The Concept of Merger and Acquisition Theories - Essay Example

? IBM Mergers & Acquisitions - A Critical Analysis of the Problems Occurred by Major Acquisitions Number and Number Name of Professor Date of Submission Number of Words: 4,250 Introduction International Business Machines (IBM) is one of the few companies around the world that has undergone a series of mergers and acquisitions. Founded back in June 1911, IBM is a US-based multinational company that specializes in technology and consulting business affairs. In line with this, IBM Tivoli is known for its advanced technology used in the manufacturing and selling of IT security software and services (IBM 2011a; Kanaracus 2010). Although commonly misinterpreted as one, merger and acquisition are two different business strategies in the sense that merger is the process of combining two or more business organizations which often occurs through the purchase acquisition of another business entity (InvestorWords 2011a) whereas acquisition is referring to the act of gaining control over a company by purchasing its stocks as a way of gaining the legal rights to take-over the business (InvestorWords 2011b; Hill and Hill 2005). As explained by Massoudi (2006, p. 19), it is important for IBM Tivoli to learn more about the market potential and profitability of acquiring another company like the BigFix by carefully examining the value of its IT technology and expertise IBM Tivoli could gain out of purchasing another company. As a strategy to improve IBM Tivoli’s security-related field, IBM has been continuously acquiring other IT companies that specializes in the development of IT security software. As IBM Tivoli’s 11th acquired producers of security-related software, the company made its final decision to formalize its acquisition of the BigFix Inc. for the price of US$400 million (?263 million) back on the 1st of July 2010 (Diaz 2010; Hoffmann and Saitto 2010; IBM 2010; Rogers 2010). Founded back in 1997, the BigFix Inc. is a US-based company that specializes in the reduction of cost and complexity when managing network servers, personal computers and mobile system (Haikes 2011). In line with this, Amrit Williams – BigFix’s CTO stated that “BigFix is a leading global provider of high-performance system and security management software designed for the special needs of enterprise companies and that BigFix’s unified management platform provides the users with real-time visibility and control through the use of a single infrastructure, single agent, and single console for systems life cycle management, endpoint protection, security configuration, and vulnerability management” (Winman 2010). Using relevant merger and acquisition theories, this report will identify and critically analyze the merger and acquisition problems that occurred when IBM Tivoli decided to acquire BigFix Inc. To give the readers a better idea about this research topic, this report will discuss the significance of merger and acquisition towards the business success of IBM Tivoli followed by discussing the common internal and external factors that may lead to merger and acquisition failure. Based on the actual business experiences of IBM Tivoli after acquiring the BigFix Inc., this report will evaluate whether or not the act of acquiring the BigFix Inc. has been a good business decision or not. Significance of Merger and Acquisition towards the Business Success of IBM Tivoli’s Decision to Acquire BigFix Inc. In general, the main purpose of entering into merger and acquisition is not limited to the need to increase IBM Tivoli’s market shares but also in terms of obtaining critical mass, expanding its geographic business coverage, increase the quality and widens the scope of IBM Tivoli’s IT-products and services, improve the company’s existing competitive advantages and improve its existing diversified portfolio (IBM 2011b). Applicable to desktops, servers, and laptops, Diaz (2010) reported that IBM Tivoli’s decision to acquire BigFix will enable IBM Tivoli offer BigFix’s IT platform technology which is needed to continuously improve IBM Tivoli’s vision of a smart datacenter. For example: As part of integrating the IT security software products of BigFix into IBM Tivoli’s security software, BigFix’s Unified Management Platform was integrated into IBM Tivoli Endpoint Manager whereas BigFix’s Asset Discovery, Device Management for Windows Mobile, OS Deployment, Software Asset Management, and Software Distribution has been incorporated into IBM Tivoli’s Endpoint Manager for Lifecycle Management (BigFix 2011). (See Appendix I – List of BigFix Security Software Products Incorporated to IBM Tivoli’s IT Security Software on page 19) According to Al Zollar – the general manager of IBM Tivoli software, “BigFix automates some of the most time-intensive IT tasks across the most complex global networks, helping save organizations significant amounts of time, labor and expenses” (Haikes 2011; Diaz 2010). In other words, the process of making BigFix’s real-time visibility and control system more compatible with IBM Tivoli’s datacenter could eventually strengthens IBM Tivoli’s ability to create and offer better IT security software which can be use in computer desktops, servers and laptops (Haikes 2011; Zacks Investment Research 2010). By making its IT security platform more intelligently secured, IBM Tivoli’s decision to acquire BigFix could make the company accelerate its security software development (Hoffmann and Saitto 2010). Since the process of managing the technical developments of personal computers, servers and laptops is becoming more complex each year, it took IBM Tivoli seven months before publicly announcing the official business integration of BigFix products into IBM Tivoli’s IT products and services on the 1st of February 2011 (BigFix 2011). Several authors revealed that IBM Tivoli could enjoy the benefits of merger and acquisitions in terms of having better economies of scale, having the opportunity to grab a bigger market share, and increase IBM Tivoli’s market value in the global markets (Sally 2007; Massoudi 2006, p. 197; Gugler and Mueller 2003). Before IBM Tivoli decided to acquire BigFix, BigFix was able to gather more than 120 resellers and 700 existing customers which include the state organizations, retailers, and service sector related to entertainment, healthcare, education, and financial (Haikes 2011; Westervelt 2010; Zacks Investment Research 2010). Aside from benefitting from BigFix’s existing resellers, it is surprising to know that SunTrust Bank alone decided to install more than 50,000 BigFix security software in its personal computers, servers, and mobile computers to allow its users to gain access to real-time visibility of its IT infrastructure across more than 1,800 bank branches (Haikes 2011). Other major customers of BigFix includes; Allianz Global Investors, BlueCross/BlueShield of Alabama (Rogers 2010). After acquiring competitive IT software companies such as the BigFix, the success of IBM Tivoli as one of the most competitive IT companies that produce and sell IT security software lies behind IBM Tivoli’s ability to integrate BigFix’s existing IT-security software technology into IBM Tivoli’s existing IT security platform. Provided that the corporate leaders behind IBM Tivoli security software are able to properly manage its human and non-human resources, entering into merger and acquisition could improve IBM Tivoli’s future business profitability out of selling more competitive security software to other large-scale companies in the global markets. Aside from being able to easily use BigFix security software through the use of WAN, LAN, 56K, satellite, and public Internet connection, the end-users can be easily install BigFix’s security software within a few days (IBM 2011c; Zacks Investment Research 2010). For this reason, IBM Tivoli’s decision to acquire BigFix can make the company easily expand its existing business operations in order to meet the continuously growing demand for IT security software and services within the global markets (IBM 2011b). Furthermore, the act of acquiring new assets like machineries and IT technology could make IBM Tivoli further improve its existing IT-related products and services (Gugler and Burcin Yurtoglu 2004). Since it is important for IBM Tivoli and its acquired company to stay focus on reaching the main acquisition goals, Huang (2009) explained the importance of regularly tracking down the acquisition performance of IBM Tivoli to enable its corporate leaders immediately address internal problems like misaligned vision and mission or the absence of two-way communication line among the stakeholders of IBM Tivoli and BigFix which could hinder the growth and sales potential of IBM. Stallworthy (1988) revealed that it is cheaper and faster to acquire an existing software company as a way to enter, penetrate, and widens IBM Tivoli’s existing market share of its IT security software and services. Acquiring BigFix offers IBM Tivoli’s existing customer-base more cost-saving solution since BigFix’s IT security platform is applicable to Windows®, Mac OS X, UNIX, Linux, and ESX-based systems (IBM 2011c; Westervelt 2010; Zacks Investment Research 2010). Furthermore, the use of BigFix security software technology enables IBM Tivoli users to have the ability to detect devices that are not in accordance to IBM Tivoli’s IT policies or not using the latest anti-virus, anti-malware tools that could protect personal computers and laptops from spywares (Westervelt 2010). For these reasons, large-scale IT companies such as in the case of IBM Tivoli considers internalization and product diversification as a strategy that could make them easily increase its market shares, corporate sales and profitability. By acquiring BigFix, IBM Tivoli is able to improve and make IBM’s existing security software like its anti-virus, anti-malware, firewall, and network access control software more attractive to its end-users (Westervelt 2010; Zacks Investment Research 2010). Hitt, Ireland and Hoskisson (2009, p. 232) explained that international diversification could benefit IBM Tivoli not only in terms of expanding its potential market but also increase benefits associated with massive investment savings on research and development (R&D) projects. By acquiring BigFix, IBM Tivoli could enjoy using BigFix’s power management technology which could offer IBM Tivoli’s customers the option to have timely software updates and configure the automatic shutdown of unused laptops or desktops aside from monitoring the customers’ printing usage (Haikes 2011; Westervelt 2010; Zacks Investment Research 2010). On the other hand, product diversification is all about modifying its existing IT security software as a strategy in terms of capturing a bigger market shares. For these reasons, IBM Tivoli considers merger and acquisition as a stepping stone that will enable the company to easily penetrate an entirely new market segment Before IBM decided to acquire BigFix, IBM Tivoli’s IT management software line is already competitive within the global markets of IT security software management business (Kanaracus 2010). By making the company able to save more money from its operational cost, economies of scale is considered an important business strategy that could increase the company’s potential earnings. Through economies of scale, IBM Tivoli will be able to manufacture IT security software and services at a much affordable market price. In the process of merging with the BigFix Inc., IBM Tivoli could have the opportunity to earn more profit by making its existing IT security software and services more competitive as compared to what IBM Tivoli’s close competitors (i.e. Microsoft System’s center configuration manager, Symantec’s Alteris line of software, and LANDesk Software) could offer (Rogers 2010; Westervelt 2010; Gugler and Mueller 2003). Other significant IT players that specialize in data center automation includes: Hewlett-Packard, BMC, and CA Technologies (Kanaracus 2010). Upon analyzing the case of IBM Tivoli, the company can easily enjoy the benefits of economy of scales each time the company enters into a horizontal merger and acquisition project. In line with this, entering into a horizontal merger and acquisition increases IBM Tivoli’s ability to immediately respond to the global business competition, deregulation, and industry consolidation (Massoudi 2006, p. 198). When it comes to reducing the cost of production, IBM Tivoli can gain benefit from entering into a vertical merger and acquisition. This strategy will empower the company in terms of being able to purchase some of its needed raw materials at a relatively low price. In some ways, entering into merger and acquisition could also enable IBM Tivoli to have more power in terms of monopolizing the global IT security software industry. By continuously entering into merger and acquisition, IBM Tivoli will have better opportunities to compete with the rest of the smaller players within the IT security software business. As a result, the smaller players within global IT industry may end up declaring bankruptcy for not being able to beat the low market price of homogenous IT products and services offered by IBM Tivoli. Importance of being able to Address Internal and External Factors the Contributes to a Failed Merger and Acquisition Several studies revealed that the corporate leaders should focus on the significance of “human factor” to make merger and acquisition successful (Majidi 2007; Veiga et al. 2000). Even though there are a lot of business people who considers merger and acquisition as one of the best solutions in solving business-related problems in terms of cutting down the company’s current operational cost and increasing its corporate earnings and revenues, the Department of Trade and Industry reported that roughly 50% of the companies that entered into merger and acquisition were unable to increase the company’s productivity level. Because of inability of the top management officials to directly address internal and external factors that contributes to a failed merger and acquisition, entering into merger and acquisition could make the acquirer gain a break-even profit after acquiring another company (Cartwright and Cooper 1992, p. 22). Since there are a lot of business people believe that merger and acquisition could make the company improve its overall business performance through economies of scale or by increasing their market shares within a given industry, a lot of them failed to examine how entering into merger and acquisition could impact the company’s current business performance. Due to lack of sufficient knowledge with regards to the actual profit and debts of another company, a lot of companies that enters into merger and acquisition could end up bidding for a wrong company of choice. For this reason, it is crucial on the part of the business owners to highlight the importance of corporate ‘value’. Furthermore, the past research survey study that was conducted by Kelly, Cook and Spitzer (1999) revealed that approximately 83% of the research survey respondents revealed that they agree that the act of entering into merger and acquisition may become unsuccessful especially in terms of generating business benefits associated with the shareholders’ value. Given that the shareholders of a newly merged company belong to two or more different business group, internal problems associated with merger and acquisition is more likely to occur. Aside from the need to go address serious management-related problems associated with the cultural differences of the stakeholders, balancing the potential business benefit between the two different companies is more difficult to achieve. Common Internal and External Factors that may lead to Merger and Acquisition Failure Internal Factors There are quite a lot of internal and external factors that could contribute to a failed merger and acquisition. Specifically the study of Bourke, Laidlaw and Woods (2001) revealed that entering into merger and acquisition could distrupt the productiion flow of a business organization. In line with this, several studies identified that the common internal factors that contribute to a failed merger and acquisition as the lack of internal business management and product integration, lack of a single organizational vision and mission which could direct employees towards a single goal, the presence of cultural clashes, and the absence of effective communication line among the corporate managers and the rest of employees (Majidi 2007; Bijilsma-Frankema 2001; Simpson 2000; Veiga et al. 2000; Feldman 1991, p. 146). Several authors pointed out that the differences between the organizational cultures of the two newly merged companies could increase the risk that IBM Tivoli will have ineffective business strategies (Ran 2008; Hopkins 1999). Given that IBM Tivoli and BigFix are two newly merged companies, it is expected that each of this companies have different organizational culture. For this reason, there is a high tendency wherein the employees in these two newly merged companies will have internal problems related to poor communication line. Simpson (2000) revealed that the secret behind the success of merger and acquisition is highly dependent on the ability of the corporate leaders to effectively integrate the two companies into one. In line with this, organizational vision and mission are created to guide two newly merged companies in reaching the goals of the acquisition (Huang, 2009; Bijilsma-Frankema 2001). Since the absence of a clear organizational goal could trigger uncertainty within a business organization (Feldman 1991, p. 146), it is a common mistake on the part of the newly merged or acquired companies not to create a new organizational vision and mission. To avoid the risks wherein the flow of the business operations can be hindered, Simpson (2000) strongly suggest the need to direct and move these newly merged companies towards a new vision and goal. Several authors revealed that failure on the part of the organizational leaders to immediately respond to the changes in IT security software technology or failure to integrate existing products and the use of human resources could lead to a failed merger and acquisition (Majidi 2007; Veiga et al. 2000). Since it is crucial on the part of IBM Tivoli to regularly update its existing IT security software and other related services, Salama (2003, p. 314) revealed that having financial limitations in support of further research and development (R&D) could somehow contribute to a failed merger and acquisition. Since there are a lot of corporate leaders who focuses on determining how the company could benefit from economies of scale, merger and acquisitions can be ineffective way of increasing the company’s potential sales and revenue simply because the organizational leaders failed to solve internal issues related to the cultural differences between the two newly merged companies (Majidi 2007; Veiga et al. 2000). “Cultural clashes” is referring to the different organizational culture, beliefs, attitude, behavior and the way the business is being managed by the corporate leaders (Harzing and van Ruysseveldt 2004, p. 91; Nahavandi and Malekzadeh 1988). In line with this, failure on the part of the newly appointed corporate leaders to effectively solve cultural clashes could lead to an early termination of the merger contract (Veiga et al. 2000). To prevent severe financial losses, there are cases wherein the acquirer who failed to manage the business and product integration of a newly merged company could end up selling the newly acquired company to an interested third party (Collinge et al. 2010, p. 290; Lewin 2004, p. 233). Considering the fact that organizational culture plays a significant role in molding how employees are expected to behave within the newly integrated companies, the corporate leaders of IBM Tivoli should not only focus on creating a new organizational goal but also create a more flexible organizational culture (Bijilsma-Frankema 2001). Basically, IBM Tivoli’s decision to establish a more flexible organizational culture which is aligned with its new organizational vision and mission is effective in terms of preventing the company from experiencing merger and acquisition failure. Other than increasing the risk of bankruptcy, Massoudi (2006, pp. 4 – 8) explained that the lack of proper communication between IBM Tivoli and BigFix could create a long list of human errors related to the process of manufacturing IT security software products and delivery of its products and services which could eventually lead to a significant decrease in IBM Tivoli’s sales and profitability, decrease in credit ratings, reduction of its shareholders value, and trigger a long-term business stagnation. For these reasons, not all companies that enter merger and acquisition could increase the acquirers’ business profitability. Ever since merger and acquisition has been an important part of the modern business strategies, Conyon et al. (2002a, b, c) reported that there has been a significant decrease in the demand for labor between the periods of 1967 to 1996. Since it is so much easier to realign the business processes through internal restructuring, IBM Tivoli has been one of the many companies that end up implementing massive layoffs after entering into merger and acquisition contracts (Greenberg 2009). To minimize organizational problems related to internal conflicts, it is important on the part of IBM Tivoli’s managers to be aware that the process of entering into merger and acquisition could create a long-list of labor problems. Associated with the increase in the levels of stress and anxiety, the presence of labor issues has been considered as a serious problem since this type of internal factor increases the risk of developing resistance-to-change (Harzing and van Ruysseveldt 2004, p. 101). Resistance-to-change could hinder the ability of the organizational leaders to effectively integrate the product and services being offered by IBM Tivoli and BigFix to its valued customers. In order to let go of the existing past labor contracts with the stakeholders and employees of the newly acquired company, Shleifer and Summers (1988) revealed that most of the companies that enter into merger and acquisition end up laying-off some of the existing employees within the newly acquired company. Since the act of laying-off existing employees could generate fear of losing jobs, several studies revealed that laying-off employees could create mistrust between employee and appointed managers, supervisors or team managers (Appalbaum et al. 2004; Handy 1993; Mirvis and Marks 1992). On the contrary, merger and acquisition could enable IBM Tivoli to have the privilege to renegotiate the existing labor contracts by cutting down employees’ salary and wages in exchange of the need to implement a massive lay-off (Shleifer and Summers 1988). By doing so, the top management officials of IBM Tivoli could effectively reduce the actual cost of labor aside from having the option to retain competitive employees and get rid of employees that are no longer contributing in the production growth of the business. External Factors With regards to external factors that could lead to the failure of merger and acquisition, several studies suggest that the global economic condition combined with the sociopolitical environment, government policies and regulations, market competition, technological changes within the IT security and software industry could affect the overall business performance of IBM Tivoli immediately after entering into merger and acquisition contract with BigFix (Carleton and Lineberry 2004, p. 140, 147). In line with this, Rock, Rock and Sikora (1994, p. 52) revealed that changes within the external environment could make IBM Tivoli experience either good or bad business performance. For example: Economic factors like the exchange rate volatility and high unemployment rate within the US market could negatively affect IBM Tivoli’s sales and business performance within the US market. Since people tend to hold onto their cash in times of tight economic crisis, IBM Tivoli’s ability to sell IT security software within the non-business sector weakens. On the other hand, given that the US dollar appreciates against other currencies, IBM Tivoli may also experience difficulty in selling IBM Tivoli’s IT security software in the global markets. Government policies and regulations could also affect IBM Tivoli’s success rate after acquiring BigFix. In case IBM Tivoli is experiencing financial loses out of acquiring the BigFix, the government has the option to protect IBM Tivoli through tax cut or granting them with a little government subsidy to ensure that the local people will have more work opportunity despite the global economic crisis. In the absence of government support, IBM Tivoli may have more difficulty trying to manage its available resources and paying its fixed operational cost in times of serious business financial crisis. When this happen, IBM Tivoli is more likely to implement another massive lay-offs just to make the company able to sustain the global business challenges. The tight market competition within the global IT security software industry could make IBM Tivoli loss some of its valuable customers to other IT security software developers like BMC, CA Technologies, Hewlett-Packard, Microsoft System’s center configuration manager, Symantec’s Alteris line of software, and LANDesk Software (Kanaracus 2010, Rogers 2010; Westervelt 2010; Gugler and Mueller 2003). Because of the increasing number of players within the global IT security software industry, IBM Tivoli’s existing customers could easily shift to other software developers that can offer them a better IT security protection software at a much lesser cost. Based on this point-of-view, IBM Tivoli’s decision to acquire BigFix is considered a good business strategy simply because IBM Tivoli could save a lot of time, money and effort in trying to enhance the quality and security of its existing IT security software technology and platform. Conclusion IBM Tivoli’s decision to acquire BigFix is a good business strategy in terms of enabling the company have a better product and market competitive advantages as compared to its close competitors (i.e. BMC, CA Technologies, Hewlett-Packard, Microsoft System’s center configuration manager, Symantec’s Alteris line of software, and LANDesk Software). By acquiring BigFix, IBM Tivoli is able to enhance the quality of its IT security software products and services, increase its potential market shares, and gain benefits from economies of scale. Internal factors that could contribute to a failed merger and acquisition includes but not limited to the lack of internal business management and product integration, lack of a single organizational vision and mission which could direct employees towards a single goal, the presence of cultural clashes, and the absence of effective communication line among the corporate managers and the rest of employees (Majidi 2007; Bijilsma-Frankema 2001; Simpson 2000; Veiga et al. 2000; Feldman 1991, p. 146). On the other hand, external factors includes the global economic condition combined with the sociopolitical environment, government policies and regulations, market competition, technological changes within the IT security and software industry (Westervelt 2010; Carleton and Lineberry 2004, p. 140, 147; Gugler and Mueller 2003). Even though there are quite a lot of internal and external factors that could make IBM Tivoli experience a failed merger and acquisition, the fact that IBM has gone through a long list of merger and acquisition process throughout its history makes the business managers behind IBM more familiar when it comes to properly managing organizational changes that usually takes place during the business integration process with its newly acquired companies. *** End *** Appendix I – List of BigFix Security Software Products Incorporated to IBM Tivoli’s IT Security Software BigFix IBM Tivoli BigFix Unified Management Platform IBM Tivoli Endpoint Manager Asset Discovery; Device Management for Windows Mobile; OS Deployment; Software Asset Management; and Software Distribution IBM Tivoli Endpoint Manager for Lifecycle Management Security Configuration Management; Vulnerability Management; Anti-Virus/Anti-Malware; Client Manager for Endpoint Protection; Device Control; and Endpoint Firewall/NAC IBM Tivoli Endpoint Manager for Security and Compliance Power Management IBM Tivoli Endpoint Manager for Power Management Patch Management IBM Tivoli Endpoint Manager for Patch Management; IBM Tivoli Endpoint Manager for Security and Compliance; and IBM Tivoli Endpoint Manager for Lifecycle Management Source: BigFix 2011 References Appelbaum, S., et al. 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