Literature review and thematic analysis

¶ … merger or acquisition and on the causes of its failure / success.

It would seem, as a result of the literature analysis, that the one of factors behind the increasing number of mergers and acquisitions that may be observed today is the prospect of increasing market share and profitability via this more appealing method, rather then to rely on the sole effects of growth. (Cartright and Cooper, 1993; Sudarsanam, 1995; Chatterjee et al., 1992; Wullaerts, 2002). All developed economies have known periods of tendency toward mergers, acquisitions or even divestments. Still, one very important factor that affects such tendencies is the economy's buoyancy. The fact that these activities rise and fall periodically brought up heated discussions between politicians, managers, academics and regulators regarding the advantages and disadvantages of such actions, as well as debate on the ethical issues at hand. (Vinten, 1992).

The most important characteristic of mergers and acquisition is that they have the potential to transform companies and to bring corporate change. (Angwin, 2001). A firm may not manage to renew its market position on its own as fast it would by way of a merger or acquisition. (Haspeslagh and Jemison, 1991; Harrison, 2002). The literature tends to describe more the sources of failure through inappropriate integration strategies. However, there are also studies that concentrate on the best available practices and their implementation for a successful merger or acquisition. Few authors have focused on learning through international acquisitions or any other forms of inter-organizational cooperation (Child, 2000).

According to a study conducted by Haspeslagh and Jemison in 1991, the real source of value creation in acquisitions is the integration process.

Successful acquisitions intend, before anything else, to create value. However, there is a surprising low rate of success with regard to acquisitions, as some authors have observed. (Lawrence, 2002; Marks and Mirvis, 1965). Transfer of capabilities and collaboration between people form both organizations are paramount in order to achieve the desired results and to take full advantage of the offered opportunities - which translates into value creation. Otherwise, in spite of the fact that a particular acquisition may seem very attractive, if there is not any will and ability of managers from both organizations to put together their efforts towards a better future, the final result may be disastrous. The key to integration is to have all people actively involved, without putting the strategic objective at risk.

One cause of employee dissatisfaction, which could seriously hamper the performance of a merger / acquisition, is the lack of similarity between management styles and organizational cultures. Choosing the right organization has become a prerequisite of a successful operation. (Larsson, 1993). (Larsson, 1993). Cultural compatibility should be used as a criterion for identifying the right candidate for an M&a (Cartwright and Cooper, 1993).

There is also a different approach to this problem: instead of finding the ideal culture fit, some authors have proved that a more realistic view of the issue would be to simply manage the cultural differences. Surprisingly at first, there are authors who believe that successful integration may be achieved even between different organizational cultures. (Buono and Bowditch 1989). Executives use various strategies to encourage employees to exercise tolerance and to engage in learning both in the parent and in the acquired firm. Companies have implemented different methods in order to facilitate the collaboration of the work units; there are all sorts of practices that integrate organizations conducting their activity in the same industry but in different countries or with contradicting corporate values. Acquisitions have the unique ability to create learning opportunities for the partner firms, if different skills and knowledge bases are involved. Management researchers have proven that the most important sources of a company's sustainable competitive advantage are the capacity to create, transfer, transform and utilize.

The challenges of the integration process. The definition of effective integration contains the concept of combining two organizations into a single unity or group, organizations that generate joint efforts in order to achieve the company's goals. However, there are often difficulties in realizing this combination, because of national and cultural differences, real or imagined. (Olie, 1994). Individual national ideologies and traditional industrial relations are a hallmark of an organization's identity. Since international mergers and acquisitions bring together people and firms with very different work values and beliefs, it is only natural that a new social identity be constructed.

Research by Datta and Grant (1990) and; Datta, 1991) showed that there are two particularly relevant organizational integration variables in an acquisition operation: a) the motive for the acquisition, i.e. strategic fit and decision making process; and b) the process of implementation (which includes the "acculturation" process).

The motive of an acquisition will influence the degree of required interaction between people of the two organizations. The implementation of strategies is a very difficult task, since it may do more harm than good to organizational effectiveness, especially in those cases when acculturate tension builds up and turns into conflict. (Buono and Bowditch, 1989). The main cause for failure of an acquisition is considered to be an acculturative conflict, which impedes the effective implementation of an organizational integration strategy

The acculturative process. The term acculturation, adopted from anthropology, was used by Nahavandi and Malekzadeh (1988, p. 82) to describe the cultural modifications which normally result from the interaction of two organizational culture, or, as the author put it,.".. The ways in which two groups adapt to each other and resolve emergent conflict."

Conflictive subgroup desires for cultural differentiation and organizational forces for integration generate a basic acculturative process (Buono and Bowdich (1989, p. 105). Sometimes, particular individuals do not accept giving up traditional cultural ideologies and patterns of behaviour, and may purposely disrupt the acculturation process, or wait behind the rest of the organization when it comes to accepting cultural modifications (Vansina, 1991).

Obviously, the forces behind making the appropriate acquisition selection are the ones of financial and strategic interest. However, there are many cases of organizational alliances which do no meet the expectations managers had before the acquisition, because of the problems posed by the acculturation process. Compromising the knowledge transfer and learning process often appear in the process of integrating another company.

Cartwright and Cooper (1992) believed that such difficulties might depend on both inappropriate integration strategies and incompatibility of the two companies' cultures. Therefore, the role of effective post-merger or post-acquisition implementation is strongly emphasized, as a means of obtaining superior performance through potential synergies. (Hunt et al., 1987). The integration of two entirely separate organizations with contradicting traditions and work environments into a single unit is often much more difficult and time consuming than one might expect (Buono et al.,1985)

Although conflicts do no appear at first, they may easily be observed during the post-merger transition period. Researchers have notice that members of the two organizations view the new situation from a very combative and antagonistic point-of-view ("us" versus "them"). Groups begin fighting over scarce resources and more complicated and difficult to solve power struggles develop. Although managers try to create a common identity, the initial cultures persist, and that is a very frequent situation in post-merger conditions, although the actual merger has been completed a great deal of time before. The study conducted by Elsaa and Veiga (1994) links the success of an integration strategy to the manager's capacity to reconcile the need for strategic interdependence in the two organizations and the need for organizational autonomy.

Therefore, managers should concentrate on post-merger integration efforts, which range from "minimal assimilation, which leaves the acquired firm more or less autonomous, to complete assimilation or blending of operations and cultures" (Salama, Holland, Vinten; 2003). Each particular acquisition has its unique characteristics that request an appropriate balance between the two factors mentioned above.

Concerning the prediction of whether a takeover will be successful or not, the literature has followed three directions, depending on the type of information tested: 1. firm/deal information, 2. market price information and 3. risk arbitrageur information. The first approach is used to predict the success or failure of takeover efforts using data such as the bid-premium size, the target company's managerial ownership, size, leverage and the acquirer's merger experience. The second concentrates on the effects of the post-announcement date price movement or the trading volume of the target organization's shares, concerning the success or failure of an acquisition. The last approach is based on the relation between the predictability of success and the arbitrageurs' purchasing behavior.

The size of the target firm is, according to researchers Hoffmeister and Dyl (1981) an important factor in the analysis of whether a takeover attempt will be successful or not. Their conclusion is that there is an inverse relation between the size of the target (measured as absolute market value) and the success rate of that particular merger. However, there are also studies that find no significant relationship between targets' market values and M&a success Cotter, Shivdasani, and Zenner (1997) and Schwert (2000).

The theoretical relationships between success and target ownership structure, bid premium, payment method and price changes are studied by Stultz (1988) and Harris and Raviv (1988). The conclusion whereat these researchers have arrived is that there is a negative mathematical relation between the probability of success of an M&a and the target company's leverage. An increasing leverage shows that equity is slowly substituted with debt, which reduces the fraction of voting right controlled by management and therefore affects the bidder's gain. Stultz finds that the probability of success of a takeover bid is decreasing as the debt-to-equity ratio increases.

Harris and Raviv (1988) have studied the same phenomenon from a different point-of-view. They have examined the effects of capital structure change, when it is used and an anti-takeover defense. Substituting debt for equity increases the bargaining power of the target companies. These conclusions were also obtained by way of empirical research (Raad and Ryan (1995), Assem and Titman (1999), and Schwert (2000)): the negative relation between the probability of takeover success and the target's leverage is sometimes modified, in a sense that ratios such as debt-to-asset (Raad and Ryan, 1995) or debt-to-equity (Schwert, 2000) have been used.

The importance of a bid premium is noticed by Walkling (1985), who states that the size of the bid premium influences in a positive way the rate of success of the tender offer. Walking also believes that previous researches, which have minimized the importance of the bid premium, are wrong due to the fact that the premium specification was incorrect (Pelligrino, 1972; Hoffmeister and Dyl, 1981).

Another important factor in establishing the success of a merger or acquisition is the degree of resistance of the target. The mangers' cash flow modifications are obviously negatively related to the resistance of the target company (Walkling and Long (1984), Mikkelson and Partch (1989) and Cotter and Zenner (1994)). It would seem that the lowest success rate is attributed to unnegotiated hostile offers (Schwert, 2000).

One helpful element in predicting the success or failure of merger attempts is the analysis of target stock price movements, for both stock swap mergers and cash tender offers. The higher the target stock price movement, the more probable the success. It would seem that there is a cyclical improvement of the market's accuracy, which acts monotonically (i.e. merger period). There is also a direct relation between the target stock price during the offer period and the estimated price at the consummation date.

There are also other factors that are explored by the literature. For instance, there is a positive relation between success of takeover efforts and the book-to-market ratios (Schwert, 2000). The sooner the target is contacted by the bidder, the higher the rate of success. Other studies indicate a relation between the purchase by the informed arbitrageurs and the success rate of takeovers.

The conclusion that may be drawn from this literature review is that managers should prepare with great care all stages of a merger or acquisition, before and after the actual operation has taken place, in order to avoid failure, or if success is achieved, to avoid ulterior complications that risk to damage in a severe way the entire process.

Reference:

Angwin, D. (2001), "Mergers and acquisitions across European borders: national perspectives on pre-acquisition due diligence and the use of professional advisers," Journal of World Business, Vol. 36 No. 1, pp. 2-57.

Assem, S., and S. Titman, "Leverage and Corporate Performance: Evidence from Unsuccessful Takeovers," Journal of Finance, 54 (1999), pp. 547-580.

Branch, B., Yang, T."Predicting Successful Takeovers and Risk Arbitrage" Quarterly Journal of Business and Economics. Lincoln: Winter 2003.Vol.42, Iss. 1/2; pg. 3, ProQuest

Buono, a.F. And Bowditch, J.L. (1989), the Human Side of Mergers and Acquisitions, Jossey-Bass, San Francisco, CA.

Buono, a.F., Bowditch, J.L. And Lewis, J.W. (1985), "When cultures collide: the anatomy of a merger," Human Relations, Vol. 38, pp. 477-500.

Cartwright, S. And Cooper, C.L. (1992), Mergers and Acquisitions: The Human Factor, Butterworth-Heinemann, Oxford.

Cartwright, S. And Cooper, C.L. (1993), "The psychological impact of mergers and acquisitions on the individual: a study of building society mergers," Human Relations, Vol. 46 No. 3.

Cotter, J.F., and M. Zcnncr, "How Managerial Wealth Affects the Tender Offer Process," Journal of Financial Economies, 35 (1994), pp. 63-97.