The different views on the success of mergers and acquisitions.
Mergers and acquisitions have played an important role in the modern business environment, especially in the wake of the global economic crisis which is facing the world. This crisis has forced businesses to cooperate and share the resources which they have, in order to survive the challenges which are in the modern business environment. The paper aims at analysing two articles; ‘If most mergers fail, why are they so popular?’ by Keith D. Brouthers, Paul van Hastenburg and Joran van den Ven, and ‘The impact of acquisitions on firm performance: A review of the evidence’. by Christian Tuch and Noel O’Sullivan. The paper will also analyse the merger which led to the creation of Unilever company and give a summary and conclusion on issues discussed.
Analysis of ‘If most mergers fail, why are they so popular?’ by Keith D. Brouthers, Paul van Hastenburg and Joran van den Ven.
The authors seek to explain the reasons why companies still seek mergers, yet they end up in failure most of the times (Brouthers et. al. 1998: 347-353). They further explain that the low success rate of mergers has been perceived by scholars to have been caused by several reasons; The first is that the managers may divert their activities from pursuance of wealth maximisation goals to other goals. The second is the assumptions by managers that they have learnt previous mistakes in mergers yet they continue making similar mistakes. The third factor is that the use of past empirical studies may lead the formation of wrong conclusions since the data collected may be inaccurate due to statistical malfeasance.
The authors aimed at using a new evaluation tool which compares the reasons which managers join mergers and the outcomes, with a view of coming up with findings which will be useful to managers in their merger activities. They relied on a survey on Dutch public traded firms which was conducted in 1994. There were 33 mergers conducted during this period and they involved 47 companies. However, only about 27% of the managers or 17 managers gave responses on the merger activities. The managers were required to rank 17 motives according to importance, with a rating of 7 being extremely important and a rating of 1 being the least important.
Three major reasons for engaging in mergers are given. The first is enhancing a firm’s economic performance and this is achieved through economies of scale, increasing profits, cost reduction, risk spreading and others. The second reason is personal reasons by managers, such as increased renumeration arising from increased profitability and sales. The third reason is strategic motives and these include global expansion, synergy, acquisition of new resources, pursuing market power among others.
The findings revealed that economic motives were considered to be the most important while strategic motives were viewed as the least important. The motives which were viewed as above average include pursuance of market power, increasing profits, attaining economy of scale, increasing value of shareholders and increasing sales, in that order. The findings also revealed that most firms pursue mergers for multiple motives.
It was explained that mergers are considered to be successful to managers as compared to the economic indicators, since managers compare outcomes against predetermined goals. By measuring the extent of achieving the goals, it was possible to measure the failure or success of the merger. A similar rating was used, but in this case, 7 represented ‘fully realised’ and 1 indicated ‘not realised’. Similar results were achieved in terms of the 17 motives which indicates that the firms achieved their objectives of the mergers.
Analysis of ‘The impact of acquisitions on firm performance: A review of the evidence’. by Christian Tuch and Noel O’Sullivan.
This research aims at analysing how acquisitions affect firm performance. The authors introduce the research by explaining that acquisitions worth billions of pounds have become common in the past three decades. The main reason for joining the merger is explained to be increasing the wealth of shareholders. However, in the recent mergers which have been examined, the authors explain that there has been an inconsistency of improving shareholder wealth. This observation holds in both the long run and short run according to these researchers. The paper also uses previous research carried out to analyse how acquisitions impact the acquiring companies’ performance. The paper assumes that the share prices change according to new market information in an unbiased and timely manner (Tuch and O’Sullivan 2007: 141-170).
In the short run event studies, the findings reveal that there was little benefits to shareholders. This observation prevails in spite of differences in the measurement period of the short term performance across different researches. The earlier researches conducted in UK and US revealed significant benefits, although these are attributed to benefits of takeovers which were included in these researches. However, researches conducted in subsequent years have revealed that the mergers have either provided no significant benefits, or they have provided negative benefits to companies. In long run event studies, further research has been required after previous researches pointed to the fact that mergers have been largely unsuccessful.
The findings of various researches conducted point to the fact that mergers have negative effects in businesses in the long run. All the findings have revealed that there is lack of evidence that takeovers improve the performance of businesses over time. However, cash transactions, hostile takeovers and mergers in similar industries, lead to significantly better performance. It is important to note that these researches are inconclusive and that further research is needed to answer deeper questions on mergers.
Unilever company was formed as a result of a merger between Margarine Unie of Netherlands and Lever Brothers of Britain (Steib 2008: 15). Both firms were in the same industry and they shared a common raw material which was palm oil. This form of merger was necessitated by strategy, which has been discussed in the two articles which have been analysed above. The managers of the two companies partnered as a cost cutting strategy. They opted to grow palm oil in overseas plantations and then import it to their respective countries. This would not only increase efficiency but it would also reduce costs.
After the merger, the company changed the management structure and appointed one CEO as opposed to the two who were previously present (Casson 1999: 53-57). The CEO, Mr Cescau made radical reforms which streamlined the organisational culture of the two companies and centralised decision making. These steps ensured that there was minimal conflict in the organisation and that employees were well motivated. This led to the success of the company as a foodstuff producer, and it is one of the leading companies in the world.
The two articles which were analysed gave reasons for collapse of mergers as diversion of activities from pursuance of wealth maximisation goals to other goals. Another reason is the assumptions by managers that they have learnt previous mistakes in mergers yet they continue making similar mistakes. Finally, the use of past empirical studies may lead the formation of wrong conclusions due to statistical malfeasance. These factors are not very well explained, since the researchers dwell on analysis of success or failure of the mergers.
Unilever can be said to have made none of these mistakes due to a central leadership from the CEO, Mr Cescau. The alignment of the organisation structure and culture of the companies which merged, helped in realisation of the common goals of the merger. Realignment of the organisation structure and culture of companies is very important in mergers, but this issue has not been addressed in the two articles which have been analysed. As was previously stated, further research needs to be carried out on the issue of success or failure of mergers.
Conclusion and recommendation.
It has been discussed that most mergers do not succeed in achieving both their long term and short term goals. Although they do not manage to do so, they still remain very popular in the modern business environment (Bush and Middlewood 2005: 45-57). This has been attributed to the realisation of their objectives, as in the case for Unilever. Since the economic indicators do not capture these unique obligations, it appears that mergers have failed yet this may not be the case. It is important to carry out further research on the subject in order to analyse more aspects related to mergers. For instance, the role of organizational culture, structure, leadership and motivation have to be analysed as far as the mergers are concerned.
Brouthers, K., van Hastenburg, P., van den Ven, J. (1998) ‘If most mergers fail why are they so popular?’ Long Range Planning, Vol. 31, No. 3, pp347 – 353
Bush, T., Middlewood, D. (2005). Leading and managing people in education. London: SAGE.
Casson, M. (1999). Cooperative forms of transnational corporation activity. Journal of international studies. London: Routledge.
Steib, M. 2008. The legacy that got left on the shelf. Retrieved on 4th October, 2008 from The economist.
Tuch, C and O’Sullivan, N. (2007) ‘The impact of acquisitions on firm performance: A review of the evidence’ International Journal of Management Reviews, Volume 9, Issue 2 pp141 -170