Mergers and acquisitions

let´s start with a short story ...

http://www.tecnofullchile.cl/component/content/article/40-tienda-virtual/105-cargadores-hp-compaq.html

On september 3, 2001 CEO Carly Fiorina announced HP´s decision to acquire Compaq in a stock transaction valued around $25 billion, soon after the announcement was made the stock prices of both companies, HP and Compaq fell significantly. The acquisition was criticized by a lot of analysts and experts who believed that merging those two companies would only create a bigger company with bigger problems. Even the son of one of the founders, Walter Hewlett was part of the opposition. The first three years the merger failed to realize its potential, but then after some changes were made and some strategies redirected, guess what?? the merger turned out to be a sensational combination!, the new HP has become a valuable profitable company with higher revenues, more market share and a superior stock price that many of its competitors envy. Three questions arise: why do some M&A fail? What are the benefits that they may bring? and what are the aspects that managers should take into account to improve the probabilities of success in a M&A process?

Differences between Mergers and acquisitions

Even if the terms are commonly used as synonyms, they are not the same... a merger happens when two companies agree to exist as a single company and the stock owners of both companies receive an  equivalent quantity of stock in the new company, this doesn´t happen in acquisitions.  When one company takes over another company (which ceases to exist) and stablishes itself as the new single owner.

Benefits of M&A?

• The can create cost reductions through economies of scale
• When firms want to enter in new markets
• Increased revenue or market share
• They may generate tax gains
• Resource and technology transfer
• IMPORTANT:they can increase value generation

Why do so many mergers fail?

• Poor strategic moves, such as: overpayment
• Unanticipated events like when a certain technology becomes obsolete suddenly
• Executives forget to have a realistic outlook of the integration process
• IMPORTANT: clashing corporate cultures

Managers, don´t forget to pay attention to the following factors!

• Appropiate objective planning, don´t fall in love with the idea of the merger, view reality as it is
• Recognize the strategic interdependency between the firms
• Acquire capabilities to manage cultural differences
• create methods to evaluate the success of the process: like performance metrics 
• Learn to handle the negative perceptions that employees may have of the other company
• Be sure to promote an environment in which communication is not hampered

Managers, one last thing!....

Keep customers informed about the merger,  they should be viewed as the most important stakeholder and deserve the appropiate treatment...

There were two tech firms that decided to merge in Silicon Valley, soon after the merger was announced, IBM which was a customer of both firms, simply decided to never do business with them again, because they felt that they deserved to be informed of the change before making the announcement.

Question for the blog…

According to the case studies what are the practical steps to minimize the feelings of uncertainty normally expected by employees, and also to facilitate the learning process to occur between the two groups of people in their process of cultural and behavioral integration?

·         The creation of an integration team

·         The determination of top managers to lead the new entity into the future helps to minimize the feelings of uncertainty of employees about the future

·          It´s not about asking: what is the ideal fit?, the fundamental question is: are we disposed and willing to fit?

·         Differences and similarities in values, beliefs and management styles between the companies should be identified BEFORE completing the deal.

·         The establishment of common goals may serve to reinforce integration

·         Understanding and setting integration strategies to facilitate the acculturation process.

References

Why do so many mergers fail (2005). knowledge@Wharton.

http://knowledge.wharton.upenn.edu/articlepdf/1137.pdf?CFID=39130196&CFTOKEN=45385092&jsessionid=a830b2842a4268858fcc316855372f3a2a24

Alzira Salama, Wayne Holland, Gerald Vinten, (2003) "Challenges and opportunities in mergers and acquisitions: three international case studies – Deutsche Bank-Bankers Trust; British Petroleum-Amoco; Ford-Volvo", Journal of European Industrial Training, Vol. 27 Iss: 6, pp.313 - 321

Hp logo. (Image). Available at: http://www.tecnofullchile.cl/component/content/article/40-tienda-virtual/105-cargadores-hp-compaq.html