Global Mega-Mergers and Failure Risk Reduction

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Table of Contents

Introduction
The need for mergers and the concept of dubious logic in Global mega-mergers
Arguments against Mega-Mergers
Reducing the risk of Failure in both the Pre and the Post-merger phases
Practice of due diligence in the pre-merger phase
Managing Post merger phase
Conclusion
References

Introduction

The modern day corporate world has been characterized by an increased frequency of mergers. Mergers have occurred mostly in MNCs as well as in companies doing business locally. There are various reasons why companies undergo mergers and acquisitions. Traditionally companies that underwent mergers did so in as an expansion program.

In the modern day business environment, businesses undergo mergers in order to fit into the various business environments. Politics play a vital role in determining whether the company will undergo merger or not. This is more so found in the MNCs where the need to come into a new market compels the company to acquire another one or merge with a local company.

When a big company merges with another one, the merger is referred to as a mega-merger. A perfect example of a mega-merger is the one that occurred between AT&T and T-mobile or between Daimler Benz and Chrysler. The ever changing market conditions have been largely responsible for mergers

Many management scientists have argued for and against the practice of mergers. Mergers can be termed as desirable depending on various measurement tools. These tools include the market they serve, the nature of their products, their strategic goals and so on. The concept of dubious logic of global mega-mergers also presents an explanation of the reasons behind many mega-mergers that have taken place.

It should however be noticed that the ultimate purpose of mergers should not be to gain a market share so as to control the market by such acts as price setting (Kingx, Dalton, Daily, & Covin, 2004, p. 193). This paper critically analyzes the arguments for and against mergers with a look at the dubious logic of global mega-mergers and also presents some measures that firms can take to reduce the risk of failure in both the pre-merger and post merger phases.

The need for mergers and the concept of dubious logic in Global mega-mergers

In the modern day merger context, the aspect of dubious logic of global mega-mergers has spurred the increased rate of the mergers. It is commonly thought that ‘bigger is better’. As such many, organizational managers have developed a bias towards expansion through mergers and acquisitions.

The aspect of globalization that has presented the worlds as a global village has fuelled cross border mergers which have consequently resulted in firms expanding exponentially into the international markets and new global frontiers. However, this general thought of bettering the organization through global mergers has been criticized by many management scientists.

One of the ways to relent from this common management myth that ‘bigger is better’ is accepting that the global economy is not a ‘winner take it all’. The management scientists argue that there are better and more viable options for managers who are seeking expansion plans for their companies.

Besides, empirical evidence shows that the most of the global mega-mergers have failed to achieve their primary merger objective. As a result the companies have faced a rather hostile post-merger environment and operations have been highly affected (Lamoreaux, 1985, p. 132). Once such a scenario occurs, the competitors may take advantage of the failed merger to gain a considerable competitive advantage.

The problem with mega-mergers is that due to the big size of the two companies being merged, administrative challenges may arise during the process of working out the organizational issues such as culture and the structure of the new company and as such, they may take too long a time to solve (Kingx, Dalton, Daily, & Covin, 2004, p. 196).

Such problems were experienced during the merger between Hewlett Packard (HP) and Compaq. Other mergers that experienced such problems were the ones between Daimler Benz and Chrysler, America online and Time Warner, and CityCorp and Travelers Group.

Most mergers happen with a purpose of strengthening their market presence as well as increasing their competitiveness in the market. This usually ensures that these firm experience economies of scale. Firms that undergo mergers usually save on the fixed costs through combining departments and also reducing the number of top managers and executives.

This is usually desirable more so in such hard market conditions as experienced in the modern day business world. Firms are therefore able to minimize on their costs thus increasing their efficiency (Harwood, 2006, p. 373).

Besides, such firms are able to command larger market base than before. Through increasing their efficiency in operations, the merged firms are able to reduce their cost of production and hence enhance their competitive advantage over rival companies. An example is the merger between HP and Compaq that led to HP being the leading manufacturer of Personal Computers overtaking bitter rivals such as Dell.

Arguments against Mega-Mergers

The concept of dubious logic for global mega-mergers shows that many mergers happen because of an inclination to expansion among many managers. However, once the expansion program is implemented the company fails to realize its ultimate goals and objective because of various reasons.

There are several critics of global Mega-mergers. It is commonly argued that large companies have their own distinct organizational cultures. As such, merging these companies’ established culture may be a hard process and if this fails, the effectiveness of the merged businesses may result causing the companies to failing to realize their integration objectives.

Some mergers are exploitative in nature. This mainly happens when a merger occurs in an oligopolistic market structures. Where there are few firms operating in the same market and offering the same product, they may conspire to collude and dictate the market prices and therefore exploit the consumers. This can happen in markets where there are no regulations from the government or where there is lack of antitrust laws.

Firms that merge in such market structures usually form a kind of monopolistic structure and as such, they exploit the consumers. This is a disadvantage of mega-mergers more so to the consumers since the market forces of demand and supply cease controlling the market (Cartwright & Schoenberg, 2006, p. 106).

Mega-mergers that occur under such circumstances usually result in unfavorable market conditions and as such are undesirable. The other disadvantage of mega-mergers is that if they fail to realize their integration objectives, their rate of collapse is highly accelerated compared to small mergers. This is because of the publicity that comes along with such mega mergers and as such, the public eye is always on them.

Reducing the risk of Failure in both the Pre and the Post-merger phases

The process of planning and subsequent execution of mergers requires a lot of strategic management. Firms that rush into merging without paying a considerable look at all the factors governing the pre merger and post merger phases usually walk on a tight rope when it comes to effective management of the merged firm. One important consideration during a merger is the practice of due diligence.

It is of critical importance to have a holistic view when assessing the viability of mergers. Practicing due diligence means a company must look at all the organizational parameters in their wholesomeness before merging and/ or acquiring another company.

Practice of due diligence in the pre-merger phase

This is a phase that is characterized by market study, forecasting and strategic re-planning of the organizational goals and objectives so as to become congruent with the interests and goals of the merging firm. First the company intending to undergo a merger ought to practice due diligence. This means that the company must assess the viability of the company being merged with so as to establish potential threats to the merger.

Due diligence here means establishing a reasonable degree of care before entering into the merger so as to protect the firms from potential threats during and after merger has occurred (Ramzon & Michael, 2003, p. 108). Assessing the viability includes a holistic approach to the viability of the organizational attributes of the two companies and identifying areas where these attributes are congruent.

These attributes include the organizational structure, culture and all other organizational parameters such as the financial records etc.

Another important measure that pertain to due diligence that firms can take during the pre-merger phase to ensure a guaranteed success is developing a common merger interest (Harwood, 2006, p. 200). This happens through bridging the gap between the different theoretical assumptions and expectations from the two firms.

Establishing a common interest will enhance communication and also help harmonize the activities in the post merger phase. These are key aspects of ensuring that the firm’s goals and objectives are achieved as while pursuing the interests of the merged firms.

Firms should also pay a keen attention to the aspect of strategic re-positioning. This includes exploring the possible ways of executing market repositioning which include such strategic variable as complementarities between the firms, and the similarities in terms of production, and other operational parameters. A critical analysis of these factors will establish a desired operational framework that will govern the management of the business in the post merger phase.

Carrying out restructuring is another very important measure that firms can take to ensure a successful merger. Often times, mergers occur before integrating the corporate structures of the two firms and this always results in problems such as the flow of communication and most importantly the making of decisions.

Firms that want to merge should reorganize their affairs in such a way that the resulting merger’s structure does not present strategy implementation hurdles. Such problems of incompatible structure have been experienced in the past that resulted in total failure of mergers concerned. Mega-mergers such as the CitiCorp and the Travelers Group had such problems where it was agreed that the merger maintain the two CEOs who would be co-equal. This is a management goof since there was a vague reporting channel and the company had to subsequently force one CEO out.

Managing Post merger phase

Once the merger has occurred, the main challenge is for the management to set the ball rolling in the wake of the new corporate image, structure and the merged cultures. To effectively manage the mergers and ensure that the firms realize the much needed success, the management ought to closely manage two important aspects; the performance of the company and the realization of synergy. It is the role of the management to ensure a continued pursuit of excellence after the merger has occurred because.

Monitoring the performance of the company may take the form of absolute performance or the performance. Absolute performance has to deal with pursuing the merger strategic goals and setting targets that are evaluated using the mergers scorecard. The other form of performance in the post merger era is the relative performance.

This has to do with the achievement of the set objectives as compared to the premerger individual firms. This aspect of relative performance is the best way to evaluate the post merger success and as such post merger strategies should be crafted while putting the relative performance aspect in consideration (Kingx, Dalton, Daily, & Covin, 2004, p. 230).

Performance is known to be the single most important tool of evaluating the success of a company and as such, the company’s management should focus on improving performance through crafting plans, goals, and objectives which are aimed at achieving excellent performance results.

The other measure that can be used to ensure success of a merger during the post merger phase is pursuing the realization of synergy. Synergy is defined as the act of achieving increasing returns to scale and as such, if a company achieves one given level of operation, two companies when working together should achieve more than two levels. This is the basic assertion of the concept of achieving synergy in production.

One of the most common merger motives is achieving economies of scale and economies of scope. Economies of scale has to do with achieving a given production level using less costs due to integrating such controllable costs as fixed costs during the merger process. ‘Economies of scope’ has to do with the ability to produce several products from a single production process.

These two factors determine the success of a merger during the post merger era and as such, the management ought to keenly follow the achievement of these two merger motives. Once a company is able to achieve the economies of scale and economies of scope, it is thought to have achieved a milestone in living up to the pre- merger motives.

Conclusion

While some mergers have become successful in achieving their objectives, others have resulted in total failure and others have been forced to undergo splits or spin-offs. The management of pre-merger and post mergers phases is quite critical in ensuring that the goals that have been set are both realistic and achievable. A close study of the market conditions with a regard to the remote environment can be a valuable activity to any firm that plans to undergo merger.

As such, the management of the companies that merge should work tirelessly to ensure that the goals and objectives of these mergers are achieved in the best possible way while striking a balance between the shareholders interests and the interests of all other stakeholders. It should be noted that the success or failure of a merger depends on the management’s approach to the merger before, during and in the post merger phase.

References

Cartwright, S & Schoenberg, R 2006, ‘Thirty Years of Mergers and Acquisitions Research: Recent Advances and Future Opportunities’, British Journal of Management, Vol.17, Special Issue, pp. S1–S6.

Harwood, I A 2006, ‘Confidentiality constraints within mergers and acquisitions: gaining insights through a ‘bubble’ metaphor’, British Journal of Management, Vol. 17, Iss. 4.

Kingx, D, Dalton, R, Daily, C, & Covin, j 2004, ‘Meta-analyses of Post-acquisition Performance: Indications of Unidentified Moderators’. Strategic Management Journal , vol. 25, no. 2, pp. 187-200.

Lamoreaux, N 1985, The Great merger movement in American business, 1895-1904. Cambridge: Cambridge University Press.

Ramzon, B & Michael, S 2003, ‘The benefits of Banking Mega-mergers: Event Study Evidence from the 1998 Failed Mega-merger Attempts in Canada’. Canadian Journal of Adminstrative Sciences, Vol. 20, Iss. 3, pp. 196–208.

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