Chapter 12 Mergers and Acquisitions

Merger- a consolidation of two organizations into a single organization.

3 Categories of mergers:
1. Horizontal Merger- the merging of 2 competitors
2. Vertical Meger- the merger of a buyer and seller or supplier
3. Conglomerate Merger- the merger od two organizations competing in different markets

Consolidation – the joining of two or more organizations to form a new organization
Takeoverone company acquiring another company

The Urge to Merge
Companies merge for three reasons: Strategic Benefits, Financial Benefits, and/or the needs of the CEO or managing team.

Strategic Benefits
Operating Synergy – the cost reductions achieved by economies of scales produced by a merger or acquisition
Vertical integrationthe merger or acquisition of two organizations that have a buyer-seller relationship
Horizontal integrationthe merger or acquisition of rivals

Financial Benefits
Financial advantages of merging may include:
  • Organizations expect to reduce the variability of the cash flow of their own business
  • Organizations expect to use funds generated by their own mature (or cash cow) businesses to fund growing businesses
  • There may be tax advantages to the takeover - which vary by country
  • It is expensive to enter new markets and to develop new products
  • Astute corporations may analyze the financial statements of a company and decide that the company is undervalued
The overriding goal is to increase the shareholders' wealth.

Management Needs
The theory here is that managers seek to acquire firms for their own personal motives, and economic gains are not the primary consideration.
Theories include:
  • Incentives or payoffs to the CEO are more important than the interests of the stockholders
  • Unconscious motives of CEO's: A need to prove oneself
  • The need to link personality characteristics, such as the need for power with growth strategies

The Success Rate of Mergers:
Many studies have established that about 20% of all M&As are successful, approximately 60% are disappointments, and the remaining 20% are clear failures. Aquisitions of related businesses fare better than acquisitions of businesses unrelated to the parent business. The novice M&A management team does as poorly as the experienced team. The success rate may also vary by sector and size.

Reasons for Failures of M&As
  • Integration difficulties
  • Inadequate evaluation of target
  • Large or extraordinary debt
  • Inability to achieve synergy
  • Too much diversification
  • Managers overly focused on acquisitions
  • Too large an acquisition
  • Difficult to integrate different organization cultures
  • Reduced employee morale due to layoffs and relocations

Merger Methods
Hostile takeovers - dramatic and complex
Poison pill - the right of key players to purchase shares in the company at a discount. Among the takeover extemely expensive
White Knights - are buyers who will be acceptable to a target company
Pac-Man - a defensive manoeuvre where the targeted company makes a counteroffer for the bidding firm
Friendly - usually completed quickly
Approximately 20% or all M&A's are successful, approximately 60% are disappointments and the last 20 % are clear failures. Success rates may vary by size and sector.

Impact on Human Resources
Real costs of a merger may be hidden. Takeovers result in human displacement which cannot be measured in accounting terms. Time involved replacing an employee with a newone represents a cost.
The loss of employee productivity stems from many sources:
  • employees go underground, afraid to make themselves visible or do anything that may put their jobs at risk
  • overt sabotage occurs when employees deeply resent the turmoil the merger is causing in their lives
  • self-interested survival tactics emerge, including hiding information from team members to accumulate a degree of power (the employee feels taht he or she is "the only one who really knows how things work around here").
  • a resigned attidtude appears, stemming from the belief that no amount of work will prevent one from being fired
  • employees spend at least one hour a day dealing with rumours, misinformation, and job-search activitie

Companies Merge for 3 Reasons:
1. Strategic Benefits - Operating Synergy (cost reductions from economies of scale),
-Economies of scope,
-Strengthening of competitive position,
- Gaining access to new markets,
-Redefining the business

2. Financial Benefits -Reduction of variability of the cash flow.. ie. putting your eggs in different baskets.
-Funding of one business by other business
- Tax Advantages
-Cheaper/ More Rapid entry into new markets
-Financial Gains by increasing perceived value
3. Needs of the CEO or managing team -incentives/payoffs for CEO's and higher salaries for more companies owned.
-Needs to prove oneself based on Freudian/unconscious motivators
-Need for Power or increase in Ego leading to increased media attention

Cultural Issues in Mergers:
Culture is the set of important beliefs that members of an organization share.
The principle reason mergers fail is due to the meshing of cultures. It is estimated that as high as 85% of all merger failures is due to the mismanagement of the culture.
There are 4 options to those involved in M&As with respect to culture:
1. Assimilation: Assimilation occurs when one organization willingly gives up its culture and is absorbed by the culture of the acquirer or dominant partner.
2. Integration: Integration refers to the fusion of two cultures, resulting in the evolvement of a new culture representing the best of both cultures. This form rarely occurs.
3. Deculturation: Sometimes the acquired organization does not value the culture of the dominant partner and is left in a confused, alienated, marginalize state knowns as deculturation. This is a temporary state, existing until some integration or separation occurs.
4. Separation: In some instances, the two cultures resist merging, and either the merged company operates as two separate companies or a divorce occurs.

M&A's Increase Risk of Anxiety

HR Issues in Mergers & Acquisitions
1. The Contingency Plan:Strategic planners must be aware of the board of directors' interest in M&As. A contingency plan that can be implemented when a deal is in play should be prepared.
2. HR Due Diligence: The second element is the need to conduct a due diligence review. The potential acquirer evaluates the firm targeted for acquisition. Included for review should be collective agreements, employment contracts, executive compensation contracts, benefit plans and policies; incentives, commissions and bonus plans; pension plans and retirement policies; WSIB statements, claims, assessments and experience rating data; employment policies, and complaints.
3. Transition Team:The third element is the need to appoint a transition team. This team is necessary because of the urgency of the situation, information gaps and employee stress.
Retention and reduction are two critical areas that require immediate attention.
Merging companies may have to merge their payroll systems, adopt one or the other, or create an entirely new one.
Appraisals for development purposes may need to be redone due to different promotion paths and developmental experiences.
Once a strategic plan has been developed, an inventory of the knowledge, skills and abilities will be needed to align with the new strategy.
Unionized employees covered by a collective agreement. The aggreement sets out the conditions under which job changes must occur. Unions should be informed and involved from the outset of any merger.

The Transition Team
Elements of a good merger management process:
  • A formal announcement containing the following items: benefits of merger, information about both companies, changes in name, structure, or management, plans for employee reduction, plans to recognize and work with the union, and any changes in products or services, information about any changes to benefits.
  • A merger hotline: a hotline so that employees can call and ask direct questions about any planned changes.
  • A managerial toolkit: Identifiable support resources to assist management in addressing employees concerns and fears.
  • A newsletter or webpage: the formation of communication channels must be swift and consistent. All communicatioin must be honest. Mentions blending cultures and how they are keeping their membership in the loop at every step Investors are not sold on this acquisition This is an amazing article regarding the merger between Daimler-Benz and Chrysler. It expands on how, when and why it was doomed from the beginning.