We have discussed about Merger and Acquisition as one of the corporate restructuring strategies and the reasons for which a company opt for it. We have also reviewed the recent trends in Merger and Acquisition and the different issues related to it. A brief review is being made on different types of Merger and Acquisitions. Actually we focused on the very HR aspects of any M & A, because studies have shown that many economically viabled transactions have failed because of not accounting properly for the human resources and issues related to them. We have found that most of the successful M & A have considered the best practices of the two firms and implemented them to the new organization for the better performance of the organization.
Introduction
In the perfect world, corporate assets would be channelled towards the best possible use. Mergers and acquisitions (M&A) help attain that goal by reallocating control over company. However, frictions such as transaction costs, manipulation of information, and agency conflicts can prevent efficient transfers of control. Merger and acquisitions activities are picking up. The first quarter saw the high level of global M&A activity since 2000. It may therefore be interest review what we have learnt about the science of M&A lately. Perhaps surprisingly, there also growing evidence the making acquisition is one of the best and safest ways to sustain shareholder value. Yet should we not have learnt that M&A usually does not make sense? That most acquisitions destroy value? That deal making are prompted by CEO vanity and not by economic reality? Not necessarily. Contrary of popular opinion, the vast majority of M&A deals succeed and add value to shareholders and society. The 1990s featured the most intense period of mergers and acquisition in U.S. economic history. This period is now recognized as the fifth merger wave in U.S. history.
Merger wave are periods of unusually intense merger and acquisition activity. There have been five such periods since the starting of the twentieth century, with the previous one occurring in the 1980s. This wave featured many record-breaking mergers. When it ended in the late 1980s, many thought that there would be an extended period of time before another one began. However, after a short hiatus, an even stronger merger wave took hold, far eclipsed that of the 1980s. The merger wave of the 1990s was path breaking due to the dollar value of the transactions and the unusually high number of deal. While the fourth waves in 1980s was known for both its megamerger and its colorful hostile deals, the fifth wave has featured far larger deal, as well as a good supply of the hostile transaction.
Fifth Merger Wave Exported to Europe.
While the fourth merger wave of the 1980s was largely confined to the United States, large-scale mergers and acquisitions finally made their way to Europe in the mid-1990s.In recent years, cross-border deals within Europe have grabbed the headlines. Even hostile takeover, long thought to be an
exclusively American phenomena started becoming more common in Europe. This is underscored by the fact that the biggest deal of all time was the Vodafone Mannesmann $183 billion hostile takeover. In addition to deals within Europe, trans- Atlantic deals, with European buyers of U.S. companies and vice versa, started to become commonplace. With the development of the European Union and the erosion of nationalistic barriers as the continent moved to a unified market structure with a common currency, companies began to see their market as all of Europe and more. It became clear that a European consolidation was in order. Although there are many indication that there will be realized benefit from such a consolidation, only time will reveal the magnitude of these benefit.
TYPES OF MERGERS, ACQUISITIONS, AND CORPORATE RESTRUCTURINGS
Mergers and acquisitions are usually, but not always, part of an expansion strategy. They can be horizontal deals, in which competitors are combined. The 1998 $77.2 billion merger between Exxon and Mobil is an example of a successful horizontal deal. They can also be vertical transactions, in which suppliers merge with buyers or dis-tributors. The 1993 $6.6 billion merger between Merck, a pharmaceutical manufacturer, and Medco, a pharmaceutical distributor, is an example of a vertical deal. Companies may also acquire firms that are in totally different industry. These types of deal is called conglomerate mergers. Daimler Benz's acquisition to the sector such as the aerospace industry helps them to convert the premium automobile manufacturer into the conglomerate and Europe's largest industrial company. The legacy of such type of deal is not impressive, but some companies, such as General Electric, have shown some success (at least up to the sizable acquisition of Honeywell). When companie look to downsize, as opposed to expand, they have several alternative available to accomplish this. They may simply sell a division through a divestiture. They may also consider a spin-off, such as when AT&T spun off different components of the overall company. When a company does this, shareholder in the original company usually become shareholder in the different and separate corporate entities. Another alternative to downsizing is an equity carve-out, which is an issuance of
stock in the division that is to be separated from the overall company. A less radical alternative is to issue a tracking stock that will follow the performance of the division in question. When the market is pressuring for a sell off, however, a tracking stock may not be sufficient to meet the demands of the market.
Why Do Firms Merge?
Growth. One of the most common motive for mergers is growth. There are two broad way a firm can grow. The first is through internal growth. This can be the slow and ineffective if a firm is seeking to take advantage of a window of opportunity in which it has a short-term advantage over competitors. The faster alternative is to merge and acquire whatever necessary resources to achieve competitive goals. Even though bidding firms will pay a premium to acquire resources through mergers, this total cost is not necessarily more expensive than internal growth, in which the firm has to incur all of the costs that the normal trial and error process may impose. While there are exceptions, in the vast
Majority of cases growth through mergers and acquisitions is significantly faster than through internal means.
Synergy. Another is commonly cited motive for the merger are the pursuit of synergistic benefit. This is the new financial math that shows that 2 + 2 = 5. That is, as the equation shows, the combination of two firms will yield a more valuable entity than the value of the sum of the two firms if they were to stay independent:
Value (A + B) > Value (A) + Value (B)
Although many merger partners would cite synergy as the major motive for their transaction, synergistic gains are often hard to realize. There are two types of synergy: that which is derived from cost economies and that which comes from revenue enhancement. Cost economies are the easier of the two to achieve because they often involve eliminating duplicate cost factors such as redundant personnel and overhead. When such synergies are realized, the merged companies generally has lower per-unit costs.
Different issues related to Merger and Acquisitions
1. Cross-Country Determinants of Mergers and Acquisitions On analyzing the determinants of mergers and acquisitions around the whole world by the focusing on the differences in the laws and regulation across countries. We find that the volume of M&A activity is the significantly larger in countries with better accounting standards and stronger shareholder protection. The probability of an all-cash bid decreases with the level of shareholder protection in the acquirer country. In cross-border deals targets are typically from countries with poorer investor protection than acquirers, suggesting that cross-border transactions play a governance role by improving the degree of investor protection within target firms.
2. Spillover of Corporate Governance Standards in Cross-Border Mergers and Acquisitions In cross-border acquisitions, the differences between a bidder and a target corporate governance have an important impact on the would be takeover return. Our country-level corporate governances indices capture the change in the quality of the national corporate governance regulation over the past 15 years. When the bidder is from the country with a stronger shareholder orientation (relative to the target), part of the total synergy value of takeover may result from the improvement in the governance of the target assets. In full takeover, the corporate governance regulation of the bidder is imposed on a target (the positive spillover by law hypothesis). In partial the takeovers, the improvement in the target corporate governance may occur on the voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from the country with poorer shareholder protection, the negative spillover by the law of hypothesis states that the anticipated takeover gains would be lower as the poor corporate governance regime of the bidder would be imposed on the target. The alternative bootstrapping hypothesis argues that poor-governance bidder voluntarily bootstrapped to a better-governance regime of the target. We can't find support for that bootstrapp effect.
3. HR issues in merger and acquisition
In an ideal merger, the newly created entity pools the best features of the two merging organizations. A well planned process built on the foundations of an open, honest and consistent communication strategy can pave the way. Mergers and acquisitions have become a common phenomenon in recent times. A merger of the size like HP-Compaq has implications for the workforce of these companies across the globe. Although the merging entities give a great deal of importance to financial matters and the outcomes, HR issues are the most neglected ones. Ironically study shows that most of the merger fail to bring out the desired outcome due to the people related issue. The uncertainty brought out by the poorly managed HR issue in mergers and acquisitions had been major reason for these failures.
The human resource issues in the mergers and acquisitions (M&A) can be classified in two phases the pre-merger phase and the post merger phase. Literature provides lot of evidences of difference in between the human resource activities in the two stages: the pre-acquisition and post acquisition period. Due diligence is important in the first phase while integration issues take the front seat in the later. The pre acquisition period involves an assessment of the cultural and organizational differences, which will include the organizational cultures, role of leaders in the organization, life cycle of the organization, and the management styles. The mergers often prove to be traumatic for the employees of acquired firms; the impact can range from anger to depression. The usual impact is high turnover, decrease in the morale, motivation, productivity leading to merger failure. The other issues in the M&A activity are the changes in the HR policies, downsizing, layoffs, survivor syndromes, stress on the workers, information system issues etc. The human resource system issues that become important in M&A activity are human resource planning, compensation selection and turnover, performance appraisal system, employee development and employee relations.
4. UNLOCKING SHAREHOLDER VALUE: THE KEYS TO SUCCESS (KPMG Report)
Any merger & acquisition follows a complex procedure from pre-deal planning till deal completion, the extraction of value. Inevitable pressure on time and resource mean that priorities must be allocated, and hard decisions made about which activities are undertaken, and when, how, and by whom they were done.
Specific objectives are as follows:
â- to correlate specific actions with the success or failure of the transaction;
â- to investigate the relative importance of the different activities; and
â- to assess respondents' approaches and attitudes to cultural and people issues.
Benchmarking Success
Shareholder value was used as the basis of the benchmark by which the success of respondents' deals was measured. We measured equity performance pre and post-deal and set individual company performance against their own industry trends. Deals were then categorized into those that failed to create value, those that neither created nor destroyed value, and those that exceeded their industry trend. Today's trend is the M&A by big giant's in industries.Buying out the the sick companies and turning them into a profitable company is not a small task,it requires a lot of indepth and 360 degree knowledge about the company and the particular industry.
Conclusion
M&As provide enormous potential for growth that simply can't be achieved as quickly through organic, incremental development. However, success rate is not very high, rendering them an expensive and very risky way to grow a business. When the financial service company pay close attention to the people aspects of a merger or an acquisition, they greatly increase the chances that the deal will fulfill its promise. That's why, in the final analysis, HR could make or break an M&A. In my opinion HR issues are the most important in M&A following by the financial and other issues like economy, industry, company involved, country involved etc and an organization should sure opt for such an option only after analyzing the actual need for it and just not only for the sake of name and fame as it happened with TATA Motors in case of acquisition of Jaguar-Landrover deal.The strategy of merger & acquisition is definitely a strong puller for the large corporate giant's.
Today if see around we will sure to find Indian companie's are following this strategy to enhance their businee value.
