Economic irregularities have led organizations to rethink their strategy regarding mega-mergers. The question that each international business organization is asking itself is whether to merge or not to merge. Mega mergers are losing its spark and constantly fading as the time is passing by. For over half a decade mega-mergers have become rare due to which organizations are forced to rethink their strategy and tactics regarding mergers. As the success of international business organizations depends highly on this particular strategy, organizations now have to chose their own path i.e. whether to bear the burden of negotiations and integration or to find alternatives in order to enhance their growth potentials (Hopkins, 2002).
The purpose of this report is to critically examine the trends in mega mergers along with the critical evaluations of the arguments of pro-mergers and anti-mergers schools. In addition, the report would also focus on providing insights regarding global mega mergers that the organization should or should not consider while establishing their policies.
Mega Trends in International Business Practice
Mega trends are the major trends that could help an organization to reshape the landscape of economic opportunities in such a way that the organization could take optimum advantage in order to rearrange the competitive environment (Elfakhani, Ghantous, & Baalbaki, 2003). Although organizations have taken advantage of mega trends in earlier years and decades but due to high competition in recent years, taking advantage of such trends have become quite difficult. Each international business organization wants to be a winner rather than being a loser. Organizations are thrusting their way into the market to enhance their growth and ability to compete. In order to do so, organizations are focusing more on embracing technology and are looking for talent everywhere (Hopkins, 2002). This indicates that organizations are looking outwards and are navigating all possible policies that could help them in creating global workforce.
One of the major trends in international business practice includes the mega mergers. Organizations have considered mergers as the most feasible policy or strategy to enhance their growth and to cater the needs of the customers outside the local market. Moreover, organizations feel that the advantages are more in comparison to the disadvantages (Hoenig, 1999). The wave of mega mergers in recent years is quite different from earlier ones due to its strategic purpose rather than just the size. With the help of such mega mergers, organizations are aiming to make the organization more competitive in the marketplace and to achieve greater market share by integrating some critical technologies in the processes (Davidson, 2003).
Phases of Mergers:
According to the research report by A.T. Kearney all mergers and consolidations regardless of nature and industry follow a distinctive trend or pattern which looks like a S-shaped curve and have four different phases namely; opening, accumulation, focus, and alliance. These four phases are decided on the basis of the industry concentration and the condition of the overall market as illustrated in the image below:
(A.T. Kearney, 2001)
In the first phase the industry consists of companies with different sizes and the three main suppliers holds around 10 to 30 percent of the overall industry. Airlines industry, along with utilities and banking industry are examples of this phase. Next comes the phase of accumulation in which the overall fragmentation of the market tends to decrease and the companies start considering about the size. Growing market facilitates the process of cost reduction with the help of the economies of scale and the hostile takeover is avoided with the help of the big size. The duration of this phase is normally for 5 years till the three main suppliers are able to capture around 30 to 45 percent of the overall industry. One of the main examples of this phase is that of breweries and food services industry. After the accumulation phases the three main organizations in the industry looks for further strengthening their position and focus more on internal core competencies and come up with more direct strategies. This phase is completed when the three main organizations hold around 60 percent of the market. The last phase is of alliance in which the three main companies are accounted for 70 to 80 percent of the market and there is more alliance at every stage of the value chain as shown in the shoe and cigarette manufacturing industries (A.T. Kearney, 2001).
Success of Mega Mergers
This new wave of mega mergers is more dictated by the need to survive in the competitive environment due to which each industry has focused on such mega trend (Tichy, 2001). One such mega merger was observed in the year 2012 in US legal industry. This mega merger was announced by SNR Denton with Canada-based Fraser Milner Casgrain and Paris-based Salans. The result of such mega merger would be enhanced profit ratio and ability to operate worldwide. In addition, the mega merger would allow the organization to become one of the largest organizations by headcount. Law firms in US are not the only ones pursuing cross border mergers to create mega firms. The biggest international merger was announced in the mid of November by UK-based Norton Rose and Houston based-Fulbright & Jaworski. Such a merger when completed would provide the organization with an opportunity to enhance its offices along with its lawyers i.e. 3800 (Post, 2012).
Failure of Mega Mergers
Despite of the fact that organizations have enhanced their markets, sizes and range of customers and profits with the help of mega mergers but there are still greater chances for failure as there is lots on stake when mega mergers are announced (Cybo-Ottone, & Murgia, 2000). Mega mergers are a daunting challenge that often results in failures than success. There are plentiful reasons for the failure of mega mergers. One of the main reasons that have been identified is that buyers are so much interested in other organizations that they pay more than the acquisition is worth. In other cases, lack of planning to take optimum advantage of products and services of the merging organizations was another reason for the failure of mega mergers. Cultural issues are the most prominent reasons for the failure of mega mergers as lack of communication and ability to work together reduces the possibility of success. Same problem was observed when AT&T bought NCR Corporation in the year 1991 for $7 billion. In the year 1995, AT&T gave up NCR Corp. due to the increasing losses that were totaled $4 billion (Davidson, 2003). The major reason for the failure of this mega merger was the introduction of executives from AT&T to run the company i.e. NCR Corporation (Silverstein, And Vrana, 1998). One of the most prominent mega merger failures was of AOL Time Warner. Warner communications merged with Time, Inc in 1990 and in 2002, the company reported a loss of $99 billion due to the company’s lack of ability to consider all the opportunities and risks associated with the mega merger and thus the huge losses of the organization highlights the story of not managing the mega merger appropriately (Turner, 2001). Another example of failure of mega merger can be seen in the case of Daimler and Chrysler due to problems with cultural integration. As the culture of both the organizations differs from one another, the shareholders had to bear the burden for the non-success of this alliance (Davidson, 2003).
Reasons For the Failure of Mega Mergers
Organizations are constantly looking for opportunities to reduce competition from the market and in order to do so; organizations are constantly involved in mergers. A research conducted by KPMG indicates that almost 85 percent of mergers fail whereas; the research conducted by A.T. Kearney shows that almost 58 percent of mergers fails due to compelling reasons. Thus both these research highlight the same fact that there are more failures when organizations merge in comparison to success. Thus it is important to identify the reasons of failures. Some of the major compelling reasons due to which mergers fail are as follows
Unclear desired future state
For a mega merger to be successful, it is essential to have clear vision for the future. The organization should clearly define its roles and goals along with other essential information that could help in the success of the merger. Most of the mega mergers fail due to lack of proper planning as each organization remains unaware regarding their position which leads to overlapped desired future state.
Neglecting of core business
The core business should always remain the focus of the buying organization as neglecting the core business would lead to severe difficulties in the success of the merger. It has been noticed that organizations that tend to focus on short-term rather than long-term often tends to change the direction of the organization which in turns puts the business in trouble.
Underestimated power of people
Mergers are followed by change in management programs which give rise to fear and uncertainty in the workforce. As organizations move forward with the merger plans, these feeling grow to such extent that organization have to face loss of key management and employees. Such behavior and feelings could significantly impact the merger. In order to address such issue, organizations should focus on important techniques related to change management which could help the workforce to reduce their negative feelings. As if the power of the people is underestimated by organization during the merger, it would end up as a failure.
Culture could play an essential and crucial role in the failure of mergers and acquisitions. It is quite common in mergers that when two or more organizations are combining forces, culture add up (Schuler, & Jackson, 2001). Culture is the driving force in an organization and helps to get the job done accordingly but if the organization fails to manage and align the culture with the operational plans, the merger would significantly fail along with the organization.
Costs are underestimated
Mega mergers are quite expensive due to which organizations take great care when merging operations of organizations. Due to cost cutting and overlooking certain factors increase the chances of failure of mergers (Lipton, 2001). For a mega merger to be successful it is essential the buying organization should estimate the costs associated with merger carefully and rationally. By doing so, the chances of failure would gradually decrease.
Core competencies are left behind
In mega mergers, buyer or acquirer organization is always in search for the best talents and capabilities from the merged company (Hitt, Ireland, & Harrison, 2001). Due to such search organization often leaves its core competencies behind so that it could take advantage of the talent and capabilities of the merged organization. This eventually leads to the loss of key core competencies and the organization loses its track in long-term (Hitt, Ireland, & Harrison, 2001).
Ineffective Knowledge Management
Another reason behind the failure of the mega merges is the ineffective knowledge management. As the size of organizations increase it becomes more difficult and challenging to share the information within the organization. This in turn leads to miscommunication and often doubling the cost of the operations. Hence, it is important for the organizations to implement proper knowledge sharing and knowledge management strategy and program in order to make sure that the merger is not a failure.
Advantages and Disadvantages of Global Mega Mergers
Mega mergers are one of the most prominent forms of acquisition. Although the concept of mega mergers is fading as the time passes but it provides the organization with plentiful benefits along with some disadvantages.
Each of the pros and cons of mega mergers are separately elaborated below;
Advantages of Global Mega Mergers
The primary advantage of mergers is its simplicity as well as it is much cheaper than other forms of acquisitions. As organizations simply combines their operations with an aim to work together to attain the desired goals and objectives due to which there is no need for the transfer of each individual assets. In addition, mega mergers are responsible for the elimination of competition from the market. As organizations combine their operations, they are provided with an opportunity to capture additional economies of scale. With the ability to be capture economies of scale, the organizations growth prospects are enhanced to great extent and both the organizations are provided with an opportunity to enhance their competitive advantage (de Camara, & Renjen, 2004).
As each organization has its own set of strengths and capabilities and by merging the organizational strength with another organization, the chances of success are enhanced significantly. By mergers, organizations are provided with an opportunity to eliminate their weaknesses by sharing strengths. This would gradually help the organizations to restructure their processes in order to strengthen the organization. In addition, the merger provides the organization with surplus money. With the proper use of such money, the organization could invest heavily to yield more profits as compared to earlier years. Furthermore, mergers allow the organization to enhance their customer base and provide the organization with an opportunity to attract new customers in the market which would eventually lead to increase in market share.
Disadvantages of Global Mega Mergers
Mega mergers have quite several disadvantages as well. In order to merge with other organizations, it is essential for the organization to get approval from the shareholders. In order to approve the merger strategy, one has to get approval from two-third of the shareholders in time consuming and quite difficult at times. In addition, the change in management also creates hurdles in the organization due to which it has been often observed that key employees leave the organization during the mergers (DeYoung, Evanoff, & Molyneux, 2009). Furthermore, mega mergers lead to diseconomies of scale and the unit costs becomes quite high. Such high cost per unit reduces the efficiency of the organization due to mega mergers. In addition to these factors, due to limited positions in the management, dissatisfaction regarding the job and organization increases to great extent is other factors that lead to higher disadvantages. Such dissatisfaction leads to higher turnover rate and low performance which could eventually lead to failure of the organization in long-run.
Moreover, culture plays an important role in the success and failure of mergers. Different type of organizations have different type of cultures and by merging the operations along with the organization, the clashes between organizational culture and management reduces the effectiveness of the organization along with its integration.
Each organization has a set of goals and objectives that it desires to accomplish in the long run but due to mergers, the goals and objectives scatter and create a conflict of interests between organizations. This clashes and conflict of interests makes decision more complicated which eventually leads to disruption in the operations of the business.
Undertaking Mega Merger Policy in International Business Practice
Although the concept of mega mergers in international business have reduced to great extent but the opportunities that it provides to business should not be neglected. It has often been heard that “two heads are better than one” it indicates that mergers could provide the organization with success and opportunities that it could not achieve on its own. The advantages of mega mergers outweigh the disadvantages associated with the merger. On the other hand, the research conducted by KPMG and A.T. Kearney indicates that more than half of the mega mergers fail.
Mega mergers have reduced to great extent for over half a decade due to the complexity involved in the process along with the large number of failures of mergers. To achieve greatness and to enhance the market share, the organization should focus more on finding alternatives than on relying on mergers. However if organizations are adapting the strategy of merger, then it should be managed appropriately to increase the chances of success.
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