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M&A: Mode of understanding
In their strictest sense, mergers and acquisitions constitute two different terms. On the one hand, the term ‘merger’ means that two companies present the willingness to merge their activities and organize a common control of their assets (Sachwald, 2001). A merger represents therefore ‘the unification of two or more firms into a new one’ (Bresslmer et al. 1989, Pausenberger 1990, and Brauchlin 1990, quoted in Straub 2006, p.15). On the other hand, the term ‘acquisition’ emphasizes that a firm presents the willingness to buy another one (Sachwald, 2001). Indeed, an acquisition represents ‘one company’s purchase of the majority of the shares from another’ (Bresslmer et al. 1989, Pausenberger 1990, and Brauchlin 1990, quoted in Straub 2006, p.15).
The difference between a merger and an acquisition is that, after a merger, the result of the unification leads to the existence of fewer firms than before the operation (Straub, 2006). Though, after an acquisition, the target firm can still remain autonomous; it can also be partially or completely integrated into the acquiring company (Straub, 2006). Moreover, mergers and acquisitions represent, in a legal point of view, different transactions (Straub, 2006).
The two terms, merger and acquisition, are often used together. Generally, the expression ‘merger and acquisition’, also known in its abbreviation ‘M&A’ or merely reduced to the term ‘merger’ or ‘acquisition’, is related to the activities of purchasing and selling companies (Straub, 2006). In this thesis, we will use these terms, interchangeably, in their broadest sense. The definition will therefore be, as described by Kootz (1996, quoted in Straub, 2006, p.16) as ‘all forms of inter-industrial relationship and cooperative activities involving the purchase or exchange of equity stakes’.
Classification and motivations
Usually, mergers and acquisitions are classified in three categories. They are categorized as vertical, horizontal or conglomerate (Gaughan, 2007). Horizontal mergers and acquisitions refer to companies that are present in the same sector of activities (Leroy, 2003). Companies represent, in this case, direct competitors in the same industry (Leroy, 2003). As an example, the merger between Chrysler and Daimler can be quoted. The main purpose of these horizontal operations is to reinforce and improve the competitive position of the company. Indeed, the company will benefit, for instance, from economies of scale due to the increase of its size, and it will increase its market shares (Leroy, 2003). The ‘size effect’ will also contribute to increase the company’s power of negotiation with its customers and suppliers (Leroy, 2003).
Vertical mergers and acquisitions refer to the acquisition or merger of a firm with another company with which it has a customer or a supplier relationship (Cameron and Green, 2009). It consists in taking control of companies that are upstream or downstream in the value chain (Leroy, 2003). This type of activities allows, for example, companies to reduce transaction costs and the number of intermediaries (Leroy, 2003). Vertical activities, thus, allow companies to benefit from economies and have an advantage compared to the competitors (Leroy, 2003). Indeed, they increase their market power by controlling the distribution channels and the access to raw materials. As an example, we can consider an airline firm that acquires a travel agency.
In contrast with horizontal and vertical deals, conglomerate activities consist in acquiring or merging with a company which is ‘neither a competitor, nor a buyer, nor a seller’ (Cameron and Green, 2009, p.224). In this case, companies have different activities and are not present in the same businesses. The main aim of these operations is to seek for diversification and reduce the risk linked to economic conditions (Leroy, 2003). As an example, the famous acquisition, some years ago, by Philipp Morris, a tobacco company, of a firm that was present in the food industry General Foods, can be mentioned (Leroy, 2003).
In addition to these three categories, Cowin and Moore (1996, p.67) describe concentric mergers and acquisitions as operations ‘involving firms with unrelated activities but where there is a relationship between the product technology, the marketing or both’.
Furthermore, mergers and acquisitions can also be categorized as domestic or cross-border activities. Chen and Findlay (2003, p.15) define cross-border mergers and acquisitions as ‘any transactions in assets of two firms belonging to two different economies’. This definition implies that the companies are not located in the same economies, or the operation takes place within the same economy but with firms that belong to different countries (Chen and Findlay, 2003). Concerning the domestic mergers and acquisitions, the firms involved are located in one country and operate in its economy (Chen and Findlay, 2003).
Besides, mergers and acquisitions can also be classified as friendly or hostile. According to Chen and Findlay (2003, p. 24), a friendly M&A is characterized by the fact that ‘the board of target firm agrees to the transaction’ whereas a hostile M&A is characterized by the fact that the operation is undertaken ‘against the wishes of the target firm and the board of the target firm rejects the other’. In fact, the classification of the different types of mergers and acquisitions is important in order to understand the motivations behind these activities (Cameron and Green, 2009). Moreover, the number of merger and acquisition operations has been increasing over years. It may be interesting to explain the reasons why companies absolutely want be involved in these activities. In the literature several reasons for merging with or acquiring other companies can be found. However, we will present the one that are, according to us, the most significant.
Growth constitutes one of the most important motivations for undertaking a merger or acquisition process. According to Cameron and Green (2009), growth is the purpose followed by most of mergers and acquisitions. M&A represent a faster way to expand without coping with incertitude of internal growth. However, although companies see, through these activities, an increase in generated revenue, the requirements related to management in larger firms, are more complex. Finally, according to Cameron and Green (2009), growth can lead to possessing new customers and acquiring new facilities, brands, technologies or employees.
Failures and M&A process
As our thesis deals with the mismanagement of mergers and acquisitions, we will focus on the reasons of failures among these activities. It is therefore essential to explain what we mean by failures. In this thesis, the term ‘failure’ will refer to the non acceptance of the process by the majority of the company’s employees, the non realization of the expectations of the firms, the separation of firms that have previously merged or the abandonment of the operation because no agreement could have been found between the firms. Moreover, it is important to notice that, in this dissertation, we will only distinguish mergers and acquisitions by the fact that they are successful or unsuccessful.
Finally, before entering in the core of this thesis and explaining the reasons of failure in M&A, it is important for readers to have a clear view of the process. In the literature, we can find different phases associated to M&A processes (Hasley, 2004). However, we have decided to draw our own picture of the merger and acquisition process based on existing researches and studies. According to us, while planning to go through a merger or acquisition process, several concrete steps have to be followed. The M&A process will therefore be summarized in three main steps.
Culture: Mode of understanding
First of all, it is important to make a distinction between the different levels of culture, the national culture and the corporate culture (Ravey, Shenkar and Weber, 1996). These two notions are essential as they play a determining role in the integration process of merger partners. Moreover, it is pointless to speak about cultural aspects among organizations if we do not take into consideration the national culture within which these organizations are developed (Ravey, Shenkar and Weber, 1996).
Hofstede (1984, p.82) defined national culture as the ‘collective programming of the mind which distinguishes the members of one group or society from those of another’. Hence, the set of shared values and norms in a nation influences the culture of companies operating or located in this nation. Moreover, the country’s norms and values determine the acceptable and appropriate behaviours and attitudes to adopt. The culture of a firm is therefore determined by its country of origin. Hofstede (1984) has proposed an analysis of culture in a national perspective. It is based on values and norms related to work. The aim is to understand the cultural differences as we do not work in the same way according to where we are operating. In Europe and in Africa for instance, people do not work together in the same way. According to Hofstede (1984), five dimensions can capture the strongest differences between countries in terms of values and norms. The first dimension concerns the ‘Power Distance’. It represents the extent to which people can accept an unequal distribution of power within the organization. The second dimension is ‘Individualism versus Collectivism’. It represents the extent to which people prefer to act as individuals or as members of a group. The third dimension is ‘Masculinity versus Femininity’. It represents the importance given by the society to values recognized as ‘masculine values’ such as achievement, heroism, material success, competition; or to values recognized as ‘feminine values’ such as human relationship, others’ welfare, sensitivity and modesty. The fourth dimension concerns the ‘Uncertainty avoidance’. It represents the extent to which people of a nation prefer structured situations compared to chaos or uncertain situations. When people search for uncertainty avoidance, it means that they are uncomfortable with and tend to not tolerate ambiguity and uncertainty. The last dimension is related to the ‘Temporal Orientation’. Nations with a long term view are future oriented and seek for economies and persistence whereas nations with a short term view are characterized by the fact that they give a significant importance to the past or the present and preach the respect of traditions and social obligations (De Cenzo, Gabillet and Robbins, 2008). Hofstede addressed differences at a national level. Nevertheless, it would not be wise to take his analysis too literally. Indeed, Hofstede’s analysis presents some weaknesses. For example, sharing a culture does not necessarily imply that all the people in a nation share the same values and beliefs as there may be influences of subcultures and other social influences. Moreover, his analysis is generalizing to a large extent and may not encompass the diversity of global influences present in our world today. Indeed, his analysis is done within limited national boundaries.
Types of synergy
Generally, a business combination implies a situation in which value is created. In mergers and acquisitions, synergy can create several kinds of benefits. Three types of synergy will be distinguished in this study, the operational, financial and managerial ones.
First of all, operational synergy represents one of the main sources of value creation. It can be achieved at different levels such as production, marketing, R&D and administration. Moreover, operational synergy can be presented under several forms.
Operational synergies can be represented through economies of scale (Larsson and Finkelstein, 1999). Economies of scale refer to a reduction of the average costs of the company due to the increase in the volume of production of a specific product. According to Ray (2010), economies of scale are more significant when a consolidation of companies that have the same operations occurs and redundant positions are eliminated. ‘More specifically, the effect of economy of scale is based on the fact that fixed costs of production remain constant despite an increasing production volume. As a result, the cost per unit is decreasing with a higher production volume since the fixed costs can be allocated to a large number of units’ (Hofmann, 2004, p. 274, quoted in Karenfort, 2011). Moreover, mergers and acquisitions which suppose a combination of activities, can lead to cost savings associated to a decrease of the personnel, restructuring or closure of some production sites (Monin and Vaara, 2005).
Economies of scope can also be considered as a relevant factor while considering wealth creation for shareholders (Depamphilis, 2011). Economies of scope refer to reductions of the average costs of the firm through an increase in the number of produced goods. In this case, it is cheaper to combine several product lines in one company than to produce them in separate companies (Depamphilis, 2011).
Furthermore, increase of revenue can be part of operational synergy (Homberg et al, 2009). A synergy of revenue represents the fact that a merged company generates more revenue than the two independent companies which could not be able to increase their revenue independently. These synergies can be created through the development of new activities or creation of new products. For instance, a firm may be interested in the acquisition of a competitor because it could allow selling new products in areas where the competitor has difficulties to generate sales. Additionally, vertical economies are considered as operational synergies (Larsson and Finkelstein, 1999). Vertical integration leads to a deeper control of the production line, from a production to a distribution level. Moreover, economies related to the acquisition of intermediate products can be realized. Vertical integration also allows the realization of economies associated to a better coordination in the management of the different levels of production.
Finally, knowledge transfers represent a relevant part of operational synergy in mergers and acquisitions (Larsson and Finkelstein, 1999). Indeed, value can be created if there is a sharing of information. Moreover, it constitutes an opportunity for learning. According to Hitt et al (2009), learning is relevant in the success of mergers and acquisitions. The success can be achieved through the ability of firms to learn from their partners and to include new knowledge in order to create new capabilities (Hitt et al, 2009). Furthermore, according to Ray (2010), economies of learning can be created. Indeed, a company can decrease its costs of production through learning which can appear under the form of effective production scheduling, reducing waste, improving team building and teamwork, preventing past mistakes and better quality.
Table of contents :
I. Introduction
1.1 Background of the research issue
1.2 Research questions
1.3 Objective and purpose
II. Methodology and data collection
2.1 Introduction
2.2 Methodology
2.3 Choice of the topic
2.4 Research approach
2.4.1 Qualitative versus quantitative approach
2.4.2 Case studies
2.4.3 Selection of the case studies
2.5 Data collection
2.5.1 Primary data
2.5.2 Secondary data
2.6 Reliability and validity of the research
III. Mergers and Acquisitions: An overview
3.1 Introduction
3.2 M&A: Mode of understanding
3.3 Classification and motivations
3.4 Evolution
3.5 Failures and M&A process
IV. A Cultural Mismatch
4.1 Introduction
4.2 Culture: Mode of understanding
4.3 Cultural incompatibility
4.4 Culture clashes
4.5 Limiting culture clashes?
4.6 Empirical illustrations
4.6.1 Daimler-Chrysler Analysis
4.6.2 Renault-Volvo Analysis
V. Missed Synergies
5.1 Introduction
5.2 Synergy: Mode of understanding
5.3 Types of synergy
5.4 The lack of synergy
5.4.1. Negligence and lack of preparation
5.4.2. Lack of due diligence
5.4.3. Overestimation of synergies
5.5 Empirical illustrations
5.5.1 BioMérieux-Pierre Fabre Analysis
5.5.2 American Online-Time Warner Analysis
VI. Leadership Ignorance
6.1 Introduction
6.2 Integration process
6.3 Leadership
6.3.1 Articulating a clear vision
6.3.2 Communicate effectively
6.3.3 Human side of M&A
6.3.4 Building trust
6.3.5 Conclusion
6.4 Empirical illustrations
6.4.1 Renault-Volvo Analysis
6.4.2 Fortis-ABN Amro Analysis
VII. Political Issues
7.1 Introduction
7.2 Power: Mode of understanding
7.3 Different approaches of power
7.4 Power conflicts
7.5 The balance power principle
7.6 Conclusion
7.7 Empirical illustrations
7.7.1 HP-Compaq analysis
7.7.2 BioMérieux-Pierre Fabre analysis
VIII. Research conclusion
IX. Limitations and vision for future research
X. References
