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Mergers & Acquisitions – Intricacies & Success Factors

Posted in Finance Articles, Total Reads: 3904 , Published on May 25, 2012

Determinants of a Merger success can be listed down as follows (Epstein M.,2005) :

1. Strategic Vision and Fit

The strategic vision should clearly articulate a merger rationale that is centered on the creation of long-term competitive advantage rather than just short-term improvements in operational efficiency. Prominent reasons for company mergers include attempts to increase scale, geographic scope, knowledge, and cross-industry extension.

2. Deal Structure

A successful merger requires careful attention to two aspects of the deal structure: price premium and financing type. Mergers often fail due to paying too high a purchase price and overburdening the new company with sky-high debt payments. The decision of whether to finance with cash, stock, or combination depends on a number of factors,including accounting and tax implications. Stock deals have become more popular throughout the last decade as the stock market rose, but both companies must consider whether their own stock and the other company’s stock may be over valued or undervalued at the time of the deal.

3. Due Diligence

Merger partners must exercise care to ensure that the potential deal can succeed in implementing the proposed strategic vision. The due diligence team should comprise members from both companies across a number of different functional areas and include accountants, lawyers, technical specialists, and other experts.

4. Pre-merger Planning

The preparation during the period leading up to the merger announcement is vital to success since it is critical to present the merger to key constituencies with confidence.

5. Post-merger Integration

The strategy of both the new company and the integration process must be clear and the new organizational structure must be well defined.

6. External Factors

Not all factors that influence the success of mergers are under the control of the company itself. Changing economic conditions may introduce dynamics in employment and customer retention that could not have been anticipated. The company’s industry or peer group may undergo drastic, unexpected change during the integration due to the success, failure, or actions of peer firms or economic conditions.

For a cross border M & A, Accenture has highlighted four major drivers of success

( Firstbrook C., 2007) :

1. Start with a clear and compelling strategy: The most successful cross-border acquirers begin with a clear view of both the role that cross-border acquisitions will play in their strategy and the type of companies best equipped to fill that role.

2. Understand the markets and their environments: The greatest risks in cross-border transactions arise from the failure to understand the culture, regulatory structure or competitive environment – and sometimes all three considerations – in the target market.

3. Convey respect for employees of the acquired company: The successful integration of an acquired management team requires sensitivity and careful attention to the cultural gaps that exist between acquirer and target, or between merging partners in a cross-border deal. Tolerance for uncertainty, attitudes toward power, cultural biases toward individualism versus collectivism, and preferences for how decisions, are made differ widely across national boundaries

4. Execution, execution and execution

Once a deal has been agreed to in principle, integration planning should begin as early as possible. It is easy to underestimate the effort involved in any acquisition. Management from both sides are expected to guide a complex integration process in addition to carrying out their continued responsibilities for day-to-day operations. Without careful attention, critical sources of value, like existing customer relationships and distribution channels, are bound to fall through the cracks, with negative consequences for both the integration process and the day-to-day business of the merging companies

Since the majority of mergers and acquisitions do not meet expected results, it is imperative to assess the usefulness of M&A concept as a strategy tool. The usefulness of M&A as a strategy tools depends on the focal firm’s human resource capability. Human resource capability serves as the engine for firms to “assimilate” effectively acquired firms. That is, M&A strategy can be effective when the firm has high HR capability and can manage the post-acquisition integration effectively.

Therefore, for some industries such as banking and retailing, M&A is basically a HR strategy that the ones with high HR capability will win the game. M&As are seldom isolated strategic moves of the focal firm. Instead, a series of M&As demonstrate the focal firm’s commitment to pursue a growth strategy through systematic acquisitions. The series of M&As may have a specific pattern that shows the focal firm’s strategic intent.

For example, the focal firm can engage in inter-state M&As to become a national player.This has several implications in the field of strategic M&A and HR management :

First, the findings of  Bou-Wen Lin, Shih-Chang Hung and Po-Chien Li help us understand how internal capabilities can affect firm performance and the effectiveness of the firm’s M&A strategy. Specifically, this study finds that HR capability contributes to the performance of banking firms. Their findings are consistent with those of several recent studies in the human capital literature, such as Hitt et al. (2001), Barney and Zajac (1994), Lepak and Snell (1999), and Sherer (1995).

We also find that HR capability can positively interact with M&A intensity and in-state propensity. These findings indicate that internal HR strategy should be considered as an integral part of corporate strategy. The value of HR capacity on firm performance increases when the firm adopts an aggressive M&A strategy. In other words, the firm should take HR capacity into consideration when developing its M&A strategy.

Second, M&A can be an effective growth strategy for banking firms. That is, high M&A intensity can enhance firm performance. Most banking M&As contribute to firm productivity, shareholder value, and profitability. By seeing M&A as a long-term strategic orientation, this study provides further evidence that M&A intensity is positively associated with firm performance.

Managerial hubris or agency problems might not be the major drivers for banking M&As recently. Since our sample included only those banking firms that have at least one M&A over a three-year period, the results do not imply that the banking firms should use only M&A as a growth strategy. Since it takes time and cost to integrate two originally separate firms, internal growth strategy might also be a good growth strategy.

Third, our findings indicate that the strategic choice of the geographic location of target firms may affect firm performance. The similarity of industrial environments between acquirers and targets will positively contributes to acquisition performance (Finkelstein and Haleblian, 2002). This study has parallel findings. Although not very significant, there might be a negative interaction effect between in-state propensity and HR capability on firm performance. We suspect that HR capability is more valuable when the firm makes out-of-state acquisitions in that the post-acquisition integration is more challenging. (Bou-Wen Lin et al, 2005)

Thus, Mergers and Acquisitions require a clear cut strategy and should aim at finding a strategic balance between the merging firms or the firm getting acquired with respect to the larger firm.

This article has been authored by Sanchit Verma from MDI Gurgaon.

Image(s): FreeDigitalPhotos.net

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