Chapter 08

Key Work feature: The merits and disadvantages of mergers and acquisitions for organizations

In order to grow organizations have the option of pursuing a number of different strategies. One that is often favoured is mergers and acquisitions. Mergers can be seen as the consolidation of two organizations into a single organization. In contrast, acquisitions are commonly thought of as the purchase of one organization by another in which the buyer or acquirer maintains control. However the promise of mergers and acquisitions all too often ends in failure. The talk of strategic fit between acquired and acquiring organizations tends to get ahead of executive directors and the reality of marketplace. Witness the demise of DaimlerChrysler. Porter (1987) argues that in the case of mergers and acquisitions the acquiring shareholders almost always lose out. This loss of shareholders value can result from many factors, chief of which include a lack of strategic vision and clear goals, and a failure to integrate different cultures.

Gadiesh et al (2003) state that some of the negative consequences of mergers and acquisitions are: (1) Billions of dollars of shareholder wealth disappears when the integration process fails. (2) Stockholders desert when the trumpeted claims of synergy that were used to justify the merger fail to materialize. (3) After being advised that a merged organization is stronger, employees become demoralized when downsizing begins a few months later without any clear strategic rationale. (4) What was hailed as an attractive acquisition is sold for a fraction of its original cost.

There are five root causes of failure with mergers and acquisitions (Gadiesh et al,.2001). These are (1) A poor strategic rationale for the M & A deal. (2) Overpayment for the acquisition based on an overestimation of its value. (3) Inadequate integration planning and execution; this is particularly true in the case of culture. (4) A void in executive leadership and poor strategic communications. (5) A severe cultural mismatch.

The key to improving the chances of success in merged organizations to have a clear strategic rationale. One rationale for a merger or acquisition might be to broaden the scope of an organization's existing activities. Another rationale might be that the organization is attempting to redefine its theory of the business (Drucker, 1995). In this way the organization acquires resources and capabilities to allow it to compete effectively in new markets. Clearly where an organization ahs strategic vision it may seek to acquire an organization to redefine the rules of the game, i.e. how others compete in the industry.

Another key to improving the chances of success is to take proper account of the cultural implications of a merger or acquisition. There is much post-merger anecdotal evidence to suggest that failed mergers often fail due to incompatible cultures. Studies of mergers and acquisitions indicate that investors are sensitive to cultural differences between different organizations. This would suggest that organizations would be unwise to neglect a serious study of culture before embarking on an expensive mergers and acquisitions trail. There is growing understanding that cultural fit issues are as important as strategic fit issues. Central to this is the respective leadership styles of different CEOs. If properly conceived strategic aims are to be achieved then the leaders of respective organizations needs to be able to communicate clearly and effectively.

As Gadiesh et al (2001,p.193) state,’Chief executives face few challenges riskier than integrating two businesses, and employees face few situations more stressful than mergers. Meeting this challenge … leaders can guide their companies through the inevitable uncertainty of merging as swiftly as possible, and capture the value that prompted the deal.’

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Oxford University Press, Online Resource Centre, Chapter 08.

Chapter 08