Challenges of mergers and acquisitions
Despite the advantages mentioned above, studies conducted by economists displayed that efforts of combining two previously different enterprises have a certain tendency to end up in serious under-achievements. The Harvard business review stated that a study of 300 mergers conducted in over a ten year period resulted that 57 % of those merged companies return to their shareholders with financial measurement of productivity under the averages of their industries (Mergers n. d. ).
Mergers and acquisitions, despite its amazing appearance on paper, usually don’t really function in reality. Two thirds of mergers and acquisition never reach their original objectives and they often destroy existing values rather than creating it (‘Mergers’, 2001). What tends to happen was the measurement of financial advantages becomes a blinding illusion. After the agreement was signed and the acquisition carried out, the management suddenly realized that due to lack of socialization, the employees do not actually know anything about the acquisition until it was conducted.
As the combined management trying to get along, the employees were getting suppressed with new management styles, communications mishaps and culture contrasts (‘Mergers’, 2001). Doubts and distrust turned to be growing viruses, resulting in the decrease of morale and working motivation. Finally rejections toward new management are expressed, the best employees leaved and leaving only the least motivated and the incompetent. Management were confused and turned to firefighters, neglecting their significant activity for the company’s survival, looking ahead.
This vicious circle was what known to bring the combined companies into destruction of values and their ability to produce profit (‘Mergers’, 2001). II. 3 Guide to Successful Mergers and Acquisitions The mentioned causes of failure in practicing the Mergers and Acquisitions usually resulted from management’s failure to recognize delicate factors involved in the mergers and acquisitions. Some of those factors are the difference of cultural habits among employees, the different point of view of good corporate governance between managers and other relatively easy to forget factors.
Some of the management preparations which can put away those factors are: 1. Comprehensive Analysis Management must consider and critically evaluate the entire spectrum of strategy, process, technology and people. Focusing on specific areas without regards for potential interaction problems might caused non-optimum results (‘Mergers’, n. d. ). 2. Aggressive Planning To achieve optimum management efficiency, critical strategies supporting business integration must be prioritized and implemented in the appropriate manner. “Doing the right thing” might not be sufficient without “doing things right” (‘Mergers’, n.
d. ). 3. Self Attainment To achieve the creation of value, company personnel must be involved in the integration process. Communication system must be designed for clarity and effectiveness to encourage collaboration in every facet of business integration (‘Mergers’, n. d. ). 4. Competent and Effective Team management To avoid failure, the highest level of competency in project management and facilitation skills is demanded. Most work output requires teams of subject-matters-expert workers, outside advisors, specialized contractors, who have never worked together before.
Objectivity, know how, and especially trust are very much important issues for such projects (‘Mergers’, n. d. ). II. 4. International Aspects II. 4. 1 OLI Paradigm Why, where and how are the first among questions of making an FDI. John Dunning, a professor emeritus at the University of Reading (UK and Rutgers University (US) has created a paradigm that among other purposes, answers the three most important questions mentioned. The OLI paradigm blends three different theories of Foreign Direct Investment • = Ownership Advantages (Firm Specific Advantages) This theory addressed the why go abroad question.
The theory believes that the MNE has one or more specific advantages (FSA or core competencies) which allowed it to overcome cost of operating in foreign countries. The advantages will increase revenue or decrease cost and prices which are equal or above the cost of operating at a distant location. The advantages are intangible in nature and can be transferred within the multinational network at a low cost. Examples are brand name, economic of scale benefits or technological advancements.
PROFIT = TOTAL REVENUES – TOTAL COST – COST OF OPERATING AT A DISTANCE (Griffin, n. d. )
• L = Location Advantages (Country Specific Advantages) This is obviously a theory designed to answer the where to invest question. CSA can be broken into three categories which is Economic, Social and Political. Economic categories are qualities of factors of production, size and scope of the market, transport and communication cost, etc. Social categories are distant of the location, attitudes toward foreigners, language and cultural differences, etc. Political categories are the government policies that influence international production, intrafirm trade and the FDI flows itself.
For a clearer view, applying the PEST analysis on a certain country and location would be preferable. To fully grasp the advantages and disadvantage of a certain location, the CSA analysis should be combined by the previously analyzed FSA (Griffin, n. d. ). • Internalization advantages The theory addresses the how to go abroad question. As mentioned before, there are principally two methods of creating a foreign business, making an arm’s length transactions (ranging from exporting to making affiliates in foreign ground) or conducting cross border acquisitions.
The theory however, suggested that an arm’s length options consist of larger risks and weaker control situation caused by tariffs barriers and other additional costs, not to mention market imperfections and the potential opportunistic behavior by licensee (if we are to choose the licensing option). The OLI model believes that the hierarchy methods (horizontal or vertically integrated firms) are superior to arms length transactions due to the imperfections or even the absence of market in foreign lands (Griffin, n. d. ).