For the companies seeking a global presence, Mergers and Acquisition is the most adopted method to reach out to the international market in the past couple of decades. This trend is evident in not only the profit making organizations, but also in non profit firms. Companies resort to mergers for reasons like increased market share, reduction of cost, create synergy, to increase the use of existing capacity, gain economies of scale, etc.
Mergers and Acquisition is more commonly understood by the word consolidation of companies. By merger we mean forming a new company by combining two different companies and by Acquisition we mean one company is taken over by the other, where no new company is formed. (Source: Website 1)
In merger, one organization is completely absorbed by the other where, the less important organization or the weaker company loses its identity and becomes a part of the stronger organization and gets its identity. (Source: Website 2)
The concept of merger and acquisition being too complex, there has been research being conducted by a range of management disciplines to assess the financial, resource allocation, behavioural and risk analysis aspect of the whole deal.
A Merger and Acquisition is necessarily a situation of financial activity where lot of care is taken about the assets and liabilities of the merging companies, creditability, technology, workforce skills, etc. The human resource aspect comes into picture only in the stage of integration. Many times it is seen that decisions of mergers and acquisition is taken by considering only the financial viability of the project, but little importance is given to the human resource aspect like culture of merging organizations, values and ethics, policies and practices followed by these companies, etc.
The Indian government bodies brought the concept of mergers and acquisition in India. Some necessary financial initiatives like restructuring the corporate sector of India were initiated by some financial organization by adopting M & As. There have been a whole lot of challenges placed in international domain by the Indian economic reform in 1991. Indian corporation started adopting strategies of mergers and acquisition for meeting the competition from global market. The trend in India has been changing in M & As and also different industrial sector are adopting this strategy to grow globally. (Source: Website 3)
Different sectors in India that have resorted to M & As recently are telecom, construction materials, FMCG, finance, pharma, steel, automobiles, etc. India now has become the number 1 nation in terms of mergers and acquisition deals happening year after year. Within two months of 2007, the M & A's deals amounted to more than $ 40 Billion. It is estimated that the total M & As deals in 2007 crossed $ 100 billion worth and this is as high as twice the amount in 2006. (Source: Website 3)
It was not very common for Indian companies to acquire foreign companies until now. But since last few years, the situation has been changing, with more and more Indian companies merging or taking over foreign companies. The reasons for each merger and acquisition happening in India have its own sets of benefits. But it has been observed that key factors like dynamic attitude of Indian companies, favourable government encouragement, and liquidity in corporate sector and buoyancy in economy can be attributed to more and more mergers happening in India. (Source: website 3)
Some recent mergers and acquisition by Indian companies can be:
A Canadian company Novalis was acquired by Hindalco for $ 5982.
Betapharm of Germany was acquired by Dr. Reddy's for a deal worth $ 597 million.
Terapia of Romania was acquired by Ranbaxy for a deal worth $324 million.
Tata acquired Corus of UK and the deal was worth $ 12, 000 million.
Globally, the strategy of mergers and acquisitions has been adopted by the corporate for the past couple of decades now. But, no research has yet been able to evaluate whether mergers and acquisition actually adds value and enhances efficiency or it results in destruction of wealth created. As a result the debate on the effects of M & As never seems to stop. Looking at the rate of mergers and acquisition in India in the last 5 years, it seems now an old concept. Although many M & As have taken place in India, there has not been any study which could provide the analysis of the post merger effect on performance and the reasons. (Source: website 4)
Aims
To investigate the possible barriers that may come in success of mergers and acquisition: Case study on Tata and Corus.
Objectives
To identify the concepts of mergers and acquisitions, reasons behind them, factors necessary for successful deals and causes for failures
To describe the Tata Corus case study
Finally assess the factors for successful merger and acquisitions in respect to Tata and Corus deal.
Literature Review
Merger & Acquisition Trends:
Till 1990s, not many Indian companies had even thought in their dreams of going for acquisition abroad. And, a UK company being taken over by an Indian company seemed only a fairly tale to hear. Financial reports suggest that more FDIs are realized through cross border mergers. (Source: Website 5)
There was a craze witnessed in 2006 and 2007 for mergers and acquisition in developed and developing nations. But this M & As was predominately by private companies than public organizations. This was due to the fact that many public undertakings were already been acquired by private giants or got merged with them.
The trend in M & As in the period 2006 and 2007 is attributed to the high growth in Private Equity Funds. Short term earnings growth and kind of regulatory structure of public sector were other reasons that encouraged M & As. (Source: Website 5)
China got approval from government in 2006 for M & As in private enterprises.
The world economy was buzzing with Private Equity transaction in 2006 and 2007. The sectors which saw the most of this activity was energy sector and real estate.
US, Japan, Israel and Europe flowed Equity capital into China for investment in retail sector. High consumer demand in China attracted them for investment.
The international mergers and acquisitions in US raised an amount of more than $ 200 billion for US. (Source: Website 5)
Motives:
Motives behind mergers and acquisitions could be different in each case. Sometimes it may be to save taxes. Continuing with the earlier mentioned example, the accumulated losses of B could be set off against the profits of A, resulting in substantial tax savings.
There could be other reasons for a merger or acquisition, like expanding the market base or complementing the existing activities. (http://ezinearticles.com/?Mergers-And-Acquisitions&id=227946)
Economies of scale: when the 2 companies merge, it reduces duplicate departments which in turn lower the cost of company with increased production as the capacity increases thus increasing profits.
Cross Selling: Selling its products to the customers of the merging company. Example: merger between a bank and brokerage firm, bank can sell its services to customers of the broker and broker can have bank's customer to open brokerage account.
Increased revenue: As two companies merge, its market share increases in terms of sales as well as revenue.
Synergy: as they have additional resources at source, they can be put to better utilization.
Tax implication: When a profit making company takes over a loss making company, its taxes can be saved.
Diversification: M & As gives a scope for going for diversified business due to better expertise and additional resources, geographical spread, different market segments, etc.
There has been pressure on companies to change due to the reason of globalization. Companies look for ways and means to attract foreign investments and foreign alliances. To maintain its competitive advantage, companies generally resort to M & As. (Granell 2000; Schraeder 2003)
To enter the new market, or a new business area, or gain technical know-how, companies look for acquiring appropriate company. M & As is generally strategy used to expand and grow. (Buckley and Ghauri, 2002).
Customer base can be expanded by acquisition, and also it provides an overall solid base to its business. (Kautz, 2000)
Now after seeing the trend, it seems that M & As is the only way how companies feel they can grow. When companies try to diversify and enter into a business in which they have no expertise or working knowledge that is where M & As fail. The failure of M & As of a British company, British Leyland can be attributed to this reason. The acquisition is successful in case when a company into similar business line is acquired by the other. (Dewhurst, 1999)
The worldwide rise in the mergers and acquisition has several motives attached to it, ach different for different firms. Decision of M & As is taken keeping in mind the financial and strategic benefits for the shareholders. (Cartwright and Cooper, 1996)
According to Buckley and Ghauri (2002) there are four different motives for mergers: strategic, economic, market and personal. But, many a times it has been observed that the decision of merger is taken to settle down a personal interest of someone rather than the need for the organization. It is argued by some that mergers is a game big boys like to play as they find it interesting and challenging and to keep their managers busy with lot of challenging work.
Reasons of failure of M & As:
In the history of American M & As, the case of mega merger between America online and Time Warner was considered to be the biggest and most profitable, a deal worth $ 230 billion. But, soon this association got dissolved and the two separate companies are now trying to re-establish themselves and looking for a market to have their base on. (Kavanagh and Ashkansay, 2006)
There are numerous factors that can go wrong and be harmful to merger or acquisition as, it is a complex activity. Merger requires a different change approach as it affects parts of participating companies in different ways. Studies reveal that not many mergers and acquisitions have shown a drastic improvement in performance. (Agarwal and Jaffe, 2000; King et al., 2004)
There can be many reasons for its failure. They can be poor management of mergers, unrealistic expectation, expertise layed off or leaves the newly formed company, etc. Company's talent is its major assets and if they are not managed properly, they may leave, which results in a huge loss. Two companies share different culture and when they merge them generally create a rift. Due to merger, the focused is shifted from the core business to other transitional activities. (Financial times, October, 2001)
At the time of planning for merger and acquisition, there are lots of plans for making the optimum use of synergy, but it may not work out in reality. They might just look good on papers. (Financial times, October, 2006)
The CEO of P & G, Mr. Lafely, says that most of the mergers fail and more often it is the big deals that fail than the small ones. He acknowledges the fact that there were initial hurdles in merger of men brand Gillette. He also admits that the reasons more common for failure of a merger is due to culture not handled properly, failure of bosses to do their job and poor strategies. You require lot of good luck and a strong management to work a merger successfully. (The Economist, August, 2007)
Successful M & As factors:
Partner: Clarity of what companies want out of it and a research to support it is required. [Mark and Mirvis, (2001)] To ensure effectiveness of the deal, factors like finance, strategic, culture and human should be considered. Evaluation of strategic positioning, current management, competitive advantage and technological advancement should be considered.
Purpose: There has to be clarity in the purpose and aims of acquisition. The focus on achieving the target gets successful when there is clarity on both the sides about the purpose. The deal could fail badly if the conflicts and confusions are not addressed on early basis. [Mark and Mirvis, (2001)]
Parameters: Planning the parameters of the deal by the senior executive along with other experts is very essential, otherwise it may result in failure of the deal because of unclear or lack of awareness of the end state of the deal.
Prepare people psychologically: Communication of mergers should be done to employees in the initial stage itself and people should be well informed about the implication of the deal on their roles, give them clarity about their new job and how it will be beneficial to them. Lack of awareness on this may bring lot of ambiguity and insecurity in the minds of people and they tend to leave.
M & As and its impact on employees:
According to Corwin, people issues are most delicate and should be handled with utmost care in mergers for it to be successful. There is a change in culture of the organization, structure, value creation etc in both the companies. Improper handling of issues can affect the performance and will amount to absenteeism or lack of motivation. Change of culture, structure and management of the organization affects the employees strongly and this in turn leads to turn over or bad performance and when these issues are not handled with caution it will affect the performance of organization also (Rusu et.al, 2006).
In normal case employees are against any merger or acquisition and this is because they are worried about their future and for the same reason they over react to such decisions of management. Whenever a merger occurs employees expects the worse. Rumours are the worst to affect such moves as it won't be fact that is said. When a company with work force of 1000 employees gets acquired rumours spreads that 3000 employees will be laid off (Cartwright and Cooper, 1992, P: 28)
It is the duty of HR department to make them aware of the situation and to communicate with them the actual situation. Employees must be assured that there won't be any job loss and with this merger it is the employees who benefits finally, so that they are motivated to remain loyal and thus work with more focus. Good and effective HR who makes real and honest communication with employees will help employees to cope up with the moves of management and thus will be able to reduce any negative impact on organization (Rusu et.al, 2006)
Communication during Mergers:
Acquisition and mergers are considered to be a threat to employee stability. When a merger takes place employees finds it difficult to identify themselves with the organization and thus lose their attachment with the firm. They are often feared about the new work group and new identity taken by the organization and thus have a negative impact on their psychology which forces them to resign their job. When employees are more attached with an organization they will find it more difficult for them to work with a new organization that forms with merger (Bartels.et.al, 2006)
Organization identification is the condition where employees counts themselves with the organization and relates themselves with the firm they work for. When there is a relation between the identity of an employee and an organization he will be more closely related to that organization. Organizational identification has a great influence on the sincerity of employees towards their work and organization for achieving organizational goals and personal goals (Ashforth and Mael, 1992).
Handling Culture Difference:
Words of Juergen Hubbert, chief of Daimler Car Company shows the importance of organizational culture. The Economist reported Juergen Hubbert saying "We have a clear understanding: one company, one vision, one chairman, two cultures." (Financial Times, October, 2001, P: 02). The statement gives a clear picture of Daimler and Chrysler merger that was a failure. Though it was said as merger between equals the difference in culture made the move disastrous. From this it is evident that the culture has a major role in future of corporate mergers.
The issue is more when the merger is between a firm from developing country and western country. Cultural clash is often regarded as the reason for failure of mergers. Siebel systems conducted an internal study (recently acquired by Oracle) regarding mergers and reveals that the reason for failure of almost all acquisitions is "cultural conflicts". When companies from two different countries merge the issue is more severe (Financial Times, October 2006)
There is no easy method to solve the issue of cultural difference caused by mergers or acquisitions, but the problem is recognized as "Post alliance culture shock" by the executives of companies now days (Cartwright and Cooper, 1992)
The acquisition of Lenovo and IBM was observed with great enthusiasm as Lenovo is a Chinese company that made products for Chinese market only and IBM a global company. Observers were sceptical about Lenovo's capability to manage global business. Acquisition was in December 2004. Both the companies were having entirely different business culture and models and the acquisition was happening in most competitive and fast growing PC industry and hence was a great challenge (Financial Times, October 2006)
Research Methodology
Introduction:
Research methodology of a topic like this is of great importance as the strategy selected by researcher and the methodology followed by him will affect the quality of research. Hence this paper chose the specific research design of case study and the methods that were chosen to carry out the research. The present topic aims to give the reader a clear picture about the method in which this dissertation will be completed. This will be helpful to give a clear picture to the reader about how this dissertation will be achieved.
Methods:
Purpose of a research is to mention the aim that is to be accomplished with this research and how the result of this paper can be made use of (Ghauri and Gronhaug 2002). Conducting a research can have more than one aim at times (Saunders et al., 2003). For a descriptive research study there will be an initial hypothesis and the design will be portraying correct profile of situation under which research is carried on, events and persons involved in this research. Prior to data collection it is necessary to have a clear picture of phenomenon on which researcher conducts research.
Strategy:
Research strategy is selected in accordance with three conditions. Research questions model prepared by researcher, how much control researcher has on actual behavioural events and focus on modern phenomenon when compared to historical phenomenon (Yin 2003).
Corbetta (2003) views that deductive study and inductive study are the two approaches if we are considering the research process logic.
In deductive approach research is carried out from general to particular and data is gathered on the basis of hypothesis that tests the worthiness of theory. In inductive approach at first observations are made and with the help of inductive reasoning derives a theory from observations made. In inductive approach qualitative data is used while quantitative data is used in deductive approach (Saunders et al., 2003).
Though these two methods differ in logic casualty entirely these two can be used together to form one ongoing research process. (Saunders et al., 2003)
Case Study:
Tata Steel is the company chosen for doing this research and role of human resource in mergers and acquisitions is presented with the help of Tata Steel. Only a few companies have made overseas acquisition and hence there were only limited choice for companies from India.
Tata group is the only corporate in India to make overseas acquisitions.
Company started this practice with acquiring Tetley tea and from then on they are in the news of mergers and acquisitions. Three British firms were taken over by Tata group from then onwards and this was in a time span of five years. The companies acquired are Tetley tea, Corus Steel, Jaguar and Land Rover brands. Among the four Land rover and Jaguar were previously owned by Ford and those were the latest to be acquired by Tata group.
It was on 31st January 2007 that the acquisition of Corus was announced. The issue was discussed in detail and with much enthusiasm by Indian news papers and visual media. As it was the main economic news for several days and so I was very much interested in this alliance reading and hearing the news for days. Thus I was quite curios about the alliance between the Indian and British firm which was first of its kind and about the fact how these two companies will manage their combined workforce of over 80,000 people spread all across the globe.
Survey Methods:
Thus I was quite curios about the alliance between the Indian and British firm which was first of its kind and about the fact how these two companies will manage their combined workforce of over 80,000 people spread all across the globe.
Survey Methods:
Surveys are one of the methods employed in this study. According to Ghauri and Gronhaug (2002), the survey is an effective tool for obtaining opinions, attitudes and descriptions as well as for identifying cause and effect relationships. Saunders et.al., (2003) are of the view that survey methods have more control on the research process as they are collected from a sizeable population and also are more economical. Some of the Advantages of survey method as pointed by Saunders et. al., (2003) are:
It is an inexpensive mode of data collection and processing.
Able to reach respondent who are widely dispersed geographically.
It enables the researcher to draw generalizations even though the sample size is low.
It is able to avoid interviewer bias.
Quantitative and Qualitative Research:
There are two categories that studies can be divided in, qualitative and quantitative research. Quantitative research involves numerical data or limited data that usually can be quantified and can vary from simple counts to more complex data such as test scores and prices. (Saunders et al., 2003)
According to Creswell (2003) qualitative research means being emergent, flexible, interpretive and conducted in its natural setting. Qualitative research is described as the opportunity to investigate a subject as real as possible. It is the conclusions of a qualitative research that are based on non-quantifiable data, such as attributes, values and perceptions. (Saunders et al. 2003)
Data Collection:
Data collection can be done by both secondary data and primary data. The researcher must keep in mind issues of reliability and validity while conducting his research.
Secondary Data
The secondary data is the data that already exists. This data has been preciously collected for other purposes. Secondary data can be both qualitative and quantitative data and can be used for both descriptive and explanatory research. Indeed data can come from internal or external sources. The researcher should try and use the recently published data, as it will be more applicable to the present day scenario. Business researchers use other's experience and data, when these are available, as secondary data.
Primary Data
Primary data is the data collected by the researcher himself. These data can be collected from different sources: interviews, observation, and survey. The main advantage of primary data is that it allows the researcher to find out people's view of what they think, believe or feel in order to find out his research objectives.
(Saunders et. al., 2003)
To collection of the primary data has been done by conducting semi-structured interviews with the HR managers of the Tata steel and survey questionnaires among Tata and Corus employees.
Interviews
Hussey and Hussey (2003, p.156), defines Interview as "Interview is a method of collecting data in which selected participants are asked questions in order to find out what they do, think or feel".
According to Burgess (1984), interviews provide the researcher with the opportunity to explore new perspectives or dimensions of a problem and to secure vivid, accurate accounts bases on personal experience. Interviewing comes in a variety of forms and uses; the most common forms of interviewing include structured, semi-structured and unstructured interviews. (Saunders et al., 2003)
Questionnaire:
The questionnaire is the most widely used survey type data because each respondent is asked to answer the same set of questions. (Saunders et al, 2003)
According to Hussey and Hussey (2003) questionnaire is a list of questions that has been carefully designed and tested with the aim of obtaining responses from a chosen sample.
According to Malhotra (1996), questionnaires are formalized set of questions for obtaining information from respondents. Relevancy and accuracy are the two basic criteria to be met if the questionnaire is to achieve the researcher's purposes. A questionnaire is relevant if no unnecessary information is collected and if the information that is needed to solve the business problem is obtained and accuracy of the questionnaire means that the information is reliable and valid.
Validity
Saunders et al. (2003) state that validity is defined as measuring instruments ability to determine what it is supposed to assess. Validity is concerned with whether the findings are really what they appear to be about.
There are three tactics that are available to the researcher to increase the validity and they are; researcher can use multiple sources of evidence, establish a chain of evidence during data collection and let the key information's review a draft of the case study report. (Yin, 2003)
Reliability:
According to Yin (2003) the aim of reliability is to be sure that if a future researcher followed the same procedures as described by an earlier researcher and conducted the same case study, this researcher would arrive at the same findings and conclusions. The goal of reliability is to decrease the errors and biases in a study.
Reliability is one of the most critical elements in assessing the quality of the construct measures, and it is a necessary condition for scale validity. There are several ways to test reliability, such as the test re-tests method, the split- halves method and the internal consistency method. (Hussey and Hussey, 2003)
Summary
This chapter charted the progress of the research, outlining the problems and the strategies for overcoming them. The researcher has used both survey and case study method and therefore this research can be called as multi-method strategy or Triangulation. This chapter also detailed the reasons for selecting the case study company, Tata steel and Corus steel. A qualitative approach rather than quantitative approach has been used by the researcher which includes semi-structured interviews and survey questionnaires to achieve the research objective. The next chapter will focus on the results and analysis of data coming from the survey questionnaires and semi-structured interviews.
Conclusion
In Mergers and Acquisitions the companies should involve the human resource department right in the planning stages, especially in cases of International Mergers and Acquisitions. The companies should unite the human resources of both the companies to make sure that the new company has the best of both to compete with other companies and achieve the benefits of acquisition. Moreover the management should inform and prepare the employees already in the pre-merger stage phase, as this reduces stress and possibility of conflict among the employees of both the companies.
