|
INTRODUCTION
Companies today need to be fast growing, efficient, profitable, flexible, adaptable, future-ready and have a dominant market position. Without these qualities, firms believe that it is virtually impossible to be competitive in today's global economy. Executives have at their disposal a wide range of strategic alternatives for inorganic growth. They may decide to grow incrementally by introducing not only new products but also gain entry into new markets by investing in research and development. However this mode of growth will have a long gestation period i.e. long time to realize the actual growth.
Welcome to the world of mergers & acquisitions (M&A), which has become the most important strategic element driving business growth and excellence. They have become the dominant mode of growth for organizations seeking a competitive advantage in an increasingly complex and global business economy. Therefore, in an era of increasing globalization and competitiveness, they are considered as a strategic driver for market dominance, geographical expansion, leverage in resource and capability acquisition, competence, adjusting to competition.
Mergers and acquisitions (M&As) often refer to the aspect of corporate strategy, and management dealing with the buying, selling and combining of another company. Mergers and acquisitions are often created to expand a current organization or operation aiming for long term profitability and an increase in market power.
Buoyant Indian Economy, extra cash with Indian corporates, Government policies and newly found dynamism in Indian businessmen have all contributed to this new merger & acquisition trend in India. Indian companies are now aggressively looking at American, African and European markets to spread their wings and become the global players. The Indian IT and ITES companies already have a strong presence in foreign markets, however, other sectors are also now growing rapidly. The increasing engagement of the Indian companies in the world markets, and particularly in the US, is not only an indication of the maturity reached by Indian Industry but also the extent of their participation in the overall globalization process..
MERGERS AND ACQUISITIONS
"It is clear that you cannot stay in the top league if you only grow internally. You cannot catch up just by internal growth. If you want to stay in the top league, you must combine."
Daniel Vasella, Chief Executive Officer, Novartis
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new owner, the purchase is called an Acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer.
A Merger is a combination of two companies into one larger company. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. A merger may be of following types: -
(i) Horizontal Merger - Two companies that are in direct competition and share similar product lines and markets.
(ii) Vertical Merger - Vertical mergers occur between firms in different stages of production operation. In a vertical merger two or more companies which are complementary to each join together.
(iii) Market-Extension Merger - Two companies that sell the same products in different markets.
(iv) Product-Extension Merger - Two companies selling different but related products in the same market.
(v) Conglomeration - Two companies that have no common business areas. It means their businesses or services, are neither horizontally nor vertically related to each other.
(vi) Concentric Mergers - Two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship.
A purchase deal will be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.
MERGER & ACQUISITION: MOTIVES
Why do companies merge or acquirer other companies? There seems to be a number of reasons given to merge/acquire a company, many of which involving the market and an extension of the customer base. These are: - - Coordinated Strategies - To create a number of new business opportunities and to gain competitive advantage
- Scale- Purchasing companies in the same space to gain revenues, streamline cost structures, and diversify sales channels;
- Geographic reach- Tapping into previously inaccessible geographic markets;
- Customers- Acquiring companies with good customer lists that can be sold more products;
- Products- Access to new products which in turn can be sold to existing customers or to reach a new customer base;
- Segments- Entering new vertical markets;
- Channels- Finding new ways of delivering the same products and services;
- Employees- Adding needed engineering, sales, or other talent quickly;
- Technology- Adding key technical capabilities or acquiring a disruptive technology.
- Shared Know-how - in the form of process knowledge, market knowledge and talent
FAILURE OF MERGER & ACQUISITION
Mergers and Acquisitions (M&As) have become the dominant mode of growth for organizations seeking a competitive advantage in an increasingly complex and global business economy. Every merger, acquisition, or strategic alliance promises to create value from some kind of synergy, yet statistics show that the benefits that look so good on paper often do not materialize. Unfortunately, many mergers and acquisitions fail to meet their objectives, which are typically to accelerate growth, cut costs, increase market share or take advantage of other synergies.
A global A.T.Kearney study suggests that 58 percent of all mergers, acquisitions, and other forms of corporate restructuring fail to produce results rather than create value. Similarly, a KPMG survey found that "83 percent of mergers were unsuccessful in producing any business benefits regards shareholder value. A major McKinsey & Company study found that "61 percent of acquisition programs were failures because the acquisition strategies did not earn a sufficient return (cost of capital) on the funds invested". Between 55 and 77 percent of all mergers fail to deliver on the financial promise announced when the merger was initiated. Even though most mergers and acquisitions are carefully designed, they still face major challenges. Nearly two-thirds of companies lose market share in the first quarter after a merger; by the third quarter, the figure is 90 percent. In the first four to eight months that follow the deal, productivity may be reduced by up to 50 percent.
The failure rate of acquisitions is unacceptable and unnecessary. This motivates us to look for other solutions and identify the real causes for the high failure rate. Each acquisition is a complex process from pre-deal research and planning (selecting the target), due diligence and integration planning, through to post-acquisition integration and value extraction. Priorities have to be set and rational decisions under time pressure have to be made for the proper performance.
HUMAN RESOURCE: KEY FACTOR
It is reported that one of the main reasons for failure of a merger or acquisition is based on Human Resources neglect. People issues have been the most sensitive but often ignored issues in a merger and acquisition. When a decision is taken to merge or acquire, a company analyses the feasibility on the business, financial and legal fronts, but fails to recognize the importance attached to the human resources of the organizations involved. Companies which have failed to recognize the importance of human resources in their organizations and their role in the success of integration have failed to reach success. While it is true that some of these failures can be largely attributed to financial and market factors, many studies are pointing to the neglect of human resources issues as the main reason for M&A failures. PricewaterhouseCoopers global study concluded that lack of attention to people and related organizational aspects contribute significantly to disappointing post-merger results. Organizations must realize that people have the capability to make or break the successful union of the two organizations involved.
Cartwright and Cooper (2000) acknowledged that the leading roles of modern human resources functions are to be actively engaged in the organization and perform as a business partner and advisor on business-related issues. Employees do not participate enough in the integration process of a merger. If a merger is to reach its full success potential, they need to be informed and involved more actively throughout all the stages of the merger process.
Human resource professionals are key in pre-merger discussions and the strategic planning phase of mergers and acquisitions early as to allow them assess to the corporate cultures of the two organizations (Anderson, 1999). Being involved in the pre-merger stage allows HR to identify areas of divergence which could hinder the integration process. They can play a vital role in addressing any communication issues, employees concerns, compensation policies, skill sets, downsizing issues and company goals that need to be assessed.
|
