A merger involves joining two companies to form one new company. On the other hand, an acquisition is the term referring to when one company buys or takes over another company. In acquisitions, no new company is formed. Therefore, mergers and acquisitions are simply consolidation of firms. Most of the past mergers and acquisitions have ended up unsuccessful. This is not solely because one single problem, the failures arise from different factors such as the strategies adopted by the firms or an unfavorable business environment. This has led to most scholars and business analysts such as Porte, Lorenz and Kitchin to believe that mergers and acquisitions are a suicidal move for any ambitious company. A failed merger or acquisition is one where the objective of the acquisition or merger is not attained. Furthermore, a failed merger is one where operating results become poorer by the day rather than improve which in turn hurts shareholders.
Reasons why mergers and acquisitions of companies fail
Failed mergers in the past have resulted in both associated companies collapsing completely. Others decided to rescind the mergers while others ended on sad notes, like the death of the masterminding executives behind the acquisitions and mergers. There are many reasons why acquisitions and mergers fail. The most common reason is that one or both companies could be having flawed corporate strategies. Corporate companies must formulate realistic and compatible strategies that would lead to good results. Both firms seeking to enter a merger or to acquire must formulate strategies that will favor its operations. However, sometimes these companies set wrong strategies when entering a merger. It could be either companies or just one. Sometimes the problem arises when the companies in question have different strategies that cannot be used concurrently. Therefore, to ensure the merger or acquisition does not fail, the companies involved must analyze their strategies to ensure that they are realistic and are compatible.
Mergers also fail because financially unstable companies come together to form a big desperate company. When a company is experiencing any kind of problems, be they financial, managerial or even business, it should not seek to acquire or merger because this does not solve the problem. When two desperate companies come together, the problem becomes larger and tougher to solve. This creates instability and as the problems get out of hand, the merger collapses. Mergers that are formed by desperate companies are likely to end in at least one company collapsing.
At times mergers do not work because at the time of formation, it was an impulse sale or buy where the board had no option but enter a merger or acquisition. This implies that the merger was unplanned for and that there were no pre-merger strategies formulated on how the merger will operate. This causes operation in the newly formed company difficulties in management and at times finance. Cases of management disputes and financial misappropriation arise because of the impulse changes at the time of the merger. If a merger or acquisition is to be successful, the board of the respective companies must plan on how the merger will be run. Impulse sales and buys are a big risk and can only lead to failure.
If the executive officers of either or one company mislead the shareholders and the board concerning the company, the merger is less likely to succeed. The shareholders and board of the companies involved plan and make decisions based on what their CEOs say. If the CEO gives false information about the financial situation of the company or any other issue such as the bill of goods, the board will have been duped into making a wrong decision to merger. Therefore, CEOs of the respective companies must give accurate information to the boards and shareholders before they make a decision on whether to the merger with or acquire another company.
When a company acquires another, it should have strong and effective corporate governance. At times mergers fail simply because the mode of governance is below required standards. The company should seek to hire competent and experienced leaders and establish strong governance. This will help at a time when challenges are experienced after an acquisition or merger. The system of corporate governance in place determines the success or failure of a merger because it is the guide on what is to be done in the organization. Furthermore, the merger or acquisition could fail because of the management team. If a team of managers is inexperienced at acquisitions and mergers, it would not know how to handle the situation. In case management of one or both companies is inexperienced in that field, it may be difficult to sustain the merger. Therefore, before a merger or acquisition, the management team must be trained and be well informed on how to manage a company after it is acquired or merges. Furthermore, the corporate governance must be revised to meet the required standards.
An unsuccessful merger or acquisition could be as a result of flawed assumptions when calculating synergies. Mergers and acquisitions must be conducted in strictly accurate and well calculated moves. There must be no assumptions when calculating synergies because it flaws the whole process. The companies must also devise an optimal strategy for integration of the companies after the merger. A good integration strategy helps the companies integrate into one entity without causing disturbances within. However, if the strategy is not well formulated or if it is not formulated altogether, chances are the merger will be unsuccessful due to the lack of integration.
Honesty is an important aspect in mergers and acquisitions. Each company involved in this process must give a true picture of its financial, business and management situation. When one or both companies give half truths and the other company believes, there are likely to be big disappointments in store. Without transparency, the merger may break down even before its objectives are attained. Finally, when an acquisition or merger takes place and employees of one company are fully replaced, failure may arise. Usually, after a merger, organizational culture changes and even when employee retention agreements expire, employees are replaced. This poses a big risk because the merger can collapse due to the loss of important employees and at times cultural misfits.
Reasons why board of directors still continue to take over firms
For the above reasons, the probability of a merger or acquisition failing is so high that any risk averse manager would not entertain the idea of mergers and acquisitions. Despite all those risks and challenges, boards of directors of many companies around the world find mergers and acquisitions a very lucrative business opportunity for their companies. This is because of the benefits that can accrue from a merger or acquisition of it is successful. Therefore the boards take the risk hoping that the whole decision turns out successful. There are many advantages of mergers as well as acquisitions.
When a company acquires or merges, it can generate extra value by utilizing assets and financial resources from the partners company to support the development and growth of the company. When the board wants to increase production and quality, or improve distribution facilities, they would find it easier and cheaper to merge or acquire another company than to build one. These companies seek other profitable businesses with huge unused production capacity to buy or merge with at reasonable costs. These acquisitions are financially beneficial in the long run because they are an avenue to increasing production, reducing costs and raising profitability of the company.
Mergers and acquisitions are lucrative to most boards of directors because of they help reduce overhead and overall costs of doing business. This is mainly because of sharing marketing budgets and increasing the company’s purchasing power. These developments, especially if the merger or acquisition involves a rival company, reduce competition. Furthermore, the company will be able to buy new property, products and services. It is easily achievable and less costly compared to building or developing another subsidiary.
Mergers and acquisitions yield immediate extra knowledge and skills from the employees of the partner company. This improves the general intelligence of the labor force in the business. Many companies seek to merge with or acquire businesses with high qualities in order to complement their own qualities and create a powerful business. Furthermore, high quality systems and management processes benefit buying organizations. Therefore, acquiring a business or merging with another provides an opportunity to optimally utilize their good attributes and qualities with the aim of improving its own.
Mergers and acquisitions can be used by a company as a way of growing the company when it is underperforming. At times, the business faces so many challenges to growth. Such companies opt to use cheaper and simpler means by buying existing companies rather than build a new one. In the case of mergers, the company can use the assets and financial resources of the partners company which is actually an advantage for both companies.
After mergers are formed, the new company has more systems and channels of distribution than when each company operated independently. This is beneficial because the company can then use the available systems and channels for its own offers to increase its client base and access a wider section of the market. Distribution channels of the partner company can also be use to distribute the products and services. This will diversify the company’s distribution channels and market.
Synergy miscalculation is one of the reasons why mergers and acquisitions fail. However, if the management teams get the aspect of synergy correct, the company can benefit significantly. After a merger, the company has high cost efficiency and performance. The company also has greater negotiation power than when it was separate. There are also economies of scale in production. These are the crucial benefits obtained from mergers and acquisitions. Boards of directors find it realistic to take the risk of acquiring or merging with another company then realize all these benefits in the long run. The merger or acquisition is fruitful if it involves companies in one location or sector because it promotes efficiency in resource combinations, cost minimization and revenue increase.
Examples of successful and unsuccessful mergers and acquisitions
There are companies that have acquired or merged with other companies and successfully achieved their objectives. This is because these companies adhered to all requirements when merging or acquiring and were under strong leadership. An example of a successful is the merger between Disney and Pixar. This is one of the most successful mergers in business history. Walt Disney and Pixar teamed up to form a formidable unit in the cartoon industry. All of Pixar’s movies had previously been produced by Disney. However, after the movie “Cars” was released, the companies announced a merger. They would proceed to collaborate in their future activities. Since then, the merger has released many movies such as “Up”, “Bolt” and “WALL-E”.
Pixar has benefited so much from the merger to the extent that it plans to release two films yearly. This is because of Disney’s expert advice in terms of merchandising, marketing plugs and advertisements. Disney is the leading marketer of children films. This was displayed in the premerger film, “Cars”, which was treated as a Disney movie. The movie is one of the top sellers of Pixar.
Another successful merger was the one between XM radio and Sirius on 29th July 2008. This was a merger between two rival satellite radio provider companies. XM Satellite and Sirius satellite Radios ended their rivalry and joined forces. Even though the merger had been announced a year earlier in February 2007, there had been delays because of minor problems. The two companies were given two licenses by the FCC on the condition that both holders of the licenses would not gain control over each other.
After the paperwork was filed by both companies, FCC approved the merger. Although it is too soon to tell whether the merger between the satellite radio providers is successful in the long run, one can conclude that the merger is successful so far. This is because of the numerous big names that the merger has managed to add to its roster such as Martha Stewart, Oprah and Howard. The companies have also had the foresight to work as a unit such a market environment.
There are also many unsuccessful mergers. One such high profile acquisition is the one where National Semiconductor acquired Cyrix. To many observers, his was a sensible acquisition because National Semiconductor wanted to use Cyrix’s technology in micro processing to achieve its vision strategy. Cyrix wanted to utilize National’s technology in manufacturing to gain competitive advantage over Intel. However, the merger was ill fated because of several reasons. Both companies had problems. National Semiconductor was flawed even before the merger. Its market for Cyrix produced products did not materialize.
National Semiconductors did not consider what implications on its operating results came along with the head on competition with Intel. After Cyrix designed products were manufactured in National’s fabs, the performance of the chips was below the expected levels. Furthermore, National Semiconductors’ had a heavy handed integration strategy. Cyrix had an incompatible culture to that of National Semiconductors. A majority of Cyrix’s senior engineers quit their jobs after the expiry of the retention agreements. This had very devastating implications on National Semiconductor. The operation outcomes deteriorated immediately after the merger. This poor performance went on until National sold most of the ownership rights of Cyrix. The company was said to have incurred huge losses amounting to over one billion dollars in a short duration of a year and a half. This was in form of write offs and losses. National Semiconductors recovered a year and a half later.
Therefore, mergers and acquisitions are a lucrative business opportunity for big companies seeking to expand their productivity and attain their objectives. Mergers and acquisitions are beneficial hence the continued interest by company directors to merge or acquire other companies. This is because they help rescue underperforming businesses and reduce competition. They also reduce costs; promote economies of scale, growth and diversification of a company’s products. More so, mergers and acquisition are important because they increase market size and share for companies, allow the company to access assets and finance easily. It also adds quality, knowledge, skills and business intelligence to the company. The management of companies that intend to acquire or merge with other companies must assess the benefits and risks of the potential merger before making a decision. Most of the mergers formed usually fail because of management, financial, strategic and transparency issues. Some of the successful mergers in history include the merger between Pixar and Disney and the merger between XM radio and Sirius. Failed mergers and acquisitions include the acquisition of Cyrix by National Semiconductor.
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