Chapter 1- Introduction

Mergers and acquisitions have become one of the fastest growing trends in today’s ever

so inter grating global economy. M&A’s(Mergers and acquisitions) have changed the

way in which companies go about restructuring themselves.

As per Sumati Reddy et al, M&A’s have become a common phenomenon in the todays

corporate landscape. She believes that the main driving factors behind such deals are the

varying business environments which require businesses to regroup their activities and

the continous deregulation of many of their activities.

It has been seen that since 1992 the pace of M&A activity has grown at unprecedented

levels (J Fred et.al). They believe that the role played by merger and acquisitions in the

economy has changed. According to J Fred. et. al. the term “Mergers and Acquisitions

(M&A’s)” incorporates all activities such as joint ventures, licensing, spin off’s ,equity

carve outs, alliances, restructuring and other similar business deals. M&A’s if carried out

successfully can help the concerned companies in increasing market share and revenues

and improve the return on their investments.

The main idea behind M&A is that the combination of two companies or enterprises will

sum up to be more beneficial for both and that the share holder value would be more

than what would have been if they were alone. These benefits can be due to varying

number of reasons, right from increased market share to decreased competition or even

benefiting from the synergy created by the merger. (www.investopedia.com)

.

As so commonly both the terms Mergers and Acquisitions are together, they can

sometimes be mistaken to be tantamount. Though in reality both the terms are used for

very different deals. A merger is particularly used when two companies, mostly of similar

sizes agree to merge them selves into a brand new company with a new identity. Their

previous identities cease to exist and a brand new company is formed.

While an acquisition usually represents a deal wherein a bigger company normally buys

out, either wholly or partly another smaller company and brings its operations under its

name. Many a time acquisitions can be termed as forced as they are done without the

consent of the company being acquired. Occasionally certain transactions are termed as

mergers rather than acquisitions to prevent any criticism by the media and the public.

As mentioned the main aspect of M&A deals is synery. This synergy can be defined as

the benefit which the new company receives as result of the earlier aspects of the

companies being merged or acquired. For example, the results of an undercapitalized

company can be changed radically by merging it with another company which has more

access to capital. Similarly a newly established innovative company would be really

benefited if it was to merge or be acquired by a strong marketing company which would

boost the marketing capabilities of newly established innovative company. (Michael E. S.

Frankel )

Mergers and acquisitions can be classified into the following categories-

Mergers-

1-Horizontal Merger- In this deal all the merging companies are usually direct

competitors which offer the same line of products . This deal is usually done in order to

reduce competiton in the market.

2-Vertical Merger- A deal in which two companies along the same vertical supply line

merge operations in order to take advantage of supply chain management.

3-Colongmerate Merger- This type of deal is characterized by the merging of two

companies which are from two totally different business areas.

While Acquisitions can be can be classified mostly in the same categories as above, the

execution of an acquisition deal can differ. An acquisition deal can be

As mentioned by Michael E. S. Frankel, M&A are like some other deals that can be

described as large transactions which can essentially alter the future and control of a

company. He terms them as strategic Transactions which can bring about a shift in

control of a company and move them towards a new strategic direction. Additionally

there has been a long-term upward trend in both the volume and average size of

acquisitions in the United States and even after the burst of the “Tech Bubble” the rate of

M&A’s is still on a rapid increase. This method of expansion has not only been adopted

by large acquirers but also by many small and middle size firms.

Looking at many big technology firms in the US such as IBM, Cisco and GE, it can be

clearly seen that a significant part of their growth process has been completed by

acquisitions. These strategic transactions can termed as “winners curse”, as many times

they fail to deliver what is expected from them. This is mainly owing to the difference

between the cost and the revenue synergies expected and actually found. A survey has

shown has 64% of these deals result in loss of shareholder value for the buyer company.

In contradiction to what is reported and seen about M&A’s , they are not as successful as

they are made out to be. Often major M&A’s are given a lot of importance during he

intitial stages of the process , but not too much follow up is done to see how benefitial

they turn turn out to be in the end. On an average approximately 2 out of 3 such deals are

below the satisfactory levels. M&A deals are usually executed in order to gain economies

of scale and to take advantage of synergies in the stock market. These advantages are

much easier to be seen on paper and much harder to be actually executed.

Due to the massive increase in utilization of Investment Banks in M&A deals, it is very

common to spot that the financials are given excessive importance. As world financial

markets have integrated towards a common global market, the impact of such deals can

be a big one the market price of a company. All organizations are very watchful about the

financial aspects relating to the deal and sometimes give it more attention than needed.

As a result sometimes organizations can ignore essential elements of M&A deals such as

how compatible their technological structures are and how can their human capital be

matched for optimum utilization of resources. Such problems will be explained in detail

with the help of real examples in the latter part of this essay.

Statistical Data-

Looking at some statistical data will enable us to get a better idea about the number

of mergers and acquisitions and how many of them turn our to be successful.

Han Nguyen and Brian Kleiner have mentioned in their report that till the

year 2002 there have been apporximatley 4363 M&A deals recorded and

these have amounted to the value of 291.7 Bilion USD. To get a better idea of how

these deals have been distributed, this essay will show the top five industries in which these deals

have occoured. Out of these the maximum deals have been related to the internet industry, these

amounted to 659 in total. Then second to the contributers list was the healthcare sector, followed

by telecommunication sector. Each with 319 and 187 deals respectively. The fourth largest

contributor to this figure was the banking sector which saw 146 deals being executed. Followed

by this was the semi conductors industry which saw around 47 such deals.

A study by Watson Wyatt in Sumati Reddy, of a 1000 companies has depicted that

every two out of three such deals fail to obtain their profit goals. Along with that

only 46% of them achieved their cost cutting goals. Another similar study by A.T

Kaerny proved that 58% of the companies failed to reach their post merger targets

and were not able to to outperform their competitors even up to a period of two

years after the deal.

A recent study of over 200 key M&A deals in Europe by the Hay group helped demonstrate that only a minor 9%of the overall executives of these companies were of the opinion that the deal ws a complete success. While considering British deals this percentage came down to only 3% of the total number of deals. These facts are all the more shocking as the overall vaule of M&A deals has reached an alamrling 1.35 trillion euros in 2006 and this is expected to increase in 2007.

Nic Paton

Surveys from major finance and accounting firms such PWC, Mckinsey and business

Week have revaled that chances of failure in new merged or acquired companies are

high. In a time period of one and a half years , 80% of micro cap , 50 % of Mid Cap

and 80 % of Micro cap transactions fall short of meeting the expectations of he

shareholders. (exhibhit)

An alarming result was illustrated by Mergerstat.com after they conducted a in depth

analysis of over 8000 US M&A deals. What they discovered was that due to M&A

failure a stunning 560 Billion USD of business value was destroyed. (By Michael

Sarlitto and Dan Roman, Chicago Members)

This essay will look at answering the following questions related to deals related with

M&A’s

1) Are M&A deals as straightforward and successful as they are made out to be?

2) What are the issues to be addressed while understanding failures in such deals?

3) What are the alternate options which one can take instead of M&A’s ?

The first part of this essay will look into some basic theories behind M&A’s , these

theories will comprise of cases both for and against the success of M&A’s . The next

part of this essay will look into some stylized facts relating to M&A deals. Thirdly this

essay look into a few aspects of M&A’s which cause downfalls in such deals. These

aspects will be studied with the help of case studies which depeict some failed M&A’s

deals.

Lastly this essay will show some alternate options which companies can opt for instead of

going in for a merger or an acquisition.

Chapter 2-Review of literature-

Understanding the Deals-

Now that we have discussed the fundamental meaning of Mergers and Acquisitions, this

essay will go into some detail theory behind the reasons of such deals.

Firstly it is important to understand why this essay has laid such emphasis on M&A

instead of other similar strategic moves. As mentioned by Amy L. Pablo et.al , M&A

deals have ofen been treated as ordinary moves of resource allocation. According to them

M&A deals have to be looked at from a totally different perspective as they are among

the most essential strategic deals due to the impact they have on the resource and

performance implications of a firm. These deals are distinguished from ordinary resource

allocation decisions because of their risk characteristics. These deals are quite uncertain

and due to this fact their outcomes are sourrounded by ambiguity, hence making such

deals very risky. Acquistions bring along with them high levels of risk for the decision

makers and such deals can have an extensive impact on the personal careers and futures

of such management. Additionally M&A deals can be associated with non routines ,

speed of decision making as well as limited use of data , involvement and debate. These

typical features are the main cause behind making such deals unsure and unpredictable.

Hence it makes it very important to understand and analyze the different factors driving

M&A activities in different manner than what is done for other strategic decision

situations.

J Fred et.al have classified the reasons behind M&A’s into forces which have been

driving these deals .

Ten such forces have been indentified by them-

1) Rapid Technological growth

2) Reduction in cost of transportation and communication.

3) Globalization of markets.

4) Varying forms and types of opponents.

5) New types of industries.

6) Relaxation of rules and regulations

7) Suitable economic and financial conditions.

8) Inequalities in income and wealth.

9) Increase in valuation relationships and equity returns.

10) With a general environment of strong economic growth, certain industries and

economies have faced some problems.

These forces have individually and collectively contributed towards making of a truly

global economy in which national boundaries have lost their importance.

They believe that in the approach towards a merger each firm has to consider a set of

capabilities and opportunities. It is essential for a firm to exploit the changing

environment around it. It must recognize that the dynamics of competition and economic

change will require continous realignment of its position to its challenges and

opportunities. A firm must be able to strategize itself to be ready for facing the

uncertainty and risks faced by it.

In this process view of strategy, divestures represent a form of strategic adjustment

process. Studies reveal that divestures were designed in order to obtain control of certain

parts of an acquisition in advance. Contradictally divestures have also been seen as a a

method of making an acquisition and paying them off in part or sometimes entirely by the

segments sold off.

At a minimum this may help make the diversification effort a low cost one. Hence it may

be said that divestures are considered by Fred et.al., to be mistakes by management.

Internal and external investment program may be successful or unsuccessful. Firms try

and attempt both strategies in order to increase their shareholder value. The

understandings and explanations on strategic planning by many authors has helped many

firms in executing these strategies with higher efficiency. It is most essential for a firm to

have an efficient information feedback system . This system is required by a firm in order

for it to be able to improve its capability to change , correct to mistakes and sieze new

opportunities. It is in this frame work that merger and take over decisions are made.

Organizational form can be critical for the implementation of a successful M&A strategy.

Fred et.al believe that there is a feedback relationship between the strategy of a firm and

its organizational structure. The organizational structure can be distinguished into the

following forms-

1) The Unitary form- wherein all the decision making is centralized.

2) The Holding company- In this type of company the decisions ar decentralized and

usually the company consists of small unrelated business units.

3) The Multidivision form- This type of company has different units that share common

functions.

4) The Matrix Form- The company is organized around various products and projects.

As per P.S sudarsanam when a firm makes an acquisition, it buys “Off the shelf” a bundle

of tangible and intangible resources and capabilities, all within an organizational form.

Both the acquirer and the acquired represent such bundled forms in an acquisition

process. Due to a mismatch in the resources, capabilities and opportunities which are

available to both the firms there is the creation of a sustainable competitive advantage.

These resources can be in the form of market power and entry barriers . Additonally a

firms architecture, innovativeness and reputation can also be a source of advantage.

There are various ways in which such deals create value, they can be differentiated by the

source of that value. Overall there are 3 main generic modes for value creation-

1)Donor recipient Mode- Wherein there is a transfer of resources from the acquirer to the

acquired firm. This kind of value creation is normally seen when a poorly performing

company is acquired by a well performing company. The end result is seen in the

improvement of the financial position of the acquired company.

2) Participative mode- In such a transfer both the companies are seen to have a mutual

exchange of resources. It is a two way process where both the firms learn from each other

and such learning ehances their joint capabilities.

3) Collusive mode- In this mode, the coming of two firms in an acquisition strengthens

strategic assets. These strategic assets are those which give a firm a competitive

advantage.

(P.S Sudrasanam)

After understanding the reasons and types of merger and acquisition transactions, it is

essential to understand what is the exact process which is followed for such a tranaction

to be executed.

Haspeslag and Jemison (1991) in P.S. Sudrasanam have classified such deals into three

stages-

Stage 1- During this stage the company generates and develops a M&A strategy. This is

usually followed by a target screening and search process. Finally once a target has been

identified , it is then evaluated.

Stage 2- The second stage starts with the development of a bidding strategy in order to

attract the desired target company. It is followed by a pricing evaluation of the target

firm. Lastly then the negoatiation phase begins where all the parties in the deal try and

make a closing deal.

Stage 3- After the first two stages are completed, the acquiring company evaluates the

target company with an angle of cultural adaptability. It then develops an integration

approach towards for the M&A deal. Finally there is a conciliation of the strategies and

culture of the two firms.

Understanding the negatives of M&A’s-

As discussed before M&A related activity has expereined a sort of mania in the recent

past. This rapid increase in M&A activity had to be followed by laying a new set of rules

and procedures. These rules are essential in order to ensure that the motive and methods

of carrying out these activities are kept a check upon.

What Werner et.al have argued in their Journal on “is economic efficiency a driving

force behind M&A activity”, is that are M&A deals actually socially acceptable. Werner

et.al feel that managers look at such deals as a source of building syneregy, competition

eliminating and empire building. What differentiates a Socially acceptable deal from an

unacceptable one is that in the end is new wealth created or old wealth just redistributed.

Merger policy may not be pretty but it is required. This is because the society needs a sets

of rules and regulations which corporate’s have to adhere to. Contrary to this some

economists such as W. T Grimm believe that increase in such laws can be harmfull to the

rate of these activities. W.T Grimm & co. believe that from the 1980’s it has been M&A

deals which have contributed towards the increase of shareholders wealth and all the

more the number of M&A deals are still lesser than what they should adequately be.

The valuation of the stock market has a major influence on M&A activities.

As Keynes has said in Werner et.al is that “The daily revaluations in the stock exchange,

though they are primarily made to facilitate transfers of old investments, between one

individual and another, inevitably exert a decisive influence on the rate on current

investment. For there is no sense in building up a new enterprise at a cost greater than

that at which a similar enterprise can be purchased ; whilst there is an inducement to

spend on a new project what may seem an extravagant sum, if it can be floated off in the

stock exchange at an immediate profit.”

Keynes pointed out a relationship in between M&A deals and new equity issues. This

relationship was based on the arbitrage oppurtunites in between financial and real asset

markets. This is very apparent is case to those companies where just the rumor of a

M&A deals can lead to increase in share activity resulting in increase in share prices.

This type of behavior can be termed as “herd Behavior” and can be attributed to irrational

thinking by the market players.

Werner et.al have concluded to there results on the basis of their empirical studies,

1) Mergers cannot always be explained by efficieny reasoning , though what can be

noticed is that they occur in waves, as in they are spread in different waves of

time. Thus showing us that market sentiment at a particular time may be the

reason behind a merger.

2) Secondly it is very evident that the targets of such deals are not always

mismanaged firms, rather they are firms which have outperformed the averages.

3) The third result suggests that at least some ostensibly discilplinary takeovers

maybe motivated by undervaluation. In such cases it can be said that wealth is not

created its just redistributed.

Porter mentiond in the Journal by Michael A Hitt et.al. that a majority of acquisitions

resulted in unsatisfactory performances and ended up in divestures. Similarly Rolls has

written about how sometimes the gains from acquisitions have been overestimated.

Research by Jensen (1988) in Micheal Hitt et.al has shown that the negative results of

M&A’s prove that such deals have some trade off’s. Muller (1985) supports this theory

by demonstrating that companies in conglomerate and horizontal takeovers underwent

heavy losses in terms of market value. Additionally a study by Pitt(1977) shows that

firms growing through acquisition invested much lesser in R&D activities than those

firms which grew internally. Thus showing us another trade off that if faced by firms

opting for such deals. The tradeoff is between acquiring new firms or the management

investing in resources and champion activities that lead to creation of new products,

technologies and processes.

Looking at it from a financial angle, acquisitive takeovers can have a positive impact as

well. They facilitate the rational restructuring of corporate assets which in turn increase

the firm’s competitiveness. Additionally certain related acquisitions help in reducing risk

and increasing efficiency.

Such deals change the management’s commitment towards building R&D resources.

They have a impact on the commitment of management towards innovation, as the

management has less riskier option of simply acquiring a new firm. Also what has been

seen is that smaller managers in firms which are dealing with M&A’s, often face the

challenge of lack of support from the senior manager. The main reason behind this is that

the senior manager are over consumed with the M&A activities and such a thing can be

harmful for any organization. Smith and Warner (1979) have added to this and explained

their concerns over the fact that M&A deals lead to increase of debt holders in place of

stakeholders. This often results in reduction of risk taking capabilities of the organization.

Megers may lead to growth of a company beyong its gravity of focus and managers may

find themselves unable to control its rate and direction of growth.

In reality a M&A deal is a socially acceptable only if there is an aggregate increase in

income & welfare and all the parties in the deal are benefited. Though this is in

mostly in theory, in reality most studies on such deals are directed towards

shareholders wealth generation and they do not consider all the parties in the deal.

Werner et.al have discussed motives behind M&A deals and the social impact that they

can have on various parties involved. One of the most common motives is target firm

undervaluation in financial markets, it works on the principle that the value of a firms

security may not always be a true representation of its fundamentals. Occasionally prices

can be influenced by accounting gimmics and in such situations the bidder shareholders

gain over the target shareholders. Another motive identified is bidder management self

interested and hubris. This motive is generally seen to favor the needs of the management

and the takeover shareholder over the bidder ones. The management of the bidder firm

become overconfident and put their needs over the needs of the company. It can be seen

as overconfidence on the part of the management and source of empire building. A third

type of motive is Breach of trust where in the takeover is in disregard to some of the

stakeholders, i.e it is without the consent or the interest of some of the stakeholders.

These types of takeovers are beneficial to the target shareholders in the short run but

cause loss of corporate culture and ethics. Another motivation for companies to enter

M&A deal is of Monopolistic Power, such deals are often entered with the intention of

market dominance and can be seen a loss of power on the side of the consumers.

Lastly Werner et.al have identified corporate tax saving as another motive for M&A

activity. In certain cases firms acquire loss making units in order to gain from tax

benefits. Additionally certain deals are done in order to take advantage of leverage

options in terms of debt raising ability of the firm. Some economists have raised their

concern over this kind of activity as the motives behind such deals are not totally

transparent.

It is equally important to look at the deal after it has been executed. i.e Post integration.

Many times the whole deal is base on limited information on the true :strategic,

organizational and financial strengths and weaknesses of the target company. This

information is seldom absolutely true and complete. Such concealment of information is

done by certain companies in order to increase their bargaining power. The net result of

this is that the company which is being cheated faces different results than what were

expected and has to alter its post merger plan accordingly.

As P.S Sudarsanam has discussed, Inegration problems can arise primarily due to

determinism, value destruction and leadership vacuum. Determinsism basically can be

described as a negligence on the part of the people managing the whole process. These

managers rely excessively on their blue prints and layouts, in the process they do not pay

adequate attention to ground reailties which in the end can cause hindrance in the desired

plan. Another problem which companies can face after such a deal is of Value

destruction. Even though on the whole there might be value creation, it is not the case at

the individual level. For example it might be the case where the management of the

acquired firm are given less importance and authority in the new entity and this might

lead them to believe that there has been a loss in value for them. Such a feeling can lead

to uneasiness and unrest among them and is the main cause for labour turnover and poor

peformance. Additionally often it is seen that after a M&A deal there is a gap in the

thinking of the two firms. This is mostly due to the fact that both managements have their

own strategies and priorities and hence go about their plans differently.

Eero Vaara in a journal on discursive frameworks, strategies and moves in Post merger

intergration has mentioned different discourse types used to evaluate and understand

success and failures in mergers and acquisitions. These different discourses help to assign

different subject positions and identities for various players in unique institutional

frameworks. As a result, these discourses help to evaluate the success and failures of such

deals in ways different from one another. There are four main discourse types,

“Rationalistic”, “Cultural”, “Role-Bound” and “Individualistic”.

The rationalistic discourse is similar to the more commonly discourse of rational decision

making and is a reflection of the various models of post merger integration .It primarily

concerns individual managers or even the entire management as a collective unit which

makes decisions to increase benefits and reduce the threats face by the firm. Studies have

shown that often success in such deals is often accounted directly to the actions of the

managers, either individually or collectively. Whereas in situations of failures the

management has rarely acknowledged that failure was due to their actions and have

passed the blame to market circumstances. Some of the usual exuses were directed

towards lack of profitability and declining business cycles. Occasionally in cases it has

been observed that failures have been attributed to other members of the management,

rather than accepting responsibility the management has been “passing the buck”. Such a

instance was witnessed when Nokia had acquired Ericssons information systems. Few of

the comments made by the Swedish managers indicated that they were of the opinion

that it was mostly the doing of the CEO which resulted in shut down of operations

immediately after the merger.

While the cultural discourse deals with the cultural perspective of an organization. In the

post integration stage of M&A deal the management faces decision making

confrontations where they have to choose between different cultures, nationalities or sub

cultures. This implies that they have to decide between conflicting needs and

requirements of the employees. As in the previous case, success was often related with

the success of one’s group rather than overall success of the deal. For example looking at

the acquisition of Esselte Well(Swedish) by Tamplella(Finnish). The Finnish

management were of the opinion that the integration was unsuccessful as they were not

able to make the Swedes opt for their production techniques. Where as the Swedish were

of the opinion that the integration was a successful one from their perspective. This was

mainly because they felt that even after the acquisition they did not have to implement

any changes in their production process. Hence this is a clear example of how the cultural

perspective of the two counter parties can be so different and this eventually cause failure

in the deal. Ocasionaly cultural discourse can also lead to feeling of “traitor” among

people when they feel that someone from their side has taken a decision against their

choice. For example a certain Finnish manager from Ovako Steel felt that his CEO went

along with the requirement of the Swedes as long as his interest was being served. Again

showing us how cultural differences can lead to miscommunication and eventually cause

failure.

Looking at the Role-Bound discourse , it can be identified as the binding which people

find with certain positions in the corporate hierarchy. What was observed was that, in

certain instances people acted in ways which was a reflection of their responsibilities and

roles in the organization. This ended up leading up to a situation where in the various

interests and aspirations of the people were different than what the overall situation

demanded. People were more concerned with doing their responsibilities in the most

appropriate manner rather than doing them in a collective manner to achieve

organizational goals. As in the previous cases success of a deal is directly claimed by

managers on the basis of their personal efforts and actions. Whereas when such deals

failed, most of the managers conveyed that they did not have much authority over the

entire deal and hence were not responsible for it. A clear example of this was when

Ovako steel’s merger ended up in a failure, the oweners of the company blamed the

management for not being competent enough to handle the situation and take suitable

action. They claimed that they were unaware of the entire happenings due to lack of

transparency which had been adopted by the management. Thus showing us again how

easily people take advantage of their positions and roles in the organization to avoid the

blame.

The last discourse discussed by Eero Vaara is of Individualistic Discourse. This discourse

basically identifies people as individual and distinctive people in the organization. During

the entire research, Eero Vaara used this recourse help her attain knowledge on how

people conducted an analysis of the entire deal from an individual points of view. The

result was very obvious, in that where there were success stories again the credit taking

was manifested by the managers, but when it came to failures again the excuse of their

limited responsibility and knowledge on the matter was given. The result also depicted

that often managers framed their own colleges for illegitimate actions in view of

promoting their careers at the expense of others. An example of this would be of a

Swedish manger who blamed his counter part in the Finnish firm Isku during its

acquisition. He was recorded naming the manager and blaming him for his unability to

make quick decisions and act accordingly.

What this entire research depicts is that, as essential it is to understand fundamentals of

the companies before the merger, the deal does not succeed just because the dotted line

has been signed. Difficulties and issues in such cases can cause major hindrance in the

intergration stage. Hence firms must be aware of such issues and have to be proactive in

resolving them in order to ensure a smooth integration process.

More often than not, companies get over involved in the bigger aspects and fail to realize

the importance of such details and end up paying the price.

Chapter 3- Stylized Facts and empirical studies

Stylized Facts-

Most interestingly Gary B. Gorton et.al have identified two key stylized on facts about

M&A deals. Firstly they have observed that on an average the returns are measured to be

negative. Secondly Mergers tend to be concentrated in those industries where some sort of a

shift in the regulatory or technological nature can be identified, thus making them a more

efficient response. Gary .B. Gorton et.al have tried analyzing two types of theories in respect to

M&A deals. These theories can be distinguished into two basically , Neoclassical and managerial

merger theories.

Though there have been studies aimed at understanding and establishing these two facts, no

particular study has been able to demonstrate both results. For example, Mitchell and Mulherin

(1996), Weston, Chung, and Siu (1998), and Jovanovic and Rousseau (2002) in their studies have

been able to demonstrate why mergers are concentrated in industries for which a regime shift can

be identified, but at the same time they have not been able to establish the reason behind negative

returns for the acquirer. Similarly Morck, Shleifer, and Vishny (1990) have been able to establish

the reason behind negative returns but have not been able to identify the reason behind the second

stylized fact. Addtitonally a third fact that has been indentified is that M&A deals come in waves,

i.e they tend to occur in trends over specific periods of time.

The findings of the research reinstate what was discussed earlier. One element of their

research is directed towards understanding profitable M&A deals, this is mostly because only if

there are profitable M&A deals there come a possibility of having unprofitable ones.

Secondy Most managers want to remain independent, as they have a concern about their role

after a merger or an acquisition. Thus they try and avoid such deals with certain defensive tactics.

One of the tactics often followed is to become bigger than the possible acquirer, hence making it

difficult to be acquired. This is termed “Eat or be eaten” by Gary .B. Gorton et.al . For example

let us assume there are five companies of similar size in a particular industry. Firm A, Firm B,

Firm C, Firm D and Firm E. Firm A might be the most profitable and efficient one in the entire

sectoe, Thus other firms might be under the apprehension that they could become potential targets

for frim A’s expansion plans. Such thinking can force them into taking a defensive approach and

opting for a M&A deal themselves, .i.e. Firm D might acquire Firm E in order for it to increase

size and make it that much harder for Firm A to acquire it. The case can be similar for Firm B and

Firm C as well. Thus merger waves arise because of externalities involved in defensive mergers.

One defensive deal can create a chain sort of reaction leading to other firms taking such action

themselves. Overall one can see that ,since the motivation behind the deal is a sense of fear, not

all these deals can be benifital and can end up as failure stories. Hence Defensive acquisitions

care termed as unprofitable.

Additionally it can also happen that sometime smaller firms in order to get targeted by big

firms endulge in acquisition in order to become more visible to such big firms. The main

intention of the small firms is to become bigger and more profitable, which in turn makes them

more attractive to the bigger firms. These types of acquisition are termed as profitable

acquisitions.

Taking an example of another industry where in there are the same five companies, just the

difference being that all of them are of different sizes. In such a situation it is observed that

smaller firms make profitable acquisitions and defensive acquisition depending on their

intentions. Whereas the biggest firm will not have any defensive motive as it has no apprehension

of a takeover. The slightly large firms are the ones who end up reacting by entering defensive

deals in order to protect their interest and thus end up in unprofitable deals.

Hence we can see that these examples help us to demonstrate the three stylized facts which

were discussed before. Proving to us that often it is that the acquirer ends up getting negative

results, as well as M&A deals are concentrated in area of regulatory and techonolgical shift and

most of all that M&A deals occur in waves.

Empirical Studies-

There is a lot of empirical study which has been conducted on Mergers and acquisitions.

With the help if such evidence many writers and analysts have argued against the belief that all

M&A deals are as easy and successful as made to be. There are many examples and cases which

have been cited by authors in relation to such empirical studies. In order to analyze such cases I

will draw upon the work of Peter Drucker (1981,1982) as discussed in a management journal by

Frank T.Paine and Daniel J.Power. Druckers five rules of M&A are highly regarded in the

financial industry and have been accepted by most practitioners. With the help of these

conventions it is simpilar to apply these rules to certain cases and spot the reasons behind the

fallout of such deals. Druker’s conventions are based on two assumptions, firstly “Acquiring or

merging with another firm can be financially successful or meet other organizational goals” and

secondly “The actions of managers have a major influence on the success of the acquisition”

Drucker established five rules for the successful completion of a M&A deal-

1) Firstly according to Druker it is essential that the merger or acquisition should be

with a company with a common core of utility .i.e they should have a common

technology, common market, or maybe even a common production process. He

believed that just having a financial relationship is not enough for a successful

Merger or acquisition. According to Drucker unrelated diversifications more often

than not turned to be failures. This can be backed by empirical evidence collected by

Rumlet’s (1974) study , which was based on 273 large industrial units . the study

revealed that companies which had extended themselves in and around their

common core resources and skills performed relatively better than firms which opted

for unrelated diversifications. Similarly studies conducted by Bettis(1981) proved

that firms which had opted for related acquisitions had a better rate of return on

assets than of those firms which went in for unrelated diversification. His studies

were primarily focused on scientific based firms who could take advantage of

common areas of research and development in cases of related diversifications. This

does not mean that unrelated diverisifications do not have any chance of success, in

fact a study by Lubatkin(1982) which used the capital Asset pricing model has

shown exactly opposite results. Though again different studies are based on

differenent parameters and hence can generate different results. What is more

important to understand is that success or failure of a M&A deal does not depend on

the fact that it is related or unlrelated, but more on the level of understanding and

strategic planning that is done by the two firms during and before the deal.

2) The second rule stated by Druker for a successful M&A deal is related with thinking

through the firms potential contributions of skills to the acquired company. The

contribution has to be more than money , there should be some sort of skills transfer

as well. The example which Druker used to explain this rule was that of GM.

Initially when Gm ventured into diesel engines, it not only contributed capital but

also along with that Gm contributed to the deal bringing in its technological and

management expertise, hence the venture was successful. On the other hand when

Gm tried to extend its operations into the Aircraft engines its main contribution was

in the form of capital, Gm did not try and contribute much into the managerial and

technological aspect of the deal which could be a reason for the fsilure of the deal.

This clearly indicates that it is very essential for any firm to plan

systematically.Similar studies by Ansoff et.al (1971) have shown that planning

variables correlated with the results measured. Though there are exceptions wherein

firms entering into deals without adequate strategic planning have succeded in their

acquisitions. Though what is important to understand is that there are circumstances

wherein just contribution on money and cash management might be enough for the

success of the deal, but it is always more beneficial for companies to strategize

carefully and analyze before taking on such acquisitions. Where many firms go

wrong is that they fall under the illusion that if a particular acquisition worked for a

company if they also follow the steps of that company they will succeed as well.

Such thinking causes failure in M&A deals because evry company has its own

charactersitcis and capabilities and it is most essential for them to take these into

mind before following the footsteps of another company blindly.

3) Thirdly it is very important for the acquiring company to respect the products,

markets and customers of the acquired company . Furthermore there must be a

temperamental Fit. Often it has been observed that managers are unable to clearly

understand and apply these two concepts. As Druker has pointed out many times the

management of the acquiring company are uncomfortable with the newly acquired

firm and end up making wrong decisions due to the ambiguity of understanding the

two concepts. He cites two particular situations where in he felt that failure to

understand these two concepts lead to the failure of the deal. Firstly, i)

Pharamaceutical companies acquiring cosmetic firms over the last few decades and

secondly, ii) Entertainment and television companies that bought book publishers.

This helps us comprehend the reason of many failures in M&A deals due to the

acquiring firms attitude of self indulgence. This has been backed by Mace and

Montgomery (1962) who identified that proficient management of the acquiring

firm, who are motivated as well as understanding and respectful of the new firms

position have more chances of succeeding.

4) Druker also felt that It is crucial for the acquiring company to be able to provide the

acquired firm with its top management within a time period of 12-15 months. He

believes that it is an erroneous belief which many firms have that they can buy out

management. In accordance to the high turnover rates in todays world it is very easy

for the management of the acquired company to switch over for a variety of reasons.

Kitching’s (1967) studies have also shown that having managers who hold the

capability of being catalysts of change are essential for the organizations success.

Interestingly another study by Hayes has shown that 64% of the top managers of

acquired companies leave the organization within five years of the acquisition. A

closer study of these managers demonstrated an extremely interesting truth, 82% of

them were of the opinion that if they were given the option they would not have sold

their firms in the first place. These managers felt that they had not fully examined the

deal to the extent they should have and there were certain aspects of the deal which

had been neglected. This is a common scenario witnessed by many firms around the

globe and can be seen as a reason behind so many mergers and acquisitions which go

wrong after the initial process. Hence acquiring companies should concentrate more

on retains the acquired firms management rather than extensively planning hiring for

the new firm. This is beneficial as firstly the old management knows best their own

enterprise and how it works, secondly it saves the acquiring firm efforts and money

which they would have spent eventually when the old management had been

removed.

5) Drukers final rules states that after the merger, managers from both the organizations

should be promoted within a period of one year. Such a step enables the organization

to maintain a sense of comfort within the entire management team, mostly because a

promotion makes the managers feel that the merger has provided them with new

opportunities and thus motivates them to work harder. As shown by the studies

conducted by Salter and Weinhold (1979), when two firms combine to form a new

one there are opportunities for managers from either firm to transfer functional or

industrial related skills to the new entity. Promoting such managers is an execellent

way of promoting such contribution from all managers.

Chapter 4- Reasons behind failures of M&A’sUse exhibit-By Michael Sarlitto and Dan Roman, Chicago Members- virat10After looking at the all the empirical studies related to mergers and acquisitons, it can easily be identifies that not all of them are successful. The reasons behind these failures are many. The next part of this essay will concentrate on listing and understanding such reasons.

1. Cultural Clash- This has been identified as one of the most common causes for the failure of a M&A deal.The culture has a major role to play in the way that the employees react to the new work environment i.e the type to expections they build and the sort of commitment they show. This cultural clash signifires the difference of the values, ethics and ideologies of the two firms.Such differences can make it difficult for the employees to adapt to the working environment and shift their focus from customers to other unrelated issues. (Han Nguyen and Brian Kleiner)

2. Improper Managing and Strategy- It has often been seen that during the intial part of the whole process, the top management takes keen interest and is deeply involved with it. Once the deal has been finalized and signed they tend to move on to others imporant issues. What they don’t not rrealize is that it’s the integration phase which requires carefull identification of areas which can create value for the newly merged or acquired firm. If adequate attention is not given at this stage, the deal can loose its direction and end up in failure. (Han Nguyen and Brian Kleiner)

3. Lack of a clear vision- one of the most essential things that is required for the success of a M&A deal is clarity of vision. Without clarity all the future actions can end up being a string of unrelated series of activites. Lack of vision can lead to loss of shareholders value. Its not enough just to have an idea in mind, but it is also imporant to know how it has to be executed and what is to be done when it doesn’t go according to plan. (Han Nguyen and Brian Kleiner)

4. Too high a Premium- In todays competitve environment no deal goes unoticed by rival firms. This is applicble to M&A’s as well. It often happens that during the merger or acquistion the rival firm makes a higer bid. A series of such steps can lead to stuation where every company it trying to outbit one another. In the end the compnay which finally wins the bid can end up over paying for the deal. Even though the deal can be a highly profitbale proposition , the expense incurred for it can be excessive. This

leads to a situation where their returns end up being lesser than planned and this leads to a feeling that the deal is a failure. (Don Wehby)

5. Poor business fit- In certain cases there are failures because ther two companies being merged are not suitable business fits for one another. This can be due to the fact that their technologies are not compatible or that the firm acquiring does not have enough technical knowledge of the company they are acquring. Even though finanically the deal may look profitable on paper it doedn not mean that the actual core of the company .i.e its technology is compatible. (Don Wehby)

6. Debt issues- In cases where the acquiring company does not have enough finances for the acquisition, it opts for debt financing. This might look feasible before the deal but can be a serious issue when the interest on this debt starts consuming a major part of the profits. Additionally an overdebted company is not favoured by the stockholders and can lead to loss of confidence. (Don Wehby)

7. Delays in action- Any sort of delay can be a major threat to the entire deal. There can be delays in the planning , execution, integration or even legal issues. When a M&A deal is announced there is an exitment in and around the company about the deal. This exitement is benficial for the company as it motivates the sharholders as well as the employees. However after an announcement when there is a delay in action all the parties and people involved in the deal loose interest in the whole process. Another risk posed by the delay is the change of prices of raw matetials, inputs, outputs etc, such change can be crutial for the failure of a deal.

8. Failure to Deliver on Synergies- Over estimating of the potential benefits of a merger or acquisition is one of the major reasons for its failure. It is essential to have rational targets and expectations so that the management does not loose its way when the results are less than expected. Occasionally incompetent managers can also make the mistake to misinterprit the possible synergies that may exist.

9. Lack of communication- miscommunication or lack of communication between the employees of firm or in between the two organization can be a major factor affecting the chances of failure or success. It is common practice to keep the middle and lower level management in the dark about the entire deal. Withholding of such a information from the employees can lead to a feeling of confusion, uncertainty and loss of trust. (Sumita Reddy)

10. Lack of training- Studies have also shown that inadequate training given to managers leads to problems in post merger integration. Proper training can help the employees of the orgainziation in allinging their activities and work with those of the new organization. Common thinking of the management is that the training is to be provided only to the technical staff, but what they do not realize is that even other staff such as HR, Administration etc need to be trained in order to ensure a smooth integration process. (Sumita Reddy)

After understanding the reasons behind the failure of M&A’s , this essay will look at a

research conducted by Coopers and Lybrand in 1992 which focused on understanding

why M&A’s failed. The research was based on 100 top companies in the Uk which were

involved in 50 such deals amounting to 13 billion pounds. Only deals worth 100 brtish

pounds or more were considered for the research. The method adopted for the research

was of interviewing top executives of companies involved in these deals. An alarming

54% of the M&A deals were considered by the executives as failures. This level has been

consistent with those in 1973 and 1988, i.e 49% and 53 % respectively. A majority of the

executives were of the opinion that the failures were primarily due to the cultural

differences between the two firms. The total number of executives who though this way

amounted to 85% of the entire respondents interviewed. Neary 80% of the respondents

were of the opinion that the failure was due to the lack of post integration planning done

by the management after the initial phase. In addition to this, around 45% of the

executives interviewed felt that the failure of the deals was caused due to the lack of

knowledge of the industry and company being acquired by the acquirer itself. A similar

percentage of respondents were also of the opinion that the fault lied with the

mismanagement of the newly acquired or merged enterprise. Lastly approximately 30%

of the executives felt that no prior experience of handling similar M&A deal was the

reason behind the lack of success .

Since the reasons of failures are so many, I will concentrate only on a couple of them and

try to analyze them with the help of case studies. This essay will look at two major

aspects which often lead to failures. Firstly it will look at cultural differences among the

two firms which can cause hindrance in the deal and secondly it will look at the issues

arising from poor technological fit in between the two firms.

Cultural Clash In between the two firms-

As Sumita Reddy has rightly mentioned “even if two companies seem to have all the

right ingredients in place for a successful merger, cultural differences can break the deal”.

It is a very different thing to have a deal on paper than from actually executing it. At the

end of the day if the employees from both the organizations are unable to put aside their

cultural differences the deal will not succeed.

The culture of an organization can be identified as its ethics, practices, traditions and

ideologies. Therefore during a merger or an acquisition, there is a need to bring together

all these aspects of both the organizations and that can turn out to be a time consuming

and difficult process.

The term culture is defined by Jaegar in Sumita Rao as “a set of ideas shared by members

of a group of people”, while national culture has bee defined as “ the software of mind,

which is embedded in the everyday life” by Hofstede (1991). His work on national

culture has been recognized as one most the most important pieces of work on the topic.

He has defined national culture into various different dimensions.

These dimensions can be classified as-

Power distance- How acceptable is the fact that there is unequal division of power

in organizations.

Uncertainty Avoidance- How threatned the people of a particular society feel

when they are faced by changes in formal rules and limit to which new different

ideas and behaviour is tolerated.

Individualism vs Collectivism- Both represent different approaches of social

frameworks. In a collective society all the members share a common feeling of

unity and loyalty among them. They come with the idea of helping one another

out. While an Individualistic society follows the simple rule of “Every man for

himself”. There is little unity and the only sense of belonging is in between

families.

Masculinity vs Feminism- This relates to how the societies perception of money,

materials and inter personal relations, while the former represents masculinity the

later stands for feminism.

In Addition to that Hofstede’s work has been stated to have an impact on the way

HRM practices are followed. (Sparrow and Wu 1998). Different cultures have

different expectation from manager –subordinate relationships. Such differences

become very visible when there is a cross border acquisition or merger. It makes it

that much harder for both the manager and subordinate as they have dissimilar

expectations from each other. Even the basic understanding of the activities which are

included in effective management differ from one organization to another. Due this

difference the methods of selection, recruitment and training also vary.

Employees from various organizations also differ from one another in the way they

perceive growth of their careers and take on responsibility. For some employees

taking an added responsibilty and taking a foreign project might be a day to day task,

while on the other hand certain employees might feel very pressured due to any added

responsibility. The remuneration packages can also be affected by the cultural

background of the employees. In organizations where the power distance is high there

are higher range of variances in the remmurination packages in between the top and

management.

Even methods of compensation of employees change from organization to

organization. There are certain cases where in employees feel comfortable and

secured with their fixed incomes and limited incentives. On the other hand there are

employees who are motivated by additional incentives and higher targets, they are not

satisfied with their limited fixed remuneration. Similarly in individualistic cultures,

individual performance based plans are more suitable. On the other hand it is more

suitable to have group based targets and seniority based promotions in organizations

which have a collective attitude. The remmuniration packages can also be affected by

the cultural background of the employees. In organizations where the power distance

is high there are higher range of variances in the remmurination packages in between

the top and management.

The disparity in the cultural frameworks is not only from organization to organization

, but also from one country to another. As put forward by Shimizu et. al. in Sumati

Reddy “ The differences in national cultural, customer preferences, business practices

and institutional forces, such as government regulations, can hinder firms from fully

realizing their strategic objectives.”. While dealing with M&A deals at the

international level managers have to take into account factors such international

labour laws & practices, management norms and institutional mechanisms. For

example labour laws are very different in the US than from Germany. It is much

easier for an acquiring firm in the US to opt for large scale lay offs than it is in

Germany.

During cross cultural negotiations there be certain cross cultural issues related to

management styles which crop up. Such perceptions can be classified into the Power

distance, Communication Context, conception of time and Collectivisim –

individualism. (Cohen 1997 in Sumati Reddy). For example looking at the conception

of time, an American manager might be very particular about the time of a discussion

and would be rigid about his timing. Whereas say a manager from a Latin American

country maybe more flexible with his time and not be that particular about his

punctuality. Further looking at the collectivism aspect, a manager from a collective

culture may prefer to develop a relationship and a sense of bonding between himself

and his counterpart. Whereas a manager from an individualistic culture would prefer

to keep his relation restricted to business and would stay away from forming groups.

Looking at a manager who comes from a background in which there is equal spread

of power and authority, he will be more compromising and willing to share his

responsibilities with others. These discrepancies in cultures can lead to feeling of

uneasiness among the firms as well as aggressive behaviour towards one another. In

normal circumstances it is the acquired company which has to undergo the changes in

order to align itself with the acquiring company. Every firm’s culcutre has its own

symbols and characteristics. The integration process can lead to the blurring of such

symbols and lead to the employees felling pressuirzed and stressed. Employees of the

acquired firm can also face phychological trauma due to superiority attitude adopted

by the acquiring firms employees. The managers of the acquiring firm feel that since

they are the ones taking over they have an upper hand over the acauired firm and its

managers. (Lubatkin, Weber, and Schweiger 1999 in sumita Reddy)

Nicola has given a very good account of the different stages of the acculturation

process. She has divided the entire process into four distinct period. During the first

period there is excess optimism from both the parties involved in the deal. This period

is also referred to as the Honeymoon period. Though this doesn’t last for too long a

time, as the realties cause problems in the deal and it ends up leading to a feeling of

frustration and depression. Only after a certain period of time when the employees of

the organization are more experienced with handling the frustration they adapt

themselves to the new cultures.

Case Study 1-Daimler-Chrysler

Underestimating cultural issues is especially dangerous in international mergers.Wolf suggests, “There has always been a tendency to underestimate the impact of culturalissues and to focus instead on organizational or structural issues. It is dangerous tounderestimate culture issues in any merger, but when the merger involves two companiesfrom different national cultures, those issues are exacerbated and unless a company isprepared they can be debilitating” (“Unhappily married,” 1999 in Sergei Golitsinski)

On the 7th of May 1998 one of the biggest deals in the history of M&A’s was announced. This deal was between the two giants of the car manufacturing industry , on one end was Daimler Benz and on the other was Chrsyler Corporation. The wall street Journal termed it “the biggest industrial merger of all time.” At that moment the deal was called the “Merger of equals” and was looked at being one of the most fruitful deals. The deal was initiated in the start on 1998 and took an approximate 12 months to be totally executed. At that moment Jurgen Schrempp was the Ceo of Daimler Benz and his counter part was Robert Eaton from Chrysler. This merger resulted in the new entity becoming the fifth largest producer of automobile producer in terms of units. It also enabled the firm to become third in terms of market capitalization and revenues. Both the organizational heads were very satisfied with the progress that their firm was making and were convinced that the new company was ready to take advantage of the opportunities presented by the global market.After the merger of the two companies the total market capitalization amounted to $100 billion and an employee strength of 442000 .The new organization wanted to take advantage of savings from synergy in areas of distributions, sales, product, R&D and design. (Professor Sydney Finkelstein)

.

Two years down the line, things turned out to be very different. The overall capitalization stood at a mere $ 44 Billion. Stocks of the company had been banished from the S&P 500, which was another evideance of the poor performance of the company. The market position of the company had gone so poor that its share value had declined to one third of what it was before the merger. While chrysler group had posted a loss of $512 million in 2000, the mercedez-benz division and smart car division had booked profis of upto EUR0 830 million. (Professor Sydney Finkelstein). Making it evident that the merger wasn’t the best thing t have happened to both the companies especially Chrysler .

The so called “merger of equals” , ended up looking more like an acquisition of Chysler. In the end there were couple of aspects which came in between both the organizations Why did the deal go down-One major aspect which played a very important part in the failure of the deal was the difference in organizational cultures in between the two firms.

Cultural clash was an expected hurdle by the management during the integration. In order to resolve this issue Schrempp made a conscious decision to let both companies maintain their respective cultures. Though there had been major plans developed for the integration process which included cultural workshops such as "Sexual Harassment in the American Workplace" and "German Dining Etiquette," Though all these efforts were made, in the end it was the basic management styles which remained far different . No workshops could be sufficient to to bridge the gap that existed between the cultural mind sets between the two firms.

Writers such as Randall Schuler and Susan Jackson were of the opinion that DaimlerChysler thought that both the cultures could be blended to form a culture which could be benefitial for the new company. They expressed concerns about the fact that cultural aspects were mostly ignored and they were only spoken about by the board officials during giving bold statement to the media. Majority of the emphasis was laid upon the operational and business synergies. In the words of Gibney (1999), “from the start, the cultlure gap made Daimler-Chrysler’s post-marriage period of adjustment more difficult than that of any merger around”

Instead of maintaining a cordial environment of sharing, they opted for a system by

which they could maintain their culture without interacting with that of their

counterparts.

Many analysts believed that both the companies were extreme poles when it came to

management styles and cultures. Their only similarlity being that they produced

automobiles. Chrysler had the image of being the very true symbol of American

creativity and adaptability. Their uniqueness lied in their “Cowboy” Risk enduring

attitude and at the same time operations were executed in a cost controlled

environment. There was a certain level of equality maintained for relations with staff.

On the other hand Daimler-Benz was known for its superior engineering techniques

and its attention towards details. Mercedes- Benz had their repuatation as a company

which maintained top line quality and standards. It was characterized by bureaucracy

and centralized decision making. In contrast to this Chrysler was one of the leanest

automobile companies around. There was a certain instance where the American

management had been amused with the amount of time and attention which was

given to a brouchere which had to be distributed to the employees.

Another huge distinction between the firms was the disparity in the wage levels

before the merger occoured. The gap between lower and upper management had been

vast in the American firm, whereas to the Germans this was a totally new concept.

The American concept of overpaying senior managers eventually lead to a situation

where certain middle levels managers were earning more than their superiors wo they

were reporting to in Germany.

Another major difference which the two firms faced was that of “style” of working.

While the Germans were known for their meticulous and precise ways of working,

the Americans preferred more spontainouty in their work. The Americans favoured

working at a pace and taking things as they come. On the other hand the Germans

believed in detailed planning of each and every step before they undertook any

actions. Such contrasts in styles of working, was a major source of dissatifaction

among the two management teams.

Mismanagement of the Deal-

Despite all these differences between the two firms, if the managers would have been more efficient in handling the differences the merger could have been successful. For example certain statements by senior officials from both companies sparkerd the already growing tention between the companies. A comment by the Chrysler president James Holden suggested that he saw the merger as the "marrying up, marrying down" phenomenon. "Mercedes [was] universally perceived as the fancy, special brand, while Chrysler, Dodge, Plymouth and Jeep [were] the poorer, blue collar relations". (Professor Sydney Finkelstein). Th Germans also retaliated against such comments and were quoted passing comments like "would never drive a Chrysler". "My mother drove a Plymouth, and it barely lasted two-and-a-half years," One of the most controversial statements was made by the DaimlerChrysler CEO Jürgen Schrempp in autumn 2000. He was quoted by financial times saying "The Merger of Equals statement was necessary in order to earn the support of Chrysler's workers and the American public, but it was never reality”. Such a statement was enough to prove that the “merger of equals” was just an acquisition of Chrysler. Such statements were also followed by actions such as firing of two of the most influential Chryser executives in a quick sucession and to make things worst they were replaced by two Daimler executives . James Holden and Thomas Stallkamp were the two main executives from Detroit and replacing them with Zatsche & Bernhard was a big demotivating factor for the employees of Chrysler in America. None of the two had any experience of the American product range or the vastly different American market.

With such factors affecting the performance of Chrysler, the writing was on the wall. Analysts predicted that after the losses in 2000, Daimler Chrysler faced a situation where they had to layoff around 20000 to 40000 employees in its North American division. Additionally they would have to shut down one

of their thirteen production plants in the North American region. These predictions were proved right when in 2001 Zetsche announced the lay of of 26000 employees. This move was not taken well by the public and majority of them felt cheated as instead of taking benfefit if the synergies between the two companies, Daimler Chrysler had to cu jobs to keep on track.An article in September 2001 Business Week summed up the entire situation. It stated “ The merger has so far fallen disastrously short of the goal. Distrust between Auburn Hills and Stuttgart ha made co-operation on even the most simplist of matters difficult. “.

Even though both the firms might have been combined under one common name, they still continued to have different operational headquarters. Even their operations were kept adrift of each other in order to allow freedom to carry the out as before. Along with this, their agendas and focus was different from one another. With such differences in products, operations, agendas and cultures, how could DaimlerChrysler become a company with one vision.( Randall Schuler and Susan Jackson)

How could things have become better-

Based on my understanding on the case, I believe that right from the outset of the deal

the attitude adopted by both the parties was questionable. It was very evident that

both Daimler-Benz and Chrysler knew the difficulties and differences that they would

have to face during the merger. With such diverse cultural backgrounds both the

companies should have prepared themselves well in advance with methods of

adopting each others practices. Unfortunatley this was not the case, managers from

both Daimler-Benz and Chrysler expressed amusement and surprise with each others

practices instead of showing interest and learning from them. Such behavior

encouraged a feeling of hostility rather than encouraging mutual respect for one

another. It would have been most appropriate for management from both firms to

keep an open mind and absorb what they learned from each other. Daimler could

have benefited by following Chryslers risking taking and exploring attitude. At the

same time it would have equally benefital for Chrysler to take a leaf out of Daimlers

book and achieve to some extend, the kind of quality control they had set standards

for. Potentially the deal would have been a lucrative one as the products from both

organizations combined covered the entire market requirements.

Difficulties in Finding a business fit-

The technological Aspect

There are many instances where in it has been noticed that M&A’s have suffered

failures due to lack of business compatability. More precisely this segment of the

essay will be looking at the failures which occurred due to technological

incompatibilities.

As very rightly said by Freda Turner by “Buying an organization can be

likened to buying a secondhand car. The seller is going to highlight the

positives while concealing or downplaying vulnerable problems”. A study of

125 companies worldwide by PricewaterhouseCoopers' has shown that a

majority of the senior executives feel that integrating information systems is

the hardest challenge they faced post a merger deal. On an approximate

75% of the companies faced difficulties during the integration of their

information systems after a M&A deal.

Information technology in today’s business world is a key element in

execution of operations and business processes. Today’s business is so

dependent on IT for its daily operations that a day without IT certain

industries would shut down. For example look at the financial sector, most

banks and stock markets need a highly developed IT structure without which

it would be impossible for them to operate. Another good example would be

of the travel industry i.e. airlines and travel agents, would be faced with

major difficulties if they did not have globally integrated IT systems.

Therefore when firms enter M&A deals, they have to look at the possible

synergies developing from IT systems. In certain industries IT contributes

heavily to the post merger integration process, while contributing lesser to

the gains. For example in the power industry IT can stand for 50% of the

integration cost while contributing only 20-30 % of the post deal synergy

benefits. A recent survey showed another interesting fact that only 50% of

the IT mangers were consulted before executing a M&A deal.

A report by Psc advisory states that a majority of the failures in mergers and

acquisitions are because of the incomplete assessment of the entire

organization before executing the deal. Additonally the report also

illustrated that a usually the assessment only covers the financial and

operational aspects and tends to ignore (Information Technology)IT

infrastructures. Where organizations go wrong is that they consider IT as

supporting system rather than taking them as part of the business. The

entire team of IT professionals is critical to the success of the organization.

In order to evaluate a business it is very essential for the acquiring firm to

value correctly the IT capabilities and staff which come along with the

organization. What makes this entire process even more important is that all

IT structures are not the same. Every organization has its own needs and

limitations which influence the type of IT structure they implement. Very

often organizations find themselves in a position where they have limited to

spend on their IT and due to this they have to alter their needs. Such

situations can be handled for a running organization, but the problem arises

when an organization gets into a merger or acquisition. Carrying on with the

limited IT structure becomes very difficult. During such a transition the

employees face situations where in certain essential IT functions might have

been changed as per the requirements of the acquiring organization.

Additionally these employees may find themselves in a situation where they

are inadequately trained for the new systems. There are also certain

advantages which can be gained from having efficient IT systems already in

place. Thus making it all the more important for an acquiring company to

assess the IT systems for any benefits and or costs they might imply on them.

Unfortunately even after so much importance is laid on the IT systems, most

of the private equity firms do not include assessment of IT structures in their

agendas before entering into M&A deals. ( Psc advisory)

In order for a business to fully take advantage of the synergies from a M&A

deal it is of utmost importance to understand the pitfalls and advantages

presented by information technology and systems. Due to the importance of

IT in M&A, a prominent research firm by the name of The Concure Group

has conducted a specialzed study on the implications of IT on mergers and

acquisitions. They designed a questionere specifically and with it examined

in depth 23 companies which had recently entered into such deals. Many

researchers from the group formed the opinion that, many of the firms had

highly underrated the importance of IT in the integration process. The study

additionally incorporated analysis of how during costing of an acquisition it

is very essential to take into consideration what are the credentials if the IT

system in place. A good exisiting IT system can be a reason for increase in

the price of the acquisition whereas on the contrary a weaker system can be

used a justification for bargaining.

The survey showed that it is better for the entire deal to be executed in a

speedy manner as delays can cause negativity in all stakeholders. This does

not mean that the deal should be done in hastyness , but keeping a good

pace is always benificial. Additionally another issue which was stressed upon

by the research was that of the readiness of the IT departments. Often the

case is that the IT systems are integrated only after the entire deal has been

executed . There should already exist a contingent plan ready for the

integration of the IT systems, in order to be able to perceive the possible

difficulties that may arise. Pre planning for the integration can moreover

help the firm adapt to the sudden change in the quantity and type of

transactions which the firm will have to execute after the deal. Another

common mistake committed by many firms is of underestimating the cost

involved in the integration of the IT systems. Due to this mistake firms find

themselves in a financial crunch when the actual expenditure turns out be

far more than expected. The study showed that on an average the

integration of the IT systems costs a approximate 50 to 70 % of the entire

integration process, hence firms entering mergers or acquisition should be

realistic before setting expenditure budgets.

The study by the concour group also shows that it is best for both the

companies to first ensure that they are on common grounds when it comes to

the having stabilized business system and practices. Only once this has been

achieved then there can be a transformation towards the new common

system. The last finding of the report has exhibited common slip ups made by

the IT departments of many firms. They believe that in many instances the

IT department gets over involved with internal issues and overlooks the fact

that it has to also contribute towards achieving business results.

As Dr Simon Rawling has mentioned, one of the most elementary mistakes made by

organizations entering into M&A deals is that they try to incorporate the best elements of both

the firms to form a superior element. In this case it would be the best aspects of the IT systems

into one. What they do not realise is that it is not easy to integrate and handle such a system.

Over ambitious plan such as this are the main causes for failures. He has also stated a study of

Business week which has demonstrated that on an approximate half the M&A deals end up in

destroying share holder value and the major culprit behind this is are IT projects. An alarming

result was seen when a research firm The Standish group claimed that only 29% of the IT deals

were a success in the year 2004. Thereby eximplerating the number of failures in the IT sector

when it comes M&A deals.