Abstract
Currently, cross border mega mergers and acquisitions have become the order of the day. Firms are seeking to expand their operation through acquiring smaller firms or joining other firms in the same industry. The key question that has triggered a heated debate about the formation of mergers and acquisitions is whether the formation of cross border mergers and acquisitions form the best way to expand one’s business? Most critics have argued that mergers and acquisition cannot be termed as a smart route towards globalization and business expansion. They argue that such undertakings are carried out for the wrong reasons and that firms are better off without them.
This paper critiques the reasons justifying why mergers and acquisitions could be termed as a sheer waste of resources and time to present day companies. The paper quotes studies that have been carried out in the past showcasing the desperate situation in which mergers and acquisitions have left the parties who have decided to form these business structures.
The paper further discusses the documented causes of mergers and acquisition and some of the weaknesses that have been observed in these business organizations. One of the key causes of the failure of mergers is the existence of cultural differences between the parties in a merger. Mergers especially those that involve companies that originate from different countries present numerous cultural challenges to the parties’ forming them since each firm operates under a different legal system, workplace culture, language etc. It becomes a challenge to merge the various cultural differences.
The second section of the paper discusses the probable mitigation measures and areas where corporate managers can chip in to remedy the negative effects of mergers and acquisition. This should be done through instituting mitigation measures to help control the negative effects brought about by a merger or acquisition.
Body
Does it really pay to be in a global economy? The answer to this question can perhaps be said that it doesn’t pay to be in a global economy. Most businesses that rush into international mergers do so based on economic misconceptions. It is important to note that better approaches exist when it comes to the issues of globalization and business expansion. Today, many businesses continue to merge and make acquisitions with the belief that it is the best way to grow. In the present corporate world, the rate at which companies are merging on a global scale is alarming in almost all industrial sectors.
In the oil sector, companies like Mobil and Exxon, Amoco and Bp among others have created huge mergers. In the automobile sector, Chrysler has merged with Daimler Benz while Volvo has been purchased by ford with Nissan being acquired by Renault. The merging trend has extended across telecommunication, soft drinks, entertainment and cement companies. These firms join forces in anticipation to control the market and scare off other competitors operating in their industry. What such firms need to recognize is that it’s a do or die game and if they are to survive leave alone flourish; they have to be the biggest players in the global industry.
Corporations have unnecessarily committed trillions of dollars in acquiring other ventures. Such moves have sometimes had positive effects on the lives of many. However, in spite of their importance and popularity, most of these acquisitions have disappointed those perusing them. Over 93 studies carried out on 206,910 corporate acquisitions showed that post-purchase corporate performance tends to be lower than corporates that operate independently. Corporate acquisition performance is measured by the degree of diversification of the predator company, the level of relation between the two businesses and the history of both companies before the acquisition. However, these parameters failed to clearly explain the variances in the performance after acquisitions are done.
The merger-acquisition scheme has its ancestry roots in the famous Karl Marx’s saying that "One capitalist always kills many." Karl’s saying could be interpreted to mean that the declining number of capitalists in the industry means the eventual monopolization of the industry. If firms keep on merging competition will cease leaving monopolies to control the market.
The postulation that the global economy is the best way to do business has been embraced by most companies in different industries as the best way to do business despite there being no evidence to support this presumption. In theory, there exists a weak interrelation between the globalization of a particular industry and the level concentration in same industry. Studies actually reveal that industry globalization has eventually resulted to reduced industry concentration. Therefore, business executives need to be independent about the misconception that larger cross border mergers and acquisition deals are the best way forward. Better and more lucrative business strategies exist to ensure globalization rather than persistent expansions.
Ghemawat is of the opinion that if one is to clearly establish the relationship between concentration and globalization, it would be important to examine the basic economics underneath the two concepts. The most important of these would be the theory of comparative advantage instituted by David Ricardo. Most firms tend to think that this theory leans towards concentration while in the actual sense; it merely predicts the geographical concentration with regards to production. Ghemawat further argues that the theory of comparative advantage does not take into account the economies of scale which is the biggest cause of concentration. He further argues that the theory could be bent to accommodate economies of scale that most companies pursue today.
A study carried out on the color film industry helps indicate the relationship between post acquisition performances and the degree of concentration in the film industry. Data that covered a period of more than forty years was collected to justify this claim. The data collected was related to the global market share of firms based in more than twenty different industries. A Herfindahl index was then calculated for each of the industry to measure the qualified degree of industry concentration. The studies revealed that if a few major players’ in an industry possess a higher market share, the Herfindahl index would be higher than it would be in case the industry’s share of the market was to be spread in an even manner across a larger number of firms. This indicates that there exists a little relationship between the post-acquisition merger performance and the industrial concentration
Researchers in this field argue that cross border mergers and acquisitions mostly fail due to the workforce and cultural differences between the firms in an acquisition or merger contract. The conflict between organizational practices, values and the “us Vs them” employee mentality in the new association, ranks as one of the major causes of acquisition failures. This attitude may amount to the lack of collaboration and thus failure to exploit the benefits of the acquisition or merger.
The problem of cultural differences could be more intense where companies from different nations come together. Language barriers may hinder smooth communication within the new larger firm. Since different countries have varying legal systems and regulatory requirements, it would be difficult to blend in all the laws comprehensively. Statistically, most of the failed cross border mergers and acquisition involve communication related issues.
Nevertheless, statistical findings on the cultural difference impacts on acquisition evoked mixed reactions among most of the researched firms. A positive relationship between the organizational cultural differences and post-acquisition performance measures were found in some cases. A recent study points out that cultural disparities contribute a very small portion to the performance variances observed in post-acquisition mergers and acquisitions . This suggests that the link between post acquisition performance and cultural differences is a complex one.
One of the major issues that merging firms should deal with before engaging into a merger would be the likelihood of the merger to materialize into successful financial deal. Historically, the response to this question is a negative one. When the share price index and broad based averages were evaluated, mergers and acquisitions were found to succeed lesser times than they failed. Most of the time, the firm’s transactions failed to increase shareholder’s value. However, since the 1999’s Survey on KPMG, companies have been found to reduce the shareholder’s value less often.
Most mergers are not able to reach their industry averages. Firms in the industry compete for customer loyalty. Most mergers are not able to beat their competitors a year or two after the merger contract was signed. This inefficiency can be attributed to the period of adjustments when the merging firms are integrating their operations. Moreover, most mergers are a financial failure though at times this may be seen as a blessing in disguise to the society in some sense. The society would benefit even if the merger runs into losses since such mergers would provide lager varieties of goods and services to their customers. Financial results and social benefits are usually expected to move in the same direction. However, if a corporate purchases new assets, tries to fight its competition too soon or adopts a technology used by the merging firm, the merger may be socially beneficial but also a financial disaster to the merging parties.
Whether or not a merger is financially successful depends on the set bench mark. At times the benchmark could be the share price of the resulting firm after the merger. The actual benchmark is determined by whether the corporate share price went up when compared to the industry average. In some circumstances, the growth of the merger’s revenues with respect to recent drift in the industry may be used as the benchmark. Nonetheless, the most efficient benchmark must comprise performance indices that should be compared to other firms in the industry.
Most of the studies carried out on mergers and acquisitions to determine best way to administer globalization indicate that mergers may not be a very wise decision for a firm to take into consideration. Historically speaking, most of the mergers and acquisition that have taken place turn out to be bad investment decisions for the acquiring parties. More than half of these mergers fail to pick up due to some inconsistencies within and outside the firms joining forces. Most of the executives authorizing the merger contracts fail to clearly understand the effect mergers may have on its component firms. Mergers take time to adjust with regards to organizational cultures, workforce culture and on the organizational unity of purpose of the firms merging. Cross border mergers pose communication challenges especially where different languages are involved. The historical evidence enumerated in this literature tends to send out a message that mergers and acquisitions are not the best way to grow and expand a business.
In the second section of this paper we analyze the major areas where international managers could reduce the risks of failure in complex cross-border merger deals.
As stated above, cross border mergers pose numerous challenges to the corporations that pursue them and they tend to have a higher likelihood of failure. However, several mitigation measures could be taken to reduce the risk of failure.
The first risk of forming mergers and acquisitions is the cultural disparities between the merging firms. In cross border mergers and acquisitions, the cultural diversity necessitated by the merger or acquisition presents more opportunities as well risks. While performing the appraisal of a likely merger, the acquiring company should assess the cultural risks that may be associated with the merger. Some of the cultural risks that are likely to occur include: misplaced expectations, processes, behaviors and practices. New structures and compensation schemes may amount to employee frustration, loss of talent and disengagement. The differences in attitudes when it comes to issues like corporate governance, ethics and corporate responsibilities may present a challenge to the new organization. A useful measure that would reduce the cultural risk would be the cross-cultural training and consulting. All cultural disparities and issues both imminent and potential that threaten a merger must be addressed as early as possible to avoid damage. Corporates engaged in cross border mergers may be conscious of the cultural differences though they may not have the full knowledge of their complexities and the length of time they may take to resolve.
In an effort to resolve cultural issues, the firm should first engage all levels in its organization structure in identifying these differences. The next step would be to review the potential impact such issues may have on the organization. Thereafter, the intellectual competence of the organization’s staff should be enlarged; a cultural change should be administered efficiently so as to decrease the likelihood of the occurrence of misunderstanding or frustrations.
Another mitigation measure would be to ensure a successful integration process. In the process of selecting cross border mergers, the firm should appraise the cultural deliberation as early as possible. In an effort to make informed decisions, the firm should have a board level consultation. This is meant to evaluate the prior experience before the cross-border merger performs a market analysis in a bid to map out the cultural disparities. The mapping process should be accompanied by a future cultural outlook that would help single out potential risks that may affect the merger or acquisition. This mapping would help the firm to make an estimate of the resources it may require to reduce the risk intensity.
Another mitigation measure a firm in a cross border merger or accusation should consider would be the performance of a cultural due diligence. Once the two firms decide to join forces, the integration process should commence quickly. This would be necessary since it would help identify and evaluate communication and cultural obstacles that may stand in the way of success. The due diligence process would help to single out the cultural distance and misplacement between the merging organization in the prevailing communication channels and methods. After this has been successfully accomplished, a clear intervention plan should be put in place. Any deviations from the plan should be tackled through training and consulting among the parties within the cultural divide.
Post-merger training and support is another risk mitigation measure in cross border mergers and acquisitions. A mixture of face to face coaching, training and consultancy focusing on individuals at all levels of the organization could be employed depending on the circumstances. This is done in order to help employees grasp the cultural values, behaviors and attitudes of their fellow co-workers. This also assists in heightening the awareness of each firm’s cultural behaviors and the possible effects these may have to their corresponding parties.
In order to ensure that cross border acquisitions and mergers are successful the merging parties must sit and agree on the type of product or services they will to offer, who will be in charge of what, the time schedules to use etc. to avoid confusion and complications. A clear definition of roles within the merger arrangement would assist in reducing internal conflict and wrangles.
In conclusion, mergers and acquisition are not the best way for a business to expand its operations. As much as mergers allow a firm to control the market, a monopolized market is unhealthy to most industries. If all the goods and services of a particular industry were to be supplied by one firm, the market would be deficient of variety and price liberalization. In addition mergers pose several threats once instituted and if these problems are not anticipated or acted upon, they could lead to financial disaster. For instance, the cultural differences among the merging firms may create conflicts that may cause inefficiencies and lead to time wastage.
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