Why Do Mergers and Acquisitions Fail and Why Do Corporate Officials Still Pursue Them - Case Study Example

Business Organisation and Policy: Why Do Mergers and Acquisitions Fail and Why Do Corporate Officials Still Pursue Them? BY YOU YOUR SCHOOL INFO HEREDATE HERE TABLE OF CONTENTS 1. Introduction.................................................................................................. 3 2. The Case of Air France and KLM................................................................ 3 3. The Case of Daimler-Chrysler....................................................................... 5 4. Externally-Driven Situations Forcing Change.............................................. 6 5. Discussion of Merger Seeking...................................................................... 7 6. Conclusion..................................................................................................... 9 References / Bibliography Business organisation and policy 1. Introduction Many businesses attempt to improve their revenue stream or maintain a higher competitive advantage through the process of acquiring or merging with other successful companies. Corporations believe that they can gain a considerable growth potential, improve overall service delivery or produce better and more innovative products by consolidating talents that exist within the business being acquired and amidst the new business entity acquired. However, many board members and executives at these companies do not fully understand the realities of what affects successful acquisition and merger philosophy, with most of these driven by the external marketplace and external stakeholders. In order to understand what causes failures in merging and acquiring other firms, it is necessary to explore real-life case histories of two different companies with radically different success and failure outcomes after merger. Air France merged with KLM and found a considerable growth potential and synergy development, whilst Daimler-Chrysler suffered substantial loss of business competitiveness and capital growth after the merger. It is likely that board members and executives, despite such a high margin of failed mergers and acquisitions, continue to seek out these opportunities for a variety of financially-based rationales, for the potential benefits achieved with shareholders and stakeholders, and as a generalised strategic methodology to improve efficiency, productivity, and cultural development. This report examines the two merged company case studies and comes to a determination as to why businesses continue to seek merger and acquisition opportunities despite numerous failures in this process. 2. The case of Air France and KLM Air France and KLM were both highly successful airline carriers that found independent revenue growth in their home markets of France and the Netherlands respectively. Both airlines agreed that a merger would improve their competitive position in the airline marketplace and could develop long-lasting synergies that would ultimately lead to sales growth and cost reduction in key divisions of operations. The Air France and KLM merger should be considered a significant success in merger philosophy. Why is this? In key markets, Ryanair and other low cost carriers were beginning to expand their fleets by using lean models of operations that allowed for cost reduction to be passed on to consumers in the price of lower fares. This was impacting the profitability bottom line of both major carriers which had higher overhead costs and administrative costs associated with labour payments to maintain their broad hub networks. These low cost carriers were using dynamic pricing and were able to reduce marketing and advertising costs; thus, it was becoming more attractive to multiple target market consumers (Malighetti, Paleari and Redondi, 2009). Because of regulatory restrictions, Air France and KLM, separately and in their host countries and markets, could not adjust their costs of operations to successfully compete with Ryanair and other growing low cost carriers using penetration or dynamic pricing models. Together, however, it gave both businesses new flexibility for market and route expansion and the ability to change processes to reduce overhead costs and payroll costs through consolidation, and consolidate advertising costs. In a short period of time, the external competitive environment did not present such a high risk or threat as it had previously accomplished when they operated as individual business units. The merger provided unique innovation opportunities, as well, to ensure that dynamic pricing could be outperformed through improved service delivery, overhead reduction, and improved efficiency of total service packages. The Air France/KLM merger also provided synergies in financial improvements and capital growth that were impossible individually. After the merger, the merged corporation achieved 60 million Euros savings in maintenance and procurement costs by consolidating supply chain distribution routes and networks and consolidating maintenance teams for a single fleet (Mukim, 2007). This reduced operational costs of doing business. Furthermore, the newly merged organisation achieved 70 million Euro savings by consolidating information technology services and systems through altering enterprise-wide knowledge management systems and less labour for technical support and analysis teams (Mukim, 2007). Through ongoing consolidation objectives, significant cost savings were experienced by the merged corporation, thus giving the business more capital for service expansion and improvement, as well as new fleet procurement for modernisation. Finally, the regulatory environment for both individual companies put new and difficult restrictions on flight operations as it related to pilot fatigue. It became policy for pilots to adhere to a government-mandated, set period of flight hours allowed to ensure flight safety protocols (Fiorino, 2009). After the merger, once the businesses changed their flight operations and improved hub efficiency and reach, the newly merged organisation was able to swap trained pilots from both organisational cultures, thus not impeding the routine and efficiency of flight operations. It was a method of essentially circumventing demands from the Flight Safety Foundation that could not have been accomplished as singular businesses. 3. The Case of Daimler-Chrysler The two automotive manufacturers, Germany-based Daimler and U.S.-based Chrysler believed that as a merged organisation, they could improve their global sales reach and improve innovation through design and technology enhancements. The goal of the merger was to consolidate research and development talent and also improve sales revenues by creating competitive products designed to outperform large automakers such as Ford and General Motors. However, this merger was a dismal failure and now Chrysler operates as a private company completely divested from the Daimler brand. One reason for the merger failure was related to culture. German executives and employees maintained what is referred to as the halo effect, where one believes that executives from the host country maintain superior characteristics to foreign executives, and thus conflict ensued as it relates to policy making and contract negotiations. The Daimler organisational culture was one that was very formal, traditional, and considered business negotiations to be of the utmost importance to maintain strict compliance; they were highly risk averse. In contrast, Chrysler’s culture was highly individualistic, flexible, willing to embrace risk in executive decision-making, and highly informal in business negotiations (Habsjah, 2009). Representatives of Daimler could not find common ground with U.S.-based Chrysler’s executives as it related to customer service for German citizens and businesspersons, thus leading to contract failures and relationship management damage internationally. Customers, in certain regions, demanded formality whilst others demanded rigid traditionalism and Daimler executives grew frustrated about Chrysler’s rather lackadaisical attitude toward business professionalism. Secondly, prior to the merger, Chrysler maintained a five billion dollar capital reserve which gave them a significant advantage over other automakers related to cash flow and the ability to seek capital project development. The sales environment previously hosted singularly by Daimler was not efficient in terms of distribution networking, sales and marketing, and manufacturing to serve international customers in key target markets. Therefore, in order for Chrysler to effectively serve these markets based on consumer demands and business-to-business markets, Chrysler was forced to invest the majority of its capital reserves into new distribution hub projects and also improve manufacturing efficiency to meet fickle customers with considerably high competitive products that customers could defect to. Between 2001 and 2002, Chrysler lost $10 billion (USD) because of the constant need to invest in improving Daimler’s network capabilities. Without these investments, customers would have chosen competing products as they were lower cost, more efficient, and more widely available through marketing distribution processes. 4. Externally-driven situations driving change If Daimler-Chrysler, prior to the merger, had adopted the principles and models of strategic planning, the Board of Directors and executives might have rejected the merger offer and continued independent operations. Policastro (2011, p. 3) suggests, “Strategic planning will help you foresee and react quickly to market changes and opportunities and identify areas in which your business is lagging behind.” Both of the businesses, especially Chrysler which maintained a superior financial position than Daimler, should have looked extensively into the sales markets internationally to determine lifestyle values of customers, the product life cycle of particular models, and the systems by which Daimler had traditionally served the majority European marketplace. Europe maintained much higher competitive presence than the North American market and Chrysler seemed to have an overconfident view of their strategic and competitive positions in a market where competition consisted of only a handful of major players in their oligopolistic markets. Changing customer preferences in Europe and other Asian countries were more rapid than in the North American market (even prior to the merger) and, thus, required more innovation and adaptable processes and systems to meet market demand. In the case of Air France and KLM, executives conducted considerable preliminary research on the external environment to determine potential shareholder and stakeholder reactions, consider the synergies possible through consolidation and revenue growth, and how to eliminate redundant systems through IT infrastructure consolidation. These businesses fully understood the impact of customer demand, distribution and service delivery and created a pre-plan scenario/diagram of how to launch a successful merger that was already established the day of the press release announcing the merger. Daimler-Chrysler did not consider, either, the impact of culture on stakeholders and shareholders that would disrupt business and operational success. Very, Lubatkin, Calori and Veiga (1997) identify that many investors are positively drawn toward the establishment of a unified organisational culture as they believe that loyal and diverse cultural theory internally leads to better human capital development and competitive advantage. The share value of Daimler-Chrysler did not achieve positive results and moved upwards and downwards in an unpredictable pattern throughout most of the maturity stage of the merger period before ultimately separating for individual operations. There was a fundamental lack of strategic focus on and examination of the attitudes, values and tangibles of the external marketplace and external partners that lead to a collapse of the merger and significant financial difficulty. 5. Discussion of merger seeking As illustrated by the case studies, especially relevant to the Air France/KLM merger, board members and executives continue to seek acquisition strategy and merger strategy as there are numerous potentials for achieving long-lasting synergies and capital production. The main failure of Daimler-Chrysler was in not considering the importance of strategic planning in the early stages of developing a new business model that included two merged companies. Board members and executives should maintain knowledge of the strategic management process and consider all risks associated with developing a merger or acquisition strategy. It would seem, based on the two case studies, that this is one of the most fundamental success factors in achieving long-term synergies and business/revenue improvements. Despite the wide variety of failures, board members and executives continue to seek these opportunities as the majority of failures lie in human capital worth and not when a preliminary diagram and systems analysis has been conducted to have a long-term, strategic plan of action about how to enhance operations, improve synergistic growth, and reduce inefficiencies throughout a new value chain. It was proven through Air France and KLM that a business must understand the dynamics of the external stakeholder market and the direct customer target groups before launching a plan of action. The regulatory environment, in this particular industry, maintains considerable clout and influence and both airlines were ready to combat these potential revenue-depleting stipulations by simply examining the potential of gaining ground in operational efficiency prior to the merger. Board members and executives can use these success factors and the associated research studies on successful mergers to role model existing merger and acquisition models, thereby having a trusted resource by which to mould their new systems and consolidations. Once the companies understand the potentials and current dynamics of the service market environment and demand factors, they can adjust business operations to achieve maximum growth and cost savings. The majority of factors that could impede merger and acquisition success, relying on the Daimler-Chrysler example, are related to the external market even though they are influenced by internal political systems. A Board of Directors or executive management team that is efficient in cultural development and conflict management are capable of seeking new merger and acquisition opportunities and thus capable of dealing with ever-changing customer and partner demands that occur in the sales markets both domestically and internationally. Mergers and acquisitions, both theoretically and in real-life, maintain virtually unlimited potential to produce synergies that are impossible individually without extensive cash capital and thus are positive strategies for business improvement and growth. 6. Conclusion As identified by the case studies of two radically different merger scenarios, mergers and acquisitions can serve to improve operational efficiency, cash flow development, better service to the external market, and better relationships with stakeholders and shareholders. This is why companies continue to pursue this strategy as the consolidation of technical and support expertise gives the company better innovation and modernisation opportunities when talent management brings human capital-based synergies. For all of the failures that exist internationally with acquisition and merger strategy, there are also volumes of success stories, both large and small ones that continue to show that synergistic and strategic outcomes are quite possible by combining resources and improving operational strategies through shared resource philosophy. Once the business recognises the impact of cultural development and cultural unity, they can better structure internal systems and processes after the merger so that motivation, productivity, and loyalty are established without complications to change management needs. Further, all of the revenue and capital gains that occur through consolidation or growth potential, such as in the case of Air France and KLM, continue to reinforce so that such strategies can bring tremendous benefit and thus are favoured by many board and executive leaders across the world. References Fiorino, F., 2009. Fatigue. Aviation Week & Space Technology, 171(11) p. 42. Habsjah, I., 2009. The failure of Daimler Chrysler Merger. [online] Available from http://www.scribd.com/doc/59790315/Daimler-Chrysler-Merger-Failure [Accessed August 1, 2012]. Malighetti, P., Paleari, S. and Redondi, R., 2009. Pricing strategies of low cost airlines: the Ryanair case study. Journal of Air Transport Management, 15, pp. 195-203. [online] Available from http://www.skytechsolutions.com/pdf/researchPapers/European%20Airline%20Industry%20-%20Strategies%20for%20the%20New%20Millennium.pdf [Accessed August 1, 2012]. Mukim, S., 2007. An analysis of stockholder returns and synergistic gains in Air France and KLM Royal Dutch Airlines merger. p.10. [online] Available from http://schwert.ssb.rochester.edu/f423/Paper_mukim0803.pdf [Accessed August 1, 2012]. Policastro, M. L., 2011. Introduction to strategic planning. The travellers company management and planning series. p. 3 [online] Available from http://archive.sba.gov/idc/groups/public/documents/sba_homepage/pub_mp21.pdf [Accessed August 1, 2012]. Very, P., Lubatkin, M., Calori, R. and Veiga, J., 1997. Relative standing and the performance of recently acquired European firms. Strategic Management Journal, 18(8). Bibliography Weber, R. and Camerer, C., 2003. Cultural conflict and merger failure: an experimental approach. Management Science, 49(4) pp. 400–415. Read More