Mergers and Acquisitions Are the Key to an Organisations Strategic Development of Knowledge - Assignment Example

KNOWLEDGE REQUIREMENTS IN MERGERS AND ACQUISITIONS Module code: Module title: Question answered: Tutor: Enrollment number: Date of submission: Mergers and acquisitions are the key to an organisations strategic development of knowledge. Knowledge acquisition is what drives organisations to carry out these activities. Critically evaluate this statement, using academic literature and current business examples. DePamphilis, (2009) defines a merger as the occurrence where two legal firms come together, in a bid to increase profits, combine to form a new legal entity. This way, the two old ones become one. The author describes acquisition as the process where a firm/company dissolves into another one. In this process, the target company disappears, leading to the formation of a new, stronger company with more shares. Fowler and Schnierderjans, (1989) says that though, the difference between the two terms has gradually become less relevant. Further on, it is apparent that most decisions in business organizations are relatively straightforward to make. The most complex involves acquisitions and mergers. Knowledge acquisition is simply the gathering of facts and logistics involved in the whole process to get ideas on how to go about the process. It is also known as due diligence that requires research or investigation of potential investments. It entails the caution a reasonable management team should use before entering into binding agreements about such sensitive issues as M&A. As such, it is important to be knowledgeable and employ expertise in carrying out these important functions of management. The Merger and Acquisition (M & A) concept has become a household one. Many entrepreneurs use this strategy as a means to value creation through the combining of energies (synergy). Due to the compound nature of the processes involved in the M& A concept, it is, therefore, important that the parties involved acquaint themselves with the types of mergers and acquisitions, the implications of the steps taken, and the possible long-term effects to the running of the business. Being a rigorous legal process, it is of utmost value to take the time to gain knowledge about it. This essay looks into the logistics, the efficacy, the value creation and the prestige derived from the process. It will delve further into finding answers for questions such as why mergers? Why acquisitions? What are the implications of the bold steps taken by the management? Why take the risk when there are many options to value creation? Do Mergers and Acquisitions always succeed? What are some of the situations that lead to either the success or the failure of M&As? Ultimately, the essay will focus on the knowledge that needs to be acquired to get viable results from the mergers and acquisitions. It is imperative to comprehend the types of alliances and the risks involved in each in to understand the concept better. There are vertical mergers that involve the combining of two firms that are in the same line of production. These are along the chain of value. For instance, a supplier can decide to merge with the producer/manufacturer so as to create a competitive advantage over other similar manufacturers. For example, X, a manufacturer, may choose to combine with Y, a supplier of their goods, to compete with efficacy. Firms that merge to engage the market with the same products are called Horizontal mergers. Mobil, an oil supply company may merge with Universal, a supplier of gas products, to offer related products and increase their market share. Conglomerates involve the merging of two different markets. They are meant to chart a way forward for business growth due to the wide fluctuations in the market. For instance, a publishing house merges with a digital marketing company to explore new ways of doing business with efficacy. Before mergers form, several factors need consideration. There are many reasons for creating alliances. This reasons, however, does not mean that the mergers are bound to be successful. Several other factors come into play that determines their success. Off with the reasons first, mergers happen to grow the companies to a world-class level. In merging, the companies look for cutting down costs, spreading of risks and creation of synergy, Evans, (2002, 59-60). Mergers and acquisitions are flexible and run smoothly and inexpensively. To be able to borrow assets from lenders, companies take the risk of merging and acquiring to get a bigger asset base. Mergers tend to dominate the market because they have a better competitive advantage and also employ the economies of scale, Holson, (2000). Different companies tend to have different abilities, talents, and skills in their greatest assets, the workforce. In mergers, such skills are pooled together to leverage a stronger base for the company’s operations. The careful evaluation of the reasons for M& A shows that it is a risk-taking affair. There could be grounds for the success or the failure of these developments. The reasons for the success include effective leadership and diligence on approaching both hard and easy issues. Leadership entails making these hard decisions that require critical knowledge of problems and risks involved. They go the way of M&A with an adequate knowledge that the results can be favorable to the success of the business or disastrous, leading to its collapse. Proper management of the M&A team is a significant factor in the success of the new entities. Active management involves the prior planning for a combined team from the two different entities. This observation is according to Charman and Carrey (2000). Knowledge requires that in the face of such sensitive issues as M&A, there be timely and extensive communications to the involved parties. It is not only success that arises with this concept. Unless adequate research is carried out, the management is bound to lose out on some aspects. As such, company management should be open minded in approaching this complex issue. Several reasons lead to the failure. Firstly, some managers follow the trend with unrealistic expectations of the benefits derived from such a development. When the enterprise fails to meet their expectations, they fail to approach the reasons and visions of the establishment leading to the inevitable collapse. That is why there is need to acquire knowledge on the expectations, especially on being open minded. Secondly, with the coming together of two entities, there is a tendency to lose out on the talents, skills, and abilities in the staff (Mergers and Acquisitions concerning social, ethical and HR, journal). Without this knowledge, it is practically impossible to succeed without considering the input of the two kinds of staff coming together and pooling energies towards a common goal. Thirdly, poor strategies that were constructed hastily with minimal planning and amateur execution largely contribute to the failure of M&A. Micro entities come together with their way of running affairs. Hence, it is of great value if the new management would put deliberate effort towards unifying the bodies to become a macro entity. As such a lot of knowledge comes in handy in learning the ways of running the business from each other rather than learn in the middle of it. In the face of this, it is necessary that culture and identity of the merging companies be in check. Failure to research on how and when the other company carries out their activity means that there will be culture clashes experienced in the course of running the new corporation. Such confrontations, if not identified and dealt with at the initial stages, will bring disintegration. Fourthly, there could be an underestimation of costs of transition. When the two companies fail to acquire enough knowledge on the legal process, it is possible to have a financial drain at the execution stage. O'Reilly and Pfeffer (2000), explain that financial strain is one of the most efficient causes of failure in M&A, more so where the transition costs escaped the attention of the management. In such a development, the management tends to shift focus from the core mission of the merger. If they happen to run the business as individual entities, the company cannot remain on its feet. When imminent failure is visible, management teams have defensive tendencies to motivate their intentions. Instead of acknowledging that the firm is going down the drain and that something needs be done to salvage the situation, they show the reasons why they are right and the other team is wrong. Without the use of synergy or rather a very high degree of the same, the business becomes as good as non-existent. Many reasons have been drafted to explain the increasing rate of failure in acquisitions. However, much of it lies in the lack of necessary knowledge on the side of the management. The inability to research the available acquisition opportunities leads to disparities especially if the two companies do not check on their compatibility and complementarity. Mercer Management Consulting and Business Week conducted a survey between 1990-1995. The research involved 150 large mergers. More than half of the mergers were found to erode the shareholder returns. Lajoux and Weston (1998) say that the main reason for this was the inadequate knowledge and diligence by the buyers. The failure to research effectively on target firms led to the deficiency of winning strategies and unrealistic expectations and plans. Having looked at the failures of mergers, and acquisitions, it is imperative; therefore, that adequate knowledge on target companies and the needs of the market is necessary. Christina Oberg (2016) acknowledges that from research, there is indeed a minimum amount of time spent on acquiring knowledge regarding mergers and acquisitions combined. Acquisitions, for the most part, are viewed as a way of reaching new trends in transaction-based transfers between companies, Allen et. Al ( 2004). A case study of a Taiwan company is a classic demonstration. In 2005, BenQ acquired Siemens mobile phones division, a collapsing company. After the acquisition, they renamed the company BenQ-Siemens. However, due to inadequate knowledge, this happened to be a grave mistake. The two firms were not compatible. BenQ did not take their time to study the culture and communication patterns of their target company. Alexander, (2008) is of the idea that the incompatibility uncovered after a few months of operation made it impossible to create synergy and value. The management needs to come up with clear objectives at the implementation and integration process. Due diligence should prevail at the execution stage. Due diligence entails the acquisition of knowledge on the employees, litigation, research, insurance, taxation and the target market size. Failure shows its ugly teeth to those that fail at this stage. A classic household example is the digital marketing company eBay that bought the social website Skype in 2005 at 2.6 billion U.S dollars. Four years later, however, the merger was to fail, and eBay ended up selling the company for 1.9 billion U.S dollars. According to PC world (2009), it was the inability to integrate the two companies' technological systems that resulted in the collapse of the merger. The acquiring company, eBay, failed to conduct necessary research on the modes of operation of the target firm. Skype was all for democracy of voice while eBay was conservative, PC World (2009). The four years of their "marriage" was short due to the disparities in which the two entities operated. Daimler-Benz and Chrysler, two automotive companies, merged with unrealistic expectations. Seemingly, none of them carried out enough research on what to expect in a merger. If they did, it did them no good. The managers felt that within a period of five years, the merger would have done so well to be among the top three automotive companies globally. This dream was never to be. The principle reasons according to Dartmouth (2002), were mismanagement, firm cultural clashes and difference in market segments. When this issues arose, some management from the Chrysler side withdrew. Others were removed and could not carry out control efficiently. The two brands were essentially different, though they were previously competitors. Clashes were not only on the brands but among the employees. Conflicting people can not achieve satisfactory results, and that is one of the main reasons what was meant to be a world class merger failed miserably. KPMG, (1999) in a survey found that more than 50% of all mergers and acquisitions never succeed. Such mergers did not produce any business benefits to the shareholders. Feldman and Pratt (1999) say that a study of roughly 150 deals valued at $500 million, half or more devastated the shareholders. It is not the big companies that fail only; some small scale companies have also failed miserably in a bid to expand geographically and leverage their asset base. The reason being, most use their property in the implementation of hastily made decisions. Such companies could not survive the waves of change in business seasons if they did not adequately prepare for the same. Though still surviving, one of the largest mergers in the UK, Kraft, and Cadbury, was almost marred by inconsistencies in the way the process went on. The "successful" merger was, however, not without any grave consequences. The merger led to the closure of Cadbury's Somerdale factory resulting in the loss of about 700 jobs (UK government, 2009). In a statement in 2010, the government issued a publication deeming the merger process irresponsible and unwise. A company of Kraft's stature ought to have acted more maturely (UK, 2010a). From the preceding, Kraft seemed an incompetent company. It was in a rush to reap short-term benefits from Cadbury. It is from this light that the government took to the press to discredit one of its largest food firms, Kraft for what the government allegedly called acting in an uninformed manner. Another large company of global interest that failed drastically was the merger between the Bank of America and Merrylin Lynch. Cuomo (2009) states that the failure was just due to the oversight on the side of the bank towards human assets in the merger. The two companies did not integrate efficiently because the two parties did not communicate plans to do with leadership and organization with honesty in the initial stages of the merging process. Rather than focus on the interests of the business itself, the Bank of America fell to pressure from the government and failed to follow the due process. Threats from the government it would remove the board of management if the failed to take the merger to completion. Merrylin operated unethically and was on the brink of dissolution when the merger started to its conclusion. Furthermore, the firm had no other prospective buyers. Cuomo (2009) further states that the companies contracted to determine a fair price, JC Flowers audited with the assumptions previously made by Bank of America, which were wrong in the first place. The results were that the bank accrued losses that had not appeared during the whole process. It is clearly evident, from the examples provided above, that it is important to acquire prior knowledge of target industries/firms in a bid to merge or take over other companies. Due diligence is a process that ought to be adhered to with a lot of caution because failure to integrate or be compatible could take the aspiring company to a critical stage of collapse. The examples given above are classic illustrations of what inadequate research on the practice of business, the management of human capital and the monetary reflections of target firms can do, Beloit and Gauvreau (2004). Formerly flourishing businesses have reduced to shadows of their former selves by the simple act of overlooking potential loopholes. Though companies merge with the intention of having a competitive advantage, some are blinded by prospects of unrealistic financial margins, thereby forgetting the likelihood of reversal of events where the two companies would fail to be compatible. The lack of knowledge is therefore what has made many large and global businesses to go down the drain. The nature of the knowledge that should be acquired before the merging process varies from firm to firm and also depending on what brands they trade. Such knowledge ranges from simple things such as what brands the target firm intends to keep to detailed information on how the company fares in the stock market and the reasons why they perform the way they do. Matthew et al. (2011) states in the acquisition of knowledge, it is important to know the key players that the target company intends to keep, should the merger materialize. This prior knowledge, according to them, is because it is more likely to gain better financial margins than with the whole group of staff who turn out to be a burden to the merged entity. The knowledge on documentation, financing and the legal process followed are strategic organizational checks that should be put in place to ensure a successful transition from the traditional bi-entity to a single legal entity. Epstein (2005) opines that it is advisable that a company hires the services of professional financial advisors to acquire the desirable knowledge on mergers and acquisitions. More often than not, especially with the modern business age, it is not unlikely to find a company merging with another not because of its products, but for the talents and skills, state Edmonds and Bao, (2007). In such instances, the products are done away with as soon as the merger is complete, but the services are retained to give the new entity a new face. Such a merger has recently been called “Acqui-hire," according to Coyle and Polsky,( 2012). Even though there lies much to learn, what drives most companies to acquire or merge is the financial question. Even though most mergers have been known to fail, many ones have succeeded provided the companies followed the right channels and communicated effectively. Mergers and acquisitions are complex business entities whose integration should have a critical evaluation, failure to which the company fails drastically. The case studies from the companies discussed above is a clear indicator of the many loopholes that are left when the company fails to gather/acquire enough knowledge on what they expect to achieve by the end of the merging process. Some of the challenges and inconsistencies associated with these new trends are overly high expectations that do not match the effort put towards realizing them and incompatibility with the dual operating scales. This situation, however, can be changed to positivity by seeking to know the finer details appertaining to the management of the large business ventures. It is indeed true that the success or failure of mergers and acquisitions is dependent on by the amount of time invested in seeking knowledge and applying due diligence in the whole process. All the materials agree that without obtaining knowledge on the process of M&A, the resultant entities are bound to fail. The internet and text references agree that though there are success stories in the mergers and take overs globally, the history of this development is laced with failure stories. Fingers are pointed at erratic process of knowledge acquisition, of course without advising on how the process should have been carried out. If a company would be motivated to merge with another one, it should be out of clear motives and informed decisions that will not lead to regrets in the course of operation. Those entities that have succeeded are not better placed or are candidates of luck. What they do is stretch themselves beyond limit, making sure no stone remains unturned in the bid to increasing their impact at the expense of their competitors. Reference List Evans, P., P.Barsoux, and V. Pucik (2002) Global HRM Challenge (London: McGraw-Hill); (2001) "The Great Mergers Wave Breaks," The Economist. Alexander, M., & Korine, H. (2008, December). When you shouldn't go global, Harvard Business Review. Kapner, S., (2002). Banking Mergers Gain Momentum in Europe.The New York Times. Holson, L., (2000). Whiz Kid: Young Deal Maker is a Force Behind a Company's Growth. The New York Times on the Web, June 28. Randall, S., and Susan, E., (2000) School of Management and Labour Relations, Rutgers University, New Brunswick, NJ, USA. http://www.mergersandacquisitions.in/merger-and-acquisition-in-india.htm [7] Charman, S., Carey, D., (2000) A CEO Roundtable on Making Mergers Succeed," Harvard Business Review. Charman, S., Hamel, S., and Doz (2014).Two ethical issues in mergers and acquisitions, Patricia H., Journal of Business Ethics, January/February 1988, Volume 7. Lajoux, A.R. and J. F. Weston (1998). Do deals deliver on postmerger performance? Mergers and Acquisitions. Christina Öberg, (2016), Acquisitions and Open Innovation – A Literature Review and Extension, in Yaakov Weber, Shlomo Y. Tara Mergers and Acquisitions, Entrepreneurship and Innovation (Technology, Innovation, Entrepreneurship and Competitive Strategy, Volume 15) Emerald Group Publishing Limited. http://www.pcworld.com/article/171267/skype_ebay_divorce_what_went_wrong. Last accessed on 22nd March 2017. Cuomo, Andrew. (2009). Attorney General of NY, – Bank of America- Merrill Lynch Merger Investigation – Letter to Christopher Dodd. http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1939&context=fac_pubs last retrieved on 23rd March 2017. Meacham, M., Van Den , D., Jean, C., Poppe, H., Harding, D., Repeatable M&A in Consumer Goods. Transaction Advisors. ISBN 2329-9134. Epstein, M. J., 2005. The determinants and evaluation of merger success. Business Horizons. Beloit, A., and Gauvreau, C., 2004. Factors influencing project success: the impact of human resource management. International Journal of Project Management, 22 Bao, J., and Edmonds, A., 2007. How Should Acquirers Select Advisors? Persistence in Investment Bank Performance. EFA 2007 Ljubljana Meetings Paper. Available at SSRN: http://ssrn.com/abstract=952935 [Accessed 23 March 2017]. Allen, L., Jagtiani, J., Peristiani, S., and Saunders, A., 2004. The Role of Bank Advisors in Mergers and Acquisitions. Journal of Money, Credit & Banking Read More