Why Mergers And Acquisitions Fail?
The term Merger and amalgamation are inter changeably used with each other. The term amalgamation means mixing up or uniting together of two or more companies. In other words it is a process where one company blends with another company. The term acquisition means when a smaller company is taken over by a larger company.
Lately we have seen a sudden boom in the field of Mergers and Acquisition and according to Mckinsey and Company in 2009 alone nearly 5800 companies were involved in the process of mergers and acquisition which accounted for nearly $2.3 trillion.
A recent trend shows that many companies are going in for mergers and acquisition without conducting a proper due diligence. Merger and acquisition may help the parent company in increasing its market share, lowering the cost of production, increasing competitiveness and improving the profit, but contrary to popular perception this is not always the case. Many a time it has been seen that the merger and acquisition has not been able to produce the desired result. According to the survey conducted by Mckinsey and Company nearly 61% of the merger and acquisition fail as the companies are not able to meet the set targets. A deep analysis into the historical trends also shows that two third of the big mergers and acquisitions are not successful.
History And Development Of Mergers And Acquisition
Mergers and Acquisition has developed in five stages which are as below
a. From 1897-1904
During this stage the mergers took place between companies who enjoyed a monopoly in the lines of production like railroad, electricity. Most of the mergers during this time were basically horizontal in nature. However, this stage ended in 1904 as the required efficiency could not be attained.
b. From 1916-29
The second stage focused on mergers between oligopolies. After the World War the economic boom that followed resulted in these mergers. In the second stage the mergers were basically horizontal or conglomerate in nature. However this stage ended with the stock market crash in 1929 and the Great Depression.
c. From 1965-69
The mergers that took place in this stage were conglomerate in nature and were inspired by high stock prices, interest rate etc. However this stage came to an end in 1968 as a result of the poor performance of the conglomerate.
d. From 1981-89
The major characteristic of this stage was that the acquisition targets under this were much larger in size as compared to the third stage. Here, the mergers that took place were between oil and gas industries, banking and airlines industries etc. This stage however ended with anti takeover laws, financial institution laws and the Gulf War.
e. From 1992-2000
The mergers and acquisition under this stage was inspired by Globalization, Stock market boom and deregulation. In this stage the mergers took place between banking and telecommunication industries. They were mostly equity financed rather than debt financed.
The major reasons as to why merger and acquisitions fail are explained as below:
1. Over estimating the value of the target company
Though the basic aim of a company in merger and acquisition is to provide benefit to the shareholders and maximize its profits but in reality most of the companies are not able to achieve this. A survey conducted by Mckinsey and Company shows that many parent companies often over estimate the value of their target company due to lack of due diligence. Also, sometimes, two or more companies are interested in acquiring the same company and this greatly shoots up the amount they eventually have meat out for the target company.
Damlier-Benz and Chrysler Group
In 1998 the German auto car maker Damlier Benz merged with Chrysler Group for a value of $36 billion. It was considered to be a win-win situation for both companies as it was perceived to be a merger between equal. However, after a few years, the value of Chrysler fell to a mere $7.4 billion. The merger had proved to be a failure. Many reasons contributed to this but all experts agree that Damlier Benz never conducted a proper due diligence before it merged with Chrysler. In other words it over estimated the value of the target company which led to merger proving to be unsuccessful.
2. High cost debt-
The acquirer many a time’s gets submerged in large and extra ordinary debts during merger and acquisition. Most of the mergers and acquisitions are financed through unsecured debts which carry a huge rate of interest with them. These high cost debts eventually lead to a fall in the stock prices of the parent company. Also when two or more companies bid for the same company they may end up paying more for the target company. This over estimated price is usually raised by the company through high cost debts. As a result the company will try to cover these high cost debts which lead to a fall in the stock prices of the parent company which eventually hampers the company
In 2008, Tata Motors acquired Jaguar. The analysts were of the opinion that it was Tata’s ambition to become a global company in quick time that led them to purchase Jaguar. Since a very high cost was paid, the deal was financed by Tata’s through high cost debts. Later the shares of both the companies suffered a huge blow as Tata tried to raise money to cover this huge acquisition debt.
3. Job Loss
One of the major reason as to why Mergers and Acquisitions is feared amongst the employees is because of job loss. According to the statistics provided by the UNI-Europa, nearly 130,000 jobs have been lost as a result of mergers and acquisition in the European financial sector. Also according to the European Restructuring Monitor, of the 3.7 million job losses, approximately 240,000 jobs were lost as a result of mergers and acquisition. This job loss is mainly the result of the company going into cost cutting schemes to give some breathing space to its highly skewed balance sheet as a result of the merger or acquisition. The other reasons leading to job losses are -
a. company wanting to save on its pay roll
b. the parent company may already have surplus workmen
c. the target company may not be trading efficiently due to a large staff
a. In USA due to the merger between Chemical Bank and Chase Manhattan in 1995, nearly twelve thousand jobs were eliminated. Also when Nation Bank acquired Bank of America in 1998 it included plans to lay off nearly 18,000 employees.
b. The merger between UBS and SBS in Switzerland led to a job loss of 1385 employees
4. Cultural aspect
This is one of the biggest issues which the companies face during mergers and acquisition. No two companies can do the business in same way. The working and organization culture of every company is different. A company may be different from the other on the basis of the way they project themselves in the market, how they treat customers, suppliers and employees, how much freedom is given to the employees and so on. The merger or acquisition between two culturally different companies eventually leads to lower productivity if this issue is not addressed by the management right from the beginning.
In 1998, the German auto car maker Damlier Benz merged with US Chrysler Group. The deal was considered to be a win-win situation for both. However, after two years the company reported a huge loss because of which nearly 21,000 jobs were lost. One of the reasons given for this failed merger was that both these companies were fundamentally different with respect to their cultural background. Damlier-Benz was always known for its methodical organization, centralized decision making and a regard for tradition and hierarchy while Chrysler had a reputation of risk taking, encouraging creativity and flexibility.
A monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. A merger can lead to a monopoly where there are not many competitors in the market giving the parent company the power to control the price of the product and increase it according to will so as to increase their profit. As a result the bargaining power is shifted from the consumer to the producer. However, this situation can not arise any more because of the stringent laws made by the government to check the menace of monopolies.
A report made by Judge Thomas Penfield accused Microsoft of enjoying a huge power in the market for Intel compatible PCs. Their position in the market gave them the power to dictate the price in the market without any fear of losing customers.
6. Shareholders and Employees interest overlooked
One of the major mistake committed by the parent company is that it neglects the interest of the employees and the shareholders during due diligence. The shareholders who are being taken over often feel hostile. Mergers and acquisitions makes the employees shift their focus from productive work to issues related to conflicts, layoff, compensation etc. It also puts a huge question mark in the minds of the employees regarding their job security. It is required that during merger and acquisition a proper communication should be maintained between the management and the employees so as to avoid such issues.
As a result of the merger between ABB-Flakt at the global level, its branches in India also merged. However a study conducted on this merger in India revealed that no proper due diligence was conducted as a result of which the gain on the merger was less than the capital market growth due to which the shareholders of Flakt lost heavily.
Most of the big companies these days are indulging in merger and acquisition and in the coming years this process is only going to get bigger. As mentioned above more than 61% of the merger and acquisition are not successful. Therefore it is of utmost need that the success rate of mergers and acquisition be improved. This can only be done if all the aspects involved in merger and acquisition are given proper attention. It is to be borne in mind that a merger or an acquisition done in haste cannot be successful. Before a merger or an acquisition actually takes place a thorough due diligence of the target company should be done. Based on that result the parent company should decide whether to go ahead with the merger or acquisition or not.
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