed throughout this work in a

condensed form to prevent managers from one-sided and poorly

thought-through decisions and common dangers putting a high risk to

the M&A project.

Without plausible response to these fundamental questions on

strategic logic and some preliminary integration matters, acquirers are

on their way to losing the acquisition game from the beginning even

before the due diligence or even the integration starts to happen:

9.1 The acquiring company’s strategy

What are your company’s competitive gaps (weaknesses,

strengths) and challenges (threats, opportunities) in a given

market?

Is your company’s strategy independent of M&A as a strategic

option and independent of acquisition candidates available on

the market?

9.2 M&A motives

67


How can a merger and acquisition support your company’s

strategy?

Which types of motive are considered: exploitation, exploration,

preservation or survival? Rational or irrational?

What is the relevance of an M&A for the implementation of the

overall strategy?

To which class of M&As does the project belong: horizontal,

vertical, conglomerate or concentric?

9.3 Strategic fit between target and acquiring firm

Does the target company improve the acquiring firm’s

competitive advantage?

Which attributes does a target company need to fit into the

strategy?

What is the degree of diversification: focus-increasing or focus-

decreasing?

9.4 Sources of synergies and price premium

What are the stand-alone expectations of acquirer and target?

What types of synergy potential exist?

Modular, reciprocal or sequential?

Complementarily or similarity?

cost, revenue, intangibles?

M&A (Fig. 9.1):

Strategic objective

Consolidate

With a

geographic

area

Extend or

add new

products,

services, or

technologies

Enter a

new

market

Vertically

integrate

Enter a

new line

business

68


Type of Synergy

Cost High Low Low Moderate Low

Revenue Low High High Low None

Market

Pow.

High Moderate Low High None

Intangible Moderate Moderate Moderat

e

Low Low

Fig. 9.1: Linking strategic objectives and synergies (Schweiger).

Value assessment:

Where will performance gains emerge in detail as a result of the

M&A?

How big are these gains?

What is the time-frame for realization? Does the value of

synergies depend on time?

Risk assessment:

What is the severity of non-achievement to M&A objectives?

What is the probability of non-achievement?

What is the degree of control and delectability to these risks?

Measurement:

How is the progression of the project measured?

How is M&A project ‘successes and ‘failure’ defined?

9.5 Integration, transformation and culture

What are the major integration necessities in the target and in

the acquiring firm?

69


Which integration efforts are required: consolidation,

standardization or coordination?

What is an appropriate level of integration to realize the

synergies defined?

Which integration scenarios do exist?

What are the milestones of the implementation plan?

Who are the key managers and employees responsible for the

implementation?

Which are the critical success factors of the target company? Are

they preserved or diminished by the pursuit strategy? Which

actions are taken to prevent destroying these success factors?

What incentives exist to foster M&A integration for acquiring and

acquired firm management and employees?

Does the target company fit the national and corporate culture of

the acquiring company?

9.6 Costs and negative synergies

How big are the efforts and investments needed for synergy

realization and integration?

What are the impacts of the M&A project on internal and external

stakeholders and on the core business?

Which strategic considerations and integration processes might

undermine synergy realization or even create negative

synergies?

Does cultural difference between target and acquiring firm foster

or hinder post- M&A integration?

What additional investments will be required to anticipate

negative synergies or resolve conflicts?

9.7 Competition’s reaction

70


Which competitors are affected by the pursuit M&A?

How will those competitors respond?

How will the response concern the M&A project’s objectives?

9.8 Alternative business collaborations

Which objectives and performance gains cannot be realized with

alternative investments?

Which risks and costs could be prevented by alternative business

collaboration?

What are the ratios between gains and risks, gains and costs for

M&A and feasible alternatives?

Dyer evaluates alternatives according to five criteria: type of synergy

potential, ratio between intangible and tangible resources, amount of

redundancy, market uncertainty, and intensity of competition for

resources

Taking into account all these matters the all-dominant questions are:

Can the acquiring firm extract more value from the target firm

than the current owners?

The value extracted will be more than the price paid for the

assets?

Picot illustrates in a qualitative and simple example how managers

should see their merger and acquisition evaluation in a summary

71


10) A CASE STUDY: HP COMPAQ MERGER DEAL

Brief Description

The following is a brief description of the two companies:

HP

It all began in the year 1938 when two electrical engineering graduates

from Stanford University called William Hewlett and David Packard

started their business in a garage in Palo Alto. In a year's time, the

partnership called Hewlett-Packard was made and by the year 1947,

HP was incorporated. The company has been prospering ever since as

its profits grew from five and half million dollars in 1951 to about 3

billion dollars in 1981. The pace of growth knew no bounds as HP's net

revenue went up to 42 billion dollars in 1997. Starting with

manufacturing audio oscillators, the company made its first computer

in the year 1966 and it was by 1972 that it introduced the concept of

personal computing by a calculator first which was further advanced

into a personal computer in the year 1980. The company is also known

for the laser-printer which it introduced in the year 1985.

Compaq

72


The company is better known as Compaq Computer Corporation. This

was company that started itself as a personal computer company in

the year 1982. It had the charm of being called the largest

manufacturers of personal computing devices worldwide. The company

was formed by two senior managers at Texas Instruments. The name

of the company had come from-"Compatibility and Quality". The

company introduced its first computer in the year 1983 after at a price

of 2995 dollars. In spite of being portable, the problem with the

computer was that it seemed to be a suitcase. Nevertheless, there

were huge commercial benefits from the computer as it sold more than

53,000 units in the first year with a revenue generation of 111 million

dollars.

Reasons for the Merger

A very simple question that arises here is that, if HP was progressing at

such a tremendous pace, what was the reason that the company had

to merge with Compaq? Carly Fiorina, who became the CEO of HP in

the year 1999, had a key role to play in the merger that took place in

2001. She was the first woman to have taken over as CEO of such a big

company and the first outsider too. She worked very efficiently as she

travelled more than 250,000 miles in the first year as a CEO. Her basic

aim was to modernize the culture of operation of HP. She laid great

emphasis on the profitable sides of the business. This shows that she

was very extravagant in her approach as a CEO. In spite of the growth

in the market value of HP's share from 54.43 to 74.48 dollars, the

company was still inefficient. This was because it could not meet the

targets due to a failure of both company and industry. HP was forced

to cut down on jobs and also be eluded from the privilege of having

Price Water House Cooper's to take care of its audit. So, even the job

of Fiorina was under threat. This meant that improvement in the

73


internal strategies of the company was not going to be sufficient for

the company's success. Ultimately, the company had to certainly plan

out something different. So, it was decided that the company would be

acquiring Compaq in a stock transaction whose net worth was 25

billion dollars. Initially, this merger was not planned. It started with a

telephonic conversation between CEO HP, Fiorina and Chairman and

CEO Compaq, Capellas. The idea behind the conversation was to

discuss on a licensing agreement but it continued as a discussion on

competitive strategy and finally a merger. It took two months for

further studies and by September, 2001, the boards of the two

companies approved of the merger. In spite of the decision coming

from the CEO of HP, the merger was strongly opposed in the company.

The two CEOs believed that the only way to fight the growing

competition in terms of prices was to have a merger. But the investors

and the other stakeholders thought that the company would never be

able to have the loyalty of the Compaq customers, if products are sold

with an HP logo on it. Other than this, there were questions on the

synchronization of the organization's members with each other. This

was because of the change in the organization culture as well. Even

though these were supposed to serious problems with respect to the

merger, the CEO of HP, Fiorina justified the same with the fact that the

merger would remove one serious competitor in the over-supplied PC

market of those days. She said that the market share of the company

is bound to increase with the merger and also the working unit would

double.

Advantages of the Merger

Even though it seemed to be advantageous to very few people in the

beginning, it was the strong determination of Fiorina that she was able

to stand by her decision. Wall Street and all her investors had gone

74


against the company lampooning her ideas with the saying that she

has made 1+1=1.5 by her extravagant ways of expansion. Fiorina had

put it this way that after the company's merger, not only would it have

a larger share in the market but also the units of production would

double. This would mean that the company would grow tremendously

in volume. Her dream of competing with the giants in the field, IBM

would also come true. She was of the view that much of the

redundancy in the two companies would decrease as the internal costs

on promotion, marketing and shipping would come down with the

merger. This would produce the slightest harm to the collection of

revenue. She used the ideas of competitive positioning to justify her

plans of the merger. She said that the merger is based on the

ideologies of consolidation and not on diversification. She could also

defend allegations against the change in the HP was. She was of the

view that the HP has always encouraged changes as it is about

innovating and taking bold steps. She said that the company requires

being consistent with creativity, improvement and modification. This

merger had the capability of providing exactly the same.

Advantages to the Shareholders

The following are the ways in which the company can be advantageous

to its shareholders:

Unique Opportunity: The position of the enterprise is bound to

better with the merger. The reason for the same was that now the

value creation would be fresh, leadership qualities would improve,

capabilities would improve and so would the sales and also the

company's strategic differentiation would be better than the existing

competitors. Other than this, one can also access the capabilities of

Compaq directly hence reducing the cost structure in becoming the

75


largest in the industry. Finally, one could also see an opportunity in

reinvesting.

Stronger Company: The profitability is bound to increase in the

enterprise, access and services sectors in high degrees. The company

can also see a better opportunity in its research and development. The

financial conditions of the company with respect to its EBIT and net

cash are also on the incremental side.

Compelling Economics : The expected accumulation in IIP gains

would be 13% in the first financial year. The company could also

conduct a better segmentation of the market to forecast its revenues

generation. This would go to as much as 2 and a half billion dollars of

annual synergy.

Ability to Execute: As there would be integration in the planning

procedures of the company, the chances of value creation would also

be huge. Along with that the experience of leading a diversified

employee structure would also be there.

Opposition to the Merger

In fact, it was only CEO Fiorina who was in favor of going with the

merger. This is a practical application of Agency problem that arises

because of change in financial strategies of the company owners and

the management. Fiorina was certain to lose her job if the merger

didn't take effect. The reason was that HP was not able to meet the

demand targets under her leadership. But the owners were against the

merger due to the following beliefs of the owners:

The new portfolio would be less preferable : The position of the

company as a larger supplier of PCs would certainly increase the

amount of risk and involve a lot of investment as well. Another

important reason in this context is that HP's prime interest in Imaging

and Printing would not exist anymore as a result diluting the interest of

76


the stockholders. In fact the company owners also feel that there

would be a lower margin and ROI

Strategic Problems would remain Unsolved : The market position

in high-end servers and services would still remain in spite of the

merger. The price of the PCS would not come down to be affordable by

all. The requisite change in material for imaging and printing also

would not exist. This merger would have no effect on the low end

servers as Dell would be there in the lead and high-end servers either

where IBM and Sun would have the lead. The company would also be

eluded from the advantages of outsourcing because of the surplus

labor it would have. So, the quality is not guaranteed to improve.

Finally, the merger would not equal IBM under any condition as

thought by Fiorina.

Huge Integrated Risks : There have been no examples of success

with such huge mergers. Generally when the market doesn't support

such mergers, don't do well as is the case here. When HP could not

manage its organization properly, integration would only add on to the

difficulties. It would be even more difficult under the conditions

because of the existing competitions between HP and Compaq. Being

prone to such risky conditions, the company would also have to vary

its costs causing greater trouble for the owner. The biggest factor of all

is that to integrate the culture existing in the two companies would be

a very difficult job.

Financial Impact : This is mostly because the market reactions are

negative. On the other hand, the position of Compaq was totally

different from HP. As the company would have a greater contribution

to the revenue and HP being diluted at the same time, the problems

are bound to develop. This would mean that drawing money from the

equity market would also be difficult for HP. In fact this might not seem

to be a very profitable merger for Compaq as well in the future.

77


The basic problem that the owners of the company had with this

merger was that it would hamper the core values of HP. They felt that

it is better to preserve wealth rather than to risk it with extravagant

risk taking. This high risk profile of Fiorina was a little unacceptable for

the owners of the company in light of its prospects.

So, as far as this merger between HP and Compaq is concerned, on

side there was this strong determination of the CEO, Fiorina and on the

other side was the strong opposition from the company owners. This

opposition continued from the market including all the investors of the

company. So, this practical Agency problem was very famous

considering the fact that it contained two of the most powerful

hardware companies in the world. There were a number of options like

Change Management, Economic wise Management, and Organizational

Management which could be considered to analyze the issue. But this

case study can be solved best by a strategy wise analysis. (HP-Compaq

merger faces stiff opposition from shareholders stock prices fall again,

2001)

Strategic Analysis of the Case

Positive Aspects

A CEO will always consider such a merger to be an occasion to take a

competitive advantage over its rivals like IBM as in this case and also

be of some interest to the shareholders as well. The following are the

strategies that are related to this merger between HP and Compaq:

1) Having an eye over shareholders' value: If one sees this merger

from the eyes of Fiorina, it would be certain that the shareholders

have a lot to gain from it. The reason for the same is the increment

in the control of the market. So, even of the conditions were not

78


suitable from the financial perspective, this truth would certainly

make a lot of profits for the company in the future.

2) Development of Markets: Two organizations get involved in

mergers as they want to expand their market both on the domestic

and the international level. Integration with a domestic company

doesn't need much effort but when a company merges

internationally as in this case, a challenging task is on head. A

thorough situation scanning is significant before putting your feet in

International arena. Here, the competitor for HP was Compaq to a

large degree, so this merger certainly required a lot of thinking.

Organizations merge with the international companies in order to set

up their brands first and let people know about what they are

capable of and also what they eye in the future. This is the reason

that after this merger the products of Compaq would also have the

logo of HP. Once the market is well-known, then HP would not have

to suffer the branding created by Compaq. They would be able to

draw all the customers of Compaq as well.

3) Propagated Efficiencies: Any company by acquiring another or by

merging makes an attempt to add to its efficiencies by increasing

the operations and also having control over it to the maximum

extent. We can see that HP would now have an increased set of

employees. The only factor is that they would have to be controlled

properly as they are of different organizational cultures.

4) Allowances to use more resources: An improvised organization

of

Monetary resources, intellectual capital and raw materials offer a

competitive advantage to the companies. When such companies

79


merge, many of the intellects come together and work towards a

common mission to excel with financial profits to the company. Here,

one can't deny the fact that even the top brains of Compaq would be

taking part in forming the strategies of the company in the future.

5) Management of risks: If we particularly take an example of this

case, HP and Compaq entering into this merger can decrease the

risk level they would have diversified business opportunities. The

options for making choice of the supply chain also increase. Now

even though HP is a pioneer in inkjet orienting, it would not have to

use the Product based Facility layout which is more expensive. It can

manage the risk of taking process based facility layout and make

things cheaper. Manufacturing and Processing can now be done in

various nations according to the cost viability as the major issue.

6) Listing potential: Even though Wall Street and all the investors of

the company are against the merger, when IPOs are offered, a

development will definitely be there because of the flourishing

earnings and turnover value which HP would be making with this

merger.

7) Necessary political regulations: When organizations take a leap

into other nations, they need to consider the different regulations in

that country which administer the policies of the place. As HP is

already a pioneer in all the countries that Compaq used to do its

business, this would not be of much difficulty for the company. The

company would only need to make certain minor regulations with

the political parties of some countries where Compaq was flourishing

more than HP.

80


8) Better Opportunities: When companies merge with another

company, later they can put up for sale as per as the needs of the

company. This could also be done partially. If HP feels that it would

not need much of warehouse space it can sell the same at increased

profits. It depends on whether the company would now be regarded

a s a make to stock or a make to order company.

9) Extra products, services, and facilities: Services get copyrights

which enhances the level of trade. Additional Warehouse services

and distribution channels offer business values. Here HP can use all

such values integrated with Compaq so as to increase its prospects.

Negative Aspects

There are a number of mergers and acquisitions that fail before they

actually start to function. In the critical phase of implementation itself,

the companies come to know that it would not be beneficial if they

continue as a merger. This can occur in this merger between HP and

Compaq due to the following reasons.

1) Conversations are not implemented: Because of unlike cultures,

ambitions and risk profiles; many of the deals are cancelled. As per as

the reactions of the owners of HP, this seems to be extremely likely.

So, motivation amongst the employees is an extremely important

consideration in this case. This requires an extra effort by the CEO,

Fiorina. This could also help her maintain her position in the company.

81


2)Legal Contemplations: Anti-competitive deals are often limited by

the rules presiding over the competition rules in a country. This leads

to out of order functioning of one company and they try to separate

from each other. A lot of unnecessary marketing failures get attached

to these conditions. If this happens in this case, then all that money

which went in publicizing the venture would go to be a waste.

Moreover, even more would be required to re-promote as a single

entity. Even the packaging where the entire inventory from Compaq

had the logo of HP would have to be re-done, thus hampering the

finance even further.

3) Compatibility problems: Every company runs on different

platforms and ideas. Compatibility problems often occur because of

synchronization issues. In IT companies such as HP and Compaq, many

problems can take place because both the companies have worked on

different strategies in the past. Now, it might not seem necessary for

the HP management to make changes as per as those from Compaq.

Thus such problems have become of greatest concern these days.

4) Fiscal catastrophes: Both the companies after signing an

agreement hope to have some return on the money they have put in to

make this merger happen and also desire profitability and turnovers. If

due to any reason, they are not able to attain that position, then they

develop a abhorrence sense towards each other and also start

charging each other for the failure.

5) Human Resource Differences: Problems as a result of cultural

dissimilarities, hospitality and hostility issues, and also other behavior

related issues can take apart the origin of the merger.

82


6) Lack of Determination: When organizations involve, they have

plans in their minds, they have a vision set; but because of a variety of

problems as mentioned above, development of the combined company

to accomplish its mission is delayed. Merged companies set the goal

and when the goal is not accomplished due to some faults of any of the

two; then both of them develop a certain degree of hatred for each

other. Also clashes can occur because of bias reactions. (William,

2008)

7) Risk management failure : Companies that are involved in

mergers and acquisitions, become over confident that they are going

to make a profit out of this decision. This can be seen as with Fiorina.

In fact she can fight the whole world for that. When their self-

confidence turns out into over-confidence then they fail. Adequate risk

management methods should be adopted which would take care of the

effects if the decision takes a downturn. These risk policies should rule

fiscal, productions, marketing, manufacturing, and inventory and HR

risks associated with the merger.

Strategic Sharing

Marketing

Hp and Compaq would now have common channels as far as their

buying is concerned. So, the benefits in this concern is that even for

those materials which were initially of high cost for HP would now be

available at a cheaper price. The end users are also likely to increase.

Now, the company can re frame its competitive strategy where the

greatest concern can be given to all time rivals IBM. The advantages of

this merger in the field of marketing can be seen in the case of shared

branding, sales and service. Even the distribution procedure is likely to

be enhanced with Compaq playing its part

83


Operations

The foremost advantage in this area is that in the location of raw

material. Even the processing style would be same making the

products and services synchronized with the ideas and also in making

a decent operational strategy. As the philosophical and mechanical

control would also be in common, the operational strategy would now

be to become the top most in the market. In this respect, the two

companies would now have co-production, design and also location of

staff. So, the operational strategy of HP would now be to use the

process based facility layout and function with the mentioned shared

values.

Technology

The technical strategy of the company can also be designed in

common now. There is a disadvantage from the perspective of the

differentiation that HP had in the field of inkjet printers but the

advantages are also plentiful. With a common product and process

technology, the technological strategy of the merged company would

promote highly economical functioning. This can be done through a

common research and development and designing team.

Buying

The buying strategy of the company would also follow a common

mechanism. Here, the raw materials, machinery, and power would be

common hence decreasing the cost once again. This can be done

through a centralized mechanism with a lead purchaser keeping

common policies in mind. Now Hp would have to think with a similar

attitude for both inkjet printers as well as personal computers.

Infrastructure

84


This is the most important part of the strategies that would be made

after the merger. The companies would have common shareholders for

providing the requisite infrastructure. The capital source, management

style, and legislation would also be in common. So, the infrastructure

strategies would have to take these things into account. This can be

done by having a common accounting system. So, the infrastructural

benefits can be made through a common accounting, legal and human

resource system. This would ensure that the investment relations of

the company would improve.

HP would now have to ensure another fact that with this merger they

would be able to prove competitors to the present target and those of

competitors like IBM as well. The degree of diversification needs to be

managed thoroughly as well. This is because; the products from the

two companies have performed exceptionally well in the past. So, the

most optimum degree of diversification is required under the context

so that the company is able to meet the demands of the customers.

This has been challenged by the owners of HP but needs to be carried

by the CEO Fiorina.

11 Conclusions

The overall conclusion from hundreds of studies is that most mergers

and acquisitions fail to achieve superior financial performance but have

a modest negative effect on the long-term performance of acquiring

firms. According to a KPMG study in 2000, 83% of deals failed to

deliver shareholder value and an alarming 53% even destroyed value.

Sirower in his book ‘The Synergy Trap’ argues: “So many mergers fail

to deliver what they promise that there should be a presumption of

failure.”

Despite decades of research, what impacts the financial performance

of firms engaging in M&A activity remains largely vague, unexplained

or full of contradicting evidence – in particular from a strategic

85


management perspective. A research stream is best characterized to

be mature when

1) A substantial number of empirical studies have been conducted.

2) These studies have generated reasonably consistent and

interpretable findings.

3) The research has led to a general consensus concerning the

nature of key relationships (Palich).

The M&A performance literature fails to satisfy the last two criteria.

That fact is troubling since no significant and generally valid success

factors for M&A deals that drive the success can be extracted.

Haspeslagh and Jemison in their studies have argued that “nothing can

be said or learned about acquisitions in general”.

It would be unfortunate if this were the only wisdom one could offer

managers gambling with shareholder resources. Altogether it seems

that managers must still suffer from an overdependence on intuition

due to missing significant results from research on M&As and the many

conflicting findings reported in the literature.

The present work uncovers two major shortcomings of most and even

today’s M&A performance studies that might reason the widely

reported vagueness and lacking evidence: methodology of the studies

and their M&A motive assumption. Regarding methodology, most

researchers have studied M&A performance on populations of deals

with little regard to the characteristics of those deals, for example

vertical vs. horizontal M&As, level of integration, size of deal, culture

concerns etc. In particular, strategic logic and insufficiencies thereof

have been widely neglected. However, context is important since

specific matters of dissimilar types of deals may not generalize very

well. As a consequence, it does not astonish that these studies could

not extract significant success factors and argue on downsides of

86


mergers and acquisitions being of value for practitioners. Concerning

motives, the vast majority of studies assume that M&A deals must

improve returns to shareholders. However, this ignores many other

‘legitimate’ and ‘illegitimate’ motives for M&A activities beside synergy

realization and that managerial actions could be in the best interest of

the firm and still may not result in improved firm value from that

transaction.

Based on the deficiencies of performance studies on generally valid

strategic success factors, the present work offers then a more

complete overview on M&A motives in an early project stage reviewing

the research literature and consultant surveys and incorporating

expert interviews and manager surveys. The broad set of rational and

irrational motivations presented, first, allows a much more subtle

assessment of post-

M&A firm performance, second, simplifies a sound review of strategic

logic and reasoning for M&A activity and, third, opens a much broader

view on upcoming integration and transformation difficulties like

negative synergies and culture concerns. A framework is presented

then to assess an M&A project and its characteristics on an individual

basis to increase the likelihood of success. No guide or checklist could

fully capture a phenomenon as complex as M&As since they involve

the interaction of a large number of target and acquiring firm

variables. However, the sporadic nature of M&As and their dissimilarity

from mangers’ regular experience make a condensed framework as

presented throughout this work a valuable tool that shall prevent

managers from one sided and poorly thought-through decisions and

common dangers putting a high risk to the M&A project and the

acquiring firm. Without plausible response to fundamental questions on

strategic logic and some preliminary integration matters, acquirers are

on their way to lose the acquisition game from the beginning even

87


before the due diligence or even the integration starts to happen. It is

not that mergers and acquisitions cannot succeed - but there are many

barriers to be overcome and pitfalls to be avoided:

A firm that takes over another firm makes two assumptions. The first is

that the acquiring firm can extract more value from the same assets

than the current owners. The second assumption is that the value

extracted will be more than the price paid for the assets.

The fact that these assumptions are often incorrect is the core reason

why many merger and acquisition projects fail as profit enhancing tool.

Insufficient synergy realization is mainly caused by synergies that are

either not present or exaggerated by the buyer, or, by synergies that

cannot be effectively realized due to integration difficulties. A study by

Sirower found that of 168 deals analyzed, roughly twothird of all

companies studied too often think they can generate synergy faster, in

greater amounts and with less additional costs than is really possible.

In particular, management fails to think through integration and

synergy realization at the very beginning of an M&A project having no

detailed conception and action plan on how value should be generated.

Independent of the underlying motives for an M&A project, during post

merger integration many different matters must be carefully blended

such as for example different strategies, brands, product portfolios,

production processes, knowledge and technology, pricing policy,

support functions, sourcing and distribution partners, administrative

policies and processes including the management of human resources,

technical operations, marketing activities and customer relationships.

Depending on the level of integration such a blending imposes many

difficulties and pitfalls for synergy realization and for reaching other

M&A objectives.

Formal considerations in a pre-M&A phase on the other hand still begin

and end far too often with the analysis of financial indices only instead

88


of reviewing also strategic logic of target firm selection, valuation of

synergy potential and detailed planning of synergy realization,

anticipation of negative synergies, considerations of additional human

and monetary resources required for implementation, knowhow

management, assessment of organizational fit between target and

acquiring firm, preservation of the target firm’s success factors, the

ability to merge two organizational or national cultures and the

consideration of feasible alternative business collaborations beside

M&A.

Literature

Agrawal A., Jaffe J. F. 2000. The post - merger performance puzzle.

Advances in Mergers and Acquisitions. Vol. 1: 7-41.

Angwin D. 2004. Speed in M&A Integration: The first 100 Days.

European Management Journal. Vol. 22, No. 4: 418-430.

89


Angwin D. 2007. Motive archetypes in mergers and acquisitions (M&A):

The implications of a configurationally approach to performance.


Barmeyer C., Mayrhofer U. 2008. The contribution of intercultural

management to the success of international mergers and acquisitions:

An analysis of the EADS group. International Business Review.

Article in press. Berkovitch E., Manayanan M. P. 1993. Motives for

Takeovers: An Empirical Investigation. The Journal of Financial and

Quantitative Analysis. Vol. 28, No. 3: 347-362.

Cartwright S., Price F. 2003. Managerial preferences in internation

merger and acquisition partners revisited: how are they influenced?.


Cloodt M., Hagedoorn J., Van Kranenburg H. 2006. Mergers and

acquisitions: Their effect on the innovative performance of companies

in high-tech industries.

Research Policy 35: 642-654.

Cullinan G.,Le Roux J.-M., Weddigen R.-M. 2004. Drum prüfe, wer sich

wig bidet.

90

the fundamentals of strategic logic and integration for merger and acquisition projects

Documents

small mergers mergers

larger mergers mergers

large merger

project guide

smaller mergers

integration planning

integration problems

project report