Mergers & Acquisitions

Lecture 7 discusses International Business Opportunities: International Merger and Acquisition Activity.           

Mergers and acquisitions (more generally, takeovers) are an important means through which companies achieve economies of scale, remove inefficient management, or respond to economic shocks.

Mitchell and Mulherin (1996) and Andrade et al. (2001) argue the merger activity in the 1990s was clustered in industries such as telecommunications, banking, and media as a result of technological and regulatory shocks. The ultimate goal of a takeover is to realise synergies.

The primary motivation for M&A deals is the quest for growth. When internal growth initiatives do not materialize, or there are no other organic growth options, M&A transactions prove to be the only way to create growth. (Slywotzky & Wise 2002)

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. (Giddy, 2009)

Slywotzky & Wise (2002) also argue that external pressure can also force managers to initiate additional M&A transactions. The demand for double-digit growth from analysts and investors becomes hard to satisfy. For listed companies the external pressure for more growth can be so immense that it cannot be realized by organic growth through internal projects alone. In this situation, M&A transactions remain the only solution, even if they might have failed in the past.

When the industries is in a period of consolidation, and as other competitors consolidate and challenge a company’s market position, the fear of being left behind spreads. Companies also engage in M&As in order to survive (“bandwagon effect”). (Van Wegberg 1994; Schenk 1996; Fauli-Oller 2000) Promoters of M&As come up with alleged opportunities and the motive to buy companies in order to prevent competitors from doing so is always difficult to evaluate.

Testimonial evidence about businesses at conferences and in the media tell us that some M&As have (supposedly) been a huge success. Often, the thinking goes that if other managers can make it work, I can do it too. But any given situation, and transaction factors, can be totally different, e.g. industry, life cycle of the company, firm-specific problems, timing of the deal and strategic intention. People, however, tend to accept testimonials, evidence that is of questionable validity. (Stanovich 1998) Also, when these success stories are examined in detail, it is often difficult to measure whether they really were successful. People tend to demand little follow-up evidence and do not look at the long-term success. (Steger and Kummer, 2011)

Why do M&A transactions fail so often? The reasons are manifold; the proposed critical success factors for M&As are as numerous as the consultants, managers and academics in the field. (Datta et al. 1991) The fact that change is happening all the time, in addition to the interdependency of factors, can add complexity to the mix and cause significant problems. This is far from being well understood otherwise the success rate of M&As would have improved drastically as a result of defining these success factors.

The main reason for M&A failure is unrealistic expectations. First, making M&A deals work is a difficult task and many managers underestimate this fact. Second, the goals of M&A deals are often unrealistic. (Steger and Kummer, 2011)

Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. (Merriam, 2009)

Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons:

1. Keep one name and discontinue the other. The strongest legacy brand with the best prospects for the future lives on. In the merger of United Airlines and Continental Airlines, the United brand will continue forward, while Continental is retired.

 2. Keep one name and demote the other. The strongest name becomes the company name and the weaker one is demoted to a divisional brand or product brand. An example is Caterpillar Inc. keeping the Bucyrus International name. (Merriam, 2009)

 3. Keep both names and use them together. Some companies try to please everyone and keep the value of both brands by using them together. This can create an unwieldy name, as in the case of PricewaterhouseCoopers, the merger of Price Waterhouse and Coopers & Lybrand, which has since changed its brand name to PwC. (www.pwc.com, 2012)

 4. Discard both legacy names and adopt a totally new one. The classic example is the merger of Bell Atlantic with GTE, which became Verizon Communications. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the company lost the considerable value of both Yellow Freight and Roadway Corp. (Carney, 2000)

In conclusion, M&As seem to have many advantages to both owners and shareholders, but only under certain circumstances. Investors need to consider the complex issues involved in M&As and the merged company must have appropriate management in order for it to succeed.