Mergers and Acquisitions (M & As) have become popular among companies, in the last two decades. The word merger describes a process whereby two or more parties come together resulting in either the creation of a totally new entity or continuance of one of the former entities (Jayesh, 2012). Conversely, acquisition refers to acquiring power over the management or assets of the company without integration of companies (Jayesh, 2012).
This question seeks to find out reasons that make board of directors go for mergers and acquisitions (M&A), despite the fact that most companies that use this approach fail. The question further seeks to explore attributes that lead to successes or failure of mergers and acquisitions (M&A), in companies. Acquired firms, which experience failure, end up getting traded at a lower price compared to similar non-merged firms. Consulting institutions approximate that more than half of M & A do not meet the expectations of their dealers. This paper discusses some factors that result to failure in mergers for synergies, according to the theory of connections between the pre- and post-merger practices (Banal-esta nol and Seldeslachts, 2011). We explain that failure may arise from informational asymmetries starting from the premerger phase and issues of collaboration and synchronisation when newly merged. We will demonstrate that, depending on its premerger details, a company might optimally consent to merging and refrain from applying post- merger efforts. We will, also, discuss the role of product capital in making prosperous acquisitions (Sorescu et al., 2007).
The Quest for Synergies
Banal-esta nol and Seldeslachts (2011) reveals that premerger and post-merger circumstances have main aspects of a merger for synergies. The prospective merger benefits are tentative, during the premerger phase. Particularly, the response of competitors, the development of the economic essentials and strategic plans remain indefinite at the instance of merging. Hence, potential partners collect data regarding the possible gains from merging through, for instance, engaging investment. Nevertheless, while a piece of this information may be accessible to both companies, another bit remains confidential. This occurs because there is no certainty that the merger will ensue, at such a moment. Suppose companies finally decide not to join, they could utilise the acquired information to ridicule each other when rivalling. Overall, it may be assumed that potential merging partners hold some confidential information on tentative merger expansions. Conversely, merging firms seek to recognise synergies through combining certain resources that are hard to trade, during the Post-merger, phase. The synergies may be acquired by the adaption and adjustment of existing processes and products, resulting to skills and knowledge that did not subsist prior to the merger (Farrell and Shapiro, 2001). Assume, for instance, that a company dealing with basic programming integrates with a company that has deals with computer design. Partners may be able to create a new and advanced computer gadget by merging their knowledge, both in calculus activities and expediency for a company. However, a more lucrative and advanced product can be created, only when one partner engraves the essential programs, and the other partner designs the structure. Hence, synergies cannot become attained through the work of a single party (Farrell and Shapiro, 2001).
Besides, synergies become achieved through a relation and cost that is private. This is because executing the required post-merger actions, automatically, involves a personal cost for both partners. Such efforts are non-contractible, considering that they are hard to examine in the post-merger practice.
Poor merger functioning, in the organizational theories, has regularly been linked to post-merger synchronisation issues (Larsson & Finkelstein, 1999). Different from internal expansion and intensification, newly merged companies cannot depend on pre existing mechanisms of coordination like set operating actions, shared language, schedules and identification, as these are all effects of long- term associations inside the firm.
Such a poor post-merger harmonisation hampers the optimal performance of newly created firms and, consequently, the capacity to obtain the projected synergy benefits.
Perhaps, a possible way from these organisation difficulties could be to assimilate the merged companies. After grouping organisational parts collectively, regular systems, authority and procedures can then be employed to decrease coordination problems. However, although post- merger assimilation assists merging companies to control what the partners recognise, through promoting synchronisation, it deters their capacity to control what they do, due to a decrease in autonomy.
Agarwal et al. (2008) reveals that investigation is essential, in a merger for synergies, since considerable effort on processes and products, by every partner are necessary to obtain synergies. Consequently, merging cohorts become often kept as independently, fully running. Therefore, despite the possible coordination difficulties, structural disconnection is the best situation, in a merger for synergies. This organisational arrangement, though required, has the extra problem of prospective free-riding by allies. Free-riding can take place, since synergies are not the sole accessible merger benefits. This implies that even when one colleague makes an effort, the other (non-synergetic) merger can still obtain benefits. Therefore, merger gains can be separated into synergies, which are the benefits that surpass the return of entity actions and non-synergetic benefits, which can be realised through the activities of a single colleague (Agarwal et al., 2008). Therefore, both issues of cooperation and synchronisation are, usually, present, in a merger for synergies.
Banal-esta nol and Seldeslachts (2011) reveals that the existence of asymmetric information creates an exclusive equilibrium in the system. When a partner anticipates considerable gains, he goes for merging and applies a post-merger exertion, in the equilibrium. Therefore, when both partners anticipate considerable gains, all prospective merger gains, together with synergies, become attained and the merger flourishes.
Suppose one company, rather, has low prospects, it follows that the merger cannot flourish (Banal-esta nol and Seldeslachts, 2011). The two authors demonstrate that when an associate has intermediate prospects, he may optimally concur to merging and refrain from applying any post-merger endeavour.
Merging can still be beneficial, although through not making an attempt, one rules out the likelihood of acquiring synergy gains. A company expects to attain non-synergetic benefits, by relying on the hard work of the other colleague, which would reimburse the expense of merging. This may occur when the other colleague expects higher prospective merger benefits and is, consequently, ready to apply effort, in the credence that both associates will mutually realise synergy benefits.
When both partners pursue a similar course of action, nonetheless, the merger automatically fails, since both refrain from applying post-merger efforts. Hence, Failure can happen albeit the management of every corporation takes the right merger decision, in required conditions. As long as shareholders do not have more knowledge than the directors of their own company, they must also acknowledge the accord.
Moreover, failure cannot become evaded by post-merger contacts. Every partner has reasons to overplay its information, separately, regarding its exertion decisions. In fact, it always desire to let the other partner put an effort, and in such conditions, reliable communication cannot become held in symmetry (Baliga and Morris, 2002).
The study by Banal-esta nol and Seldeslachts (2011) offers a formal justification for how and why post-merger issues can lead to merger failure, as it becomes habitually alleged by the organisational theories. The study demonstrates that failure occurs, even when all mergers have the latent for synergy gains, since the merger associates do not go after synergy gains. Hence, synergy execution is a premeditated decision. It is, also, worth noting that, in a merger for synergies, the aspects of post-merger efforts, which result to potential issues of both collaboration and synchronisation, may provoke the above mentioned course of events. Supposing this was the situation, companies would refrain from joining a merger. Post- merger coordination issues, exclusively, cannot cause failure either, since companies can apply effort through mergers.
Mergers with more anticipated possible benefits bear less from post-merger problems. However, it is essential to consider both organisational variables and the value of possible synergies. When the expense on post-merger endeavours is low, the possibility of failure, also, remains low. In contrast the lesser the opportunity outlays of merging, the more the possibility of failure.
Product Capital and Acquisitions
Another study by Sorescu et al. (2007) reveals that product capital influences acquisition performance. The study offers a system by which product capital influences performance, that is, by superior choice of the acquirer and exploitation of targets’ potential for innovation (Sorescu et al., 2007). Hence, corporations with superior support assets and product development make elegant acquisitions. These Corporations are better at choosing targets with potential for innovation and then utilising this potential to achieve competitive advantage.
Corporations with more selection skills apply it ahead of the actual acquirement of the assets through differentiating between losing and winning assets. Significantly, the aptitude to choose better assets denotes that such Corporations are, moreover, able to evade obtaining unsuitable assets.
Again, high-product-capital Corporations have a superior aptitude to absorb new assets and realize possible synergies with the target (Cohen & Levinthal, 1990), through changing promising notions into prolific outputs.
So as, to utilise new assets like technological expertise, efficiently, the acquiring corporation should first examine and comprehend these assets. Nevertheless, new expertise acquired from exterior is apt to be hard to examine and comprehend, since it may be from diverse fields, represent diverse heuristics, or be entrenched in circumstances that vary from that of the acquirer. Hence, the performance outcomes of this superiority in choice and deployment of superficially, formed assets show in long-term fiscal rewards to the acquiring Corporation.
Other reasons that can explain failure, apart from organisational problems, include incompatibility of partners, ego clash, expecting results too quickly, size, diversification, previous acquisition experience and failure to make follow ups by top management (Jayesh, 2012).
Incompatibility of Partners
Integration between two powerful firms is a safer stake than between two frail alliances. Regularly, strong firms look for small partners, so as to, have control, whereas weak firms seek stronger firms to rescue them. However, in most occasions, the weak partner becomes a lug and outcomes friction amid partners. Jayesh (2012) reveals that a powerful firm, which makes an alliance with a weak firm, in anticipation of rehabilitation, may find itself in liquidation.
Ego Clash
Ego wrangle between the executives and, also, lack of synchronisation can lead to fall of a company following the merger. The issue is more outstanding in situations of mergers amid equals firms. For instance, in 1964, the Dunlop Pirelli merger, which formed the second leading tyre firm, in the world, terminated in a pricey divorce. Thus, mergers between two equals may not work, since integration deals with both manufacturing plants and human personnel. Conversely, it is difficult for mergers between two weak firms to thrive. For instance, in 1955, two sick carmakers united in the Studebacker-Packard merger. Ten years later, both firms collapsed, and they became closed.
Expecting Results too quickly
It is not feasible to expect instant outcomes from a merger. Examples of companies who experienced failure of M &A due to quick expectation include Whirlpool (during its Philips white goods acquisition), R.P.Goenka’s (during acquisition of Gramaphone Corporation) and Manu Chhabria's (during acquisition of Gordon Woodroffe) and Dunlop (Jayesh, 2012).
Size Issues
A disparity in size between target and the acquirer can result to poor acquisition operation. Most acquisitions do not succeed either because of failing to give small acquisitions adequate attention and time, or obtaining extremely large targets.
Diversification
Only a few companies can control diversified businesses, successfully. Previous studies demonstrate that acquisitions into associated businesses do better than acquisitions into unrelated businesses, constantly. Unrelated diversification becomes correlated with lesser capital yield, inferior financial performance and an elevated measure of variance, in performance. Some contributing factors to this state include supposed incapacity to gain significant synergies and lack of industry knowledge (Jayesh, 2012).
Previous Acquisition Experience
Whereas past acquisition experience is not essentially a requisite for acquisition success, in prospect, most futile acquirers have little experience. Experience can assist the acquirers to correct previous acquisition errors and enable them to make thriving acquisitions, in the future. This experience can, as well, assist them by taking counsel, so as, to capitalise on chances of acquisition triumph.
Failure to make follow-ups by Top Management
Mostly, the top management relaxes following the signing the M&A accord. Follow-up by top management is crucial to go with an apparent road map of activities to be completed and set the speed for execution, once power becomes assumed.
A Firm such as Global Trust Bank (GTB) merged with Oriental Bank of Commerce (OBC), successfully. Another example of firms that merged successfully includes the Bank of Punjab and Centurion Bank, to form Centurion Bank of Punjab. Also, Procter & Gamble acquired Gillette, successfully, and Shinhan Bank acquired Chohung Bank in South Korea, successfully (Kanter, 2009). However, the merger and acquisition process is never easy, as it is likely to face many criticism and antagonism. Thus, excellent management team is essential during the process of M&As.
In conclusion, this paper attempted to explain the reasons as to why some mergers fail while others thrive, as well as, the reason as to why board of directors still go for M&As, even with the knowledge that most of them fail. One reason as to why mergers fail is due to lack of sufficient and authentic information during the premerger phase, as well as, issue of coordination and cooperation, during the post-merger phase. The response of competitors, the development of the economic essentials and strategic plans remain indefinite at the instance of merging. Hence, potential partners collect data regarding the possible gains from merging through, for instance, engaging investment. Nevertheless, while a piece of this information may be accessible to both companies, another bit remains confidential. Conversely, in the post-merger phase, the synergies may be acquired by the adaption and adjustment of existing processes and products, resulting to skills and knowledge that did not subsist prior to the merger. The paper illustrates this point using the integration of a company dealing with basic programming and a company that deals with computer design. While these partners may be able to create a new and advanced computer gadget by merging their knowledge, both in calculus activities and expediency, a more lucrative and advanced product can be created, only when one partner engraves the essential programs, and the other partner designs the structure.
Another reason that contributes to failure of mergers and acquisitions is product capital. The paper argues that corporations with superior support assets and product development make elegant acquisitions. These Corporations are better at choosing targets with potential for innovation and then utilising this potential to achieve competitive advantage. Corporations with more selection skills apply it ahead of the actual acquirement of the assets through differentiating between losing and winning assets. Significantly, the aptitude to choose better assets denotes that such Corporations are, moreover, able to evade obtaining unsuitable assets. Other reasons that can explain failure include incompatibility of partners, ego clash, expecting results too quickly, size, diversification and previous acquisition experience.
Some synergistic benefits of M&A actions include more competent management, economies of scope and scale, integration of corresponding resources, enhanced techniques of production and relocation of assets to more gainful uses. These benefits make board of directors’ attempt implementing M &As, even with the knowledge that most of them fail.
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