These technical factors can restrict the new deal right from the beginning, but there are other considerations. The costs of disruption can also be significant for both customers and employees as illustrated by the following data points:. These talent and cultural impacts have significant ripple effects, but many companies do not get serious about the human side of bringing organizations together.
It is assumed to be more about the balance sheet than the hard work of cultural due diligence, communication and integrating two distinct organizations. This amount is worthy of our consideration; just to put it in context, a trillion dollars could buy:. There are no simple answers, or one easy formula, to achieving greater success in mergers and acquisitions. So many economic, political, legal, personal and contextual factors pertain, but it is true that if the human-side is ignored or underserved, then success is virtually impossible to achieve.
HR must be a fearless and continuous advocate to protect and optimize the investment potential of the newly formed organization. You must be logged in to post a comment. Receive this article in PDF.
Kurt Lewin, the father of social psychology, once remarked that there is nothing so practical as a good theory! There is, unfortunately, no theory of how to manage mergers and acquisitions, and it is important to underscore yet again that the book makes no such claim. What the book does claim is this.
When there is no theory to guide action, the next best things are some models and frameworks, some cognitive maps, which both sides can share to guide thinking about action. Models and frameworks on their own are no more than abstract mental maps, but when rooted in context and shared by both sides, they provide a focus that can be invaluable for planning and negotiation purposes. The frameworks can then develop into local, tentative theories-in-use — by no means perfect, but grounded in the specific culture and acquisition experience of each firm. This is the spirit in which the book is offered.
It is intended to help all firms move quickly up the integration learning curve from whatever position they find themselves. If that happens, it can go a long way towards reversing the view that mergers and acquisitions are one of the top ten ways of destroying shareholder value. Of the three major routes see Figure 1. Organic growth can be slow: market penetration can be difficult against established competitors and it can take many years for a company to reach any appreciable size.
Growth through innovation can be costly: it carries a high risk of technical failure, and at the time of making the capital investment there is no certainty of demand for the capacity created. Firms can diversify quickly through acquisitions. Operating efficiencies can be improved. Greater size increases market power and protects against economic and market instability. And the downside is cushioned. If the purchase proves to be disappointing, usually it can be sold off to another buyer. From a strategic perspective it is easy to understand the attraction of acquisitions and why growth through acquisitions has become almost a generic strategy in many companies.
Testimony to the power of acquisitions and the economic concentration that follows is visible all around us. One glance at the economic and corporate landscape says it all. At the end of the nineteenth century, it was still a world of small-scale local enterprises. At the beginning of the twenty-first century, it is a world of corporate leviathans. The largest companies in any industrialised country owe their size and power principally to a succession of acquisitions and mergers.
These firms drive the global economy. They dominate world production and global markets. They transcend national boundaries, and often eclipse the autonomy of 3 4 Global Acquisitions Figure 1.
All of which sends out a very powerful message. Today, some of the biggest firms in the world have more economic power and influence than many United Nations member states. These firms seem to have become huge and successful by stacking acquisitions one on top of another. So, why not follow their example?
It is a challenge some firms would rise to. There is certainly no shortage of firms eager to follow the acquisition trail. The market for corporate control Manne, grew exponentially during the last ten years of the twentieth century see Figure 1. Mega-deals and globalisation have been responsible for the sharp rise in both the number and the value of deals in the late s. Acquisitions: The Promise and the Problem In other words, companies grow by assimilation into others, and for all sorts of reasons.
Then they mature, decline, go into liquidation or are taken over, and thus shape and grow into something else. Acquiring and being acquired are thus perfectly normal activities at different stages in the business lifecycle as environmental circumstances change. Figure 1. Research has shown that if a company disappeared from UK stock exchange listings prior to , the major reason was liquidation.
Post, it was attributable almost entirely to takeover or merger Singh, If viable parts of a business can be saved in time, the acquisition process would seem a more efficient — and certainly a more socially responsible — alternative to bankruptcy or voluntary liquidation. However, of all the justifications for acquisitions, the two which usually carry most weight are the claims that takeovers improve economic efficiency and protect investor interests.
With shareholdings in most firms widely dispersed, corporate executives have broad discretion to act in ways that may benefit their own interests but not necessarily those of investors. The takeover mechanism, when operating efficiently, is argued to protect against this in two ways: 5 6 Global Acquisitions 1. The act of takeover is said to replace underperforming managers with more able counterparts. The possibility of takeover acts as a threat to all corporate managers who do not act on behalf of shareholders.
From this perspective, the takeover mechanism is said to act as a discipline upon managers who are complacent or have lost focus or are in any other way underperforming, to put shareholder interests first. If not, action by financial markets will ensure that they are replaced by other managers prepared to do so — ultimately, if necessary, by means of a hostile bid. All of which, it is argued, should keep companies competitive and profitable and safeguard investor interests. How Sound is Takeover Theory?
These are just some of the justifications for mergers and acquisitions. All are impressive; all are solidly grounded in theory from economics and finance. However, there is a problem, a massive billion-dollar problem. In fact, the way in which financial markets interpret underperformance and the types of sanction they impose seem to vary across industries and countries, and also across time.
There is a wide gulf between what takeover theory predicts should happen and what actually happens in the post-acquisition period. This is not to deny that many firms have used the takeover route to grow successfully and Acquisitions: The Promise and the Problem profitably. Their acquisitions have delivered all that was expected of them; sometimes even more. But other firms, particularly those with over-optimistic expectations about the power of takeovers to deliver corporate growth and renewal, often have been bitterly disappointed.
A range of studies has shown a consistent pattern of poor long-run performance in both acquiring firms and target firms. Yes, they did, but with this critical proviso: those that survived did it more efficiently than the rest. They acquired in a way that, on average, delivered performance and shareholder returns. In most instances, they managed their acquisitions in a way that delivered returns greater than the cost of buying and integrating the targets — or if not, they cut their losses and divested. Big successful firms are the survivors in the acquisition game, the tip of an enormous iceberg.
Corporate history is littered with the names of companies that went on an acquisition spree with a bag of debt chasing poorly understood hope. A few years later, with their share price in tatters, they disappeared without trace, unable to manage successfully what they had bought.
These lessons apply equally to acquisitions where there is a good strategic fit into existing businesses as it does to diversifications into new areas. This is the central problem in acquisition performance. Takeover theory predicts synergy — that two plus two can equal 7 Global Acquisitions 8 five.
There are few definitive explanations as to why, post-deal, the majority of acquisitions struggle to get two plus two to equal four. Value Destruction Value-destruction and why it happens remains the biggest unresolved question in mergers and acquisitions. Some analysts blame rosy-eyed calculations or rushing the deal.
Others blame flawed strategy. Business life-cycle reasons are also suggested. But increasingly the finger is being pointed at a fundamental weakness in both the theory and the practice of Western strategy. And when top managers follow the models, they often compound the weakness by making strategic decisions in isolation from the senior executives who have to carry them out.
The effect in mergers and acquisitions is the all-too-familiar practice of strategy separated from implementation. Deal-makers rarely get involved in implementation, and implementation managers — whose job is to make acquisitions deliver their intended value — are rarely at the table when a deal is negotiated. Sometimes the first they know about a deal is when the implementation job lands on their desks. At present, there is very little help available to companies on how to avoid value destruction. We know very little about how firms make their acquisition decisions or about how they select a particular style of implementation.
The whole area remains an enormous and uncomfortable black hole in management understanding — uncomfortable because it puts the spotlight on how selective management research can be in terms of the inefficiencies it seeks to remedy. For most of the twentieth century, armies of researchers have crawled all over workers on the factory floor to seek efficiency gains — which sometimes have amounted to no more than a few pennies. During the same period, countless thousands of mergers and acquisitions have taken place in every industrialised country.
They were the most significant shapers of the corporate landscape as it evolved in the twentieth century, and their cumulative expenditure amounted to a truly astronomical figure. But imagined synergy is much more common than real synergy. It entered such industries as toys, crafts, musical instruments, sports teams and hi-fi retailing. While this corporate theme sounded good, close listening revealed its hollow ring. They were all sold, often at significant losses, except for a few publishing-related units … erod[ing] the shareholder value [CBS] created through its strong performance in broadcasting and records.
Porter, not until around that management researchers began to pay serious attention to them. It is a sobering thought that if twentieth-century management scholars had been more willing to challenge strategy at source and put boardroom inefficiencies under the microscope, we would now have an acquisition knowledge base capable of delivering efficiency savings of huge proportions.
But most of that experience has been lost — gone with the managers to their graves. That lost opportunity — given the number and size of current deals and the magnitude of underperformance — potentially is worth billions of pounds and dollars every year. Supposedly gilt-edged mergers and acquisitions are now going sour at a jaw-dropping rate. Culture clashes were blamed. Indecisive integration and a clash of management styles were reported. Choose another decade and the names would change, but not the message. Far less publicity is given to the thousands of smaller acquisitions that run into trouble.
Their losses may not be as great, but cumulatively they also run into billions. Most have one problem in common — an inability to integrate two companies together to deliver value. What help has been available to these companies? Up to now, very little. We are still pretty hopeless at explaining why one acquisition turns into gold and another into a lemon.
Integration: The Value-Creating Capability In the twenty-first century, the critical economic resource will be knowledge, rather than capital or labour. Knowledge, we are repeatedly reminded, is the new engine of economic growth. Any two firms can merge using their shares as capital, but knowing how to combine the two firms to create value is the scarce resource.
It is a competitive necessity. Large corporations can no longer rely on their sheer size to act as a barrier against other companies entering and taking their markets. Increasingly, it is smaller companies that steal their market share, not other big companies. This is because smaller companies with state-of-the-art technology have learned something very important. With traditional business boundaries and borders collapsing faster than ever before, smaller companies have learned that they can use acquisitions and collaborative ventures anywhere around the world to obtain and develop new technologies and bring them to market at speeds unimaginable a decade or so ago.
Provided they are nimble and are able to integrate together the various businesses and capabilities, smaller firms can beat the giants at their own game. It is an example repeatedly demonstrated in the Tiger economies and now occurring on a global scale. Nor can large corporations simply rely on a continuous supply of smaller companies for rejuvenation or to stave off competition. But the rigidity of large corporations often works against the more flexible and innovative character of smaller firms and can stifle capability transfer. In the knowledge sector especially, if acquired staff Acquisitions: The Promise and the Problem dislike the new style of management, value-purchased can simply walk out the door.
Fast and effective integration — to ensure that value-purchased quickly becomes value-added and not value-lost. It is a capability that all firms will need if they are to compete successfully in the future. Mega-deals may grab the headlines but in the global economy of the twenty-first century firms of all sizes will need to become involved in acquisitions or mergers or joint ventures or some other form of strategic alliance simply to stand still.
Firms that lack a capability will source it, worldwide if necessary. Firms with innovation, talent or ideas will be seized upon. The boundaries of firms, markets, even entire industries, as they have traditionally been conceived, are becoming increasingly fuzzy and unrecognisable. Fast and effective — at being integrated. Both sides need to create the optimal conditions to make an acquisition or alliance work. Often target firms know how best to achieve value-added and increasingly they will drive the integration agenda in the future. The days when the larger or dominant partner dictated the style of post-deal management and integration are disappearing fast.
Smaller firms joining global corporations are now resisting being gobbled up. They want to keep some measure of autonomy and independence, as much for performance reasons as for staff morale. Hard bargaining in the future will be as much about price as about prospective management style. It will require a new breed of deal-makers able to operate at this level of subtlety and able to recognise the performance significance of values on each side.
Global goliaths hoovering up smaller companies around the world will need to adopt multiple styles of integration, tailoring each to the circumstances of the target. Delivering results will require a new breed of integration manager. In the future they will be highly specialised; selected as much for their psychological disposition and Human Resource skills as for their business and technical acumen.
An ability to be comfortable and effective interfacing across multiple boundaries will be essential.
For example, in the knowledge sector, a typical integration task might centre on the development of an item of cutting-edge software. An example such as this may not be the easiest to grasp, but it does illustrate very clearly that managing in the dot. Fast and effective integration — not just of firms and their structures but also systems, processes, cultures, and right down to individuals and their motivation and commitment. That can be one of the hardest things to achieve.
Talk to any managers with acquisition and merger experience and they will tell you that structuring the deal is usually straightforward. It is afterwards that the really intractable problems arise. Go further and ask them what, with hindsight, they would do differently, and two answers are always consistent. One is that they wish they had known more about the reasons why acquisitions and other collaborative ventures underperform before they entered into negotiations. The other is that they wish they had devoted far more time and effort to planning the implementation and integration before the deal was signed.
The following chapters should go a long way towards meeting these wishes. This chapter goes into detail on how the term is used here and also explains some of the thinking that lies behind the book. It should not be skipped even though it is conceptual.
It goes straight to the heart of the current critique of strategy. The human factor can be considered at several levels. At a straightforward level, it is about bringing together two different sets of people from each firm and managing their reactions and uncertainties. Or it is about handling any closures, redundancies, redeployments or relocations that become necessary after an acquisition. These are important considerations but not primarily what the book is about. Chief among these influences are the different structures, systems, controls and procedures, the management styles, and the values and beliefs on each side.
In international mergers, the human factor extends into national culture and includes the task of interfacing the sometimes very different management styles and workplace expectations in different countries. And in all acquisitions the human factor includes power and politics on each side and the way these sometimes pull in different directions to influence both the style and the effectiveness of post-deal management see Figure 2. We also know that at present there is very little guidance available to managers on how best to proceed.
Which aspects should be changed on the target side and which should be left alone? When is full merging appropriate and when not? What type of interfacing is most effective for commitment and performance? How fast should it all happen? Later chapters will address these practical questions in more detail and suggest how they might be approached in different acquisition contexts. At this stage, it is more appropriate to note two points: 1.
Most people regard integration as predominantly a technical matter — with perhaps a human edge. Few regard integration as fundamentally a human matter with technical dimensions. Integration in practice acts as a mirror upon strategy. Weaknesses in strategic thinking are mirrored and writ large in the way that firms approach integration.
If we combine these two observations, we will see that there is even more to the human factor than the issues outlined above. Nor is it some lesser consideration to the technical aspects of integration. It is a central and fundamental component of both. The term as used here captures what is currently missing in so much of strategic thinking. It is a counterpoint to depersonalised and rational-numerical approaches to strategy. In acquisitions, for example, the vast bulk of strategic planning is formuladriven with the emphasis almost exclusively upon financial and economic and commercial considerations.
These, as we know only too well, provide the necessary but not sufficient preconditions for a successful acquisition. It is a general weakness in Western strategic thinking and it has been recognised for some time.
That message has barely penetrated the strategy field and now needs to be restated, this time in a different form. But so conditioned have we become by years of depersonalised academic analysis of management and organisations that we regularly forget the human fundamentals. Likewise for strategy. The substance of strategy is all about markets and competition, but the processes that conceive and deliver strategy are essentially psychological and social. Strategy is about markets but it is formulated in hierarchies and implemented in hierarchies by people whose thinking and actions have been shaped by hierarchies.
The twist in acquisitions is that strategy formulated in one hierarchy has to be effected in another. The organisational logic and guiding mindsets on each side are different. A common belief is that social engineering of the target organisation is sufficient to bridge the gap. It is a highly questionable assumption and it will be scrutinised later. At this stage we will just note the following. Changing the outer logic of the acquired organisation — the technical side of integration — is relatively straightforward. Changes to structure and reporting relationships, changing financial controls and IT systems, harmonising rewards and benefits, meshing supply and distribution channels — these tasks can be time-consuming and costly but they are relatively easy to grasp.
They have a visible logic. Start and finish parameters are easy to identify. Technical solutions can be provided. Structures and systems and procedures have meaning for the staff who use them. But note that this is a two-way problem. For management and staff on the target side, trying to understand these aspects of the acquiring organisation can be equally perplexing. The Human Factor and Mindsets These hidden or taken-for-granted ways of thinking in a company are best captured by the concept of mindsets. Mindsets are at the heart of organisations. Understanding how managers and staff are programmed to think and behave is central to understanding the way that organisations work and to handling change or interfacing effectively.
We now rephrase an earlier statement. For any organisation to function, all the different abstract components structures, controls, systems, technology, values, and so on have to combine and come alive to make the organisation perform as it does. The components have to be energised with human emotion, intention and commitment.
All this connecting occurs in the minds of organisational members. In ways that we only dimly understand, all the different organisational components combine, first and foremost, within the minds of organisational members, and one outcome of this combining is the formation of mindsets. Individual intention and emotion drive an organisation but shared mindsets hold it all together and provide the logic and the orientation.
Mindsets are the essential glue that binds all the different aspects of an organisation together into a functioning whole. They govern: 1. Understanding these fundamental processes of how people see, think and act on each side is crucial if two firms are to dovetail effectively into each other. Yet most organisation theorists and integration specialists seem unaware of them — or choose to ignore them. They focus almost exclusively upon the outer aspects of an organisation and the technical aspects of integration.
People — if recognised — are but adjuncts to an essentially technical rationality. However, technical or personnel solutions do not create a meeting of minds. Merger history provides countless examples of companies spending small fortunes on the social engineering of target firms — changing structures, systems, procedures, controls, and so on — and then finding that that was exactly what they got: an engineered environment with precious little change in managerial thinking. Ways of perceiving and reacting to competition, attitudes to risk, selecting priorities and ways of doing business — these either changed little or the extent of change was patchy.
Obviously, some organisational changes will influence thinking, but the problem lies in knowing which ones will do so. Any manager who has integrated a cross-border acquisition, especially across different continents, will be only too familiar with the problem of ingrained mindsets.
The sometimes very different ways of thinking and behaving on the other side and the justifications given for courses of action or non-action can often confound comprehension and bedevil integration. What we learn is that mindsets are partly function-specific, partly firmspecific, partly industry-specific and partly country-specific — the latter being the deepest and the most taken for granted and hardest to access.
- Mathematical Problems in Image Processing: Partial Differential Equations and the Calculus of Variations.
- Imbeciles: The Supreme Court, American Eugenics, and the Sterilization of Carrie Buck;
- Encyclopedia of Lakes and Reservoirs.
This, of course, is one of the biggest difficulties for global managers bridging national cultures. Integration requires them not only to access and try to understand the ingrained assumptions behind mindsets in another country, but also to start questioning those they carry with them from home. Wrestling with such matters can be mind-bending, literally, but can also lead to rich discoveries, to the roots of integration wisdom. Like discovering how few of the certainties that managers work with, and business schools teach and advisers prescribe, have any solid scientific basis — most are The Human Factor and Strategic Integration products of time, place, custom and practice.
Then realising how few solid grounds there are for imposing any management practice upon a target company — only a belief or a conviction that one practice may be better than another. However, not all managers get the opportunity to make such discoveries. Indeed, many might find the process highly uncomfortable. In Summary Strategic integration is viewed here as a human or social endeavour with important technical dimensions. Fundamentally, at a practical level, it is about bringing together two sets of people with different mindsets and different conditioning environments — sometimes just top management teams; sometimes entire organisations — in the most appropriate way to deliver acquisition strategy.
The proposition here is that organisations are microcosms of the national culture in which they are embedded and from which they draw their personnel. These abstract notions — the conceptual bones of the book — are outlined in Figure 2. The mindset concept is absolutely central and runs through all the chapters.
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Mindsets of those who act in this case, acquiring and integrating and 19 20 Global Acquisitions mindsets of those who are acted upon i. Figure 2. We will examine them one by one, looking at a mindsets as they are i. Along the way, we should be able to incorporate the thinking of many influential others. In Part 2, we start by plugging the mindset concept into a strategic planning perspective.
Given the risks, what types of strategic thinking justify takeover activity? Does it derive from selective collection of data or from selective interpretation of data? These are important questions for any strategy agenda. They are especially important for integration. Weaknesses in strategic thinking become amplified in the post-deal period. But if potential value really does exist, care must be taken not to destroy it. So Parts 3 to 5 examine integration in detail. Each chapter looks at a different aspect of bringing two companies together — moving from the national domain through to the international and global domains.
Common to all is the question: what types of thinking can help or impede the value creation possibilities of integration? Every chapter is about mindsets that drive action — acquiring top management mindsets, acquired top management mindsets, mindsets at different levels on each side — and the performance consequences that follow. Along the way, some of the least explored areas in mergers and acquisitions will be highlighted. For managers involved in acquisitions, the journey should open up whole new ways of conceptualising what they do.
And it is timely to open up that agenda. The proposition that acquisition outcomes were more a product of managerial processes than strategic choice was first suggested by Jemison and Sitkin in , yet very little work of any substance — either conceptual or empirical — has been done to date to take the proposition forward. The typical twentieth-century merger mindset drew almost exclusively upon three academic disciplines: finance, economics and strategy. These were the cornerstones upon which most thinking and practice and research rested.
Now in the twenty-first century, a fourth human or managerial cornerstone is 21 22 Global Acquisitions Figure 2. It encompasses several related fields of knowledge — chiefly organisation behaviour, social psychology, cultural anthropology and managerial decision-making. Note that this is more than just belatedly putting people in the picture. The emphasis on mindsets shaping action points to organisations as psychologically driven entities; that knowledge and nostrums from strategy, finance and economics are psychologically interpreted in each firm before being turned into action.
All this should provide a strong focus for pulling together writers in the strategy field who have been moving in this direction — emphasising the social and psychological processes of strategy rather than the economic and market substance. However, mindsets and enactment raise some fiendishly tricky questions. These are important questions for understanding and explaining and learning from acquisition activity — and for strategy in general — and they are by no means straightforward.
How do these three psychic states present, past, future all interact and shape mindsets and actions? And under which circumstances? These are not the easiest of questions to get to grips with. They require considerable mental agility to unscramble and pursue. Caution is therefore advisable. There is no suggestion of any Catch research agenda here. Just a gentle reminder that investigating mindsets needs researchers with mindsets that understand mindsets!
To conclude: the purpose of this chapter was to outline some of the thinking behind the book and to explain the human factor and strategic integration as simply and succinctly as possible. It has been a conceptual exercise — inevitably — but has tried to be as jargon-free as possible. It probably is of more interest to academic readers, although managers who enjoy conceptualising about what they do and who are familiar with the literature should gain a lot out of it.
For other readers, it may have left them feeling a bit lost and bewildered. Just remember the Game of Golden Lemon Box 2. Box 2. If your critical faculties are not in good shape, you might believe it really is gold. If you then convince others to see it the way you do, you all might cheerfully part with gold. Recognise the game? Of course you do! Our advisers had a first-class reputation. To be fair, their procedures were faultless — absolutely smooth.
But any mention of future difficulties was dismissed as untypical of the deals the bank handled. We were led to believe that failure statistics came from obscure academics with sampling problems. Most managers have come across the statistic on acquisition performance — half to three-quarters fail. But what does it really tell us? Apart from acting as a warning to would-be acquirers, by itself it says very little.
If the statistic is to have any practical value, we need to know more about how it has been arrived at. These are highly complex questions. Teams of researchers throughout the world have been investigating them for decades and have not come up with a consistent set of answers. Each of the disciplines mainly finance, economics and strategy acts like a lens illuminating different aspects of the acquisition process. When these different perspectives and findings are put together, a composite picture emerges about acquisition performance which makes for uneasy reading. Every manager involved in merger and acquisition activity, whether as acquirer or as target, should be familiar with what this work has to say.
However, with much of it tucked away on library shelves and in academic 27 28 Global Acquisitions journals, access can be difficult and time-consuming. This chapter and the next are devoted to summarising what is known about acquisition underperformance in a readable and accessible way. Digesting what they have to say should more than repay any effort involved. How is Acquisition Performance Measured? There is no single, universally agreed measure of acquisition performance, and for good reason.
An acquisition usually sets out to achieve several goals, not just one. The various parties who have an interest in the acquisition usually have different expectations and have a preference for different outcomes. Some of these outcomes are easy to quantify; others are more a matter of judgement. Thus, in practice, we find acquisitions and mergers being judged across a wide spectrum of measures ranging from hard numerical measures through to soft judgemental or impressionistic measures, depending on which perspectives and interests are being taken into account, and also — most importantly — the time period over which performance is being assessed.
There are five different types of measure in common use: 1. Financial measures. These measures are solidly numerical and usually allow direct comparison between firms in the same country. However, different accounting and regulatory regimes in different countries can distort straight cross-border comparisons. Economic measures. Has the acquisition delivered higher efficiency and profitability? Have synergies and economies of scope or scale been realised? Does the acquirer have more market power? Has the acquisition allowed the company to grow faster than by internal effort alone?
Some of these outcomes can be difficult to quantify accurately on a before-and-after basis. Major restructuring, for example, can result in operating units no longer being recognisable for comparative purposes. However, if efficiency or synergy outcomes are realised, they should translate into improved profitability, which can be quantified. How Unsuccessful are Acquisitions? Strategic measures. Has the acquisition achieved the goals that top management set out to achieve?
Other goals can be shown to have occurred acquiring a capability, repositioning the company, building foundations for future growth, defending markets, and so on , but how effectively and efficiently they have been pursued — the costbenefits — are often hard to quantify, let alone gauge independently. Sometimes managers are the best placed to form a judgement, given their inside knowledge of the companies and their awareness of what they intended the acquisition to achieve. But then they become judge and jury in their own defence.
Executive measures. Have the owners or CEOs and the top management teams from each side gained out of the acquisition? Have their salaries, bonuses, stock options and other financial benefits risen? Top managers commonly expect rewards to be related to the size of the firms they run. Merged firms are instantly bigger, so increases in financial rewards usually happen quickly.
These are easy to quantify. Increases in psychic income require more indirect measurement, but these too usually rise with size. Regulatory measures. Is the acquisition in the public interest? Does it comply with monopoly anti-trust legislation? Will it be anticompetitive? What are the likely economic and employment consequences? Questions of this nature are directed mainly at large mergers and acquisitions. Generally speaking, the public interest is a notion that is notoriously difficult to pin down.
In part because criteria vary from one country to another. In part because criteria are often political in that they usually reflect the economic and industrial and social policies being pursued by governments in the countries concerned. Such matters are not the province of this book. Clearly, these measures are assessing very different things. They reflect different perspectives and interests, which is why discussions on takeovers often become heated and bogged down with people talking at cross-purposes.
An acquisition is an investment. Therefore, it has to be considered like any other investment. Does the acquisition bring value to shareholders? Does it deliver as good or better returns compared to other investments that could have been made with the capital involved? This is the base from which we start. Do Shareholders Benefit from Takeover Activity? There is now a substantial body of research that has attempted to measure the impact of takeovers upon shareholder wealth. Both conclude negatively. It is a highly complex procedure but, stated simply, a mathematical model is used to predict how the shares would have behaved if the takeover had not happened.
Then a comparison of the prediction with the actual movements in share price is made. Any difference the abnormal gain or loss, or the residual is attributed to takeover. When the procedure is applied to a large number of firms and averaged, then repeated across different time periods, the results should give a fairly accurate indication of whether bidding and target shareholders gain or lose from takeover activity and also the trend across time.
There is now more than 20 years of such research available. It involves dozens of studies covering thousands of takeovers on both sides of the Atlantic, and it shows a consistent pattern of poor long-run acquisition performance. The size of the underperformance varies with the mathematical models the researchers use and the time period under investigation, so How Unsuccessful are Acquisitions? However, there appears to be agreement on the following: 1. Any acquirer share price gains around the time of a takeover fairly common during the s and early s very quickly disappear, followed by a pattern of longer-term losses see, for example, Firth, ; Franks and Harris, Shareholders in target companies often do well out of the deal.
Some analysts explain this as value transferring from bidder to target in the short term Mandelker, ; Firth, In the longer term, both sides generally show losses. There is strong evidence across the decades that cash bids do not perform quite as badly as equity bids. Negative returns to cash acquirers are less than half those to equity acquirers. But leveraged buy-outs usually perform well and deliver positive returns Hansen, ; Agrawal et al. Takeovers during the s and early s appear to have some of the poorest levels of post-acquisition performance.
The last finding is especially significant. Since the late s, firms have had unprecedented amounts of computing power to improve and refine their financial and commercial projections. For this reason, one would expect a much closer match between projections at the time of takeover and performance in the years ahead. Yet the gap appears to be widening. However, some people are uncomfortable with this approach because it is heavily grounded in complex finance theory.
They also distrust the findings because they believe that financial markets are too fickle for solid benchmarking. They prefer the second approach, which is more direct and easier to grasp. This examines the actual returns to shareholders over an extended 31 32 Global Acquisitions time period, and then compares this performance either to an industry average or to a control group of non-acquiring companies over the same period. The method may be different but the conclusions are depressingly similar. Returns to shareholders in acquiring companies are consistently lower than in nonacquiring companies.
A representative flavour of two decades of research is given below. All were massive; all promised golden returns; all performed dismally. Not one reached In their sample of 58 takeovers, only 6 i. Longer-term underperformance appeared even higher Smith and Hershman, The overall conclusion that these and other studies point to — albeit using different methods — is both consistent and compelling.
On average, there may be modest initial returns to shareholders of acquiring firms, but these then tail off rapidly. Between two-thirds and three-quarters of acquiring firms do not recover the costs of their acquisitions during the first five years. Shareholders in target firms often benefit around the time of the deal, perhaps by value crossing over from acquirer to target, but then there is a pattern of longer-term losses. However, these studies tell us very little about why mergers and acquisitions fail to deliver value.
They simply paint a before-and-after picture. We now need to turn to the field of economics, and then later to strategy, to shed some light on the processes that can create but can also destroy value. Do Takeovers Increase Efficiency and Profitability? Economics theory tells us that size matters. Greater size should deliver a multitude of synergy and efficiency benefits — greater market power, financial synergies, risk reduction, higher productive efficiency with lower unit costs, lots of scope for restructuring and rationalisation — all of which should translate into higher profitability.
So central are these propositions to managerial mindsets that there is scarcely a takeover or merger which has not been justified by invoking some or all of them. However, economics research tells a different story. There is very little solid empirical evidence that the efficiency and synergy possibilities of greater size are actually translated into higher profitability. Throughout the twentieth century, economists have been investigating large samples of merging firms and comparing their before-and-after profitability. These are the most comprehensive and rigorous and reputable studies available.
One finding, which occurs consistently throughout, stands in stark contrast to most managerial claims. Economically speaking, big is not always beautiful. Hogarty, , p. Mergers have but modest effects, up or down, on the profitability of merging firms in the three to five years following merger.
Any economic efficiency gains from mergers would appear to be small … as would any market power increases. Mueller, , p. They found compelling evidence that takeover damaged the profitability of acquired firms. Even the profitability of individual lines of business declined following takeover. In of the targets studied i. One third of all acquisitions in the study were subsequently divested Ravenscraft and Scherer, a, b. Industry consolidation and market concentration across the s should have delivered higher efficiency and increased cost savings, but they did not.
For many insurers, as market share grew so also did costs. Why do the predictions of economics theory not always hold? Why does size not always deliver? Seven reasons go a long way towards answering these questions see Box 3. All concern the usually unrecognised problems of a creating greater size and b managing the complexity of increased size. The costs of the latter usually go unrecognised in merger calculations, even though they often exceed the value of any predicted paper benefits.
Horizontal related mergers are where economies of scale are potentially greatest with duplication of similar functions. However, every function evolves surrounded by its own web of organisational components structure, political order, managing systems, culture, and so on. Box 3. The human difficulties and resource consequences are often immense.
Synergy calculations can easily estimate the costs of physical relocation, systems redesign and downsizing. The costs associated with resistance to change — assuming that they are recognised — can rarely be predicted with any degree of accuracy. Displaced Competition If the two companies are direct competitors, each may have entrenched negative attitudes towards the other. When the companies are big, they often Figure 3. Bring them together and the interfirm competition previously located in the marketplace becomes displaced inside the bigger merged organisation. However, the competition is not about customers.
It is about survival and power and control — who is to remain and who is to run different parts of the business; which systems are to be adopted and which culture is to be dominant. When the primary task shifts to winning internal wars, the main casualties are suppliers and distributors and customers, and ultimately the bottom line. It is a lesson acquirers regularly forget. Taking a competitor out of the market only takes a day, but stopping the two sides from fighting each other can take years.
Exponential Complexity Even if all strategic fits happen as intended and culture integration is smooth and market power increases, all are offset by having a bigger organisation to manage. One bigger merged organisation is significantly more complex to manage than either organisation was prior to takeover.
In the long run, size and complexity can constrain efficiency and market responsiveness. We know from organisation theory that as firms get bigger their complexity increases not in proportion to size but exponentially with size.
Ever-increasing amounts of effort need to be channelled inwards to coordinate and control the larger unit created. The number of organisational relationships to be managed increases exponentially with size, as does the scope of these relationships. In a large or diversified corporation, the complexity of the management task is potentially overwhelming Caplow, ; Chandler, How do managers handle this complexity?
Managers at the centre and at further decentralised centres structure relationships by limiting the duties and responsibilities of others, then they establish formal rules and procedures for interaction, and then decide who will interact with whom, and so on. These actions help to avoid fuzzy relationships and make control easier. On the plus side, they contribute to the smooth running of the organisation and give the bureaucratic structure its undeniable strengths. But the downside — almost always, as size increases — is reduced flexibility, lost market opportunities and wasted talent — well-recognised problems for more than thirty years Lawrence and Lorsch, ; Jaques, But it is often their pre-deal weaknesses that are amplified.
When the newly merged unit is many times more complex than the sum of its already complex parts, managers tackle the new complexity using the approach they are familiar with, which is often the only one they know. They view the newly merged complexity through the bureaucratic template. The result is that large merged corporations almost invariably become even more structured, more rigid and less adaptable than either single entity was prior to takeover.
Citibank thought not, until when it looked at how complex its operations had become. Even something as ordinary as a demanddeposit account turned out to be mind-boggling. Around the world, for reasons of local regulations and history, Citibank was offering not one such account but almost , versions of it. Some accounts calculated interest daily, others monthly; some charged fees, others did not; daily withdrawal limits varied, as did interest rates, and so on. However, not all firms are willing to get on top of their own complexity, or even to recognise it.
What Citibank discovered is not uncommon in any sprawling global corporation where earlier acquisitions have not been fully rationalised. Merge any two of them and the integration complexity becomes horrendous. If two organisations have difficulty grasping and simplifying their own complexity before they merge, what are their chances of rationalising the complexity of a much bigger merged entity when half of it is completely unfamiliar? The Economist, 5 June , p.
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Big organisations traditionally have been good at achieving one type of efficiency, static efficiency i. But their inherent complexity and rigidity have made it harder to achieve dynamic efficiency i. In the days when size and scale created an almost impregnable competitive advantage, static efficiency was a sufficient barrier for dominating markets. But note that this worked more by keeping rivals out than by leading from up-front.
However, especially during the last decade or so, scale increasingly has been defeated by the pace of technological change. Competitive advantage no longer can be secured by doing efficiently what was done in the past. Increasing numbers of smaller companies are competing profitably with global giants on the basis of their superior dynamic efficiency: through more flexible internal structures, a lower cost base, or by networking and strategic alliances.
As a result, they have been able to offset the established concentrations of economic power enjoyed by many large firms. Dell provides a perfect illustration see Box 3. Weak Innovation Innovation especially is affected by organisational size. In general, giant firms are not as innovative as smaller firms. Instead, they rely heavily upon a continuous supply of purchased innovation which they adapt or improve — and the bigger the organisation, the greater the dependence on external sources of knowledge and ideas to avoid decline. Ground-breaking research is much more likely to happen in small dedicated environments than in large corporations.
But deep corporate pockets allow the large firms to acquire almost any innovation and knowledge they seek. However, that rigid and bureaucratic character which comes with size, can work against acquired innovation in various ways. It can constrain the How Unsuccessful are Acquisitions?