Abstract:
The majority of firms are choosing mergers and acquisitions as a strategy to maintain a competitive advantage. Therefore, it appears that billions are spent to obtain this strategy. However, it turned out to be that some mergers are not as successful as they meant to be. In this paper, there will be an investigation of the main pitfalls of mergers and acquisitions from integration. In addition, corporate culture may differ from one company to another, which is one of the most common drawbacks in M&As. In other words, the personalities of the board of directors of the two companies’ executive management may create odds that pull back any improvements in the future. When mergers occur between successful companies, there will be several pitfalls that emerge during and after the merging process.
Furthermore, integrating the operations of two different entities into one firm is one of the most challenging processes, which causes companies to struggle to act as a single unit. The success factors for M&As are many, and there is inevitably a dynamic change occurring all the time. While the reasons behind M&As failures are still not very clear, this paper will discuss both factors to know how can we can benefit from successful mergers and overcome its pitfalls.
1.Introduction:
A merger is known as a technique, which is a significant need and increasingly popular means for achieving corporate diversity and growth. The effectiveness of this strategy depends on extensive planning and careful implementation (Lynda, B. et al., 2011). There are a number of external variables, which link in to the surrounding environment, that a few researchers examine and internal variables too, which linked to the firms taken part in the merging procedure; these variables can give the researchers the opportunity to estimate how successful the mergers and acquisitions can be, including both local and global (Calipha, R. et al., 2010). It seems that the number of mergers and acquisitions has grown in the last few years, yet the rate of success of mergers and acquisitions has significantly decreased. Many research studies showed that nearly 40% to 60% of all mergers do not achieve their desired goals, while another study demonstrated that the rate of failure had reached a higher percentage of 60% to 80% (Houwers, R., 2016). However, merging two companies may be a very successful procedure, but in basic terms, mergers and acquisitions follow significant changes in cultural and structural aspects. As a result, numerous problems may emerge in the board of directors, such as negative emotional behaviours, which lead to unpleasant results. For example, the amount of productivity will decrease as well as the rate of disaffection, unfaithfulness and high turnover will increase, and many other issues will arise following up the previous ones (Arora, M. et al., 2012). Since the beginning of the 1980s, many studies have demonstrated that more than half of the M&A’s transactions between big companies have resulted in dropping the acquiring firm’s share value after sharing the news with the public (Sirower, M, L. et al., 2006). During mergers and acquisitions, participants typically aim to achieve the best results that meet their benefits, so it is a crucial aspect to talk about these interests to avoid any obstacles that can lead mergers to fail (Walker, C. 2018). Additionally, it is common knowledge that M&A has been a widely used technique to protect and increase the market value of companies’ shares, but sometimes M&A fail to meet shareholders’ anticipations in achieving the economies of scale. In the history of mergers and acquisitions, we can see that the primary intention is to attain synergy, or what is it known as 1 + 1 = 3. Furthermore, during the last four decades, many deals looked perfect on paper, but within the first few years of these deals, companies may be tricked by the inflated numbers on the balance sheet due to one-time cost savings and smart tax manoeuvres. As a result, the merger’s profits are moderately challenging to estimate, and there are too many difficulties in choosing suitable indicators for estimations (Cartwright, S. 2015). This essay will talk about the most common pitfalls and how to avoid them by trying to find a formula that companies can use to make their deals successful. One of the most common pitfalls that leads to a huge failure in M&As is culture because changing the companies’ culture can damage the essential factor that makes the firm successful (Kestenbaum, R. 2017). Strategic fit is ignored during the majority of M&A, and that leads to its failure because companies, which are merging, are far from the parent firm’s main competition. Another reason is getting the wrong price or the transaction structure, which occurs when the acquirer falls into the trap of paying more than the actual price during auctions. The culture of the companies will probably not be the same, even if the two firms are in the same business sector. Therefore, knowing companies’ culture is crucial not to miss any information out and maintain clear communication between merging organisations as many deals have failed due to the board of directors becoming involved without including the whole employees’ sector. Financial performance is considered to be the main factor of M&As success, so focusing on income growth is more substantial than cost control; which is why companies should focus on customers and sales more during mergers to reach the best outcomes of the deal (Price, J. 2012). There are too many pitfalls that can face companies in the process of merging and it is very complicated to avoid all of them. Consequently, each company have to deal with various drawbacks and try to avoid them in the best way possible. This case study will give a general overview of the common pitfalls and a solution to each case.
This paper presents as follows: part 2 conveys the literature review; part 3 includes the research aim, research question and objectives of the study; part 4 shows the research methodology; part 5 is the data collection, and part 6 presents the data results. Finally, part 7 includes the discussion before ending with the last two parts summarising with an overview in the form of the conclusion, limitations and recommendation.
2. Literature Review:
2.1. Introduction:
Mergers and acquisitions topics pose many difficulties because there are two companies under great consideration, and the encounter of such firms involves change and evolutions over time. The issue of whether M&As benefit companies have provoked a steady flow of research. Furthermore, the success of the M&As between medium or large firms depends upon numerous factors (Schraeder, M. et al., 2003). Moreover, successful companies are always looking forward to growing at an increasing rate. Common knowledge prevails that both small and big firms strive to increase their size and profits. Therefore, the main reasons behind this need are nearly similar for each company. However, every company follow a different technique in order to reach its goals and the most favourable technique is the one that makes the firm grow bigger and faster. According to Manne (1965), which is the most used definition for mergers and acquisitions, mergers and acquisitions are known as the combination of two business organisations in order to achieve a certain organisational target (Yang, L. C. et al., 2016). In other words, the main reason why companies do mergers and acquisitions is to create new value, which gives them a competitive advantage (Weber, Y. et al., 2013). Moreover, companies have utilised the term mergers and acquisitions as a strategy for a long time, but this strategy is not always achieving success. Moreover, many studies have demonstrated that companies after acquisitions managed to add a small amount of value or no value at all (Hitt, M. A. et al., 2009). It appears in a Ted Rouse and Tory Frame study that there is one clarification, according to their experience, that several firms follow a strategy of pursuing mergers similar to their main business, from this point the majority of problems emerge (Rouse, T. et al., 2009). Additionally, Hoffmeister demonstrates that many acquirers do not give the long-term strategy enough attention during mergers and acquisitions, so they only focus on short-term outcomes (Hoffmeister, J., 2017). Therefore, Martin Kinsella, chief executive, draws the attention towards the important stage after mergers and avoiding the mistake of concentrating on short-term goals only by saying “Mergers are only the start,” and he also added “the challenge is to make it work after the event – do not ever take your eyes off the ball.” (Salman, S., 2010). Furthermore, it can be seen that nine out of ten respondents failed to reach their objectives on prior mergers, according to a survey by Deloitte (Thomson, R. et al., 2015). Many studies by researchers showed a countable number of pitfalls, but this essay will present the most common blunders and how companies can overcome them. First of all, the term “company culture” defines as a shared value system that every company tries to develop over time. Therefore, the variations in companies’ culture emerge from how they work, guide, connect and encourage their staff. These differences can hold mergers back and cause many problems that may result in the deal’s failure (Zhu, Z. et al., 2007). Secondly, the high rate of failure in mergers and acquisitions was due to the lack of information about which industry fits with the acquirer business. According to historical cases, due-diligence has a significant role in authenticating the financial background of the possible firm and collecting its legal information. The majority of firms do not give sufficient attention to due-diligence during mergers and acquisitions. Therefore, the process of due diligence needs to be extended to cover the period before, during and after the deal until the two organisations become a single entity (Harvey, M. et al., 1998). The president of Zurich’s Specialties business unit, Kenneth Sroka, demonstrates that “mergers and acquisitions can become a minefield of volatile risks such as employee class-action suits, accusations of pension fund malfeasance and unforeseen environmental liabilities.” As a result, many barriers may face mergers and acquisitions, especially in deals that cross international borders. These hurdles may be environmental, which can be revealed by due-diligence, directors and officers liability, which can be protected by a modified “run-off” coverage until both entities merge into one firm, employment practices liability(which increase during post-mergers period), fiduciary liability (which increases risk on acquiring firm when a target company has more plans that may transform to cash or switched for other purposes), and companies usually confront political risk during cross-border deals that is why it is essential to have an insurer, who predicts hurdles and participates in designing insurance programs that save M&As from failure (Risk Management, 2006). Some mergers and acquisitions impose amendments in organizational structure, size and employment. These adjustments head for breaking up previous workgroups and make new groups, which results in an internal rivalry between colleagues, therefore, killing the spirit of teamwork and slower its outcomes (Feldman, M. L. et al., 1991). Human resource departments have played a crucial role in driving mergers and acquisitions to success (Waight, C. L., 2004). A human resource department contributes to putting a merger plan, which describes an M&A deal as preformed, including important elements such as, organisational and management structure. In addition, it is very significant to mention that any merger deal should be done correctly and as quickly and efficiently as possible (Camara, D. et al., 2004). Finally, another issue that appears to be very common in M&A is overpaying for the target. There are many reasons behind this issue but here it can be seen that the majority of buyers fail to assess a company’s intrinsic value, not following valuation best practices correctly and failed to have enough information to evaluate the skills in the target company, which all affect the final price paid by buyers (Rogers, H., 2016).
2.2. Main M&A Pitfalls and How to Overcome Them:
2.2.1. Culture Clash:
Culture stands for attitudes, values and beliefs that have an effect on a person or group of people within a company. Schein defines culture as “a pattern of shared basic assumptions learned by group as it solved its problems of external adaption and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think and feel in relation to those problems” (Ronald, B. et al., 2018). So even if firms seem to be very comparable, they still can be very diverse in terms of culture and those cultures cannot be easy to combine during mergers and acquisitions. Many studies have shown that merging companies’ balance sheet is easier than integrating cultures and this is clear when it comes to the main reason behind 85% of unsuccessful mergers and acquisitions due to different misunderstandings of cultures. Moreover, successful firms realise that both culture, due diligence and financial analysis are equally significant during M&A (Miller, R., 2000). During mergers and acquisitions, companies are not only acquiring assets and products but also talented employees and each firm during integration does not intend to lose its best employees in the transaction. Subsequently, organisations do not want to lose their culture that represents their existence and profile (Milligan, S., 2014). The “culture distance” hypothesis indicates that all problems linked to cross-cultural deals rise when cultural variations between companies, groups, or people increase (Hofstede, G., 1980). Generally, companies always try to maintain their cultural values without any changes. Therefore serious issues may occur during this kind of mergers if there are a large number of cultural distinctions. Furthermore, many studies suggested that cultural variations can affect the process of post-merging integration negatively, which emphases the pitfalls of cultural differences in a merger. Other studies have shown that cultural diversity may have a positive effect on M&A’s success; in other words, cultural variations do not usually have an unpleasant effect on M&A. Therefore, Evans, Pucik and Barsoux (2002) have demonstrated that during cross-border deals acquiring companies tend to purchase firms related to their business field in order to add value (Evans, P. et al., 2002) (Stahl, G. K. et al., 2003). Helene has also mentioned that achieving synergies during merger and acquisitions can add value (Abrams, H., 2013). Furthermore, many theories were discussed in management literature to study and analyse the crucial influence of cultural distance on M&A deals. However, in this thesis, there will be two opposing theories regarding this issue. The first theory is called the “culture clashes”, which elaborates the idea that during the post-merger period, the merging process companies joined from several cultural backgrounds will confront cultural difficulties (Javidan, M. et al., 2002). The second theory is called the “cultural synergy” theory, which states that the term cultural distance can be beneficial in creating opportunities for cultural transformation and create more intrinsic value (Stahl, G. K. et al., 2004). It is known that cultural diversity may rise M&A costs during the process of merging and therefore decrease the outcomes. Teamwork and communications between the employees are affected by cultural variations because the majority of employees tend to coordinate more effectively with people, group and companies that have a similar culture. From this point, it is utterly important to choose the acquired company wisely to overcome cultural deficiencies (Hewstone, M. et al., 2002). There is an opposite relation between M&A performance and cultural distance. The higher the M&A performance, the lower the cultural distance, so if there is a large cultural distance, the acquiring company will impose slight changes on the merged company in order to fit its strategic planning and systems. In this case, the acquired organisation will not be affected by the acquiring firm’s culture (Dundas, K. N. et al., 1982). Some theories can be used by a large number of firms to overcome cultural difficulties that could result in the deal’s failure. Additionally, the most famous theory used by companies is Hofstede’s cultural dimension theory, which uses a framework originally from factor analysis to represent the effect of culture in the society on the standards of a certain group or company and gives a clear view on how these standards being affected. The theory consists of six culture dimensions: power distance, individualism, uncertainty avoidance, masculinity, long-term orientation and indulgence versus self-restraint. This theory examined more than 10,000 IBM employees around the world in three different years (1968, 1972 and 2001). Hofstede used a similar questionnaires method for all staff in various IBM branches in order to analyse its employees’ standards, which are being impacted by IBM’s culture (Fink, G. et al., 2007). By knowing the acquired company’s culture closely, the acquiring company will avoid the majority of cultural diversity problems and forming a stiff combination that results in a successful merger and acquisition.
2.2.2. The Lack of Due Diligence:
According to the chief of the global compliance group at Baker & McKenzie, Mini VandePol, companies should have a compliance programs to make sure that laws are not being broken during cross-border mergers, and that was clear when she said “With regulators in the US, the UK, China and many other Asian economies ramping up efforts to crackdown on corruption, companies are faced with an unprecedented level of urgencies and complexities to put together effective compliance programs that meet both domestic and extra-territorial laws.” It appears that the success of mergers and acquisitions can be affected by corruption risk; therefore, Mini has insisted on that idea by stating “identifying, investigating and mitigating risks ahead of the deal is critical” (Platt, G., 2014). Here it can be seen that the more time companies give to due diligence during M&As, the more they can avoid confusions and risks that may end up in deals’ failure. Sometimes due diligence is a long, complicated process that involves the periods before, during and after the merger which makes it an ongoing task, therefore, many firms making mistakes during mergers results in failures because of its complexity. Steelcase Inc’s chief of HR, Jones, had described due diligence process by demonstrating it is “an ongoing process…[and] necessary to constantly tweak and adjust thinking to reflect changing business conditions and greater knowledge about how to conduct due diligence” (Greengard, S., 1999). Furthermore, various due diligence activities companies must do during mergers and acquisitions. Before deals, the acquiring company wants to know the background information about the company that they are going to merge with their own. Ordinarily private companies are not subject to the scrutiny of the public audience. In this case, the acquiring firm only has a limited amount of information that can be gathered from a few available resources. As a result, when there is a sufficient time given to due diligence, companies can overcome any problems that could result from the lack of information. First of all, the buyer is always interested in knowing how was the financial performance of the target company and analyse its financial statements, working capital, audits and EBITDA that allow the buyer to predict target firm’s future performance. An example of this was such case mentioned during the purchase of one of the Amazon subsidiary businesses. The deal was going as planned and on the verge of being completed. However, because of the financial checks in due diligence, it was found that the business did not collect sales tax from its clients. Therefore, the deal failed to materialise, and this showed how important was the financial check to not enter in a deal that could end up failing. Due diligence provides the buyer with the target company’s technology and intellectual property, and what steps have been taken to protect it. Due diligence helps to acquire companies to know the customer base of the target company. It contains the categories of customers, which one takes the majority of the company’s customer base and what kind of profits made. For instance, in 2005, a merger of $35 billion had happened between Sprint and Nextel Communications and became the third biggest telecommunications supplier. The deal’s target was to increase sales. There were distinctions in how they treated customers. These differences surfaced shortly after the announcement of the deal. Due to these factors which had conflicted with the difference in corporate culture between the two companies, several managers resigned from Nextel.
The second company faced intense competition causing the cancellation of the deal and losing billions of dollars. Furthermore, due diligence shows the buyer how to target companies will perfectly fit well within their strategies. Also, an essential aspect of due diligence is giving the buyer a review of all material contracts and commitments of the acquired company with third parties such as loans, credit agreements, revenue shares, intellectual property rights and settlements agreements. An example of this case is the merger between TinyCo, which is a video game company owned by Jam City, and Loytr, which is an app company behind MyPad. In 2011 Loytr made this deal to get access to MyPad’s fundamental customer base and with the possibility of paying a certain proportion of future income.
Additionally, this merger could have had an unrevealed or underestimated contract disclosure that could result in Jam City, wasting a considerable amount of money. Another feature in the due diligence process is knowing the acquired company’s management and employee base are significant matters that could cause several problems during mergers if it is hidden, so due diligence provides the acquiring company with all needed information. Supplying the buyer with any litigation and any previous tax liabilities, also analysing any antitrust problems, an overview of insurance policies of the acquired company and accessing the corporate records in general. Moreover, leases of real property, operating leases and property owned by target companies are reviewed through due diligence. The buyer needs to know the type of current and future competitors in which the target company is trying to surpass them.
Additionally, a comprehensive disclosure schedule is prepared, including all the previous diligence points discussed above. The schedule is a vital aspect in which a company can merge smoothly and minimising problems when this schedule is adequate (Harroch, R. et al., 2014) (French, J., 2018). Finally, the main factor considered for success in acquiring another company is to know the maximum price for the target company without paying extra. The reason behind overpriced deals is that most acquisitions these days are too expensive, and the overconfident CEOs are racing to win desired deals ahead of their competitors. The amount of acquisition premiums is not a guarantee of the acquisitions’ success. For example, in 1998, there was a bidding war between Bell Atlantic and Vodafone to buy Air-Touch Communications, which shows that the prices offered were reasonable. The negotiations between Bell Atlantic and Air-Touch started on December 31, 1998. Bell Atlantic offered 7% premium above Air-Touch’s share price of $68. As a result, Bell Atlantic’s share price experienced a decline of 5% because the deal did not have market support. On January 7, 1999, Vodafone started the negotiations by offering Air-Touch an $89 per share but ended up paying $62 billion ($97 per share). Vodafone had paid 33% more than Bell Atlantic’s bid and 43% more than Air-Touch’s original share price. The share prices of Vodafone rose by 14%. Markets have played a crucial factor in the deal’s success so overpaying companies can be excessive money which does not add any value, but if the market wanted the deal to happen, it would succeed no matter how much the buyer paid more than its competitors (Eccles, R. et al., 1999). Companies can take operating margins as a measure for deal’s success during the due diligence process, but studies have shown two different sides. The first side found that there was no indication of improvements regarding operating measures after M&A. While the other side discovered a positive effect on operating margins, so it depends on the type of the deal and how it is done (Kaplan, S., 2006).
2.2.3. Human Capital:
In the past twenty years, many research papers and case studies have drawn the attention towards the human perspective of firms and consider it as a critical factor to achieve success in M&A (Goulet, P. et al., 2006). In fact, during mergers and acquisitions companies are not only integrating brands, structure and entities but they merge employees too, which can be considered to be a complicated issue resulting in losing talented employees from both sides of the deal because of not involving human resources in M&A. In some cases, firms face legal restrictions that make organisations unable to select qualified employees. According to the PWC survey, one of the participants wrote that “we constantly have that challenge about who I’m allowed to work with. There’s the constant back and forth about who needs to know and so the folks that really need to be engaged in that early due diligence, such as road trips and cultural audits and conversations with leaders, tend not to get nondisclosure agreements from legal until we’re way down the road. And then it’s really difficult to play catch-up.” As a consequence of this, there should be an efficient system to adjust management and arrange employees with business plans in every M&A deal. The plan can be done by establishing a merging management office that concentrates on human capital during the M&A process. Moreover, this office has several responsibilities, such as staff retention, employee’s selection, and avoiding cultural bias (Colombo, L. et al., 2011). Additionally, Ashkenas (2014) has mentioned that what makes an integration successful or not is usually not related to logic or strategy, but it is more about culture and relationships. CEOs and CFOs are involved in mergers and acquisitions, and they are the ones who are responsible for putting it all together. However, it appears that these essential employees do not get the needed attention. Because financial and strategic interests of the integration are gaining more importance than the human factor without focusing on how the board of directors will be after the combination of the two entities. This is considered as the first step in M&A’s failures, or it could minimise the benefits of the integration. As a result, companies must involve human dimensions of the deal are established during the due diligence process and participate in every period of the deal. It is imperative to know that firms are not only buildings or financial statements, but it is a small community that communicate and interact with each other to add value and achieve goals (Ashkenas, R. 2014). In general, a high rate of employees’ turnover is caused by an insufficient amount of research during M&A deals, and the majority of turnovers occur in management levels. Many studies have shown that more than 50% tend to hand in their resignation after nearly a couple of years of the deal accomplishment (Ahammad, M. et al., 2011). Many managers from all levels of management typically determine to quit the company to save their jobs in the future. This aspect is recognised in merged companies because they are usually confronted with a high rate of employee turnover, especially between chiefs (Haleblian, J. et al., 2009). However, companies can tackle this problem and overcome the pitfall of management turnover. Therefore, firms must keep employees updated and persuaded of the importance of impartiality of the board of directors. In other words, it appears to be that the organisation should always be open and honest with its staff to evade any perplexity and confusions. As a result, this will have a direct effect on managers’ performance, strengthen their relationship with the company and in some cases changing their decision of leaving the firm after mergers and acquisitions (Schein, E. 2010). Pikula (1999) demonstrated that nearly every company deal with employee turnover, especially after five years from the deal. This turnover typically recognised in the board of directors because in some cases the managers of the acquired company feel occupied, resulting in a lack of communications between the two executive teams from both companies (Pikula, D. A., 1999). The most crucial stage for employees during combinations is post-merger consolidation because during this stage results could be achieved or fail to be achieved, and employees’ awareness can be raised significantly (Harrison, S. et al., 2008).
2.3. Conclusion:
In conclusion, there are various drawbacks in mergers and acquisitions that companies could not avoid them because they keep following and making the same mistakes. This essay has mentioned the most common aspects and techniques that firms do mistakes in and how to overcome them. First of all, due diligence has a substantial role during integration, and the majority of organizations do not give it much time when planning to integrate with other companies. Also, there should be a compliance programme during cross-border integrations in order to not break any international law. Generally, companies do not spend too much time with due diligence because it is considered to be a very long procedure. Due diligence is described above with several stages, such as collecting background data about the acquired company. These stages then apply to both public and private firms. Furthermore, the acquiring company wants to know about the financial performance of the firms that are going to be acquired. Providing the purchaser with that target firm’s technology, customer base and revenues, it gives the buyer accurate information that makes mergers and acquisitions subtle and without any difficulties. This essay showcased cultural aspect, which deemed to be one of the major problems that each company confront during local mergers generally and cross-border deals especially. Moreover, cultural differences are still occurring even among similar companies, and that combining balance sheets are much more straightforward than merging two different or even similar corporate culture. As a result, companies always intend to protect and not to change its culture as it represents its entity. Therefore, firms merge with similar businesses field to gain value. There are two contradicting theories in cultural differences, culture clashes, (which says many cultures mean more issues during deal), while cultural synergy demonstrates that distance can let culture transform and develop. Culture is a crucial factor that companies have to amalgamate and being adjusted adequately to ensure mergers and acquisitions success. Finally, our last factor is human capital, which is typically ignored during the vast majority of deals. Therefore, M&A deals with failure. Employees from both companies are merged during acquisitions and try to form one team that functions well together. Consequently, organisations have to inform employees on new changes during post-acquisition stages. In this case, employees will start feeling more comfortable about the deal, and their company is preparing them to get used to new policies and regulation that could alter the way they work. It turns out that the high rate of employees’ turnover tends to happen between high levels of management in which makes companies suffer from the lack of talented people. In other words, companies lose nearly all their beneficial and most experienced managers, which leads to integration failure. All the required solutions to the previous cases were provided above, which make this case study useful to companies on the verge of merging.
3. Research Aim:
The main aim of this Masters’ thesis is to analyse, having a better understating of mergers and acquisitions problems and find the most appropriate solutions of the most common pitfalls to overcome them. These previous points are in the literature of similar case studies. As a result, the findings of this paper will form a formula that can be applied in future M&A integration that minimises the rate of failure and increases the chance of success.
4. Research Questions:
This case study includes one main question and two sub-questions. First of all, the research question represents:
What are the main key factors to overcome the most common pitfalls of mergers and acquisitions?
All the related data to the main research question of this thesis was collected and viewed in the literature review, and the most appropriate solutions were mentioned above. This master dissertation demonstrated the most three common pitfalls: due diligence, culture clash and human capital.
The two sub-questions are:
1. How to make mergers successful enough to add value?
Mergers can be successful and start to add value to both companies in the deal by finding adequate solutions to the most common M&A issues that will be mentioned in the findings.
2. How to solve employees’ turnover issue after mergers?
This issue was pointed out in the third part of the literature review under human capital. In basic terms, this issue was one of the main reasons behind integrations failure, and the proper solutions will be highlighted to tackle this hurdle.
5. Objectives of The Dissertation:
This thesis has shown and discussed many research studies that have been published by universities, distinguished authors and academic journals. Nearly all of them found that mergers and acquisitions fail to deliver their desired goals. Furthermore, many of the latest research assignments or articles agree with the results mentioned on this case study that supposedly around 40 to 60 per cent of all mergers and acquisitions do not attain the results placed before the combination process. From the previous reasons that led to M&A failure, we come up with three points. First of all, the object of this essay is to discuss the key factors, which make any merger deal successful by solving and avoiding the most common mistakes. Secondly, how can mergers add value when they are successful. The third point discusses one of the most controversial issues, which is the managerial turnover after mergers. The introduction in the literature review has given us a general view of the majority of mergers and acquisitions pitfalls. Then, the first part of the literature review focused on due diligence and presented the problems that could face any company while using this technique. Furthermore, the first part tried to cover the solutions that should have been used to avoid due diligence deficiency. The second part gives an overview of the cultural perspective and understand the fundamental values and use them to achieve M&A success. According to Miller (2000), more than 80 per cent of mergers and acquisitions failed because of cultural issues. Therefore, this thesis is trying to draw companies’ attention towards culture as it is considered to be a significant factor to reach the expected results. The third part points out to remarkable factor, which many research papers have mentioned it, leading to failure or success of mergers and acquisitions deals. A recent survey by PWC explained the importance of this crucial feature and how their views helped in the success of future mergers. On the other hand, the biggest hurdle in human capital is management turnover during and after mergers and acquisitions. This paper tried to find an innovative solution in more detail through the empirical illustration of integrations.
6. Research Methodology:
The style of research selected in this paper will be discussed in this section. Mark Saunders, Philip Lewis and Adrian Thornhill have their own definition of research methodology, which is “the systematic collection and interpretation of the information with clear purpose to find things out.” They also explained what is research methodology when they said “the research philosophy you adopt contains important assumptions about the way in which you view the world. These assumptions will underpin your research strategy and the methods you choose as part of that strategy. In part, the philosophy you adopt will be influenced by practical considerations.” According to Mark Saunders’s ‘onion’, which describes all research philosophies, approaches, strategies, choices, time horizons, techniques and procedures; a deductive approach is the most appropriate approach to this research paper. The deductive approach also can be called deductive reasoning, as Lodico mentioned “deductive reasoning uses a top-down approach to knowing. Educational researchers use one aspect of deductive reasoning by first making a general statement and then seeking specific evidence that would support or disconfirm that statement.” (Lodico, M. G. et al., 2006). Furthermore, a quantitative approach is within this thesis. When a quantitative style is incorporated into the research, there will be many options to choose to carry on the research and descriptive survey research “questionnaires” is one of these choices. The descriptive survey research strategy describes participants behaviours and collects people’s opinions about the issues in this case study. Moreover, the information transforms into numbers representing each person’s response. Research question and sub-questions started with what and how and the best primary method to use to give an accurate answer to these questions is survey strategy. Moreover, the quantitative style is utilised in this study to gather primary data and come up with findings and results (Saunders, M. et al., 2007). This paper includes secondary data of present literature from academic journals, books and other thesis papers. In other words, data is collected and gathered from existing literature resources, then this data is put together and analysed to form new literature. Results are concluded and discovered from surveys, therefore, collecting primary data that took into account the problems mentioned in the research question and finding solutions to them. This paper includes a quantitative method, which standardises data collection to generalise the results after performing a statistical comparison. Value creating theory is one of the most controversial theories of mergers and acquisitions, which demonstrates that companies merge to add more value and create synergy such as the economies of scale. This theory was cited in the first sub-question, and an answer to this theory will be found in the results (Leepsa, N. M. et al., 2016). Finally, collecting data strategies by using surveys that present numbers and statistical analyses is agreed to be a quantitative strategy, which this paper delivers.
7. Data Collection:
7.1. The Population/Sample:
The sample consists of 31 employees from audit, financial advisory and financial consultancy firms (Deloitte, PWC and EY) in the Middle East.
7.2. Data Collection:
This part of the paper will give a full description of the data collection procedure and show the particular data collection method chosen. Furthermore, there are various data-collecting methods, such as qualitative and quantitative, which can analyse primary or secondary data. This thesis uses a quantitative method to come up with new results from primary data. The most common instrument used to collect primary data is questionnaires, which contains only closed questions with several fixed answers (Coughlan, M. et al., 2007). The type of data that is existing in academic journals, magazines, books and research papers are considered to be secondary data, which is used in the literature review. Nonetheless, this research paper includes numbers and statistical analysis because the quantitative search was adopted to collect primary data.
The primary data was collected from analysing survey’s answers. While secondary data used in the literature review was gathered from different recourse, which is shown below:
1. Questia.com, which is a trusted online library that provides a platform to a large number of books, journals, magazines and newspapers.
2. Google Scholar, which includes a variety of universities’ libraries and a significant number of research papers, case studies, and dissertations that have been published by well-known authors.
3. The library of our university that gives students access to recent case studies.
4. Academic journals, such as Financial Times, The Economist, The Guardian and Harvard Business Review.
5. Famous publishers such as, John Wiley & Sons who provide a publishing platform to an expansive network of students, authors and professors to publish their work.
6. A large number of articles in trusted websites, which end with “.org” or related to other universities.
All secondary data collected is from different sources mentioned above is used in the literature review as a part of this study. On the other hand, analysing primary data enables coming up with new results that solve the problems related to the research questions of this study. Moreover, the primary intention of this research study is to give an explanation of the reasons behind the most three common issues of mergers and acquisitions and try to approach an appropriate solution for each pitfall.
9. Discussion:
During this part of the dissertation, the findings of this research paper will be stated, discussed, linked with existed literature, research questions and demonstrate how these questions are answered.
A previous case study by Miller showed that corporate culture could be very tricky because many companies seemed to be very similar, but in fact, they still can vary from a cultural perspective. The author also said that both due diligence and cultural analysis have the same level of importance during deals (Miller, R., 2000). Company’s culture is a sensitive matter, which is not solved by changing the other firm’s culture. Moreover, Hofstede mentioned that all problems linked to cross-cultural deals rise when culture variations between firms, groups, people increase (Fink, G. et al., 2007) (Hofstede, G., 1980). While the findings of this paper found that the there is some difference in the culture at the workplace compared to before mergers, decreasing the languages barrier during international deals/mergers have helped to decrease the effects of culture clash, and employees are more affected by the presence of new management despite being culturally entwined/similar].
On the other hand, not all employees are open to cultural integration while welcoming the differences of new management after the merger, also not all employees find that M&A allows the same workflow. These previous findings contradict with Goulet and Schweiger study that insisted on the advantages of cultural differences on employees during the learning process in order to have more experienced and flexible staff (Goulet, P. et al., 2006). Smith has demonstrated that due diligence is not a critical factor, which pledges the success of integration deals, but the author stated that the business combination process needs to be given sufficient investing time by a legal tool, such as due diligence (Smith, S. J., 2005). The results of the survey showed that to ensure M&As succeed, due diligence has to be done by both parties. Greengard said that companies tend to avoid spending enough time in due diligence because of its complexity (Greengard, S., 1999). However, respondents agree that two parties should do the same amount of due diligence to ensure the success of the M&A, and the due diligence is an ongoing process that helps to understand the market. Furthermore, French demonstrated that due diligence could reveal any hidden plans in post-merger stage, which can affect the path of the deal (French, J., 2018). The results showed that using due diligence consultancy firm will ensure the quality of the due diligence, and deal success.
Moreover, A percentage of employees tend to leave their company after a bad M&A deal, and it appears to be from the managerial level according to Ahammad and Glaister study of high levels of turnover in mergers (Ahammad, M. et al., 2011). This issue can be solved by the results of this paper that demonstrated that managerial and organisational support would prevent employees’ turnover. Also, continuing training programs, one-to-one meetings to discuss employees confident of the new rules, and workloads, increasing remuneration, new management that is open to suggestions and feedbacks will prevent employees’ turnover. Finally, Helene Abrams has shown in her case study, synergies emerge during successful mergers and acquisitions, and these synergies rise to add value to the integration deal (Abrams, H., 2013). The previous study has only mentioned the idea of achieving synergies to add value and how it differs between merger types. Conversantly, findings demonstrated that the company’s size, and using different funding methods would add more value to M&A. It can be seen that findings answered all the research questions adequately and found more solutions that were not mentioned in the previous literature.
10. Conclusion:
In conclusion, this paper has formed a platform to provide the reader with a general overview of the most common essential factors that could be an issue for any merger and acquisition deal and finding the most reasonable approaches that could lead to integration success between companies. First of all, the paper mentioned several of the external and internal variables carefully. Furthermore, in the last two decades, the rate of M&A failure has increased significantly to reach more than 60 per cent. Therefore, many case studies explored the main reasons behind these failures. Secondly, the literature review showcased the most relative case studies that discussed the same problems of mergers and acquisitions; cultural clash, lack of due diligence and employees’ turnover. Thirdly, the most three common pitfalls include due diligence, culture clash and human capital. This research highlighted the main key factors to overcome the most common pitfalls of mergers and acquisitions. The most crucial factor that leads to a successful deal is the due diligence, also, to solve the culture crash to make mergers successful enough to add value. One way of solving the issue of employees’ turnover is by establishing a merging management office. The office and its concentration on human capital allow a smoother transition, and consolidation of personnel, during the M&A process. Furthermore, using a different funding method, and considering the company’s size during M&A has a direct effect on adding value. Finally, this paper addressed the main problems and derived their solutions from the questionnaire by answering the research questions.
11. Limitations:
This research paper constitutes of quantitative research, such as the literature review and discussion, so the limitations are going to be categorised into quantitative research limitations and limitations of the researcher.
11.1. Quantitative Research Limitations:
The first limitation was the data limitations of the literature review because numerous case studies were not covered or at least covered to the sufficient detail expected of the researcher. To cover and analyse this massive amount of data require considerable time which was not available. All mentioned recourses were chosen wisely and analysed accurately. In terms of research methodology typically needs a large sample, but this appears to be impossible because of the lack of resources. Furthermore, the quantitative method relies on wide-ranging statistical analysis and precise regulation. Also, it is considered to be expensive, challenging and takes a significant duration of time to finish the analysis. Moreover, quantitative research includes a survey with close-ended questions which can limit the outcomes. The selection of the article was related to the main pitfalls in M&A deals, and what factor can lead to M&A success, so this paper only discussed the most three hurdles that were mutual in the most of the collected resources. Another limitation to highlight is the lack of the information available about mergers and acquisitions problems as a lot of research paper analyse M&A failure in a specific company, but this case study only mentions a general pitfall that could apply to a large number of companies in different industries. Finally, there is no perfect research study, and each research paper has its own limitations. Despite the limitations, the main question in the research was believed to be adequately answered throughout this dissertation. The data limitations could affect the validity of the data and the results of the literature review. However, the findings were related to the outcomes of the questionnaire and represented the most common essential factors that overcome M&A pitfalls (Chetty, P., 2016).
11.2. Limitations of The Researcher:
The main limitation of the researcher for this research paper was time. The researcher faced difficulties due to the lack of time to analyse data related to the research problem because of the due date of this thesis. If the researcher had sufficient time, he would have collected and collated an increased number of respondents to gather a more extensive amount of data, performed more research as well as perform an evaluative perspective on the effectiveness of the acquired research to formulate sound arguments throughout the dissertation. The results of this thesis would, therefore, be more accurate, given the increased mean average of the weighted responses of each answer during the questionnaire. Time limitation is a common problem during research that any researcher could confront with and set up an adequate schedule to not let the research interfere without external activities will be prevalent in the validity and accuracy of future studies.
12. Future Research:
It was mentioned above that there is no flawless research study, so even if the outcomes of this research paper were achieved, there would be a need to do more further research in the future. The literature review needs more future research to analyse more M&A problems and try to find a suitable solution for it. Future research regarding due diligence as it is a long and complicated process with many aspects. Furthermore, future research could do more research about more geographical regions and include them in the study. Further research could be done through the cultural issue and support the research with more theories. More research could be undertaken through managerial turnover as there are too many case studies about this issue that mention recent examples not only a general view. Throughout this study, it was discovered that future research could discuss the size of the firms, the type of their industry and include a larger sample to collect more primary data and have more generalised outcomes. More research needs implementing in this field of study in order to ensure an improved pool of resources for both academics and businesses.
13. Recommendations:
Companies should give the planning of, and implementation in, the creation of a merger when planning to integrate with other companies.
A compliance programme planned and executed during cross-border integrations in order to not break any international law.
Companies should spend too much time with due diligence and should be done by both parties to ensure a successful deal.
Using due diligence consultancy firm will ensure the quality of the due diligence, and deal success.
Establishment of a merging management office that concentrates on human capital during the M&A process.
Provision of managerial support to the employees, continuous training programs, one-to-one meetings with employees to discuss new rules and workloads, and getting feedback/suggestions.
Increased remuneration of employees to decrease employees’ turnover.
Decreasing the languages barrier during international deals/mergers help to decrease the effects of culture clash.
The post Abstract: The majority of firms are choosing mergers and acquisitions as a appeared first on PapersSpot.
