MERGERS AND FAILURE OF MERGERS

Abstract
Corporate mergers and acquisitions (M&As) have become popular from corner to corner the world during the last two decades. Thanks to globalization, liberalization, technological developments and intensely competitive business environment. The synergistic gains from M&As may result from more efficient management, economies of scale, more profitable use of assets, exploitation of market power, the use of complementary resources, etc. Interestingly, the results of many empirical studies show that M&As fails to create value for the shareholders of acquirers.

Introduction
Mergers and acquisitions are almost a daily occurrence in the life sciences. Competition is fierce, and companies must team up to survive in an industry where specialized knowledge is king. One of the largest, most critical, and most difficult parts of a business merger is the successful integration of the enterprise networks of the merger partners

The prime objective of a firm is to grow profitably. The growth can be achieved either through the process of introducing or developing new products or by expanding or enlarging the capacity of existing products. Mergers and Acquisitions (M&As) are quite important forms of external growth. The last decade of 20th century has been substantial increase in both number and volume of M&A activity. In fact, consolidation through M&As has become a major trend across the globe. This wave was driven by globalization, liberalization, technological changes, and market deregulation and liberalization. Almost all industries are going through reorganization and consolidation. M&A activity has been predominant in sectors like steel, aluminum, cement, auto, banking and finance, computer software, pharmaceuticals, consumer durables, food products, agro-chemicals, textiles, etc. Generally M&As aims at achieving greater efficiency, diversification, market power, etc.

The synergistic gains by M&A activity accrue from more efficient management, economies of scale and scope, improved production techniques, combination of complementary resources, redeployment of assets to more profitable uses, the exploitation of market power or any number of value enhancing mechanisms that fall under the rubric of corporate synergy. M&As is a indispensable strategic tool for expanding product portfolios, entering new markets, acquiring new technologies and building new generation organization with power and resources to compete on a global basis.

Mergers and acquisitions (M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. M&A activity significantly increased during the second half of 2010 especially for large sized (multi-billion dollar) takeovers.

Recent mergers
Late July, the month of August, and September, were notable for heavy merger & acquisition activity. Those months were highlighted by the announcements of : 7/22/2010 General Motors [GM] AmeriCredit Corp 8/14/2010 -BHP Billiton [BHP] Potash Corp 8/19/2010 Intel [INTC] McAfee [MFE] 9/17/2010 Johnson & Johson [JNJ] Crucell [CRXL] 9/27/2010 Unilever Plc [UL] Alberto Culver [ACV]

Reasons for failure of mergers 1. Lack of research

Acquisition requires gathering a lot of data and information and analyzing it. It requires extensive research. A carelessly carried out research about the acquisition causes the destruction of acquirer's wealth.

2. Diversification
Very few firms have the ability to successfully manage the diversified businesses. Unrelated diversification has been associated with lower financial performance, lower capital productivity and a higher degree of variance in performance for a variety of reasons including a lack of industry or geographic knowledge, a lack of focus as well as perceived inability to gain meaningful synergies. Unrelated acquisitions, which may appear to be very promising, may turn out to be big disappointment in reality.

3. Poor Cultural Fits

Cultural fit between an acquirer and a target is one of the most neglected areas of analysis prior to the closing of a deal. However, cultural due diligence is every bit as important as careful financial analysis. Without it, the chances are great that M&As will quickly amount to misunderstanding, confusion and conflict. Cultural due diligence involve steps like determining the importance of culture, assessing the culture of both target and acquirer. It is necessary to assess the cultural fit between the acquirer and target based on cultural profile. Potential sources of clash must be managed. It is necessary to identify the impact of cultural gap, and develop and execute strategies to use the information in the cultural profile to assess the impact that the differences have.

4. Poor Organization Fit

Organizational fit is described as "the match between administrative practices, cultural practices and personnel characteristics of the target and acquirer. It influences the ease with which two organizations can be integrated during implementation. Mismatch of origination fit leads to failure of mergers

5. Poorly Managed Integration

Integration of the companies requires a high quality management. Integration is very often poorly managed with little planning and design. As a result implementation fails. The key variable for success is managing the company better after the acquisition than it was managed before. Even good deals fail if they are poorly managed after the merger.

6. Failure to Set the Pace for Integration

The important task in the merger is to integrate the target with acquiring company in every respect. All function such as marketing, commercial; finance, production, design and personnel should be put in place. In addition to the prominent persons of acquiring company the key persons from the acquired company should be retained and given sufficient prominence opportunities in the combined organization. Delay in integration leads to delay in product shipment, development and slowdown in the company's road map.The speed of integration is extremely important because uncertainty and ambiguity for longer periods destabilizes the normal organizational life.

7. Ego Clash
Ego clash between the top management and subsequently lack of coordination may lead to collapse of company after merger. The problem is more prominent in cases of mergers between equals.

8. Lack of Proper Communication

Lack of proper communication after the announcement of M&As will create lot of uncertainties. Apart from getting down to business quickly companies have to necessarily talk to employees and constantly. Regardless of how well executives communicate during a merger or an acquisition, uncertainty will never be completely eliminated. Failure to manage communication results in inaccurate perceptions, lost trust in management, morale and productivity problems, safety problems, poor customer service, and defection of key people and customers. It may lead to the loss of the support of key stakeholders at a time when that support is needed the most.

9. Failure of Leadership Role

Some of the role leadership should take seriously are modeling, quantifying strategic benefits and building a case for M&A activity and articulating and establishing high standard for value creation. Walking the talk also becomes very important during M&As.

10. Expecting Results too quickly

Immediate results can never be expected except those recorded in red ink.

Corporate culture
Corporate culture is the way an organization views itself, or its written and unwritten policies and procedures. Experts urge that in order to get a good organizational fit, one should look at its own corporate culture and try to acquire similar companies. One thing that can tear a merger apart is the attitude of "us versus them". This attitude is the reason of failure for most of the mergers. It is believed that if culture is the problem in a merger, it can have overwhelming effects on the newly formed company.

According to Paul Temple Organizational fit is "the match between administrative practices, cultural practices and personnel characteristics of the target and acquirer. It influences the ease with which two organizations can be integrated during implementation". It is believed that the major reason for the failure of mergers and acquisitions is the clash between corporate cultures.

An example of the failure of merger due to problems with cultural integration can be seen in the case of DaimlerChrysler. The merger of Daimler-Benz and Chrysler became a straight out clash between the business cultures of

the two firms. The differentiation in corporate culture of the firms involved was the main reason for the non success of this alliance. While the management style of Daimler-Benz's was more of a formal and planned out sort, Chrysler's management was more tilted towards a stress-free, unrestrictive style. Additionally, the views of both the firms on key factors, for instance pay scales, benefits and travel expenditure, were completely different from each other. As a result the company's shareholders had to bear the burden of the collision.

DAIMLERCHRYSLER MERGER, A CULTURAL MISMATCH?

A recent example of such intercultural failure has been that of DaimlerChrysler. Both sides in the partnership set out to show that intercultural hurdles would and could be overcome in their global merger. Recent articles in the Wall Street Journal and Business Week suggest however that DaimlerChrysler underestimated the influence of culture, and due to culture clash, almost two years later is still struggling to become a unified global organization.

In the period leading up to the Daimler-Chrysler merger, both firms were performing quite well (Chrysler was the most profitable American automaker), and there was widespread expectation that the merger would be successful (Cook 1998). People in both organizations expected that their merger of equals would allow each unit to benefit from the others strengths and capabilities. Stockholders in both companies overwhelmingly approved the merger and the stock prices and analyst predictions reflected this optimism.

Performance after the merger, however, was entirely different, particularly at the Chrysler division. In the months it was found that the high rate of turnover among management at acquired firms was not related to poor prior performance, indicating that the turnover was not due to the pruning of underperforming management at the acquired firm.

Following the merger, the stock price fell by roughly one half since the immediate post merger high. The Chrysler division, which had been profitable prior to the merger, began losing money shortly afterwards and was expected to continue to do so for several years.In addition, there were significant layoffs at Chrysler following the merger (that had not been anticipated prior to the merger. Differences in culture between the two organizations were largely responsible for this failure.

Operations and management were not successfully integrated as equals because of the entirely different ways in which the Germans and Americans operated: while Daimler-Benzs culture stressed a more formal and structured management style, Chrysler favored a more relaxed, freewheeling style (to which it owed a large part of its pre merger financial success). In addition, the two units traditionally held entirely different views on important things like pay scales and travel expenses. As a result of these differences and the German units increasing dominance, performance and employee satisfaction at Chrysler took a steep downturn. There were large numbers of departures among key Chrysler executives and engineers, while the German unit became increasingly dissatisfied with the performance of the Chrysler division. Chrysler employees, meanwhile, became extremely dissatisfied with what they perceived as the source of their divisions problems: Daimlers attempts to take over the entire organization and impose their culture on the whole firm failed.. The guiding hypothesis is that an important component of failure is conflict between the merging firms cultural conventions for taking action, and an underestimation by merger partners of how severe, important, and persistent conflicts are. Cultural conventions emerge to make individual firms more efficient by creating a shared understanding that aids communication and action. However, when two joined firms differ in their conventions, this can create a source of conflict and misunderstanding that prevents the merged firm from realizing economic efficiency

Such discourse is highlighting the need for more intercultural training both within the framework of mergers and acquisitions and for key personnel such as managers and HR departments. In both instances culture is being ignored rather than being embraced and used positively.

If intercultural understanding is to be recognized within the systems of processes of mergers and acquisitions, staff training is critical. It is the leaders, managers and HR personnel of companies that must have intercultural competency. However, it appears that companies are not investing enough in intercultural, or for that matter any, training.

Conclusion
M&As have become very popular over the years especially during the last two decades owing to rapid changes that have taken place in the business environment. Business firms now have to face increased competition not only from firms within the country but also from international business giants Generally the objective of M&As is wealth maximization of shareholders by seeking gains in terms of synergy, better financial and marketing advantages, diversification, improved inventory management, increase in domestic market share and also to capture fast growing international markets abroad. But astonishingly, though the number and value of M&As are growing rapidly, the results of the studies on the impact of mergers on the performance from the acquirers' shareholders perspective have been highly disappointing. Making the mergers work successfully is not that easy as here we are not only just putting the two organizations together but also integrating people of two organizations with different cultures, attitudes and mindsets. While making the merger deals, it is necessary not only to make analysis of the financial aspects of the acquiring firm but also the cultural and people issues of both the concerns for proper post-acquisition integration.

Author: S. Aishwarya, I-MBA. Co-author: L. Preethi, I-MBA.