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Mergers and acquisitions have become one of the fastest growing trends in today¶s ever
so inter grating global economy. M&A¶s(Mergers and acquisitions) have changed the
way in which companies go about restructuring themselves.
As per Sumati Reddy et al, M&A¶s have become a common phenomenon in the todays
corporate landscape. She believes that the main driving factors behind such deals are the
varying business environments which require businesses to regroup their activities and
the continous deregulation of many of their activities.
It has been seen that since 1992 the pace of M&A activity has grown at unprecedented
levels (J Fred et.al). They believe that the role played by merger and acquisitions in the
economy has changed. According to J Fred. et. al. the term ³Mergers and Acquisitions
(M&A¶s)´ incorporates all activities such as joint ventures, licensing, spin off¶s ,equity
carve outs, alliances, restructuring and other similar business deals. M&A¶s if carried out
successfully can help the concerned companies in increasing market share and revenues
and improve the return on their investments.
The main idea behind M&A is that the combination of two companies or enterprises will
sum up to be more beneficial for both and that the share holder value would be more
than what would have been if they were alone. These benefits can be due to varying
number of reasons, right from increased market share to decreased competition or even
benefiting from the synergy created by the merger. (www.investopedia.com)
.

As so commonly both the terms Mergers and Acquisitions are together, they can
sometimes be mistaken to be tantamountO Though in reality both the terms are used for
very different deals. A merger is particularly used when two companies, mostly of similar
sizes agree to merge them selves into a brand new company with a new identity. Their
previous identities cease to exist and a brand new company is formed.
While an acquisition usually represents a deal wherein a bigger company normally buys
out, either wholly or partly another smaller company and brings its operations under its
name. Many a time acquisitions can be termed as forced as they are done without the
consent of the company being acquired. Occasionally certain transactions are termed as
mergers rather than acquisitions to prevent any criticism by the media and the public.
As mentioned the main aspect of M&A deals is synery. This synergy can be defined as
the benefit which the new company receives as result of the earlier aspects of the
companies being merged or acquired. For example, the results of an undercapitalized
company can be changed radically by merging it with another company which has more
access to capital. Similarly a newly established innovative company would be really
benefited if it was to merge or be acquired by a strong marketing company which would
boost the marketing capabilities of newly established innovative company. (Michael E. S.
Frankel )

Mergers and acquisitions can be classified into the following categories-

Mergers-
1-Horizontal Merger- In this deal all the merging companies are usually direct
competitors which offer the same line of products . This deal is usually done in order to
reduce competiton in the market.
2-Vertical Merger- A deal in which two companies along the same vertical supply line
merge operations in order to take advantage of supply chain management.
3-Colongmerate Merger- This type of deal is characterized by the merging of two
companies which are from two totally different business areas.

While Acquisitions can be can be classified mostly in the same categories as above, the
execution of an acquisition deal can differ. An acquisition deal can be

As mentioned by Michael E. S. Frankel, M&A are like some other deals that can be
described as large transactions which can essentially alter the future and control of a
company. He terms them as strategic Transactions which can bring about a shift in
control of a company and move them towards a new strategic direction. Additionally
there has been a long-term upward trend in both the volume and average size of
acquisitions in the United States and even after the burst of the ³Tech Bubble´ the rate of
M&A¶s is still on a rapid increase. This method of expansion has not only been adopted
by large acquirers but also by many small and middle size firms.
-ooking at many big technology firms in the US such as IBM, Cisco and GE, it can be
clearly seen that a significant part of their growth process has been completed by
acquisitions. These strategic transactions can termed as ³winners curse´, as many times
they fail to deliver what is expected from them. This is mainly owing to the difference
between the cost and the revenue synergies expected and actually found. A survey has
shown has 64% of these deals result in loss of shareholder value for the buyer company.

In contradiction to what is reported and seen about M&A¶s , they are not as successful as
they are made out to be. Often major M&A¶s are given a lot of importance during he
intitial stages of the process , but not too much follow up is done to see how benefitial
they turn turn out to be in the end. On an average approximately 2 out of 3 such deals are
below the satisfactory levels. M&A deals are usually executed in order to gain economies
of scale and to take advantage of synergies in the stock market. These advantages are
much easier to be seen on paper and much harder to be actually executed.
Due to the massive increase in utilization of Investment Banks in M&A deals, it is very
common to spot that the financials are given excessive importance. As world financial
markets have integrated towards a common global market, the impact of such deals can
be a big one the market price of a company. All organizations are very watchful about the
financial aspects relating to the deal and sometimes give it more attention than needed.
As a result sometimes organizations can ignore essential elements of M&A deals such as
how compatible their technological structures are and how can their human capital be
matched for optimum utilization of resources. Such problems will be explained in detail
with the help of real examples in the latter part of this essay.

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essay will show the top five industries in which these deals have occoured. Out of these the
maximum deals have been related to the internet industry, these amounted to 659 in total. Then
second to the contributers list was the healthcare sector, followed by telecommunication sector.
Each with 319 and 187 deals respectively. The fourth largest contributor to this figure was the
banking sector which saw 146 deals being executed. Followed by this was the semi conductors
industry which saw around 47 such deals.
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This essay will look at answering the following questions related to deals related with
M&A¶s
1) Are M&A deals as straightforward and successful as they are made out to be?
2) What are the issues to be addressed while understanding failures in such deals?
3) What are the alternate options which one can take instead of M&A¶s ?
The first part of this essay will look into some basic theories behind M&A¶s , these
theories will comprise of cases both for and against the success of M&A¶s . The next
part of this essay will look into some stylized facts relating to M&A deals. Thirdly this
essay look into a few aspects of M&A¶s which cause downfalls in such deals. These
aspects will be studied with the help of case studies which depeict some failed M&A¶s
deals.
-astly this essay will show some alternate options which companies can opt for instead of
going in for a merger or an acquisition.


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Now that we have discussed the fundamental meaning of Mergers and Acquisitions, this
essay will go into some detail theory behind the reasons of such deals.
Firstly it is important to understand why this essay has laid such emphasis on M&A
instead of other similar strategic moves. As mentioned by Amy -. Pablo et.al , M&A
deals have ofen been treated as ordinary moves of resource allocation. According to them
M&A deals have to be looked at from a totally different perspective as they are among
the most essential strategic deals due to the impact they have on the resource and
performance implications of a firm. These deals are distinguished from ordinary resource
allocation decisions because of their risk characteristics. These deals are quite uncertain
and due to this fact their outcomes are sourrounded by ambiguity, hence making such
deals very risky. Acquistions bring along with them high levels of risk for the decision
makers and such deals can have an extensive impact on the personal careers and futures
of such management. Additionally M&A deals can be associated with non routines ,
speed of decision making as well as limited use of data , involvement and debate. These
typical features are the main cause behind making such deals unsure and unpredictable.
Hence it makes it very important to understand and analyze the different factors driving
M&A activities in different manner than what is done for other strategic decision
situations.

J Fred et.al have classified the reasons behind M&A¶s into forces which have been
driving these deals .
Ten such forces have been indentified by them-
1) Rapid Technological growth
2) Reduction in cost of transportation and communication.
3) Globalization of markets.
4) Varying forms and types of opponents.
5) New types of industries.
6) Relaxation of rules and regulations
7) Suitable economic and financial conditions.
8) Inequalities in income and wealth.
9) Increase in valuation relationships and equity returns.
10) With a general environment of strong economic growth, certain industries and
economies have faced some problems.

These forces have individually and collectively contributed towards making of a truly
global economy in which national boundaries have lost their importance.

They believe that in the approach towards a merger each firm has to consider a set of
capabilities and opportunities. It is essential for a firm to exploit the changing
environment around it. It must recognize that the dynamics of competition and economic
change will require continous realignment of its position to its challenges and
opportunities. A firm must be able to strategize itself to be ready for facing the
uncertainty and risks faced by it.
In this process view of strategy, divestures represent a form of strategic adjustment
process. Studies reveal that divestures were designed in order to obtain control of certain
parts of an acquisition in advance. Contradictally divestures have also been seen as a a
method of making an acquisition and paying them off in part or sometimes entirely by the
segments sold off.
At a minimum this may help make the diversification effort a low cost one. Hence it may
be said that divestures are considered by Fred et.al., to be mistakes by management.
Internal and external investment program may be successful or unsuccessful. Firms try
and attempt both strategies in order to increase their shareholder value. The
understandings and explanations on strategic planning by many authors has helped many
firms in executing these strategies with higher efficiency. It is most essential for a firm to
have an efficient information feedback system . This system is required by a firm in order
for it to be able to improve its capability to change , correct to mistakes and sieze new
opportunities. It is in this frame work that merger and take over decisions are made.
Organizational form can be critical for the implementation of a successful M&A strategy.
Fred et.al believe that there is a feedback relationship between the strategy of a firm and
its organizational structure. The organizational structure can be distinguished into the
following forms-
1) The Unitary form- wherein all the decision making is centralized.
2) The Holding company- In this type of company the decisions ar decentralized and
usually the company consists of small unrelated business units.
3) The Multidivision form- This type of company has different units that share common
functions.
4) The Matrix Form- The company is organized around various products and projects.
As per P.S sudarsanam when a firm makes an acquisition, it buys ³Off the shelf´ a bundle
of tangible and intangible resources and capabilities, all within an organizational form.
Both the acquirer and the acquired represent such bundled forms in an acquisition
process. Due to a mismatch in the resources, capabilities and opportunities which are
available to both the firms there is the creation of a sustainable competitive advantage.
These resources can be in the form of market power and entry barriers . Additonally a
firms architecture, innovativeness and reputation can also be a source of advantage.
There are various ways in which such deals create value, they can be differentiated by the
source of that value. Overall there are 3 main generic modes for value creation-
1)Donor recipient Mode- Wherein there is a transfer of resources from the acquirer to the
acquired firm. This kind of value creation is normally seen when a poorly performing
company is acquired by a well performing company. The end result is seen in the
improvement of the financial position of the acquired company.

2) Participative mode- In such a transfer both the companies are seen to have a mutual
exchange of resources. It is a two way process where both the firms learn from each other
and such learning ehances their joint capabilities.

3) Collusive mode- In this mode, the coming of two firms in an acquisition strengthens
strategic assets. These strategic assets are those which give a firm a competitive
advantage.
(P.S Sudrasanam)

After understanding the reasons and types of merger and acquisition transactions, it is
essential to understand what is the exact process which is followed for such a tranaction
to be executed.
Haspeslag and Jemison (1991) in P.S. Sudrasanam have classified such deals into three
stages-
Stage 1- During this stage the company generates and develops a M&A strategy. This is
usually followed by a target screening and search process. Finally once a target has been
identified , it is then evaluated.

Stage 2- The second stage starts with the development of a bidding strategy in order to
attract the desired target company. It is followed by a pricing evaluation of the target
firm. -astly then the negoatiation phase begins where all the parties in the deal try and
make a closing deal.
Stage 3- After the first two stages are completed, the acquiring company evaluates the
target company with an angle of cultural adaptability. It then develops an integration
approach towards for the M&A deal. Finally there is a conciliation of the strategies and
culture of the two firms.

*



 

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As discussed before M&A related activity has expereined a sort of mania in the recent
past. This rapid increase in M&A activity had to be followed by laying a new set of rules
and procedures. These rules are essential in order to ensure that the motive and methods
of carrying out these activities are kept a check upon.
What Werner et.al have argued in their Journal on ³is economic efficiency a driving
force behind M&A activity´, is that are M&A deals actually socially acceptable. Werner
et.al feel that managers look at such deals as a source of building syneregy, competition
eliminating and empire building. What differentiates a Socially acceptable deal from an
unacceptable one is that in the end is new wealth created or old wealth just redistributed.
Merger policy may not be pretty but it is required. This is because the society needs a sets
of rules and regulations which corporate¶s have to adhere to. Contrary to this some
economists such as W. T Grimm believe that increase in such laws can be harmfull to the
rate of these activities. W.T Grimm & co. believe that from the 1980¶s it has been M&A
deals which have contributed towards the increase of shareholders wealth and all the
more the number of M&A deals are still lesser than what they should adequately be.
The valuation of the stock market has a major influence on M&A activities.
As Keynes has said in Werner et.al is that ³The daily revaluations in the stock exchange,
though they are primarily made to facilitate transfers of old investments, between one
individual and another, inevitably exert a decisive influence on the rate on current
investment. For there is no sense in building up a new enterprise at a cost greater than
that at which a similar enterprise can be purchased ; whilst there is an inducement to
spend on a new project what may seem an extravagant sum, if it can be floated off in the
stock exchange at an immediate profit.´
Keynes pointed out a relationship in between M&A deals and new equity issues. This
relationship was based on the arbitrage oppurtunites in between financial and real asset
markets. This is very apparent is case to those companies where just the rumor of a
M&A deals can lead to increase in share activity resulting in increase in share prices.
This type of behavior can be termed as ³herd Behavior´ and can be attributed to irrational
thinking by the market players.
Werner et.al have concluded to there results on the basis of their empirical studies,
1) Mergers cannot always be explained by efficieny reasoning , though what can be
noticed is that they occur in waves, as in they are spread in different waves of
time. Thus showing us that market sentiment at a particular time may be the
reason behind a merger.
2) Secondly it is very evident that the targets of such deals are not always
mismanaged firms, rather they are firms which have outperformed the averages.
3) The third result suggests that at least some ostensibly discilplinary takeovers
maybe motivated by undervaluation. In such cases it can be said that wealth is not
created its just redistributed.

Porter mentiond in the Journal by Michael A Hitt et.al. that a majority of acquisitions
resulted in unsatisfactory performances and ended up in divestures. Similarly Rolls has
written about how sometimes the gains from acquisitions have been overestimated.
Research by Jensen (1988) in Micheal Hitt et.al has shown that the negative results of
M&A¶s prove that such deals have some trade off¶s. Muller (1985) supports this theory
by demonstrating that companies in conglomerate and horizontal takeovers underwent
heavy losses in terms of market value. Additionally a study by Pitt(1977) shows that
firms growing through acquisition invested much lesser in R&D activities than those
firms which grew internally. Thus showing us another trade off that if faced by firms
opting for such deals. The tradeoff is between acquiring new firms or the management
investing in resources and champion activities that lead to creation of new products,
technologies and processes.
-ooking at it from a financial angle, acquisitive takeovers can have a positive impact as
well. They facilitate the rational restructuring of corporate assets which in turn increase
the firm¶s competitiveness. Additionally certain related acquisitions help in reducing risk
and increasing efficiency.
Such deals change the management¶s commitment towards building R&D resources.
They have a impact on the commitment of management towards innovation, as the
management has less riskier option of simply acquiring a new firm. Also what has been
seen is that smaller managers in firms which are dealing with M&A¶s, often face the
challenge of lack of support from the senior manager. The main reason behind this is that
the senior manager are over consumed with the M&A activities and such a thing can be
harmful for any organization. Smith and Warner (1979) have added to this and explained
their concerns over the fact that M&A deals lead to increase of debt holders in place of
stakeholders. This often results in reduction of risk taking capabilities of the organization.
Megers may lead to growth of a company beyong its gravity of focus and managers may
find themselves unable to control its rate and direction of growth.

In reality a M&A deal is a socially acceptable only if there is an aggregate increase in

income & welfare and all the parties in the deal are benefited. Though this is in
mostly in theory, in reality most studies on such deals are directed towards
shareholders wealth generation and they do not consider all the parties in the deal.

Werner et.al have discussed motives behind M&A deals and the social impact that they
can have on various parties involved. One of the most common motives is target firm
undervaluation in financial markets, it works on the principle that the value of a firms
security may not always be a true representation of its fundamentals. Occasionally prices
can be influenced by accounting gimmics and in such situations the bidder shareholders
gain over the target shareholders. Another motive identified is bidder management self
interested and hubris. This motive is generally seen to favor the needs of the management
and the takeover shareholder over the bidder ones. The management of the bidder firm
become overconfident and put their needs over the needs of the company. It can be seen
as overconfidence on the part of the management and source of empire building. A third
type of motive is Breach of trust where in the takeover is in disregard to some of the
stakeholders, i.e it is without the consent or the interest of some of the stakeholders.
These types of takeovers are beneficial to the target shareholders in the short run but
cause loss of corporate culture and ethics. Another motivation for companies to enter
M&A deal is of Monopolistic Power, such deals are often entered with the intention of
market dominance and can be seen a loss of power on the side of the consumers.
-astly Werner et.al have identified corporate tax saving as another motive for M&A
activity. In certain cases firms acquire loss making units in order to gain from tax
benefits. Additionally certain deals are done in order to take advantage of leverage
options in terms of debt raising ability of the firm. Some economists have raised their
concern over this kind of activity as the motives behind such deals are not totally
transparent.
It is equally important to look at the deal after it has been executed. i.e Post integration.
Many times the whole deal is base on limited information on the true :strategic,
organizational and financial strengths and weaknesses of the target company. This
information is seldom absolutely true and complete. Such concealment of information is
done by certain companies in order to increase their bargaining power. The net result of
this is that the company which is being cheated faces different results than what were
expected and has to alter its post merger plan accordingly.
As P.S Sudarsanam has discussed, Inegration problems can arise primarily due to
determinism, value destruction and leadership vacuum. Determinsism basically can be
described as a negligence on the part of the people managing the whole process. These
managers rely excessively on their blue prints and layouts, in the process they do not pay
adequate attention to ground reailties which in the end can cause hindrance in the desired
plan. Another problem which companies can face after such a deal is of Value
destruction. Even though on the whole there might be value creation, it is not the case at
the individual level. For example it might be the case where the management of the
acquired firm are given less importance and authority in the new entity and this might
lead them to believe that there has been a loss in value for them. Such a feeling can lead
to uneasiness and unrest among them and is the main cause for labour turnover and poor
peformance. Additionally often it is seen that after a M&A deal there is a gap in the
thinking of the two firms. This is mostly due to the fact that both managements have their
own strategies and priorities and hence go about their plans differently.
Eero Vaara in a journal on discursive frameworks, strategies and moves in Post merger
intergration has mentioned different discourse types used to evaluate and understand
success and failures in mergers and acquisitions. These different discourses help to assign
different subject positions and identities for various players in unique institutional
frameworks. As a result, these discourses help to evaluate the success and failures of such
deals in ways different from one another. There are four main discourse types,
³Rationalistic´, ³Cultural´, ³Role-Bound´ and ³Individualistic´.
The rationalistic discourse is similar to the more commonly discourse of rational decision
making and is a reflection of the various models of post merger integration .It primarily
concerns individual managers or even the entire management as a collective unit which
makes decisions to increase benefits and reduce the threats face by the firm. Studies have
shown that often success in such deals is often accounted directly to the actions of the
managers, either individually or collectively. Whereas in situations of failures the
management has rarely acknowledged that failure was due to their actions and have
passed the blame to market circumstances. Some of the usual exuses were directed
towards lack of profitability and declining business cycles. Occasionally in cases it has
been observed that failures have been attributed to other members of the management,
rather than accepting responsibility the management has been ³passing the buck´. Such a
instance was witnessed when Nokia had acquired Ericssons information systems. Few of
the comments made by the Swedish managers indicated that they were of the opinion
that it was mostly the doing of the CEO which resulted in shut down of operations
immediately after the merger.
While the cultural discourse deals with the cultural perspective of an organization. In the
post integration stage of M&A deal the management faces decision making
confrontations where they have to choose between different cultures, nationalities or sub
cultures. This implies that they have to decide between conflicting needs and
requirements of the employees. As in the previous case, success was often related with
the success of one¶s group rather than overall success of the deal. For example looking at
the acquisition of Esselte Well(Swedish) by Tamplella(Finnish). The Finnish
management were of the opinion that the integration was unsuccessful as they were not
able to make the Swedes opt for their production techniques. Where as the Swedish were
of the opinion that the integration was a successful one from their perspective. This was
mainly because they felt that even after the acquisition they did not have to implement
any changes in their production process. Hence this is a clear example of how the cultural
perspective of the two counter parties can be so different and this eventually cause failure
in the deal. Ocasionaly cultural discourse can also lead to feeling of ³traitor´ among
people when they feel that someone from their side has taken a decision against their
choice. For example a certain Finnish manager from Ovako Steel felt that his CEO went
along with the requirement of the Swedes as long as his interest was being served. Again
showing us how cultural differences can lead to miscommunication and eventually cause
failure.
-ooking at the Role-Bound discourse , it can be identified as the binding which people
find with certain positions in the corporate hierarchy. What was observed was that, in
certain instances people acted in ways which was a reflection of their responsibilities and
roles in the organization. This ended up leading up to a situation where in the various
interests and aspirations of the people were different than what the overall situation
demanded. People were more concerned with doing their responsibilities in the most
appropriate manner rather than doing them in a collective manner to achieve
organizational goals. As in the previous cases success of a deal is directly claimed by
managers on the basis of their personal efforts and actions. Whereas when such deals
failed, most of the managers conveyed that they did not have much authority over the
entire deal and hence were not responsible for it. A clear example of this was when
Ovako steel¶s merger ended up in a failure, the oweners of the company blamed the
management for not being competent enough to handle the situation and take suitable
action. They claimed that they were unaware of the entire happenings due to lack of
transparency which had been adopted by the management. Thus showing us again how
easily people take advantage of their positions and roles in the organization to avoid the
blame.
The last discourse discussed by Eero Vaara is of Individualistic Discourse. This discourse
basically identifies people as individual and distinctive people in the organization. During
the entire research, Eero Vaara used this recourse help her attain knowledge on how
people conducted an analysis of the entire deal from an individual points of view. The
result was very obvious, in that where there were success stories again the credit taking
was manifested by the managers, but when it came to failures again the excuse of their
limited responsibility and knowledge on the matter was given. The result also depicted
that often managers framed their own colleges for illegitimate actions in view of
promoting their careers at the expense of others. An example of this would be of a
Swedish manger who blamed his counter part in the Finnish firm Isku during its
acquisition. He was recorded naming the manager and blaming him for his unability to
make quick decisions and act accordingly.
What this entire research depicts is that, as essential it is to understand fundamentals of
the companies before the merger, the deal does not succeed just because the dotted line
has been signed. Difficulties and issues in such cases can cause major hindrance in the
intergration stage. Hence firms must be aware of such issues and have to be proactive in
resolving them in order to ensure a smooth integration process.
More often than not, companies get over involved in the bigger aspects and fail to realize
the importance of such details and end up paying the price.

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Most interestingly Gary B. Gorton et.al have identified two key stylized on facts about
M&A deals. Firstly they have observed that on an average the returns are measured to be
negative. Secondly Mergers tend to be concentrated in those industries where some sort of a
shift in the regulatory or technological nature can be identified, thus making them a more efficient
response. Gary .B. Gorton et.al have tried analyzing two types of theories in respect to M&A
deals. These theories can be distinguished into two basically , Neoclassical and managerial
merger theories.
Though there have been studies aimed at understanding and establishing these two facts, no
particular study has been able to demonstrate both results. For example, Mitchell and Mulherin
(1996), Weston, Chung, and Siu (1998), and Jovanovic and Rousseau (2002) in their studies have
been able to demonstrate why mergers are concentrated in industries for which a regime shift can
be identified, but at the same time they have not been able to establish the reason behind negative
returns for the acquirer. Similarly Morck, Shleifer, and Vishny (1990) have been able to establish
the reason behind negative returns but have not been able to identify the reason behind the second
stylized fact. Addtitonally a third fact that has been indentified is that M&A deals come in waves,
i.e they tend to occur in trends over specific periods of time.
The findings of the research reinstate what was discussed earlier. One element of their
research is directed towards understanding profitable M&A deals, this is mostly because only if
there are profitable M&A deals there come a possibility of having unprofitable ones.
Secondy Most managers want to remain independent, as they have a concern about their role
after a merger or an acquisition. Thus they try and avoid such deals with certain defensive tactics.
One of the tactics often followed is to become bigger than the possible acquirer, hence making it
difficult to be acquired. This is termed ³Eat or be eaten´ by Gary .B. Gorton et.al . For example
let us assume there are five companies of similar size in a particular industry. Firm A, Firm B,
Firm C, Firm D and Firm E. Firm A might be the most profitable and efficient one in the entire
sectoe, Thus other firms might be under the apprehension that they could become potential targets
for frim A¶s expansion plans. Such thinking can force them into taking a defensive approach and
opting for a M&A deal themselves, .i.e. Firm D might acquire Firm E in order for it to increase
size and make it that much harder for Firm A to acquire it. The case can be similar for Firm B and
Firm C as well. Thus merger waves arise because of externalities involved in defensive mergers.
One defensive deal can create a chain sort of reaction leading to other firms taking such action
themselves. Overall one can see that ,since the motivation behind the deal is a sense of fear, not
all these deals can be benifital and can end up as failure stories. Hence Defensive acquisitions
care termed as unprofitable.
Additionally it can also happen that sometime smaller firms in order to get targeted by big
firms endulge in acquisition in order to become more visible to such big firms. The main
intention of the small firms is to become bigger and more profitable, which in turn makes them
more attractive to the bigger firms. These types of acquisition are termed as profitable
acquisitions.
Taking an example of another industry where in there are the same five companies, just the
difference being that all of them are of different sizes. In such a situation it is observed that
smaller firms make profitable acquisitions and defensive acquisition depending on their
intentions. Whereas the biggest firm will not have any defensive motive as it has no apprehension
of a takeover. The slightly large firms are the ones who end up reacting by entering defensive
deals in order to protect their interest and thus end up in unprofitable deals.
 Hence we can see that these examples help us to demonstrate the three stylized facts which
were discussed before. Proving to us that often it is that the acquirer ends up getting negative
results, as well as M&A deals are concentrated in area of regulatory and techonolgical shift and
most of all that M&A deals occur in waves.


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There is a lot of empirical study which has been conducted on Mergers and acquisitions.
With the help if such evidence many writers and analysts have argued against the belief that all
M&A deals are as easy and successful as made to be. There are many examples and cases which
have been cited by authors in relation to such empirical studies. In order to analyze such cases I
will draw upon the work of Peter Drucker (1981,1982) as discussed in a management journal by
Frank T.Paine and Daniel J.Power. Druckers five rules of M&A are highly regarded in the
financial industry and have been accepted by most practitioners. With the help of these
conventions it is simpilar to apply these rules to certain cases and spot the reasons behind the
fallout of such deals. Druker¶s conventions are based on two assumptions, firstly ³Acquiring or
merging with another firm can be financially successful or meet other organizational goals´ and
secondly ³The actions of managers have a major influence on the success of the acquisition´
Drucker established five rules for the successful completion of a M&A deal-
1) Firstly according to Druker it is essential that the merger or acquisition should be
with a company with a common core of utility .i.e they should have a common
technology, common market, or maybe even a common production process. He
believed that just having a financial relationship is not enough for a successful
Merger or acquisition. According to Drucker unrelated diversifications more often
than not turned to be failures. This can be backed by empirical evidence collected by
Rumlet¶s (1974) study , which was based on 273 large industrial units . the study
revealed that companies which had extended themselves in and around their
common core resources and skills performed relatively better than firms which opted
for unrelated diversifications. Similarly studies conducted by Bettis(1981) proved
that firms which had opted for related acquisitions had a better rate of return on
assets than of those firms which went in for unrelated diversification. His studies
were primarily focused on scientific based firms who could take advantage of
common areas of research and development in cases of related diversifications. This
does not mean that unrelated diverisifications do not have any chance of success, in
 fact a study by -ubatkin(1982) which used the capital Asset pricing model has
shown exactly opposite results. Though again different studies are based on
differenent parameters and hence can generate different results. What is more
important to understand is that success or failure of a M&A deal does not depend on
the fact that it is related or unlrelated, but more on the level of understanding and
strategic planning that is done by the two firms during and before the deal.
2) The second rule stated by Druker for a successful M&A deal is related with thinking
through the firms potential contributions of skills to the acquired company. The
contribution has to be more than money , there should be some sort of skills transfer
as well. The example which Druker used to explain this rule was that of GM.
Initially when Gm ventured into diesel engines, it not only contributed capital but
also along with that Gm contributed to the deal bringing in its technological and
management expertise, hence the venture was successful. On the other hand when
Gm tried to extend its operations into the Aircraft engines its main contribution was
in the form of capital, Gm did not try and contribute much into the managerial and
technological aspect of the deal which could be a reason for the fsilure of the deal.
This clearly indicates that it is very essential for any firm to plan
systematically.Similar studies by Ansoff et.al (1971) have shown that planning
variables correlated with the results measured. Though there are exceptions wherein
firms entering into deals without adequate strategic planning have succeded in their
acquisitions. Though what is important to understand is that there are circumstances
wherein just contribution on money and cash management might be enough for the
success of the deal, but it is always more beneficial for companies to strategize
carefully and analyze before taking on such acquisitions. Where many firms go
wrong is that they fall under the illusion that if a particular acquisition worked for a
company if they also follow the steps of that company they will succeed as well.
Such thinking causes failure in M&A deals because evry company has its own
charactersitcis and capabilities and it is most essential for them to take these into
mind before following the footsteps of another company blindly.
3) Thirdly it is very important for the acquiring company to respect the products,
markets and customers of the acquired company . Furthermore there must be a
temperamental Fit. Often it has been observed that managers are unable to clearly
understand and apply these two concepts. As Druker has pointed out many times the
management of the acquiring company are uncomfortable with the newly acquired
 firm and end up making wrong decisions due to the ambiguity of understanding the
two concepts. He cites two particular situations where in he felt that failure to
understand these two concepts lead to the failure of the deal. Firstly, i)
Pharamaceutical companies acquiring cosmetic firms over the last few decades and
secondly, ii) Entertainment and television companies that bought book publishers.
This helps us comprehend the reason of many failures in M&A deals due to the
acquiring firms attitude of self indulgence. This has been backed by Mace and
Montgomery (1962) who identified that proficient management of the acquiring
firm, who are motivated as well as understanding and respectful of the new firms
position have more chances of succeeding.
4) Druker also felt that It is crucial for the acquiring company to be able to provide the
acquired firm with its top management within a time period of 12-15 months. He
believes that it is an erroneous belief which many firms have that they can buy out
management. In accordance to the high turnover rates in todays world it is very easy
for the management of the acquired company to switch over for a variety of reasons.
Kitching¶s (1967) studies have also shown that having managers who hold the
capability of being catalysts of change are essential for the organizations success.
Interestingly another study by Hayes has shown that 64% of the top managers of
acquired companies leave the organization within five years of the acquisition. A
closer study of these managers demonstrated an extremely interesting truth, 82% of
them were of the opinion that if they were given the option they would not have sold
their firms in the first place. These managers felt that they had not fully examined the
deal to the extent they should have and there were certain aspects of the deal which
had been neglected. This is a common scenario witnessed by many firms around the
globe and can be seen as a reason behind so many mergers and acquisitions which go
wrong after the initial process. Hence acquiring companies should concentrate more
on retains the acquired firms management rather than extensively planning hiring for
the new firm. This is beneficial as firstly the old management knows best their own
enterprise and how it works, secondly it saves the acquiring firm efforts and money
which they would have spent eventually when the old management had been
removed.
5) Drukers final rules states that after the merger, managers from both the organizations
should be promoted within a period of one year. Such a step enables the organization
to maintain a sense of comfort within the entire management team, mostly because a
 promotion makes the managers feel that the merger has provided them with new
opportunities and thus motivates them to work harder. As shown by the studies
conducted by Salter and Weinhold (1979), when two firms combine to form a new
one there are opportunities for managers from either firm to transfer functional or
industrial related skills to the new entity. Promoting such managers is an execellent
way of promoting such contribution from all managers.

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After looking at the all the empirical studies related to mergers and acquisitons, it can
easily be identifies that not all of them are successful. The reasons behind these failures
are many. The next part of this essay will concentrate on listing and understanding such
reasons.

1. Cultural Clash- This has been identified as one of the most common causes for the
failure of a M&A deal.The culture has a major role to play in the way that the
employees react to the new work environment i.e the type to expections they build
and the sort of commitment they show. This cultural clash signifires the
difference of the values, ethics and ideologies of the two firms.Such differences
can make it difficult for the employees to adapt to the working environment and
shift their focus from customers to other unrelated issues. (º



 



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2. Improper Managing and Strategy- It has often been seen that during the intial part
of the whole process, the top management takes keen interest and is deeply
involved with it. Once the deal has been finalized and signed they tend to move
on to others imporant issues. What they don¶t not rrealize is that it¶s the
integration phase which requires carefull identification of areas which can create
value for the newly merged or acquired firm. If adequate attention is not given at
this stage, the deal can loose its direction and end up in failure. (º







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After understanding the reasons behind the failure of M&A¶s , this essay will look at a
research conducted by Coopers and -ybrand in 1992 which focused on understanding
why M&A¶s failed. The research was based on 100 top companies in the Uk which were
involved in 50 such deals amounting to 13 billion pounds. Only deals worth 100 brtish
pounds or more were considered for the research. The method adopted for the research
was of interviewing top executives of companies involved in these deals. An alarming
54% of the M&A deals were considered by the executives as failures. This level has been
consistent with those in 1973 and 1988, i.e 49% and 53 % respectively. A majority of the
executives were of the opinion that the failures were primarily due to the cultural
differences between the two firms. The total number of executives who though this way
amounted to 85% of the entire respondents interviewed. Neary 80% of the respondents
were of the opinion that the failure was due to the lack of post integration planning done
by the management after the initial phase. In addition to this, around 45% of the
executives interviewed felt that the failure of the deals was caused due to the lack of
knowledge of the industry and company being acquired by the acquirer itself. A similar
percentage of respondents were also of the opinion that the fault lied with the
mismanagement of the newly acquired or merged enterprise. -astly approximately 30%
of the executives felt that no prior experience of handling similar M&A deal was the
reason behind the lack of success .

Since the reasons of failures are so many, I will concentrate only on a couple of them and
try to analyze them with the help of case studies. This essay will look at two major
aspects which often lead to failures. Firstly it will look at cultural differences among the
two firms which can cause hindrance in the deal and secondly it will look at the issues
arising from poor technological fit in between the two firms.

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As Sumita Reddy has rightly mentioned ³even if two companies seem to have all the
right ingredients in place for a successful merger, cultural differences can break the deal´.
It is a very different thing to have a deal on paper than from actually executing it. At the
end of the day if the employees from both the organizations are unable to put aside their
cultural differences the deal will not succeed.
The culture of an organization can be identified as its ethics, practices, traditions and
ideologies. Therefore during a merger or an acquisition, there is a need to bring together
all these aspects of both the organizations and that can turn out to be a time consuming
and difficult process.
The term culture is defined by Jaegar in Sumita Rao as ³a set of ideas shared by members
of a group of people´, while national culture has bee defined as ³ the software of mind,
which is embedded in the everyday life´ by Hofstede (1991). His work on national
culture has been recognized as one most the most important pieces of work on the topic.
He has defined national culture into various different dimensions.
These dimensions can be classified as-
— Power distance- How acceptable is the fact that there is unequal division of power
in organizations.
— Uncertainty Avoidance- How threatned the people of a particular society feel
when they are faced by changes in formal rules and limit to which new different
ideas and behaviour is tolerated.
— Individualism vs Collectivism- Both represent different approaches of social
frameworks. In a collective society all the members share a common feeling of
unity and loyalty among them. They come with the idea of helping one another
out. While an Individualistic society follows the simple rule of ³Every man for
himself´. There is little unity and the only sense of belonging is in between
families.
— Masculinity vs Feminism- This relates to how the societies perception of money,
materials and inter personal relations, while the former represents masculinity the
later stands for feminism.

In Addition to that Hofstede¶s work has been stated to have an impact on the way
HRM practices are followed. (Sparrow and Wu 1998). Different cultures have
different expectation from manager ±subordinate relationships. Such differences
become very visible when there is a cross border acquisition or merger. It makes it
that much harder for both the manager and subordinate as they have dissimilar
expectations from each other. Even the basic understanding of the activities which are
included in effective management differ from one organization to another. Due this
difference the methods of selection, recruitment and training also vary.
Employees from various organizations also differ from one another in the way they
perceive growth of their careers and take on responsibility. For some employees
taking an added responsibilty and taking a foreign project might be a day to day task,
while on the other hand certain employees might feel very pressured due to any added
responsibility. The remuneration packages can also be affected by the cultural
background of the employees. In organizations where the power distance is high there
are higher range of variances in the remmurination packages in between the top and
management.
Even methods of compensation of employees change from organization to
organization. There are certain cases where in employees feel comfortable and
secured with their fixed incomes and limited incentives. On the other hand there are
employees who are motivated by additional incentives and higher targets, they are not
satisfied with their limited fixed remuneration. Similarly in individualistic cultures,
individual performance based plans are more suitable. On the other hand it is more
suitable to have group based targets and seniority based promotions in organizations
which have a collective attitude. The remmuniration packages can also be affected by
the cultural background of the employees. In organizations where the power distance
is high there are higher range of variances in the remmurination packages in between
the top and management.
The disparity in the cultural frameworks is not only from organization to organization
, but also from one country to another. As put forward by Shimizu et. al. in Sumati
Reddy ³ The differences in national cultural, customer preferences, business practices
and institutional forces, such as government regulations, can hinder firms from fully
realizing their strategic objectives.´. While dealing with M&A deals at the
international level managers have to take into account factors such international
labour laws & practices, management norms and institutional mechanisms. For
example labour laws are very different in the US than from Germany. It is much
easier for an acquiring firm in the US to opt for large scale lay offs than it is in
Germany.
During cross cultural negotiations there be certain cross cultural issues related to
management styles which crop up. Such perceptions can be classified into the Power
distance, Communication Context, conception of time and Collectivisim ±
individualism. (Cohen 1997 in Sumati Reddy). For example looking at the conception
of time, an American manager might be very particular about the time of a discussion
and would be rigid about his timing. Whereas say a manager from a -atin American
country maybe more flexible with his time and not be that particular about his
punctuality. Further looking at the collectivism aspect, a manager from a collective
culture may prefer to develop a relationship and a sense of bonding between himself
and his counterpart. Whereas a manager from an individualistic culture would prefer
to keep his relation restricted to business and would stay away from forming groups.
-ooking at a manager who comes from a background in which there is equal spread
of power and authority, he will be more compromising and willing to share his
responsibilities with others. These discrepancies in cultures can lead to feeling of
uneasiness among the firms as well as aggressive behaviour towards one another. In
normal circumstances it is the acquired company which has to undergo the changes in
order to align itself with the acquiring company. Every firm¶s culcutre has its own
symbols and characteristics. The integration process can lead to the blurring of such
symbols and lead to the employees felling pressuirzed and stressed. Employees of the
acquired firm can also face phychological trauma due to superiority attitude adopted
by the acquiring firms employees. The managers of the acquiring firm feel that since
they are the ones taking over they have an upper hand over the acauired firm and its
managers. (-ubatkin, Weber, and Schweiger 1999 in sumita Reddy)

Nicola has given a very good account of the different stages of the acculturation
process. She has divided the entire process into four distinct period. During the first
period there is excess optimism from both the parties involved in the deal. This period
is also referred to as the Honeymoon period. Though this doesn¶t last for too long a
time, as the realties cause problems in the deal and it ends up leading to a feeling of
frustration and depression. Only after a certain period of time when the employees of
the organization are more experienced with handling the frustration they adapt
themselves to the new cultures.
 Case Study 1-Daimler-Chrysler

Underestimating cultural issues is especially dangerous in international mergers.

Wolf suggests, ³There has always been a tendency to underestimate the impact of cultural
issues and to focus instead on organizational or structural issues. It is dangerous to
underestimate culture issues in any merger, but when the merger involves two companies
from different national cultures, those issues are exacerbated and unless a company is
prepared they can be debilitating´ (³Unhappily married,´ 1999 in Sergei Golitsinski
)

On the 7th of May 1998 one of the biggest deals in the history of M&A¶s was announced.
This deal was between the two giants of the car manufacturing industry , on one end was
Daimler Benz and on the other was Chrsyler Corporation. The wall street Journal termed
it ³the biggest industrial merger of all time.´ At that moment the deal was called the
³Merger of equals´ and was looked at being one of the most fruitful deals. The deal was
initiated in the start on 1998 and took an approximate 12 months to be totally executed.
At that moment Jurgen Schrempp was the Ceo of Daimler Benz and his counter part was
Robert Eaton from Chrysler. This merger resulted in the new entity becoming the fifth
largest producer of automobile producer in terms of units. It also enabled the firm to
become third in terms of market capitalization and revenues. Both the organizational
heads were very satisfied with the progress that their firm was making and were
convinced that the new company was ready to take advantage of the opportunities
presented by the global market.
       
   
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Two years down the line, things turned out to be very different. The overall capitalization
stood at a mere $ 44 Billion. Stocks of the company had been banished from the S&P
500, which was another evideance of the poor performance of the company. The market
position of the company had gone so poor that its share value had declined to one third of
what it was before the merger. While chrysler group had posted a loss of $512 million in
2000, the mercedez-benz division and smart car division had booked profis of upto EUR0
830 million. ("   
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The so called ³merger of equals´ , ended up looking more like an acquisition of Chysler.
In the end there were couple of aspects which came in between both the organizations
  

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One major aspect which played a very important part in the failure of the deal was the
difference in organizational cultures in between the two firms.
Cultural clash was an expected hurdle by the management during the integration. In order
to resolve this issue Schrempp made a conscious decision to let both companies maintain
their respective cultures. Though there had been major plans developed for the
integration process which included cultural workshops such as 6 
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Writers such as Randall Schuler and Susan Jackson were of the opinion that
DaimlerChysler thought that both the cultures could be blended to form a culture which
could be benefitial for the new company. They expressed concerns about the fact that
cultural aspects were mostly ignored and they were only spoken about by the board
officials during giving bold statement to the media. Majority of the emphasis was laid
upon the operational and business synergies.
In the words of Gibney (1999), ³from the start, the cultlure gap made Daimler-Chrysler¶s
post-marriage period of adjustment more difficult than that of any merger around´
Instead of maintaining a cordial environment of sharing, they opted for a system by
which they could maintain their culture without interacting with that of their
counterparts.
Many analysts believed that both the companies were extreme poles when it came to
management styles and cultures. Their only similarlity being that they produced
automobiles. Chrysler had the image of being the very true symbol of American
creativity and adaptability. Their uniqueness lied in their ³Cowboy´ Risk enduring
attitude and at the same time operations were executed in a cost controlled
environment. There was a certain level of equality maintained for relations with staff.
On the other hand Daimler-Benz was known for its superior engineering techniques
and its attention towards details. Mercedes- Benz had their repuatation as a company
which maintained top line quality and standards. It was characterized by bureaucracy
and centralized decision making. In contrast to this Chrysler was one of the leanest
automobile companies around. There was a certain instance where the American
management had been amused with the amount of time and attention which was
given to a brouchere which had to be distributed to the employees.
Another huge distinction between the firms was the disparity in the wage levels
before the merger occoured. The gap between lower and upper management had been
vast in the American firm, whereas to the Germans this was a totally new concept.
 The American concept of overpaying senior managers eventually lead to a situation
where certain middle levels managers were earning more than their superiors wo they
were reporting to in Germany.
Another major difference which the two firms faced was that of ³style´ of working.
While the Germans were known for their meticulous and precise ways of working,
the Americans preferred more spontainouty in their work. The Americans favoured
working at a pace and taking things as they come. On the other hand the Germans
believed in detailed planning of each and every step before they undertook any
actions. Such contrasts in styles of working, was a major source of dissatifaction
among the two management teams.

Mismanagement of the Deal-

Despite all these differences between the two firms, if the managers would have been
more efficient in handling the differences the merger could have been successful. + 
 
  
 
  
  
      
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How could things have become better-

Based on my understanding on the case, I believe that right from the outset of the deal
the attitude adopted by both the parties was questionable. It was very evident that
both Daimler-Benz and Chrysler knew the difficulties and differences that they would
have to face during the merger. With such diverse cultural backgrounds both the
companies should have prepared themselves well in advance with methods of
adopting each others practices. Unfortunatley this was not the case, managers from
both Daimler-Benz and Chrysler expressed amusement and surprise with each others
practices instead of showing interest and learning from them. Such behavior
encouraged a feeling of hostility rather than encouraging mutual respect for one
another. It would have been most appropriate for management from both firms to
keep an open mind and absorb what they learned from each other. Daimler could
have benefited by following Chryslers risking taking and exploring attitude. At the
same time it would have equally benefital for Chrysler to take a leaf out of Daimlers
book and achieve to some extend, the kind of quality control they had set standards
for. Potentially the deal would have been a lucrative one as the products from both
organizations combined covered the entire market requirements.


 
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There are many instances where in it has been noticed that M&A¶s have suffered
failures due to lack of business compatability. More precisely this segment of the
essay will be looking at the failures which occurred due to technological
incompatibilities.
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