Mergers & Acquisitions
Successful in managing integration processes
©2002
Masterarbeit
124 Seiten
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 […]
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.
Copyright © 2002 by Raphael König.
All rights reserved.
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
-1-
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
-2-
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
-4-
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
-5-
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
-6-
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
-7-
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
-8-
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
-9-
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
-10-
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
-11-
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
A
and the value of firm B is V
B
. The difference between the value of the merged firm
(V
AB
) and the sum of the values of the separated firms is the synergy from the acqui-
sition:
Synergy = V
AB
(V
A
+ V
B
)
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
-12-
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
-13-
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.
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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.
UK
13.8
Mexico
Banamex
Citigroup
USA
12.5
USA
Powertel
Deutsche Tele-
kom AG
Germany
12.3
UK
Billiton plc.
Australia
11.5
USA
AXA Financial AXA Group
France
11.2
South Africa
De Beers Con-
solidated Mines
DB Invest-
ments
UK
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
UK
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-
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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
- Erscheinungsjahr
- 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