Issues Can Arise with the Merge of Two Companies or Acquisition - Research Paper Example

 Issues Can Arise With the Merge of Two Companies or Acquisition Introduction Mergers and acquisitions have emerged to be a common phenomenon in the business environment of the 21st century. Economic fluctuations and its influences in terms of shocks can be regarded as one of the reasons to influence the merger and acquisition activities (Bischoff, Sallstom & Danylow, 2011). Apart from this, two companies often opt for acquisitions or mergers due to many reasons. It is one of the favored methods used by the companies to achieve growth targets, to comfort key stakeholders and to increase shareholder value (Mcdonald & Et. Al., 2005). According to Pautler (2001), ‘decisions to merge are part of a broader strategic plan aimed at positioning the firm to achieve some long-term goal’. It is in this context that the merger and acquisition process can give rise to various issues or problems creating a significant impact over the achievement of the objectives determined by the organization. Based on a similar perception, this paper is about the issues which arise with the merger or acquisition of the two companies. Theoretical explanation to merger and acquisition The fundamental motive of merger is that it can prove to be a profitable investment for the buyer company rather than the company which liquidates and thus can be referred as an alternative type of investment. Companies opt for acquisition when it proves to be profitable for capacity enhancement, for entering in a new product or geographical areas, for obtaining knowledge and enhancing skills, and for transferring assets of the company into the control of the most efficient managers or owners. Mergers can be divided into two categories, i.e. horizontal merger and vertical merger (Pautler, 2001). Horizontal mergers arise when two companies are from same industry background, with similar product range, structure and target markets are combined. The companies go for horizontal merging activity to increase the strength in its market position in terms of competitive advantage. For instance, combination of two manufacturing plants enhances the production capacity of the merged company followed by a workforce reduction, decrease in the excess capacities, and gaining market share through the competitive advantages as well as reduction in cost by sharing administrative structure with the help of horizontal mergers (Bischoff, Sallstom & Danylow, 2011). Vertical mergers occur in the companies which are operating at different stage leading to combination of the production and value chains. There can be upstream mergers as well as downstream mergers in the vertical merger activity. Downstream mergers are more common than upstream mergers because companies need to be in a strong bargaining position. There is another factor if the suppliers are specialized in certain products or services where there is a requirement of superior expertise gaining dominance in the negotiation process. The main intention of vertical mergers is to reduce costs with the interlinked processes where more than one party is involved to gain better control on the market happenings. It also helps to cut back on transaction costs to have immediate access to resources avoiding uncertainty and minimizing contractile costs (Bischoff, Sallstom & Danylow, 2011; Pikula, 1999). Conglomerate merger is also a kind of merger in which two companies operating in different industries merge to diversify their risk. Notably, conglomerate takeovers are regarded to have a significant impact over organizational cultural changes (Bischoff, Sallstom & Danylow, 2011). According to Pikula (1999), “acquisition can be defined as the possession of a controlling interest in another company, a legal subsidiary or selected assets”. ‘Acquisition’ can also be termed as takeovers. The buyer company can also term it as ‘purchase’, where the acquired company becomes the part of the buyer. There are many reasons for the acquisition, some of them being financial reasons as the purchaser company expects the value of asset will do better than the price paid for the acquisition. When a company acquires other company through stock purchase then the acquired company can continue to exist as a legal subsidiary of the acquirer. If a company acquires other company it does not necessarily mean that the entire company is purchased and cannot be termed as a separate entity any further, but it can also be stated as acquisition by parts (Bischoff, Sallstom & Danylow, 2011; Pikula, 1999). However, it should be mentioned that the success of merger or acquisition depends upon the cultural compatibility of the two companies to a large extent. In spite of the cultural fit, there is involvement of conflict in all mergers and acquisitions. In the conflict stage the two companies intend to overcome their difficulties either by positive strategic implementations or by negative strategic implementations. In a positive adaptation, the agreement reaches with a concern of operational and cultural elements and in negative adaptation, the conflict will be strongly hindering employees’ satisfaction level as well as soaring turnover rates. This can consequently result in operational under-performance (Pikula, 1999). Major issues of merger and/or acquisition There are various issues that may arise due to merger and acquisition processes. Every modern organization is quite different from another organization not only in terms of operational processes, but also in terms of culture and structure. It is in this context that merger and acquisition can lead to anxiety and stress within the employees working in the organization. According to Pikula (1999), employees can respond to the news of merger in several ways. Mostly, the response obtained from the employees is observed to be negative as a depiction of their reluctance to change. These emotional reactions can be in terms of denial, fear, anger or even sadness. Notably, as per the theory of Pikula (1999), once the employees confirm their acceptance of the merger or acquisition, they tend to reflect positive emotions in terms of relief, interest, liking and enjoyment as well. The various stages of merger emotions syndrome can be explained with the help of the below illustrated figure: Source: (Pikula, 1999) Mergers and acquisition have become one of the important tools for the execution of corporate strategies and reallocation of resources. Companies often consider mergers and acquisitions because of the increasing competitive forces in the industry. After the financial crisis there was a decline in the merger and acquisition activity. The investors and shareholders became cautious after the recent economic downturn. In this current scenario, merger and acquisition activity has just become an inflationary term. The issues regarding merger and acquisition are not only driven by logical implications such as value enhancement, but also by power displaying social behavior and status of the companies. The companies have found a platform to show their power in terms of wealth and the ability to buy the competitors. From the recent data of 2011, it has been observed that there is an overvaluation of merger and acquisition activity in terms of investment due to changing managerial behavior. To prevent this, there have been issues stated regarding the logical viewpoint from the management and implementation of legal rules to protect shareholders. To avoid the uncertainty and for successful decision implementation, accuracy should be maintained for the measurement of the value of mergers and acquisitions (Bischoff, Sallstom & Danylow, 2011). There are various merger and acquisition motives. Some of them include efficiencies, financial and tax benefits, market power effects, obtaining a good buy and stakeholder expropriation. Considering the efficiencies when one company merges with another or attains its assets, it generates a market for corporate control. With the help of mergers or acquisitions, companies combine their operations of business assets which help to reduce production costs, improve the quality of product, increase in the output and also provides new product to the market. There can be increased operational as well as managerial efficiencies with the help of mergers or acquisitions (Bhatia, 2009). Operational efficiencies can arise from economies of scale, systemized resource allocation, transferring to a cost effective production technology and enhanced use of information and expertise. Another merger and acquisition motive is financial and tax benefit to the company. Companies can diversify their earnings by the process of merger or acquisition. It helps to lessen the disparity in the company’s profitability and reduces the risk of bankruptcy and its employee costs. Market power effects are also one of the motives for merger or acquisition of companies. Obtaining a good buy is also one of the motives of merger or acquisition. According to Pautler (2001), another motive for merger or acquisition is Stakeholder Expropriation. Generally mergers and acquisitions are inspired by a desire to impound gains from the taxpayers, laborers or consumers and bondholders (Pautler, 2001). It is worth mentioning that despite of such innovative motives and promising outcomes, mergers and acquisitions often fail due to various issues apart from the human resources related issues mentioned above. One of the main reasons for the failure of mergers or acquisition is the poor strategic foundation of merger or acquisition. When two companies are merged or one company acquires the other, there is a mismatch of cultures of the two companies which can result in the failure of merger or acquisition. Once the two companies are merged, there are chances where difficulties can arise in communicating and executing the organization. Poor combination of planning and execution can also lead to failure of merger or acquisition. In the process of merger or acquisition, the company has to pay huge amount for the targeted company which can in turn have a substantial impact over the financial viability of the company. Of all the above reasons, the most important reason for the failure is the poor strategic foundation of merger or acquisition and to overcome this failure there should be clear strategic foundation for the merger. The clear foundation will help to conduct pre-merger and post-merger actions (McDonald & et. al., 2005). Issues related to the mergers and acquisitions processes also include the ethical concerns of leadership. As stated by Bruner (2004), CEOs targeting a merger or acquisition of a firm by another firm requires presenting detailed and well-structured financial disclosures indicating the financial viability of the company to its probable buyers or partners. It has often been observed in this context that CEOs tend to practice “prettying up” or manipulating the financial disclosures in such a manner so as to have a positive impression on its buyer. Moreover, organizational leaders are also often observed to use the tactic of paying a “greenmail” to the raider in order to secure an attempt of hostile takeover. However, in these cases, it becomes quite vague whether any unethical or unjustifiable behavior has been committed by the organizational leaders deliberately with the purpose of attaining the complete advantages of a merger or an acquisition. It is worth mentioning in this context that the ethical issues linked with a merger or an acquisition is often vague apart from any legal offences caused by the company officials ultimately leading to the failure of the process. Hence, ethical considerations should also be taken into consideration with due significance in order to avoid the failure of the process (Bruner, 2004). Conclusion and recommendations For the success of merger and acquisition activity in the organization, a proactive strategy should focus upon corporate culture and human resource issues. The companies do not consider these types of issues as a serious matter until and unless serious difficulties are caused. Management usually fails to acknowledge that human resource related issues along with culture issues that often causes merger to fail. The managers should recognize that it is a noteworthy issue for employees in determining merger and acquisition outcomes in reality (Schuler, Jackson & Luo, 2004). The commitment and cooperation from the employees who are associated with production, decision making and application of the strategies is required for the success of merger and acquisition process. A cautious proactive planning is required before acquisition or merger is taking place for any company. It reduces the emotional fallout and helps in the transition which ultimately reduces the risk of failure and work as an advantage for merger and acquisition process. Conclusively, it can be stated that mergers and acquisitions are quite challenging as a process to be executed by companies with minimum issues. A company might have to face significant challenges in terms of human resource issues, financial matters and even in terms of ethical dilemmas (Pikula, 1999). References Bischoff, A. L., Sallstom, L. & Danylow, J. A. (2011). Mergers & Acquisitions: A Trendy Fad or Sustainable Value Creation? Norderstedt Germany. GRIN Verlag. Bhatia, S. K. (2009). HRM in global scenario: practices and strategies for competitive success. India. Deep and Deep Publications. Bruner, R. F., (2004). Applied Mergers and Acquisitions. New Jersey: John Wiley and Sons. McDonald, J., Coulthard, M. & De Lange, P. (2005). Planning for a successful merger or acquisition: lessons from an Australian study. Journal of Global Business and Technology. 1 (2). pp. 1-11 Paulter, P. A. (2001). Evidence on mergers and acquisitions. Bureau of Economics. Pikula, D. A. (1999). Mergers & Acquisitions: Organizational Culture & H R Issues. Industrial Relations Centre. Schuler, R. S., Jackson, S. E. & Luo, Y. (2004). Managing human resources in cross-border alliances. London. Routledge. Bibliography Haushalter, D. & Lowry, M. (2012). When Do Banks Listen to Their Analysts? Evidence from Mergers and Acquisitions. Retrieved from http://rfs.oxfordjournals.org/content/24/2/321.short?rss=1 Heidric & Struggles. (2006). Mergers & Acquisition. Retrieved from http://www.directorsandboards.com/BBFall06.pdf Kling, L. R. & Simon, E. N. (1992). Negotiated acquisitions of companies, subsidiaries and divisions, Volume 1. Newyork. Law Journal Press. Read More