Influence of Mergers on Firm Performance - Term Paper Example

Introduction Mergers and acquisitions is a practice concerned with the purchase, sale or integration two or more companies in a bid to improve performance. They are among the strategic responses undertaken by firms to cope with a changing competitive environment. Merging firms increase the resource base of the resultant company thereby boosting growth without necessarily developing another unit. The process of mergers is usually long and complicated, depending on various factors that influence the outcome, which may be a success or failure. The result of a merger may therefore have a positive or negative influence on a firm’s productivity. This paper draws on theory and evidence in evaluating the extent to which mergers influence the performance of firms. Influence of Mergers on Firm Performance Mergers increase market power of firms, which is the ability to influence the price and supply of a commodity in the market without affecting customer loyalty (Peterson, 2002). The merging firms within a particular industry are able to establish a monopoly that is capable of controlling the quantities and prices of commodities produced. On the other hand, as DePamphilis (2002) observes, merging increases the competitive advantage of firms over competitors. A market leader results from mergers so long as government policy favors a monopolistic market and hence with the perspective of market power, mergers can be considered to have a positive influence on a firm’s performance. Organizational effectiveness can also be accomplished through mergers that pool resources from the merging organizations to form one firm with a strong resource base. A firm that has success to sufficient resources is capable of maintaining a competitive advantage. A business with sufficient resources is likely to succeed in the long run especially due to the fact that it is able to utilize emerging opportunities (DePamphilis, 2002). Such a business is likely to be competitive because they are capable of adopting emerging inventions in the market before competitors with meager resources. For example, if a new technology for production is realized, an organization with ample space and finances can set up a pilot project to run concurrently with the existing production system. This allows the firm to have sufficient time to test the applicability of emerging inventions; hence it can not incur heavy losses. Moreover, merging firms enjoy the economies of scale due to the combined production (Sudarsanam, 2004). Mergers increase the new firm’s market share as a result of the amalgamation of the different levels of market share existing before the merger. In other words, firms do not lose their customers after the merger. A successful merger requires that each firm accounts for its input in to the merger, including its human resources and customers. A greater market share resulting from the merger leads to economies of scale, increased turnover and hence increased profitability (Bruner & Perella, 2004). Tax reduction has significant implications on a firm’s profitability. Each firm submits tax as a single entity depending on the level of profits. When a firm’s external environment is unfavorable and makes losses yet it continues paying taxes, a merger comes in hardy to save it from collapse. Merging with a larger profit making company enables the loss making firm to continue producing while the larger firm enjoys a tax advantage. This may not be a favorable merger for the loss making firm and hence it may not have any positive impact on performance (Sudarsanam, 2004). Mergers develop a positive outlook of the new organization with regards to the stock market. The larger organization has the capacity to maintain stock stability than the original smaller firms. This stability is significant in maintaining the confidence of investors in the stock market, which on the other hand translates to a strong capital base that is necessary for a firm’s long term strategic objectives. Moreover, the merging firms are capable of maintaining a large geographical coverage especially for cross border mergers. Moreover, a large company has a high potential for establishment of subsidiaries over a wide area than a smaller company. Small companies can take advantage of such opportunities to establish in foreign markets (Bruner & Perella, 2004). Technological transfer is a critical component for high performance. Organizations benefit from technological transfer when they merge and share expertise and ideas with regard to new production processes. Sharing experiences with regards to outsourced technologies is significant in determining future outsourcing strategies. Moreover, the emergent company benefits from diverse human resources from both companies. Each company has unique strengths that can be combined to establish a competent and productive workforce (Bresman et al. 1999). A firms’ visibility among its consumers and investors is also improved through mergers. A big firm is believed to be competitive in the market. Nevertheless, this does not help to solve the problems initially faced by the individual firms since the merger is only intended to make the firm look fascinating to customers and investors (Pablo & Javidan, 2001). Even though there are many positive implications of mergers on a firm’s performance, there are various negative aspects that emerge. Demoralization of employees is one of the negative aspects that may lower performance. There is usually a tendency for employees from one of the organizations to view their counterparts as intruders in their workplace. Differences in organizational culture are usually exhibited in organizations through several aspects such as; organizational structure, bureaucracy, leadership style and organizational principles. Difficulties in mergers usually arise when there happens to be large gaps with regards to organizational culture (Gunter and Andreas 2008). In most cases, this stand point results in dissatisfaction and rejection of the new organization’s employees. Differences in organizational culture may generate a feeling of superiority among those from the larger company thereby lowering the productivity of employees from the smaller company (DePamphilis, 2002). The dominant culture in the emerging organization is most likely to be that of the larger organization while minority cultures tend to be ignored. This is comparable to the superior company discrediting the capabilities of the other, and making it mandatory for the smaller organization to adopt the new culture (Gunter & Andreas, 2008). Under such circumstances, the merger may fail to positively influence the performance of any of the organization since non will acknowledge to be branded as inferior, especially considering that there are various strengths in either organization. This may cause the break off especially if the driving force for the merger was the desire to expand the production capacity and increase visibility to consumers (Hitt et al. 2001). The implications of mergers on job security are far reaching within the two organizations. The prolonged process of restructuring for the merger to work generates insecurity among workers with regards to job loss especially for the jobs that are duplicated by the merger (Sudarsanam, 2004). Due to the long time that managers in each firm spend in the negotiation process, work processes are negatively affected. Moreover, the firm sacrifices significant resources that increase the firm’s overheads. There is also the possibility of endless speculation and rumors regarding the outcome of the merger among employees. They spend less time concentrating on the organization’s activities leading to declining performance (Pablo & Javidan, 2001). Both organizations have to conduct a combined job analysis to ensure that they cut down operational costs by engaging the most suitable employee for each position. The fact that these positions existed in the original firms means that for every position existing in both organizations, the new organization has to lay off one employee (Sudarsanam, 2004). The authority of top executives is affected since mergers compel them to relinquish some of their duties while others are shared. This is mainly translated as downgrading with regards to position in the organizational structure. Employees who understand this process lose confidence in the firm and begin to seek employment elsewhere. Others live in constant anxiety with regards to their employment benefits. All these uncertainties result in a performance decline among the two companies (DePamphilis, 2002). However, these drawbacks in mergers can be avoided through due diligence. Bank mergers in the UK are known to take place cautiously. For example the merger that was signed in 2005 between “Deutsche Bank and UK-based Aberdeen Asset Management on the sale of part of the German bank's asset-management businesses in the UK and the US” (Gordon, 2005) took time before the banks engaged in the merger, in order for due diligence to be performed. Due diligence assists the merging companies to determine the legal aspects relating to the merger in the host country, the in-depth of the target company’s performance, analyze the risks, opportunities and threats relating to the merger, as well as decide on the possibility of better alternatives. If for example two or more aspects do not favor the merger, the company can find other organizations with better opportunities for survival of the merger (Hitt et al. 2001) Successful completion of the process allows the companies to comfortably finalize the procedures leading to the merger. Conclusion This discussion highlights some significant positive influences of mergers on a firm’s performance. Nevertheless, it also exposes some negative influences of mergers that should not be ignored by firms intending to merge. The positive influences include; increased market power of firms enabling them to influence market prices and quantity of products supplied, organizational effectiveness through increased resource base as well as increased market share as each firm contributes its customers to the new firm. Some large organizations also utilize mergers to relieve themselves of their tax burden. Mergers develop a positive outlook of the new organization with regards to the stock market. Firms are also likely to benefit from a positive outlook resulting from the big size of the new company after merger. Most importantly, firms also increase performance through technological transfer enhanced by a merger. On the contrary, mergers may lower performance through demoralizing employees as a result of introduction of new employees that are used to different working strategies as well as uncertainty with regards to job security. Organizational culture differences may raise concerns with regard to which culture to be applied in the new organization. These may lead to a decline in performance. Conducting due diligence has been highlighted as a significant process that can help organizations to cope with the drawbacks of mergers. References Bresman, H., Birkinshaw, J. and Nobel, R. 1999, “Knowledge transfer in international acquisitions”, Journal of International Business Studies, Vol. 30, 3, pp. 439-462. Bruner, R. F. & Perella, J. R. 2004, Applied Mergers and Acquisitions, Wiley DePamphilis, D. 2002, Mergers, Acquisitions, and Other Restructuring Activities, Second Edition: An Integrated Approach to Process, Tools, Cases, and Solutions, Academic Press Gordon P. 2005, Occurrences in Europe's Financial Sector, Corporate Financing Focus, Global Finance Media Inc. Gunter K. and Andreas V. 2008, Do Cultural Differences Matter in Mergers and Acquisitions? A Tentative Model and Examination, Institute for Operations Research and the Management Sciences. Hitt A., Jeffrey S., Harrison R. 2001, Mergers and Acquisitions: A Guide to Creating Value for Stakeholders, Duane Ireland: Oxford University Press Pablo, A. L. & Javidan, M. 2001, Mergers and Acquisitions: Creating Integrative Knowledge: Strategic Management Society, Wiley-Blackwell Peterson, W. 2002, Market Power and the Economy: Industrial, Corporate, Governmental and Political Aspects, Springer. Sudarsanam, P. S. 2004, Creating value from mergers and acquisitions: the challenges: an integrated and international perspective, Blackwell Publishing Read More