Factors in favour of merger and acquisition

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and combining of
different companies that can aid, finance, or help a growing company in a given industry grow
rapidly without having to create another business entity.
Acquisition
An acquisition is the purchase of one company by another company. Consolidation is when two
companies combine together to form a new company altogether. An acquisition may be private
or public, depending on whether the acquiree or merging company is or isn't listed in public
markets. An acquisition may be friendly or hostile.
Whether a purchase is perceived as a friendly or hostile depends on how it is communicated to
and received by the target company's board of directors, employees and shareholders. It is quite
normal for M&A deal communications to take place in a so-called 'confidentiality bubble'
whereby information flows are restricted due to confidentiality agreements (Harwood, 2005). In
the case of a friendly transaction, the companies cooperate in negotiations; in the case of a
hostile deal, the takeover target is unwilling to be bought or the target's board has no prior
knowledge of the offer. Hostile acquisitions can, and often do, turn friendly at the end, as the
acquiror secures the endorsement of the transaction from the board of the acquiree company.
This usually requires an improvement in the terms of the offer. Acquisition usually refers to a
purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire
management control of a larger or longer established company and keep its name for the
combined entity. This is known as a reverse takeover. Another type of acquisition is reverse
merger, a deal that enables a private company to get publicly listed in a short time period. A
reverse merger occurs when a private company that has strong prospects and is eager to raise
financing buys a publicly listed shell company, usually one with no business and limited assets.
Achieving acquisition success has proven to be very difficult, while various studies have shown
that 50% of acquisitions were unsuccessful.[citation needed] The acquisition process is very complex,
with many dimensions influencing its outcome.[1] There are also a variety of structures used in
securing control over the assets of a company, which have different tax and regulatory
implications:

• The buyer buys the shares, and therefore control, of the target company being purchased.
Ownership control of the company in turn conveys effective control over the assets of the
company, but since the company is acquired intact as a going concern, this form of
transaction carries with it all of the liabilities accrued by that business over its past and all
of the risks that company faces in its commercial environment.
• The buyer buys the assets of the target company. The cash the target receives from the
sell-off is paid back to its shareholders by dividend or through liquidation. This type of
transaction leaves the target company as an empty shell, if the buyer buys out the entire
assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the
assets that it wants and leave out the assets and liabilities that it does not. This can be
 particularly important where foreseeable liabilities may include future, unquantified
damage awards such as those that could arise from litigation over defective products,
employee benefits or terminations, or environmental damage. A disadvantage of this
structure is the tax that many jurisdictions, particularly outside the United States, impose
on transfers of the individual assets, whereas stock transactions can frequently be
structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral,
both to the buyer and to the seller's shareholders.
The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where
one company splits into two, generating a second company separately listed on a stock exchange.

As per the knowledge based views, firms can generate greater values through the retention of
knowledge-based resources which they generate and integrate. Extracting technological benefits
during and after acquisition is ever challenging issue because of organizational differences.
Based on the content analysis of seven interviews authors concluded five following components
for their grounded model of acquisition:
1. Improper documentation and changing implicit knowledge makes it difficult to share
information during acquisition.
2. For acquired firm symbolic and cultural independence which is the base of technology and
capabilities are more important than administrative independence.
3. Detailed knowledge exchange and integrations are difficult when the acquired firm is large
and high performing.
4. Management of executives from acquired firm is critical in terms of promotions and pay
incentives to utilize their talent and value their expertise.
5. Transfer of technologies and capabilities are most difficult task to manage because of
complications of acquisition implementation. The risk of losing implicit knowledge is always
associated with the fast pace acquisition.
Preservation of tacit knowledge, employees and literature are always delicate during and after
acquisition. Strategic management of all these resources is a very important factor for a
successful acquisition.
Increase in acquisitions in our global business environment has pushed us to evaluate the key
stake holders of acquisition very carefully before implementation. It is imperative for the
acquirer to understand this relationship and apply it to its advantage. Retention is only possible
when resources are exchanged and managed without affecting their independence.

Distinction between mergers and acquisitions

Although often used synonymously, the terms merger and acquisition mean slightly different
things.[2] When one company takes over another and clearly establishes 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.
In the pure sense of the term, a merger happens when two firms 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". The firms are often of about the same size. Both
companies' stocks are surrendered and new company stock is issued in its place. For example, in
the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when
they merged, and a new company, GlaxoSmithKline, was created.
In practice, however, actual mergers of equals don't happen very often. Usually, one company
will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that
the action is a merger of equals, even if it is technically an acquisition. Being bought out often
carries negative connotations, therefore, by describing the deal euphemistically as a merger, deal
makers and top managers try to make the takeover more palatable. An example of this would be
the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at
the time.
A purchase deal will also 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.
Business valuation
The five most common ways to valuate a business are
• asset valuation,
• historical earnings valuation,
• future maintainable earnings valuation,
• relative valuation (comparable company & comparable transactions),
• discounted cash flow (DCF) valuation
Professionals who valuate businesses generally do not use just one of these methods but a
combination of some of them, as well as possibly others that are not mentioned above, in order to
obtain a more accurate value. The information in the balance sheet or income statement is
obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an
Audit.
Accurate business valuation is one of the most important aspects of M&A as valuations like
these will have a major impact on the price that a business will be sold for. Most often this
information is expressed in a Letter of Opinion of Value (LOV) when the business is being
valuated for interest's sake. There are other, more detailed ways of expressing the value of a
business. While these reports generally get more detailed and expensive as the size of a company
increases, this is not always the case as there are many complicated industries which require
more attention to detail, regardless of size
Financing M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are
financed and partly by the relative size of the companies. Various methods of financing an M&A
deal exist:

1. Exogenous Factors Affecting Mergers:

Accounting. The availability of pooling accounting for mergers has been a significant factor in
the 1990s merger activity. Pooling avoids dilution of earnings brought about by the recognition
and mandatory amortization of goodwill when a merger is accounted for as a purchase. As
pooling came under increasing pressure from the SEC and the FASB, its impending demise, first
at the end of 2000 and then in the first-half of 2001, undoubtedly acted as a stimulant for some
mergers, but it is not possible to gauge accurately how many deals were undertaken in 1999 and
2000 to beat the deadline. Now, at the beginning of 2001, the FASB is proposing that purchase
accounting replace pooling but that goodwill should not be automatically written down, but
instead should be subjected to a periodic impairment test. An impairment charge would be taken
when the fair value of goodwill falls below its book value. This method of accounting could be
even more favorable for mergers than pooling in that it will avoid amortization of goodwill and
not saddle the merged companies with the restrictions against share repurchases and asset
dispositions that encrust the pooling rules. Thus, accounting will basically be a neutral factor in
2001 and the foreseeable future, neither significantly stimulating nor restraining mergers.
However, the new purchase accounting will make hostile exchange offers practical for the first
time in the United States and therefore might be a greater stimulant to merger activity than
presently thought.
Antitrust. Government policy can promote, retard or prohibit mergers and is a major factor
affecting mergers. The antitrust regulators in the U.S. and the EU have been reasonably receptive
to mergers. They have recognized that markets are global and have accepted divestitures,
licenses and business restrictions to cure problems. The “big is bad” concept has been
abandoned. At this time it appears that the EU has become a bit more restrictive and the U.S.,
with a change in administration, will be a bit less restrictive. The overall situation can be
summarized: Current antitrust enforcement policies will not unduly restrain mergers in 2001.
Arbitrage. Arbitrageurs, together with hedge funds and activist institutional investors, are a
major factor in merger activity. They sometimes band together to encourage a company to seek a
merger and sometimes to encourage a company to make an unsolicited bid for a company with
which they are dissatisfied. By accumulating large amounts of stock of a company to be
acquired, they can be, and frequently are, a factor in assuring the shareholder vote necessary to
approve a merger. They will continue to be a force both facilitating and promoting mergers.
Currencies. Fluctuations in currencies have an impact on cross-border mergers and current
conditions in the foreign exchange markets have contributed to the slowdown in merger activity.
The sharp decline in the Euro during 2000 was a deterrent to European acquisitions of U.S.
companies. The strong dollar and weak Asian currencies led to a significant increase in
acquisitions by U.S. companies in Asia. The recent strength in the Euro has not had time to
become a factor in mergers. The uncertainty as to the U.S. economy, the U.S. trade deficit and
the strength of the dollar portend at best slow growth of cross-border acquisitions of U.S.
companies.
Deregulation. The worldwide movement to market capitalism and privatization of state
controlled companies has led to a significant increase in the number of candidates for merger.
The concomitant change in attitude toward cross-border mergers has had a similar effect.
Deregulation of specific industries – like financial institutions, utilities and radio and television
in the U.S. – has also contributed to an increase in mergers.
Experts. The development of experts in conceiving, analyzing, valuing and executing mergers
has been a significant factor. While some consider this to be phenomenon of the 1980s, it in fact
dates to the turn of the 20th Century when JP Morgan merged the Carnegie steel interests with a
number of others to create U.S. Steel. The fact that global investment banks are calling merger
opportunities to the attention of all the major companies in the world is a merger stimulant. So
too the availability of specialized lawyers, consultants and accountants to provide backup and
support to the managements and directors of merging companies has been a merger stimulant.
Hostile Bids. With the demise of the financially motivated bust-up bids of the 1970s and 1980s,
and the shift to strategic transactions, major companies have been willing to make hostile bids.
General Electric, IBM, Johnson & Johnson, AT&T, Pfizer, Wells Fargo and Norfolk Southern
are some of the companies that have done so. In addition there has been a dramatic increase in
hostile bids in Europe. The $202 billion record-setting bid by Vodafone for Mannesmann being
the prime example. The willingness of continental European governments to step back and let
the market decide the outcome of a hostile bid has opened the door and led to a significant
increase in European hostile bid activity. In the U.S. the success rate for strategic hostile bids by
major companies has similarly led to an increase in activity.
Labor. The general prosperity and full employment in the U.S. in the 1990s resulted in
weakened resistance to mergers by the employees of acquired companies. As long as there is a
vibrant job market, employee resistance to mergers will not be meaningful. It should be noted
that the present debate in the EU with respect to the long-pending merger legislation revolves
around a last-minute attempt to require company boards to consider employees as well as
shareholders prior to effectuating a merger and to authorize target companies to adopt takeover
defenses.
LBO Funds. The growth of LBO funds from a humble beginning in the 1970s to the mega-funds
of the 1990s has been a significant factor in acquisitions. With tens of billions of dollars of
equity to support leverage of two to three to one, these funds have the capability of doing major
deals and will continue to be an important factor.
Markets. Receptive equity and debt markets are critical factors in merger activity. Prior to mid
2000 the equity markets were very favorable for telecommunications, media and technology
stocks and for five years these sectors led merger volume to new heights. This same period saw
an active, growing junk bond market and ready availability of bank loans, both at attractive
interest rates. With the NASDAQ down more than 50% from its early 2000 highs and many
telecommunications, media and technology stocks down even more, stock mergers in these
sectors are no longer readily doable and at this time there is little prospect of a return to
conditions conducive to telecommunications, media and technology mergers. The junk bond
market has virtually dried up and banks have tightened their lending standards. This has resulted
in a reduction of cash acquisitions. Outside of the telecommunications, media and technology
sectors, merger activity has been less impacted by the decline in the securities markets, but the
uncertainty as to the economy, with concern that the landing will be hard rather than soft, has
dampened the merger ardor of many companies. The recent actions of the Federal Reserve in
twice reducing interest rates may change market psychology and stem the fall of the equity
markets. If so, that restraint on mergers will be ameliorated. A special feature of the collapse in
the telecommunications, media and technology stocks is that there are now many good
companies with low stock market values and a need for fresh capital that may be met only
through merger with a stronger company.
New Companies. Just as the explosive formation of new companies in the latter part of the 19th
Century fueled the first and second merger waves, the recent formation of thousands of new
companies in the technology areas has fueled the fifth wave and will be a major factor in merger
activity in the future.
Taxes. The general worldwide reduction in capital transaction taxes has lifted a restraint on
mergers. For example, the pending change in German tax law – to facilitate banks selling their
significant stakes in German companies – is viewed as a potential stimulant to mergers in
Germany.
Autogenous Factors Affecting Mergers:
The foregoing external factors are essentially beyond the ability of companies to control or even
to influence significantly. While they basically determine whether a particular merger is doable
at a particular time, they do not explain why companies want to merge. What are the autogenous
businesses reasons driving merger activity? There is no single or simple explanation and again
no ranking in importance is possible. Experience indicates that one or more of the following
factors are present in all mergers:
Obtaining market power. Starting with the 19th Century railroad and oil mergers, a prime
motivation for merger has been to gain and increase market power. Left unrestrained by
government regulation it would be a natural tendency of businesses to seek monopoly power.
The 19th Century Interstate Commerce Act and Sherman Antitrust Act were the governmental
response to the creation of trusts to effectuate railroad and oil mergers.
Sharing the benefits of an improved operating margin through reduction of operating
costs. Many of today’s acquisitions involve a company with a favorable operating margin
acquiring a company with a lower operating margin. By improving the acquired company’s
operations, the acquirer creates synergies that pay for the acquisition premium and provide
additional earnings for the acquirer’s shareholders. Acquiring firms may reallocate or redeploy
assets of the acquired firm to more efficient uses. Additionally, intra-industry consolidating
acquisitions provide opportunities to reduce costs by spreading administrative overhead and
eliminating redundant personnel.
Sharing the costs and benefits of eliminating excess capacity. The sharp reductions in the
defense budget in the early 1990s resulted in defense contractors consolidating in order to have
sufficient volume to absorb fixed costs and leave a margin of profit. The Defense Department
encouraged the consolidations to assure that its suppliers remained healthy. The pressure to
control healthcare costs has had a similar impact in the healthcare industry. The mega-mergers
of, and joint-venture consolidation of refining and marketing operations by, oil and gas
companies is another example of an effort to reduce costs by eliminating overcapacity.
Integrating back to the source of raw material or forward to control the means of
distribution. Over the years vertical integration has had a mixed record. Currently it has a poor
record in media and entertainment, particularly where “hardware” companies have acquired
“software” companies. However, vertical integration continues to be a motivation for a
significant number of acquisitions, and, as noted below, is being widely pursued as a response to
the Internet. The acquisition of Time Warner by AOL is an example.
The advantage or necessity of having a more complete product line in order to be
competitive. This is particularly the case for companies such as suppliers to large retail chains
that prefer to deal with a limited number of vendors in order to control costs of purchasing and
carrying inventory. A similar situation has resulted in a large number of mergers of suppliers to
the automobile manufacturers.
The need to spread the risk of the huge cost of developing new technology. This factor is
particularly significant in the aerospace/aircraft and pharmaceutical industries.
Response to the global market. The usual and generally least risky means of increasing global
market penetration is through acquisition of, or joint venture with, a local partner. Due to the
increased globalization of product markets, U.S. cross-border merger and acquisition activity has
been steadily increasing. Many of the most important and largest product markets for U.S.
companies have become global in scope.
Response to deregulation. Banking, insurance, money management, healthcare,
telecommunications, transportation and utilities are industries that have experienced mid-1990s
mergers as a result of deregulation. Examples are the acquisition of investment banks and
insurance companies by commercial banks following the relaxation of restrictions on activities
by commercial banks, and the cross-border utility mergers following the relaxation of state utility
regulation.
Concentration of management energy and focus. The 1990s witnessed a recognition by
corporate management that it is frequently not possible to manage efficiently more than a limited
number of businesses. Similarly, there has been recognition that a spinoff can result in the
market valuing the separate companies more highly than the whole. These factors resulted in the
spinoff or sale of non-core businesses by a large number of companies. The amendment to the
tax law eliminating new Morris Trust spinoff/merger transactions had a dampening effect on the
level of spinoff/merger activity, but spinoffs have continued as a frequently used means of
focusing on core competencies.
Response to changes in technology. Rapid and dramatic technological developments have led
companies to seek out acquisitions to remain competitive. Cogent examples are the acquisitions
by telephone, software, cable and media companies designed to place them in a position to
compete in an era of high-speed Internet access via cable in which people interact with the World
Wide Web for news, information, entertainment and shopping. For instance, AT&T’s acquisition
of cable companies reflected its strategy to use cable lines to form a network for local phone and
internet services. Similarly, the AOL and Time Warner merger is premised on convergence of
media and the Internet. Banking is another example where rapid changes in technology have
sparked a significant number of mergers.
Response to industry consolidation. When a series of consolidations takes place in an industry,
there is pressure on companies to not be left out and to either be a consolidator or choose the best
partner. Current examples of industries experiencing significant consolidation are banking, forest
products, food, advertising and oil and gas. A recent study by J.P. Morgan shows that size has a
major impact on a company’s price earnings multiple. Larger companies have significantly
higher multiples than smaller companies with the same growth rate.
The receptivity of both the equity and debt markets to large strategic transactions.When
equity investors are willing to accept substantial amounts of stock issued in mergers and
encourage deals by supporting the stock of the acquirer, companies will try to create value by
using what they view as an overvalued currency. When debt financing for acquisitions is also
readily available at attractive interest rates, companies will similarly use what they view as cheap
capital to acquire desirable businesses.
Pressure by institutional shareholders to increase shareholder value. Institutional investors
and other shareholder activists have had considerable success in urging (and sometimes forcing)
companies to restructure or seek a merger. The enhanced ability of shareholders to communicate
among themselves and to pressure boards of directors has had a significant impact. Boards have
responded by urging management to take actions designed to maximize shareholder value,
resulting in divestitures of non-core businesses and sales of entire companies in some cases. In
other cases, shareholder pressure has been the impetus for growth through acquisitions designed
to increase volume, expand product lines or gain entrance to new geographic areas.
Less management resistance to takeovers. The recognition by boards of directors that it is
appropriate to provide incentive compensation, significant stock options and generous severance
benefits has removed much of the management resistance to mergers. So too the ability of
management to obtain a significant equity stake through an LBO has been a stimulant to these
acquisitions.

Mergers and Acquisitions and Successor's Liabilities

Many of today's mergers and acquisitions have a hidden "Russian Roulette feature" which if
unaddressed, could prove to be financially fatal years after a deal is completed. Mergers and
acquisitions have played a major role in the business marketplace for many years. Many
companies acquired other entities with little thought to the potential liabilities that they could
inherit which is known as successor liability. If they did nothing to protect themselves from
future litigation arising out of successor liability, these lapses in judgment could come back to
haunt them.
With the increase in frequency of products, completed operations and professional liability
lawsuits that seek more than $1,000,000 in damages... executives have become more concerned
that there may be a skeleton or two in their closets resulting from past mergers or acquisitions.
They wonder where the next asbestos or defective construction lawsuit will come from. In fact,
a firm recently found itself in the midst of a product liability class action lawsuit from silicon
products that had been manufactured by a company that it acquired. These products were used
in conjunction with breast implants and this resulted in a much-litigated situation with expensive
damage suits and settlements. Companies contemplating mergers or acquisitions have an
opportunity to protect themselves against the pitfalls of successor liability.
Acquirers have the opportunity to mitigate much of the unknown and unforeseen risk through
insurance protection that would provide monetary coverage for potential losses from future
liabilities. The warning is that the insurance coverage is truly effective only when it's part of a
systematic pre-merger due diligence strategy that includes a well-drafted buy/sell
agreement that clearly assigns responsibilities to the acquirer and the acquired.
Seeking solutions prior to the final handshake may enable companies to avoid or minimize the
financial cost of lawsuits. Even those companies that have been through a merger or acquisition
and haven't had any liability claims should take action to protect themselves against the unknown
liabilities of successor liability. The determination of who will be responsible for liabilities
arising out of past activities of the acquired company more often than not can be difficult and
seem unfair, but must be addressed up front and with great care and circumspection.
A number of factors must be considered in assessing liability arising out of the merger or
acquisition. This information can only be obtained by gleaning the facts surrounding the entire
acquisition and the subsequent conduct of the parties in terms of the purchase/sale agreement…
This is what was formerly known as the buy and sell agreement. The structure of each
company's insurance policies will also determine who is going to be responsible... particularly
when it comes to the deep pocket syndrome.
A successor liability claim may manifest itself in many different ways. It is critical that
companies develop a well-rounded plan for managing liabilities associated with mergers and
acquisitions that address all of the factors mentioned previously. Prudent measures should be
used by the successor company prior to completion of the acquisition. A thorough due diligence
investigation can alert corporate executives and their legal counsel to previous or current
exposures to liability. A proper due diligence process can help identify and quantify products
that have been manufactured or services rendered (prior) to the merger or acquisition and allows
an opportunity to properly access those exposures. The result of the due diligence process can
significantly influence the value of the transaction if the successor company agrees to accept
liability for products or services rendered in the past.
During the due diligence process, risk management professionals should review the insurance
records along with the claims history and carefully review the products and services rendered by
the company being acquired. Since many of today's liability claims involve products or services
rendered or sold many years ago, it's important to locate and preserve insurance policies that may
have been purchased even decades ago by the predecessor company. These policies may prove
to be very valuable by providing coverage for future claims and a thorough due diligence
examination may also reveal loss trends or defects of which the successor company should have
been aware.
Again, the purchase/sale agreement plays a very important role in establishing the companies
first line of defense against lawsuits. The successor company should work closely with legal
council to make sure that the purchase/sale agreement is drafted in such a way to make sure how
responsibility between the parties is allocated properly. Additionally, it is important that the
allocation is compatible with the triggering of the successors and the acquired company's liability
coverages.
Most insurance companies are very sensitive to mergers and acquisitions and its incumbent
potential exposures. Without any special agreement in advance their policies will more than
likely exclude coverage for this successor liability. To address this concern, the new extended
reporting period policy being used in conjunction with a thorough due diligence investigation
and a carefully structured purchase/sale agreement may offer the type of protection required.
Successor companies that have not explored ways of reducing or eliminating exposures to
successor liability lawsuits are playing Russian Roulette.
In addition to products, completed operations professional liability coverage where
applicable, there are other insurance coverages available to meet merger and acquisition
exposures:
• Representation and warranties coverage protects the seller company
against disputes over alleged breach of specific representations or warranties
in the purchase/sale agreement. The typical representations and warranties
would include such items as accounts receivable -- employee benefits --
financial statements -- intellectual property and taxes.
• Tax opinion guarantee insurance may be available if the deal depends on
specific tax treatment. This is especially important if the tax authorities were
later to rule against the treatment and the expectation called upon in the due
diligence and the reason that the merger/acquisition was made, could be
adversely affected. Tax opinion guarantee insurance pays in the event of
unanticipated taxes which may be owed as a result of a ruling against a
specific tax strategy which was used for the merger or acquisition.
• Bid cost insurance reimburses for fees that must be paid to various
external advisors originally retained to facilitate an aborted deal. The deal
may fall through as a result of failure to receive regulatory approval or loss of
financing.

Factors in against merger and acquisition

Why do firms carry out mergers and acquisitions, and how
can the difficulties involved be overcome?
In October this year, the British government approved a merger between two major television
companies, Carlton and Granada. The £4 billion deal, which creates a single ITV company for
the whole of England and Wales, was welcomed enthusiastically both by investors and by the
managers of the two troubled companies , who have steadily lost audience share and advertising
revenue to new rivals such as BSkyB, and lost money following the collapse of their ITV Digital
venture. However, it remains to be seen whether the new partnership will succeed in turning
around the companies' fortunes, or whether, like many past corporate marriages, it will end in
unhappiness and divorce.
The merging of two companies into one is not a recent idea - there were "waves" of corporate
mergers back in the 1920s, the 1960s and the 1980s (Fairburn and Kay 1989) - but the enormous
scale on which companies have swallowed each other up over the past decade far exceeds what
has gone before. The total worldwide value of mergers and acquisitions in 1998 alone was $2.4
trillion, up by 50% from the previous year. However, research suggests that a large proportion of
mergers and acquisitions do more harm than good to companies and their shareholders: Mercer
Management Consulting (1997) concluded that "an alarming 48% of mergers underperform their
industry after three years" , and Business Week recently reported that in 61% of acquisitions
"buyers destroyed their own shareholders' wealth".
Why do so many firms choose to participate in mergers and acquisitions, and why do so many of
these subsequently go wrong? In this essay, I will attempt to answer these questions, and
examine what steps companies can take in order to prevent acquisitions from ending in failure.

The reasons for mergers and acquisitions

One of the most common arguments for mergers and acquisitions is the belief that "synergies"
exist, allowing the two companies to work more efficiently together than either would separately.
Such synergies may result from the firms' combined ability to exploit economies of scale,
eliminate duplicated functions, share managerial expertise, and raise larger amounts of capital
(Ravenscraft and Scherer 1987). Carlton and Granada hope to save £55 million annually by
combining their operations. Unfortunately, research shows that the predicted efficiency gains
often fail to materialise following a merger (Hughes 1989).
'Horizontal' mergers (between companies operating at the same level of production in the same
industry) may also be motivated by a desire for greater market power. In theory, authorities such
as Britain's Competition Commission should obstruct any tie-up that could create a monopoly
capable of abusing its power - as it did recently in preventing the largest supermarket chains
from buying the retailer Safeway - but such decisions are often controversial and highly
politicised. (In the case of Carlton and Granada, the government imposed strict safeguards to
prevent the combined firms from unfairly raising the price of TV advertising. ) However, some
authors have argued that mergers are unlikely to create monopolies even in the absence of such
regulation, since there is no evidence that mergers in the past have generally led to an increase in
the concentration of market power (George 1989), although there may be exceptions within
specific industries (Ravenscraft and Scherer 1987).
In some cases, firms may derive tax advantages from a merger or acquisition. However,
Auerbauch and Reishus (1988) concluded that tax considerations probably do not play a
significant role in prompting companies to merge.
Corporations may pursue mergers and acquisitions as part of a deliberate strategy of
diversification, allowing the company to exploit new markets and spread its risks. AOL's merger
with media giant Time Warner, for example, saved it from being affected quite so disastrously as
many of AOL's Internet competitors by the 'dot com crash' (Henry 2002).
A company may seek an acquisition because it believes its target to be undervalued, and thus a
"bargain" - a good investment capable of generating a high return for the parent company's
shareholders. Often, such acquisitions are also motivated by the "empire-building desire" of the
parent company's managers (Ravenscraft and Scherer 1987).

Why mergers and acquisitions fail

Sometimes, the failure of an acquisition to generate good returns for the parent company may be
explained by the simple fact that they paid too much for it. Having bid over-enthusiastically, the
buyer may find that the premium they paid for the acquired company's shares (the so-called
"winner's curse") wipes out any gains made from the acquisition (Henry 2002).
However, even a deal that is financially sound may ultimately prove to be a disaster, if it is
implemented in a way that does not deal sensitively with the companies' people and their
different corporate cultures. There may be acute contrasts between the attitudes and values of the
two companies, especially if the new partnership crosses national boundaries (in which case
there may also be language barriers to contend with).
A merger or acquisition is an extremely stressful process for those involved: job losses,
restructuring, and the imposition of a new corporate culture and identity can create uncertainty,
anxiety and resentment among a company's employees (Appelbaum et al 2000). Research shows
that a firm's productivity can drop by between 25 and 50 percent while undergoing such a large-
scale change; demoralisation of the workforce is a major reason for this (Tetenbaum 1999).
Companies often pay undue attention to the short-term legal and financial considerations
involved in a merger or acquisition, and neglect the implications for corporate identity and
communication, factors that may prove equally important in the long run because of their impact
on workers' morale and productivity (Balmer and Dinnie 1999).
Managers, suddenly deprived of authority and promotion opportunities, can be particularly bitter:
one survey found that "nearly 50% of executives in acquired firms seek other jobs within one
year". Sometimes there may be specific personality clashes between executives in the two
companies. This may prove a problem in the case of Carlton and Granada: Carlton's chief
executive Charles Allen and Granada's chairman Michael Green, who will have joint
responsibility for running the merged company, have been likened to "ferrets in a sack".

Strategies for a successful acquisition

Why are so many organisations apparently unable to overcome such difficulties? A merger or
major acquisition is often a unique, one-off event in the lifetime of a firm; companies therefore
have no opportunity to learn from their experience and develop tried-and-tested methods to
ensure that the process is carried out smoothly. One notable exception to this is the financial-
services conglomerate GE Capital Services, which has made over 100 acquisitions during a five-
year period (Ashkenas et al 1998). Through this extensive experience, GE Capital has learnt four
basic lessons:
1. The integration of acquired companies is an ongoing process that should be
initiated before the deal is actually closed. During the period in which the
acquisition is being negotiated and subjected to regulatory review, the
management of the two companies can liaise with each other and draw up a
clear integration strategy. Starting earlier not only allows the integration to
proceed faster and more efficiently, but also gives GE Capital the opportunity
to identify potential problems (such as drastic differences in management
style and culture) at a stage when it is not too late to abandon the deal if the
difficulties encountered seem so severe that the acquisition is likely to fail.
Unfortunately, however, even if a very thorough investigation is done prior to
the acquisition, there are often potential problems that will not manifest
themselves until long after the deal has been done (Ravenscraft and Scherer
1987). It is also impossible to take early steps towards integration in the case
of a hostile takeover bid (where the managers of the company being acquired
refuse to co-operate with their potential buyers).
2. Integration management needs to be recognised as a "distinct business
function", with an experienced manager appointed specifically to oversee the
process. The 'integration managers' that GE Capital selects to oversee its
acquisitions can come from a wide variety of backgrounds, but all must have
the interpersonal skills and cultural sensitivity necessary to foster good
relationships between the management and staff of the parent company and
its new subsidiary.
3. If uncomfortable changes (such as layoffs and restructuring) have to be made
at the acquired company, it is important that these are announced and
implemented as soon as possible - ideally within days of the acquisition. This
helps to avoid the uncertainties and anxieties that can demoralise the
workforce of a newly-acquired company, allowing employees to move on and
to focus on the future.
4. Perhaps the most important lesson is that it is important to integrate not just
the practical aspects of the business, but also the firms' workforces and their
cultures. A good way to achieve this is to create groups comprising people
from both companies, and get them to work together at solving problems.
Other authors, however, question whether aiming for total integration of two contrasting
company cultures is necessarily the best approach. There are, in fact, four different options for
reconciling cultural differences: complete integration of the two cultures, assimilation of one
culture by another, separation of the two cultures (so that they are maintained side by side), or
deculturation (eventual loss of both cultures). The optimal strategy may depend upon the degree
of cultural difference that exists between the organisations, and the extent to which each values
its own culture and identity (Appelbaum et al 2000).
Tetenbaum (1999) suggests an alternative set of "seven key practises" to assist with a successful
merger or acquisition:
1. Close involvement of Human Resources managers in the acquisition process;
they should have a say in whether or not the deal goes ahead.
 2. "Building organisational capacity" by ensuring that close attention is paid to
the retention and recruitment of employees during the acquisition.
3. Ensuring that the integration is focused on achieving the desired effect (for
example, cost savings), while at the same time ensuring that the core
strengths and competences of the two companies are not damaged by the
transition.
4. Carefully managing the integration of the organisations' cultures.
5. Completing the acquisition process quickly, since productivity is harmed by
the disorganisation and demoralisation that inevitably occur while the change
is underway.
6. Communicating effectively with everyone who will be affected by the change.
Other authors agree that "being truthful, open and forthright" during an
acquisition is vital in helping employees to cope with the transition
(Appelbaum 2000).
7. Developing a clear, standardised integration plan. Tetenbaum cites the
example of Cisco Systems, which, like GE Capital, makes large numbers of
acquisitions and has been able to learn from its experiences and build up
tried-and-tested processes for carrying them out successfully.

Conclusions
Although there are many different opinions on precisely what causes so many mergers and
acquisitions to fail, and on how these problems can be avoided, there are certain points that most
analysts appear to agree on. It is widely accepted, for instance, that the 'human factor' is a major
cause of difficulty in making the integration between two companies work successfully. If the
transition is carried out without sensitivity towards the employees who may suffer as a result of
it, and without awareness of the vast differences that may exist between corporate cultures, the
result is a stressed, unhappy and uncooperative workforce - and consequently a drop in
productivity.
With this in mind, it is important that a clear 'integration plan' is in place, and that it is overseen
by a dedicated manager with the experience and interpersonal skills to calm employees' anxieties
and reconcile cultural differences. Preparation for the transition should begin as soon as possible,
preferably before the deal has been signed, and any necessary changes should be implemented as
quickly as possible to avoid stressful uncertainties that can damage morale. Open and honest
communication throughout the process is vital in retaining the trust of employees.
Even when following these principles, there may be situations in which a tie-up between two
companies could never be made to work effectively, because there are irreconcilable differences
in corporate culture or because the drawbacks of a merger would outweigh any potential
benefits. Although it is obviously impossible to predict with certainty the outcome of a merger or
acquisition before it takes place, thorough preparation can definitely help, and companies should
not be afraid to abandon plans for a tie-up if there is evidence that it is unlikely to be a success.
Most importantly, any decision to carry out a merger or acquisition should consider not only the
legal and financial implications, but also the human consequences - the effect of the deal upon
the two companies' managers and employees. It is upon them, ultimately, that the fate of the
newly-merged company will depend.
 Postmerger
Integration Impact Stories

Integrating Leading
Global Consumer Brands
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while preserving the identity of each.

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ConsumCo, a world-market-leading consumer goods company with retail activities
headquartered in Europe, had acquired a large competitor. Both companies commanded strong
global brands as core assets, but they were complementary in regions, products, and consumer
segments. The goal of the deal was to unlock value from extended geographic reach, a
diversified product offering, and a broadened brand portfolio.
BCG's role was to ensure the timely and smooth integration of the target, facilitate the detailing
and capturing of synergies, and help build a unified and strong organization.
The key challenge was to quickly unlock the merger's full value while also paying particular
attention to the individual identity and value of the two brands.