Mergers and Acquisitions have been an attractive strategy over the last few decades, for companies to expand and grow. The Globalization and reduction of trade barriers have made it possible for businesses to merge (Harrison et al. 2001). Mergers and Acquisitions take place when two or more organizations join all or parts of their operations together (Coyle 2000). Firms gain new means to resources and can therefore increase their revenues and cut cost. (Pazarskis et al.2007) There is a difference between mergers and acquisitions, mergers combine two companies to create a new entity while in acquisitions a smaller company is purchased by a larger company. The different types of mergers are horizontal, vertical, conglomerate and congeneric. A horizontal merging occurs when direct competitors are acquired. An example of a horizontal merger is between HP and Compaq worth $25 billion in 2001 (NY Times 2001). There a strategic motive behind the horizontal mergers which means the acquirer is aiming economies of scale and gain market shares. Vertical merging is between companies that are in the same supply-chain with the aim of higher quality control, merger synergies, and a better flow of information along the supply-chain. A good example of vertical merger happened between America Online and Warner Times in 2000. In a conglomerate merger, two companies with no relation to one another join together. This type of merger brings forth a higher risk due to the businesses operating in completely different markets, products, and services. A congeneric merger is when companies are from the same or related industry but offer different products join together.
Mergers and Acquisitions a Success or Failure?
Various business analysts and writers insist that mergers and acquisitions are failed strategies, concluding that studies show 7 out of 10 mergers do not succeed (Epstein 2005). According to Ghemawat and Ghadar (2000), executives of cross-border or mega-mergers deals exploit markets by scaring off competitors and are not the right approach of handling globalization. The authors are firmly convinced that expansion is not the best strategy to deal with globalization. Smaller companies who are not among the ‘’world’s biggest players’’ have difficulties to survive in the economy. However, according to Epstein (2005) the analysis that has been carried out to ascertain the reason why mega-mergers fail, are often insubstantial and the evaluation of success is uncertain. Generally, the objectives, strategies, and implementation are considered during the measurement of mergers and acquisitions success or failure (Bradt 2015), but a fundamental aspect in M&A is culture. But what exactly is culture? Hofstede (2003) defined culture as “the collective programming of mind that distinguishes the members of one human group from another”. Culture can be defined in many ways, therefore, there is not a specific definition. The common understanding of culture is shared values, ideas, and beliefs of different groups of people (Venaik, Brewer 2008). In order to succeed in M&A, companies need to understand that the cultural element is crucial in the process of pre-merging, pre-planning, implementation, and evaluation. Referring back to the largest merger deal of $165bn between AOL and Time Warner in 2000 is a great example of a merger failing due to cultures and ambitions clashing. The Time Warner executive said following about their AOL colleagues, "They had this intolerable holier-than-thou attitude, running around with these Superman complexes, talking about AOL, AOL, AOL everywhere, and promising to save us, when we knew our businesses didn't need saving." (Surowiecki 2003).
Although many argue that M&A are doomed to fail, there are several motives that drive executives to enter into global merger deals. The effective and efficient way to enter a new market, improvement of new technologies and products is a benefit of M&A. Customers may be interested in trying the new products and services because they have access to a larger range of the brand. Both companies can also make use of their intellectual resource, which is the valuable knowledge of their employees. Some companies have very talented employees in position, so there is no need for additional training costs. This is a way for companies to come together in an affordable manner. Executives of A.T. Kearney tracked a history of 1,345 M&A with high transaction values to ensure a global context, from 1989-2001. They built an S-Curve (Graph 1) showing industry moves over 25 years based on the speed of concentration. The authors came to a result that, mergers determine profitability, market share, and stock prices and are ‘’The Endgame’’. The Endgame is a tool to strengthen consolidation strategies by revealing how to generate returns on growth investments.
Graph 1
source: AT Kearney
In 1999, Exxon and Mobil merged into an $81bn deal and formed ExxonMobil. ExxonMobil became the largest oil company with a high hold on the international market and impressive earnings. In 2008 it had a quarterly earning of over $11bn. This is an example of great mergers and reveals the possibilities and success of a well-executed strategy.
Conclusion and Recommendation
Mergers and Acquisitions are the key role in a company’s growth but it is a difficult matter M&A can be a though process but if it is well planned and appropriately executed, it can achieve a great success. The business transaction should not be rushed without any thought.