Mergers & Acquisitions

König, Raphael

Mergers & Acquisitions

Successful in managing integration processes

von Raphael König (Autor:in)

BWL - Unternehmensführung, Management, Organisation

Zusammenfassung

Inhaltsangabe:Abstract:
There is a wide body of evidence that suggests that the management of human and cultural factors in post-M&A implementation is important and, where it is badly managed, helps to explain why up to two thirds of M&A deals are not deemed to be successful.
This master dissertation discusses, investigates, and reports on research of essentials which make an integration process in mergers and acquisitions successful. The focus of the project is on the consideration of human resource management and cultural integration concerning the pre as well as post-M&A phase. Indeed, integration starts already in the pre-M&A phase with an intensive human capital and cultural due diligence. Thoroughly selected key employees and a highly skilled communication program might be fundamental keeping on the right track. The discussion about cultural integration includes cultural fit, cultural change and managing across national cultures in mergers and acquisitions. Furthermore, a comparison of international human resource management practices in mergers and acquisitions provides some interesting issues in that field.
The factors discussed are based on a wide range of literature corroborated by some empirical findings published by international business consultants and scientists. Ultimately, the absolutely core message of this research is the issue that a comprehensive and sophisticated pre and post-M&A integration management leads to a successful transaction.

Inhaltsverzeichnis:Table of Contents:
AcknowledgementI
AbstractII
Table of ContentsIII
IllustrationsV
List of AppendicesVI
1.Introduction1
2.Research structure4
2.1Aims of research4
2.2Usefulness of the study4
2.3Research objectives5
3.Methodology6
3.1Research methods6
3.2Data collection and analysis7
3.3Propositions8
4.Principles of mergers & acquisitions9
4.1The nature of M&A9
4.1.1Terms9
4.1.2Types10
4.1.3Reasons11
4.1.4Cross-border M&A13
4.2History15
4.3The M&A process18
5.Success factors of mergers & acquisitions22
5.1Successful in business logic23
5.2Get the right understanding of the new business23
5.3Faultless deal management24
5.4Optimal integration and corporate development25
6.The integration process before and after the deal closes27
6.1The Pre-M&A integration phase27
6.1.1Identifying and planning integration27
6.1.2Integration starts with due diligence28
6.1.2.1Human capital due diligence30
6.1.2.2Cultural due diligence32
6.2The Post-M&A […]

Leseprobe

Inhaltsverzeichnis

ID 7120

König, Raphael: Mergers & Acquisitions - Successful in managing integration processes

Hamburg: Diplomica GmbH, 2003

Zugl.: South Bank University, Universität, MA-Thesis / Master, 2002

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M&A - Abstract

-II-

Abstract

There is a wide body of evidence that suggests that the management of `human and

cultural factors' in post-M&A implementation is important and, where it is badly

managed, helps to explain why up to two thirds of M&A deals are not deemed to be

successful.

This master dissertation discusses, investigates, and reports on research of essentials

which make an integration process in mergers and acquisitions successful. The focus

of the project is on the consideration of human resource management and cultural

integration concerning the pre as well as post-M&A phase. Indeed, integration starts

already in the pre-M&A phase with an intensive human capital and cultural due dili-

gence. Thoroughly selected key employees and a highly skilled communication pro-

gram might be fundamental keeping on the right track. The discussion about cultural

integration includes cultural fit, cultural change and managing across national cul-

tures in mergers and acquisitions. Furthermore, a comparison of international human

resource management practices in mergers and acquisitions provides some interest-

ing issues in that field.

The factors discussed are based on a wide range of literature corroborated by some

empirical findings published by international business consultants and scientists.

Ultimately, the absolutely core message of this research is the issue that a compre-

hensive and sophisticated pre and post-M&A integration management leads to a suc-

cessful transaction.

M&A - Contents

-III-

Table of Contents

Abstract... II

Table of Contents ...III

Illustrations... V

List of Appendices...VI

1. Introduction... 1

2. Research structure ... 4

2.1 Aims of research... 4

2.2 Usefulness of the study... 4

2.3 Research objectives ... 5

3. Methodology ... 6

3.1

Research

methods... 6

3.2 Data collection and analysis ... 7

3.3

Propositions ... 8

4. Principles of mergers & acquisitions... 9

4.1 The nature of M&A... 9

4.1.1

Terms... 9

4.1.2 Types ... 10

4.1.3 Reasons... 11

4.1.4 Cross-border M&A... 13

4.2

History... 15

4.3 The M&A process ... 18

5. Success factors of mergers & acquisitions ... 22

5.1 Successful in business logic ... 23

5.2 Get the right understanding of the new business... 23

5.3 Faultless deal management... 24

5.4 Optimal integration and corporate development ... 25

M&A - Contents

-IV-

6. The integration process before and after the deal closes... 27

6.1 The Pre-M&A integration phase ... 27

6.1.1 Identifying and planning integration... 27

6.1.2 Integration starts with due diligence ... 28

6.1.2.1 Human capital due diligence... 30

6.1.2.2 Cultural due diligence ... 32

6.2 The Post-M&A integration phase... 38

6.2.1 Integration of functional areas... 38

6.2.2 Human resource integration management... 40

6.2.2.1 Selecting key employees ... 40

6.2.2.2

Communication... 44

6.2.3 Cultural integration ... 48

6.2.3.1 Cultural fit ... 48

6.2.3.2 An effective integration program for cultural change... 51

6.2.3.3 Managing integration across national cultures... 56

6.3 International human resource management practices in

mergers & acquisitions... 61

6.4 M&A integration controlling... 65

6.4.1 Four areas for measure integration... 65

6.4.2 Methods to measure HR success... 67

7. Conclusion... 71

References ... 75

Appendices... 81

M&A - Illustrations

-V-

Illustrations

List of Figures

Figure 4.1: The M&A wave from 1997 to 2002 ... 17

Figure 5.1: Objective measure of success creating value

in mergers and acquisitions... 22

Figure 5.2: Number of mergers examined by the European Commission... 25

Figure 6.1: Percent of respondents who believe activity is `critical'... 42

Figure 6.2: Four areas for measurement ... 66

List of Tables

Table 4.1: Largest cross-border M&As recorded during 2001... 15

Table 6.1: Stage at which Human Resources becomes involved in the

deal process ... 29

Table 6.2: Four-Phase Communication Process ... 45

Table 6.3: Cultural Conflicts... 49

Table 6.4: The DiscoverFormulate Approach to Cultural Integration... 53

Table 6.5: Comparison of national HRM practices ... 62

Table 7.1: Research Results ... 73

M&A - Appendices

-VI-

List of Appendices

Appendix I:

The Acquisition of Boots Pharma (Case Study)... 81

Appendix II:

Addressing Human Resource Issues (Checklist)... 83

Appendix III:

Cultural due diligence Twelve dimensions

(Additional

Issues)... 92

Appendix IV:

Communications One of the Keys to Merger Success:

AstraZeneca (Case Study) ... 97

Appendix V:

Driving cultural integration with redesigned processes

(Checklist)... 100

Appendix VI:

British and Italian definitions of behaving professionally

(Additional

Issues)

Forging Cultures: The Formation of Marconi

Communications (Case Study) ... 106

Appendix VII: Integration Process Assessment (Questionnaire)... 111

Appendix VIII: Cultural Progress check (Questionnaire) ... 113

Appendix IX:

PowerPoint Presentation (CD-ROM)

The complete dissertation in pdf-format (CD-ROM)... 117

M&A - Introduction

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1. Introduction

In recent years, the number of domestic as well as cross-border mergers and acquisi-

tions has grown significantly. The year 2000 could be titled as `The year of M&A'.

The two biggest transactions were AOL's purchase of Time Warner (USA) and

Glaxo Welcome's purchase of SmithKline Beecham (UK). [The Economist (1)] The

hype of M&A was mostly based on the very well economic environment and there-

fore the extremely bullish stock markets. Some industries were faced on a thoroughly

consolidation like the media industry and the automobile industry. The increasing

importance of information technology (IT) has triggered the fantastic boom on

NASDAQ and provided hundreds of companies high performance. The overall im-

proving share prices have increased the value of such companies in order to evaluate

market capitalisation. Thereby shares became more and more popular as a currency

for M&A deals. Because of the huge bubble at the international stock markets, lots of

shares were top-heavy and deals happened just to get bigger. The motto `eat or be

eaten' occurred to preventing the own company becoming a target itself. That means

deals have obviously taken place without a detailed long-term planning, a clear struc-

ture of pre and post-merger integration as well as adjusting corporate culture, and an

estimation of real value-added.

Worldwide mergers and acquisitions fell to $1.90 trillion, measured by deal value, in

2001, down by 45% from 2000, as a slowing global economy cooled demand for

new deals. [The Economist (2)] According to the business consulting firm Accenture,

was the financial volume of mergers and acquisitions in Germany just 160 billion

Euro in 2001. In addition, the consultants found that about seven billion Euro pre-

dicted synergies have not been realised. [Frankfurter Allgemeine Sonntagszeitung

(2002)] In 2002, the M&A business is likely to decrease again after the low deal-rate

in the previous year. A survey by KPMG found that 2002 the total value of global

M&A deals has fallen 56% from $1.02 trillion in the first half of 2001 to $0.45 tril-

lion in the first half of 2002. Looking at the downturn across the world's major re-

gions, Asia Pacific took the biggest value drop (76%) compared to this time last year,

M&A - Introduction

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followed by USA which fell 61% by value. Western European values fared better at

49% below the first half of last year. The most active nations in the world were USA,

UK, Germany and France. [KPMG (2002)]

Business newspapers such as Financial Times and Wall Street Journal are presenting

immediately on their front page if companies are in talk or already steps further in

negotiation. For instance, the now completed deal between Hewlett-Packard and

Compaq or the spectacular acquisition of Go by EasyJet.

Although, there is currently no huge M&A-wave on the market, the M&A business is

still of high relevance to the present situation. It is no secret that consolidation will

go further in some industries, e.g. the banking sector, which will definitely include

impressive M&A deals. [The Economist (3)] The decision about such transactions is

at least up to the shareholders, who have to be convinced that a deal will provide

additional value for the company's performance.

An excellent concept including a comprehensive and detailed pre-merger strategy, a

thoroughly due-diligence and a smoothly transaction process as well as a sophisti-

cated post-merger integration management is indispensable to be highly successful in

managing mergers and acquisitions. Due to the enormous complexity of such a trans-

action this master dissertation is focused on the pre and post-M&A integration man-

agement particularly on human resource and cultural issues.

After this introduction, the following two sections outline the research structure and

fundamental methodology issues. In detail, section 2 demonstrates the aims of re-

search and underpins the usefulness of the study. Furthermore, this section includes

the definition of seven research objectives. Section 3 considers the relevant research

methodology and explains the data collection and analysis. This section ends with

seven clearly defined propositions.

The literature review of this master dissertation starts with section 4 that identifies

the principles of mergers & acquisitions. This unit gives comprehensive definitions

by characterising the nature of M&A and provides an overview of the historical de-

M&A - Introduction

-3-

velopment concerning the titled field of research. The final consideration of section 4

illustrates the whole M&A process divided in twelve steps.

Section 5 identifies the essential success factors of any M&A transaction. It is highly

important to take all these into account and to be extremely concentrated from the

early beginning to avoid a failure. Moreover, the given issues are supported with

survey data found by McKinsey and KPMG. In addition, section 5 connects themati-

cally the principles of M&A with the specific consideration in section 6.

Indeed, the integration process before and after the deal closes dominates this study.

Section 6 is dealing with this subject comprehensively. The first consideration con-

tents the pre-M&A phase which includes identifying and planning integration as well

as human capital and cultural due diligence. After that the author turns the spotlight

on the post-M&A phase. Its integration issue is threefold: 1. Integration of functional

areas; 2. Human resource integration management; and 3. Cultural integration. In

order to contribute the given elucidation, this section also includes an international

comparison of M&A integration management. The final aspect of the core section

considers controlling of integration in mergers and acquisitions.

Ultimately, a conclusion presents the results of the propositions and gives an overall

recommendation for being successful in managing M&A integration processes.

An extensive appendix contributes the whole master dissertation on different pas-

sages. It includes some case studies, checklists and questionnaires as well as addi-

tional issues. Furthermore, a CD-ROM provides a PowerPoint-Presentation and the

complete master dissertation in pdf-format.

M&A Research Structure

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2. Research structure

2.1 Aims of research

The aims of research for this dissertation and subsequent consideration determine

how mergers and acquisitions must be organised, managed, controlled and inte-

grated. In particular, the importance of highly sophisticated integration management

should demonstrate and confirm the contribution of human capital and cultural issues

on successful M&A transactions. In order to achieve a successful deal it requires

optimal results in all relevant business areas. However, according to Richard Coates,

European partner at Mercer Human Resource Consulting, people issues are often

seen as the most difficult to address in a merger or acquisition. [Coates (2002)]

Therefore, the research is focused on the most relevant success factors and the essen-

tial issues concerning the integration process before and after a deal closes to outline

the rising significance of integration in a global business world.

2.2 Usefulness of the study

The study should be useful to achieving successful mergers and acquisitions. It

makes obviously sense to point out the indispensability of integration management in

mergers and acquisitions. This is because of the high failure rate in mergers and ac-

quisitions and the fact that an enormous number of transactions do not provide any

value added due to the often less considered integration management concerning

human resource and cultural aspects. Indeed, the most successful mergers and acqui-

sitions are those where companies devote significant time and attention to the people

issues.

M&A Research Structure

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2.3 Research objectives

In addition to the aims of research some objectives are listed below to identify

clearly the purposes of the study.

1. To provide a brief introduction to the field of mergers & acquisitions. That

means, outline basic principles of mergers & acquisitions, define aims and incen-

tives of M&A deals, consider the history and characterise the process of M&A

transactions.

2. To examine key success factors for achieving high value added through efficient

M&A management.

3. To identify the importance of pre-M&A integration management including plan-

ning and due diligence and demonstrate these theoretical implications by provid-

ing a practical example in form of a company profile.

4. To identify the significance of post-M&A integration management particularly

the human resource issues and cultural aspects in the case of cross border transac-

tions and evaluate the success of cultural integration to the sensitivity of a com-

pany's overall performance.

5. To demonstrate and compare international human resource management practices

concerning mergers and acquisitions.

6. To provide an insight of integration controlling that means to identify methods to

measure integration as well as human resource success.

7. Ultimately, to conclude the dissertation with a critical result of the investigation

and give an outlook to expected developments.

M&A Methodology

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3. Methodology

"Methodology is the overall approach to the research process."

M.Saunders

3.1 Research methods

Within the following, it is explained the research approach that is chosen. The ap-

proach is clearly related to the suggested content of the dissertation. Generally speak-

ing, literature on academic research identifies two approaches or research paradigms,

quantitative and qualitative. Quantitative (positivist) is based on the natural sciences.

It seeks the facts or causes of social phenomena, with little regards to the subjective

state of the individual. Qualitative (phenomenological) stresses the subjective aspects

of human activity by focussing on the meaning, rather than the measurement of so-

cial phenomena. [Saunders et al. (2000) pp. 85 et sequence]

The dissertation is based on literature research; no questionnaires have been under-

taken. However, as mentioned in the research objectives, theoretical arguments and

conclusions are illustrated with practical examples and company profiles.

The topic has demanded qualitative consideration supplemented conceivably by

some numerical work to generate a comparison or draw a conclusion of performance

in mergers and acquisitions. All the literature referred to summarises the essence of

mergers and acquisitions into some key issues and considerations, respectively.

To conclude, the research paradigm is mostly determined by the nature of the re-

search problem to investigate. In this particular research study, the research problem

concerns "Mergers & Acquisitions: Successful in managing integration processes"

and is of a qualitative rather than quantitative nature. Therefore, the underlying ap-

proach is qualitative.

M&A Methodology

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3.2 Data collection and analysis

In both research approaches, the intention is to collect data regarding significant

variables. There are two main sources of data, primary and secondary data. Primary

data is original data; secondary data is data that already exists. Data can also be de-

scribed in terms of the type, as qualitative or quantitative. Qualitative data is con-

cerned with qualities and non-numerical characteristics, whilst quantitative data is all

data that is collected in numerical form. [Saunders et al. (2000) pp. 150 et sequence]

As outlined in the previous section, initial research was carried out via conventional

academic methods. Keyword searches for books, journals, and articles containing the

words `Mergers and Acquisitions', `Integration management', `Cultural change',

`Cultural fit', `Managing across national cultures', `Human resources in mergers and

acquisitions' and `Planning and integration of M&A deals' were undertaken at the

Perry Library, South Bank University London; Fachhochschule Mainz, University of

Applied Sciences, and many other worldwide academically recognised universities.

As the subject is particularly contemporary and of principal interest within the busi-

ness community, academic journals were investigated comprehensively. The next

avenue of research was the Internet in order to achieve pragmatic insights into the

research topic.

The mainly qualitative collected data are analysed and assimilated. One possible ap-

proach is to quantify the data, either formally or informally. The other possibility

employs non-quantifying methods. In the case of a phenomenological paradigm, the

analysis should follow the informal, quantifying method. Problems in terms of ana-

lysing data occur regarding reliability and validity due to the fact that both issues are

overwhelmed within the credibility of the research findings. Furthermore, generalisa-

tions made by previous research might be a limiting factor. [Saunders et al. (2000)

pp.150 et sequence] This master dissertation about "Mergers and Acquisitions" em-

ploys the approach of quantifying data and addresses research limitations within the

conclusion.

M&A Methodology

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3.3 Propositions

1. Mergers and acquisitions are a driving force in consolidating industries on a na-

tional as well as international scale.

2. The intensity of integration is associated with achieving predicted synergies.

3. A comprehensive and sophisticated pre and post-merger integration management

leads to avoid a failure.

4. Human capital and cultural due diligence requires more time and money rather

than contributing integration management.

5. A thoroughly implemented and encroached corporate culture adds significant

benefit and improves a company's performance.

6. Different cultures imply different human resource management practices in

mergers & acquisitions.

7. Human resource integration managers use controlling methods to demonstrate the

importance of their function in mergers and acquisitions.

M&A Principles

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4. Principles of mergers acquisitions

4.1 The nature of MA

Nowadays, the term mergers acquisitions is one of most used terms in strategic

management and investment banking. The MA business is therefore one of the core

activities for consultants and a highly profitable sector of financial advisory services.

One essential criterion explaining the central position of managing MA deals could

be seen in the extreme complexity of such a transaction. Before consolidating the

topic it is quite useful to make some definitions and explanations here at the starting

point of the literature review.

4.1.1 Terms

Mergers

"A merger is a transaction in which two firms agree to integrate their operations

on a relatively coequal basis because they have resources and capabilities that to-

gether may create a stronger competitive advantage." [Hitt, Ireland (1999) p.239]

The merger between Daimler-Benz AG and Chrysler Corporation is an example.

Acquisitions

"An acquisition is a transaction in which one firm buys controlling or 100 percent

interest in another firm with the intent of more effectively using a core compe-

tence by making the acquired firm a subsidiary business within its portfolio."

[Hitt, Ireland (1999) p.239] The acquisition of TCI by ATT is an example for a

typical acquisition.

Takeovers

"A takeover is an acquisition in which the target firm did not solicit the bid of the

acquiring firm." [Hitt, Ireland (1999) p.240] The term takeover refers most of the

MA Principles

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times to unfriendly takeovers, so-called hostile takeover. An example for a hos-

tile transaction is the acquisition of Mannesmann by Vodafone.

4.1.2 Types

Horizontal MA

"A company that is seeking to strengthen its current link or links in the value

chain by acquiring competitors or similar businesses in a different geographic

area is undertaking a strategy of horizontal integration. [Chorafas (1988) p.307]

Some of Cisco Systems' acquisitions involve niche companies whose technology

and core business fill Cisco's strategy of providing a comprehensive end-to-end

networking solution.

Vertical MA

"A company that remains in the same industry but seeks to participate in other

links in the value chain by, for example, acquiring suppliers or production

technology, or acquiring sales or distribution capacity, is undertaking a strategy

of vertical integration. [Chorafas (1988) p.307] The acquisition by the drug com-

pany Merck of the pharmaceutical benefits management company Medco is an

example of this strategy.

Diagonal MA

"A company that pursues an acquisition that involves both horizontal and vertical

elements is undertaking a strategy of diagonal integration. [Chorafas (1988)

p.307] The AOL Time Warner deal is an example of diagonal integration.

Conglomeration

"A company that makes acquisitions across disparate industries is undertaking a

conglomerate strategy. [Chorafas (1988) p.307] The acquisition by Philip Morris

of General Foods is an example for such a strategy.

MA Principles

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4.1.3 Reasons

Before assessing the strategic acquisition process and particularly the integration

concepts, a closer look on the motives for MA is indispensable. Many firms have

several reasons for considering an acquisition project. In the following these reasons

are described.

Suppose firm A is taking into account acquiring firm B. The value of firm A is V

and the value of firm B is V

. The difference between the value of the merged firm

) and the sum of the values of the separated firms is the synergy from the acqui-

sition:

Synergy = V

+ V

)

Synergy is the amount of the increased value after a combination, in other words

2+2=5. The concept of synergy can be separated into two basic categories as reasons

for MA:

1. Market synergies

Market share

Companies frequently acquire to increase their market share and with many care

and effort, this can be achieved. It is not clear how greater market share, per se,

would necessarily contribute to increasing shareholder value and why it would

not be more beneficial to shareholders to build up this market share internally.

The acquired company may be profitable at present but often has to be changed

radically and expensively before synergy can be achieved. [Bengtsson (1992)]

Market power

Market power is different to market share and is determined through size, re-

sources and capabilities to compete on the marketplace. Synergies can be

achieved by buying a competitor, supplier or a distributor or a business in a re-

MA Principles

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lated industry to exercise core competencies and gain competitive advantage.

[Bengtsson (1992)]

2. Cost reduction synergies

Economies of scale

If the average cost of production falls while the level of production increases,

there is said to be an economy of scale. Economies of scale are one benefit of

horizontal MA. This refers to the sharing of central facilities, e.g. corporate

headquarters, top management, production areas etc. [Buckley et al. (1998)]

Economies of vertical integration

The main reason for vertical acquisitions is a better co-ordination of related oper-

ating activities although the industries are not related. This is probably the reason

why most airline companies own aeroplanes or why some airline companies pur-

chased hotels and car rental companies. The transfer of technology is another rea-

son for economies of vertical integration. [Buckley et al. (1998)]

Complementary resources

Some firms acquire others to make better use of existing resources or to increase

their core competencies. E.g. a ski-equipment store could merge with a golf- or

tennis-equipment store to produce more sales in the winter and the summer sea-

son and to learn from each other to increase competencies. [Buckley et al.

(1998)]

3. Other reasons for MA

- Foothold in foreign markets (Cross-border MA)

- Tax considerations

- Cost of new product development (RD)

- Lower risk compared to developing new products

- Increase speed to market

- Maximise shareholder value

[Hill, Jones (1994)]

MA Principles

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4.1.4 Cross-border MA

"Cross-border MA boom continues purchasers pay record prices for US and EU

targets" this statement by KPMG (1999) described the situation of the worldwide

MA market in recent years and documented also the trend to merge across borders.

As Hannah points out, production processes and markets are becoming increasingly

complex; moreover, the skill mix of different country workforces is varied. Cross-

border MA then can be viewed as an important instrument for an efficient alloca-

tion of resources. Sizeable synergies can be achieved through them. [Hannah (1993)]

Before looking closer to cross-border MA motives, we must distinguish between

mergers and acquisitions, as both are types of externally created business corpora-

tions.

Cross-border mergers are the result of the increasing globalisation of markets. If two

companies located in different countries want to extend their areas of production and

sales, then cross-border mergers provide an effective way for both companies to

achieve their objectives. They must not give up their identity, and the voting power

of their shareholders will shrink, but not disappear. Worldwide capacity surpluses,

technological innovation, or regulatory changes may drive cross-border mergers. An

example of such a new regulatory system is the EU with the single European cur-

rency. [Schmidt (1999)]

In case of cross-border acquisitions, companies will find it easier and cheaper to buy

a company than grow by internal activities such as building brand names overseas.

What cross-border mergers and acquisitions have in common is the desire to expand

into a new market. The acquiring company will then not only buy the usual tangible

assets of the target, but also intangible ones, the most valuable such as market

knowledge and business practices. The creation of such `information synergies' is

one of the most appealing features of cross-border MA, as Davis, Shore and

Thompson (1993) point out.

MA Principles

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Cross-border MA has reached Europe during the mid 1990s and other parts of the

world. For example, the largest hostile transaction attempt in French history with

Assicurazioni General (Italy) acquiring Assurances Generales de France (AGF). The

merger between Daimler-Benz AG and Chrysler Corporation may also be a good

example for a cross-border merger. Cross-border MA for European firms are

driven by the objective to compete successfully with other international firms, so

they must have a global or at least a European presence.

Cross-border MA also expand well beyond Europe, e.g. Mexico's CEMEX has

started a worldwide expansion strategy, primarily using acquisitions to expand into

new markets. Since 1989 CEMEX has grown through MA to the third largest ce-

ment maker globally. Primary operations outside Mexico are the United States,

Spain, Central and South America and the Caribbean. Mergers and acquisitions

across borders are also increasing in other Latin American countries, such as Brazil,

an attractive market for foreign firms. [Hitt (1999)] The trend toward global MA is

likely to continue for years to come and a professional and strategic approach is get-

ting more and more important and indispensable.

However, the growth rates are generally lower after the technology bubble, which

caused the MA hype from 1999 to the middle of 2001. The decline in cross-border

as well as domestic MAs in 2001 is related to the slowdown in the world economy.

The prices of shares which in 2000 were used to finance some 56% of cross-border

MAs fell significantly. A lull in the consolidation processes in certain industries

through MAs (e.g. telecommunications, automobiles) also plays a role. The value

of cross-border MAs completed between January and early September 2001 stood

at some $400 billion, about one third of the total value in 2000. The number of mega

deals (deals exceeding more than $1 billion) during the same period was 75, worth

$253 billion, which corresponds to some 40 % of the total number and 30% of the

total value of mega deals in 2000. [UNCTAD (2001)]

Table 4.1 shows the biggest cross-border MAs within the first eight months of

2001.

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Host country

Acquired

company

Acquiring

company

Home country

Value

($ billion)

USA

VoiceStream

Wireless Corp.

Deutsche Tele-

kom AG

Germany

24.6

Germany

Viag Interkom British Tele-

kom plc.

13.8

Mexico

Banamex

Citigroup

USA

12.5

USA

Powertel

Deutsche Tele-

kom AG

Germany

12.3

Billiton plc.

Australia

11.5

USA

AXA Financial AXA Group

France

11.2

South Africa

De Beers Con-

solidated Mines

DB Invest-

ments

11.1

USA

Railston Purina Nestlé

Switzerland

10.4

USA

CIT Group Inc. Tyco Inter-

national Ltd.

Bermuda

10.2

USA

ATT Wire-

less Group

NTT DoCoMo

Inc.

Japan

9.8

PowerGen plc. E.ON AG

Germany

7.3

Table 4.1: Largest cross-border MAs recorded during 2001 (first eight months)

Source: UNCTAD (2001)

4.2 History

A historical perspective on MA activity contributes to an understanding of the stra-

tegic drivers of successful transactions. This overview reveals that MA activity

over the past century has been driven by a wide range of forces, including techno-

MA Principles

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logical innovations, economic conditions, regulatory developments, and innovations

in financial products. Today, the world is faced by the fifth wave of significant MA

activity in economic history.

The first wave of MA, which began at the turn of the last century (late 1890s to

early 1900s), was concentrated in mining and manufacturing. This MA activity was

characterised by horizontal mergers, which were an attempt to achieve economies of

scale. Strategic manager were convinced that growing the total size of one's com-

pany through MA would lead to lower per-unit costs and thus greater efficiency.

During this wave firms such as General Electric and Eastman Kodak were formed,

which are still successful global players in these days.

The second wave of MA activity took place from the mid-1910s until the stock

market crash of October 1929. This wave was fuelled by the post-World War 1 eco-

nomic boom. During this wave horizontal mergers continued to be the norm, but also

vertical transactions played a significant role. The industries affected by the MA

activity at this time were mainly primary metals, petroleum products, chemicals, and

transportation equipment. As in the first wave, big companies were formed, for in-

stance General Motors and IBM.

The third wave ran from the mid-1960s to the end of the 1960s. This wave was char-

acterised by the booming economy and the bullish stock markets. Furthermore,

firms started growing through diversification. The high activity of acquisitions out-

side the core industries created large conglomerates, e.g. ITT. Many of the cross-

industry acquisitions of this wave were sold off in the following decades, mainly due

to the fact that the acquirers had overpaid for the companies they bought.

The fourth wave occurred during the 1980s and was essentially characterised by hos-

tile takeovers, corporate raiders, and leveraged buyouts (LBO). This wave included

big deals such as the acquisition of Kraft by Philip Morris and the merger of Bristol

Myers with Squibb.

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The fifth wave started in the mid-1990s and had its peak in 2000 with a series of re-

cord transactions. Some of the biggest deals include the Citycorp-Travelers merger,

the Daimler-Chrysler merger, and the AOL Time Warner merger. The `merger ma-

nia' was basically supported by the rising stock prices on the international financial

markets particularly through the high new economy" securities. Thus, many compa-

nies were extremely overvalued at this time. Since the end of 2001, the valuation of

almost all companies began to return to more realistic levels therefore the MA ac-

tivity fall equally. [Borghese, Borgese (2001)]

Figure 4.1 illustrates the recent MA wave, which makes the up and down trends

visible.

Figure 4.1: The MA wave from 1997 to 2002

Source: The Economist [The Economist (4) (2002)]

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4.3 The MA process

The MA process is definitely a highly complex procedure. However, the complex-

ity depends on the transaction form (merger, acquisition, or (hostile-) takeover), the

involved companies (size, industry, location (possibly cross-border deal), market

position and financial situation) and market regulations. Thus, each MA deal face

its individual process including approach, concept, negotiation, timescale, and inte-

gration.

According to Daniel and Metcalf (2001), a usual MA transaction is characterised

by the below considered steps. In chronological order, such a merger or acquisition

most typically includes twelve steps:

1. Identifying target or candidate companies

The choice of potential MA partners is primarily to add economic value. Poten-

tial partners are mostly in similar or complimentary lines of business. It is to a

great extent a matter of finding another company in the right businesses and mar-

kets with current interest or availability in joining forces at the right price. More-

over, to find the best organisational partner also means finding the right people

and dealing with each other in ways that achieve common goals.

2. Narrowing the field of choices

Narrowing the field is a step forward of getting realistic. Many companies might

be interesting, but in most cases, the majority is not really interested or available.

At this step of the process it is very important to make the right decision from a

purely factual point of view.

3. Selecting `first choice' companies

The first-choice company should be the ideal one or simply the best alternative

available under the given circumstances. A high degree of MA activity in an

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industry can accelerate the `first choice' because of decreasing choice of avail-

able targets.

4. Reviewing regulatory compliance

This step of the process is mainly a search for any regulatory (e.g. environmental

or legal) pitfalls. That means this stage is preparation for a valuation by regula-

tory agencies, such as the European Commission. However, information about

regulatory compliance problems will often only be factored into decision-making

in the light of larger prospects for the deal.

5. Conducting preliminary discussion

In this stage of the process, gathered information is used to create a first concept

of the potential deal. An essential piece is the initial valuation of each company,

to be reflected in the total value of the deal, whether in stock, cash, or both.

6. Signing a letter of intent

Signing a letter of intent occurs if discussions have been successful and plans for

a deal are formalised between the parties. This moves the process from one of in-

vestigation to one of purposeful activity. The signing is the beginning of real

changes in both companies.

7. Conducting due diligence

The due diligence process is another step of valuation the involved companies.

Particularly a closer look to the financial statements and the regularities about re-

porting or transactions take place. The core questions of this investigation is

whether the company is what it represents itself or are there any `skeletons in the

closets' which will present later problems?

In many cases due diligence does not include any analysis about culture and

people. According to the high failure rates in mergers and acquisitions it is very

short-sighted to ignore the human side.

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8. Completing the financial negotiations

Completing the financial negotiations means fixing the value of each company.

In the case of an acquisition it includes also the price of the transaction by cash or

like in the case of a merger, the number of exchanging shares. High share prices

such as the `dot.com' securities in 2000 do not always reflect a realistic worth of

a company. Thus, estimation by market capitalisation often differs from evalua-

tion by generally accepted accounting principles.

9. Signing the definitive agreement

It often takes a long time and endless negotiations to work out the final agree-

ment about the transaction. The signatures under this contract should represent

the end of a decision-making process and the beginning of transferring plans in

reality.

10. Announcing the deal

However, making the transaction public does not mean that the deal is done. De-

pending on the nature of the deal and the companies involved, it can take some

time to closing the transaction because of questions, valuations, and investiga-

tions from employees to shareholders, media, financial analysts, government, and

regulatory agencies. Such issues include, for instance, the closing of business

sites, layoffs of employees, relocation of headquarters, and shifts in marketplace

competition.

11. Closing the transaction

According to the noted reasons in the previous step, the time between the public

announcement of a deal and its finalisation can vary from days to months. It de-

pends mostly on the level of scrutiny required by regulatory agencies, but further

negotiations between the companies (e.g. about key positions) can sometimes

drag on as well. On the other hand, pressure to get a deal done can also happen

thereby, decisions will be put off until after the signing of the agreement.

Details

Seiten
Erscheinungsform: Originalausgabe
Jahr: 2002
ISBN (eBook): 9783832471200
ISBN (Paperback): 9783838671208
DOI: 10.3239/9783832471200
Dateigröße: 1 MB
Sprache: Englisch
Institution / Hochschule: South Bank University London – International Business
Erscheinungsdatum: 2003 (August)
Note: 1,0
Schlagworte: strategic management integration cultural people

Autor

Raphael König (Autor:in)