Strategic Leadership in Mergers and Acquisitions

The Strategic Issue: Mergers and Acquisitions

Ascertaining strategic issues within an organization is the core of the strategic planning process. A strategic issue is a key policy problem or critical challenge impacting the obligations, mission, or values of an organization, its consumers, organizational structure, practices, or management. The strategic issue faced by the company at the present moment is the need for diversification and increasing its financial capacity. As a result, the organization is considering a merger with one of the key players in the industry.

Background and Driving Factors

Several factors and resource constraints have combined to give rise to the strategic issue of mergers and acquisitions. One key factor is economies of scale. Specifically, cost reductions take place owing to corporate assimilation—reductions that may occur because of declines in per-unit costs that emanate from a rise in the size or scale of organizational operations. As a result, companies consider merging to capitalize on the production of greater output volumes in order to attain lower costs. Another factor is the need for diversification. The organization might employ a merger to diversify its business operations by entering new markets and offering new products or services. Furthermore, the merger will enable the organization to diversify the risks linked to its operations (Kaol, 2017).

An additional organizational reason involves an increase in financial capacity. Every firm has a finite financial capacity to fund its operations, either through debt or equity markets. Consequently, owing to insufficient financial capacity, the organization might benefit from merging with another. The newly consolidated financial entity will be able to attain greater financial capacity that can be utilized in additional business development activities. There is also the combined need for acquiring assets. A merger can be driven by a desire to acquire particular assets that cannot ordinarily be obtained through other approaches. Within merger and acquisition transactions, it is possible for the organization to gain access to distinctive assets (McDonald et al., 2015).

Several motives are considered likely to enhance the financial performance of the organization. First, there is the financial motive that mergers facilitate the acquiring company in enjoying a prospectively desired portfolio effect by attaining risk reduction while potentially sustaining the rate of return (Kaol, 2017). Second, mergers facilitate business expansion, as larger companies may enjoy greater access to financial markets and therefore be better positioned to raise both equity and debt capital. Greater financing capability may also be intrinsic in the merger itself. Additionally, there is a financial motive in that tax losses carried forward may be accessible in a merger if one of the companies has sustained a tax loss in the past (Kaol, 2017).

Financial synergy takes place when the amalgamation of two firms enhances financial activities to a magnitude greater than when the firms were operating as separate entities. More often than not, mergers and acquisitions give rise to a larger company with greater bargaining power to obtain a lower cost of capital. Attaining a lower cost of capital owing to a merger or acquisition is a fitting example of financial synergy. Synergy in mergers and acquisitions is achieved when the value added by the unification of two corporations exceeds that of the firms operating independently (Chatterjee, 1986).

VUCA Analysis and Key Stakeholders

The VUCA model in strategic management stands for Volatility, Uncertainty, Complexity, and Ambiguity. Different elements of this model apply to mergers and acquisitions. Complexity refers to the multiplicity of issues and factors, several of which may be interconnected. In the case of mergers and acquisitions, this is an intricate process in which different organizational structures come into play, along with different regulatory environments and cultural values—particularly when one of the parties is from a different country. Volatility encompasses the quality of being subject to frequent, rapid, significant change. Uncertainty describes circumstances in which events and outcomes are unpredicted; in the M&A context, this relates to organizational change and prospective synergy—specifically, whether positive synergies will form and whether all parties will embrace organizational change. Ambiguity is manifested in the absence of clarity and the difficulty of comprehending precisely what the situation is. When a company enters a merger for diversity, ambiguity may emerge concerning entry into a new market or the launch of products that fall outside the organization's core competencies (Bennett and Lemoine, 2014).

Several key stakeholders and leaders within the organization bear directly on the challenges of mergers and acquisitions, organizational procedures, and relevant policies.

C-Suite and Investment Committee

The investment committee comprises the Chief Executive Officer (CEO) along with other C-suite and senior-ranked executives. These leaders serve as the most influential decision-makers, sustaining accountability for the efficacy of each transaction. They bear the responsibility of ensuring the right individuals and teams are in place, fostering a culture of collaboration and discipline, and maintaining an organization-wide emphasis on long-term, value-enhancing objectives. As a stakeholder group, the investment committee deals with instituting a comprehensible strategy and a cohesive vision across the organization (Anderson, Havila, and Nilsson, 2013).

Business Unit Leadership

After the completion of a transaction, the business unit is responsible for operating the merged business. Each business unit leader therefore plays a pivotal role in the later phases of the M&A lifecycle. Business unit leaders are expected to support the due diligence and integration processes, drawing on their specific knowledge to identify prospective red flags and applying their comprehensive understanding of how the business should operate once the merger and acquisition is complete (Hitt, Harrison, and Ireland, 2001).

Corporate Development Team

The corporate development team is responsible for shepherding the planned constituents of an acquisition. Working most regularly in tandem with the target entity, the corporate development team can demonstrate extensive understanding of the target, articulate a well-expressed acquisition strategy and implementation plan, and help guarantee that the necessary resources are available or can be secured (Deloitte, 2020).

Reprioritization of Physical, Monetary, and Human Resources

Successful mergers and acquisitions require proper management and reprioritization of resources—physical, monetary, and human. The high failure rate of mergers and acquisitions is often linked to human resource factors such as cultural incompatibility, incompatible management styles, lack of motivation, loss of key employee talent, poor communication, and declining trust combined with unclear long-term goals. Human resource professionals must be proficient at identifying prospective issues, ascertaining solutions, and influencing management to adopt them. Human resource considerations that need to be addressed include retention of significant personnel, employee selection and downsizing, establishment and advancement of compensation approaches, and the development of comprehensive employee benefits programs (SHRM, 2016).

Reprioritization of monetary and physical resources—including assets—is equally pivotal. Within a merger, the acquiring party typically takes on all the assets and liabilities of the target company. Managing these new assets is critical in determining the right fit for the new entity, whether by disposing of unnecessary assets or selling them. Monetary management in M&A is also important in order to achieve financial synergy. Mergers give rise to improved performance and efficiency, as reflected in overall increases in profitability levels, long-term firm solvency, and capital adequacy levels (Berger et al., 2003). They also produce changes in efficiency and effectiveness, market power, economies of scale and scope, accessibility of services to smaller consumers, and payment systems efficacy. Beyond improvements in cost and profit efficiency, mergers may enable organizations to generate higher profits through financial markets by leveraging loan and deposit interest rates. Reprioritization of financial resources is therefore pivotal (Berger et al., 2003).

References

Anderson, H., Havila, V., & Nilsson, F. (Eds.). (2013). Mergers and acquisitions: The critical role of stakeholders (Vol. 52). New York: Routledge.

Andersson, M., & Karlsson de la Rosa, M. (2006). Cross-border and corporate aspects on culture in mergers and acquisitions. Uppsala University.

Ayers, R. (2019). Communication is key: How to ensure your companies merge effectively. Business2Community.

Bennett, N., & Lemoine, J. (2014). What VUCA really means for you. Harvard Business Review, 92(1/2).

Berger, A. N., Demsetz, R. S., & Strahan, P. E. (1999). The consolidation of the financial services industry: Causes, consequences, and implications for the future. Journal of Banking & Finance, 23(2–4), 135–194.

Chatterjee, S. (1986). Types of synergy and economic value: The impact of acquisitions on merging and rival firms. Strategic Management Journal, 7(2), 119–139.

Deloitte. (2020). The critical roles of five M&A stakeholders. Retrieved from https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/five-critical-roles-in-the-m-and-a-process.html

Gomes, E., Angwin, D. N., Weber, Y., & Yedidia Tarba, S. (2013). Critical success factors through the mergers and acquisitions process: Revealing pre- and post-M&A connections for improved performance. Thunderbird International Business Review, 55(1), 13–35.

Hitt, M. A., Harrison, J. S., & Ireland, R. D. (2001). Mergers & acquisitions: A guide to creating value for stakeholders. Oxford: Oxford University Press.

Jemison, D. B., & Sitkin, S. B. (1986). Acquisitions: The process can be a problem. Harvard Business Review.

Kaol, W. A. (2017). The effect of mergers and acquisitions on the financial performance of commercial banks in Kenya (Doctoral dissertation, United States International University–Africa).

McDonald, J., Coulthard, M., & De Lange, P. (2005). Planning for a successful merger or acquisition: Lessons from an Australian study. Journal of Global Business and Technology, 1(2), 1–11.

Schuler, R., & Jackson, S. (2001). HR issues and activities in mergers and acquisitions. European Management Journal, 19(3), 239–253.

SHRM. (2016). Managing human resources in mergers and acquisitions. Retrieved from https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/mergersandacquisitions.aspx

Weber, Y., Belkin, T., & Tarba, S. Y. (2011). Negotiation, cultural differences, and planning in mergers and acquisitions. Journal of Transnational Management, 16(2), 107–115.

Wright, A. D. (2010). Successful mergers integrate cultures. SHRM.