Mergers & Acquisitions

A Critical Reader

Annette Risberg, Annette Risberg

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135032531
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Mergers and acquisitions remain one of the most common forms of growth, yet they present considerable challenges for the companies and management involved. The effects on stakeholders, including shareholders, managers and employees, must be considered as well as the wider implications for the economy, the level of competition and employment.

By drawing on classic research perspectives and placing them alongside more recent alternatives, this book provides readers with a focused yet far-reaching introduction to the study of M&As. Each paper is set in context by editorial commentaries and reflects the important organizational and behavioural aspects which have often been ignored in the past. By providing this in-depth understanding of the mergers and acquisitions process, the reader understands, not only how and why mergers and acquisitions occur, but also the broader implications for organizations.

The book is structured clearly into sections concerned with the issues that arise before, during and after the mergers and acquisitions process including motives and planning, partner selection, integration, employee experiences and communication.

A unique collection of selected readings and contextualising commentary, this volume will greatly appeal to MBA and graduate students as well as experienced practitioners.

SECTION ONE

Why do firms engage in mergers and acquisitions?

INTRODUCTION TO SECTION ONE

As the book aims to examine the merger and acquisition process from various perspectives, we shall start from the beginning, discussing the motives for firms merging with or acquiring another company. Merger and acquisition motives have traditionally been studied in financial literature¹ but today they are frequently linked to the whole acquisition process. A literature review reveals two main types of motives for mergers and acquisitions. The first are financial reasons, such as increasing the overall performance and creating shareholder value. Fowler and Schmidt (1988) mentioned the financial motive of gaining synergistic effects, information asymmetries or control over the acquired firm. Another financial motive was brought up by Fluck and Lynch (1999). In their endeavour to answer the question why merged firms divest they found that the motive for mergers stems from the inability of firms to finance marginally profitable projects as stand-alone entities due to agency problems between managers and potential claim holders. A merger, according to them, is thus a short-term solution to finance problems. The second type of motives mentioned in the literature are non-value-maximizing managerially based motives: for example, managers' desire to increase power, sales or growth (e.g. Levinson, 1970; Fowler and Schmidt, 1988; Napier, Simmons and Stratton, 1989). Brouthers, van Hastenburg and van den Ven (1998) make a slightly different categorization. They distinguish between economic, personal and strategic motives. However, the most commonly cited motive for mergers and acquisitions is to achieve synergy effects (see e.g. Lubatkin, 1983).

Management literature can leave the impression that decisions to merge and acquire are very rational. As we can see from the types mentioned above, and as you will read in, for example, Trautwein in the next chapter, that is not the case. The motives can be quite personal, aiming to improve the managers' posiion. It has been further pointed out that there is most often more than one motive involved in the decision (Brouthers, van Hastenburg and van den Ven, 1998). Angwin (2001) discusses public rational motives and other motives, and how these motives are complex and interact. The public motives are aimed at achieving the rational outcomes of improved performance and increased shareholder value. The nonpublic motives may be less rational, yet, Angwin writes, the business press and investors alike tend to concentrate upon the publicly stated rational motives. Another reason merger and acquisition motives are described as rational and efficient could be because they are retrospective interpretations. Litz (1999) writes that merger and acquisition decisions are often framed in post hoc rationales that bear limited relation to the actual motive for the decision. One can understand if managers do not admit that they acquired another company in order to boost their own power, increase their own bonus or add another achievement to their CV.

Levinson (1970) brings up two further, more subtle, reasons for mergers and acquisitions. He talks about what he calls psychological motives, namely fear and obsolescence. Firms acquire other firms out of fear of being taken over and destroyed by another larger firm. By acquisition, the firm will be more powerful and thereby prevent this happening. Obsolescence arises to firms through age, as they become more bureaucratic and rigid, leaving less room for individual initiative and spontaneity. In order to avoid obsolescence new blood is needed in the firm which is something an acquisition can bring. The obsolescence theme is also brought up by Vermeulen and Barkema (2001). They claim that acquisitions may revitalize the acquiring organization by bringing in new knowledge to foster long-term survival.

But why should we study motives? Some scholars just want to understand why firms engage in mergers and acquisitions. Others claim that the motive sets the stage for the rest of the merger or acquisition process. Or to phrase it in another way, if one does not know where to go, or why, it does not really matter which road to take. To use a well known simile from Lewis Carroll's (1865/1994) Alice in Wonderland:

Alice came to a fork in the road. ‘Which road do I take?’ she asked.,
‘Where do you want to go?’ responded the Cheshire cat.
‘I don't know,’ Alice answered.
‘Then’ said the cat ‘it doesn't matter.’.

The merger or acquisition motive is therefore often linked to acquisition and integration strategies and outcome in the literature. Napier (1989) points to the lack of links in the literature between merger motives and postmerger issues, such as changes in organizational practices and merger outcomes, and employee reactions.² Olie (1990) argues that the motives and needs of the acquiring party or merging parties are important in deciding which acculturation mode will be followed and the degree of integration. Moreover, he connects this to culture-related problems that may occur during the integration process.

If the strategy is dependent upon the motive, then the outcome of the merger or acquisition could be expected to be affected by motive and strategy. Napier, Simmons and Stratton (1989) link merger motives to merger outcome, focusing especially on communication. They write ‘depending upon the reason for merging, the communication provided to employees may well influence their attitudes and stress concerning the mergers. The motives can have various outcomes and thus reactions of employees could be expected to fluctuate’ (1989: 106).

This reasoning was theoretically developed by Napier (1989) in a framework where motives and characteristics of the merging firms are related to the degree of integration, what she calls a merger type. The merger type is in turn linked to the outcome, which could be, for example, financial performance or employee reactions. Napier and Olie view mergers and acquisitions as processes where the different parts of the process are interlinked (cf. Haspeslagh and Jemison, 1991).

Seth, Song and Pettit (2000) hypothesize that the motives may be different for cross-border acquisitions compared to domestic acquisitions. They found that the synergy hypothesis dominates explanations for why foreign companies acquire US firms. Moreover, they found two other motives with partial explanation power. Value-creating acquisitions appeared to be driven by hubris motives whereas cross-border acquisitions characterized by value destruction appeared to be motivated by managerialism. Seth, Song and Pettit (2002) confirm their argument in a later study, linking the outcome of the cross-border acquisition with the motive. The hubris motive is mentioned in several studies (e.g. Berkovitch and Narayanan, 1993; Hayward and Hambrick, 1997; Kroll, Toombs and Wright, 2000).

The chapters chosen for this section focus mostly on the why question, even though Trautwein links motive to financial or market performance, whereas Bower mentions the importance of integration activities to achieve the initial objective.

The first chapter in the section by Trautwein is a critique against a strategic explanation of merger motives. Trautwein points out that the strategic explanation for why mergers occur is linked to efficiency theory and has little explanatory value. Mergers are better explained based on decision processes, conflicting goals and ambiguous private information, Trautwein maintains. Companies are thus not rationally planning their merger or acquisition strategies. Moreover, Trautwein points out that it is incorrect to value merger outcomes based on stock market performance. Instead, one should focus on individual companies' actual performance.

Trautwein's chapter is a good overview of merger motives literature. Moreover, he briefly reviews prescriptions for merger and acquisition strategies, such as selecting the target and integration strategy, arguing that these theories are mostly based on efficiency arguments. This chapter by Trautwein does therefore serve as an excellent prelude to the book.

Bower, representing the second chapter in this section, has answers to why acquisitions occur which differ from Trautwein's results. Whereas Trautwein tries to explain managerial behaviour, that is explaining why managers decide to merge with, or acquire, another company, Bower aims to explain why an acquisition occurs from a mix of industry and firm points of view. He finds five different reasons, and from these he deduces five different types of acquisition strategies. Bower thus links merger types and motives. He also discusses the importance of integration activities in order to achieve the objectives of the merger or acquisition. This chapter is a good example of the view that the different stages of the merger and acquisition process are interlinked. One stage cannot be held apart from another, and the motive for the merger or acquisition determines the following strategies. The chapter by Bower is therefore a good link to the rest of the book, discussing target selection and integration strategies.

NOTES

1 A quick search in any journal database on the words merger, acquisition and motive confirms this.

2 Note that Napier differs from finance and to some extent strategy literature when she does not equate outcome with financial performance only.

REFERENCES

Angwin, D. (2001) ‘Mergers and acquisitions across European borders: national perspectives on preacquisition due diligence and the use of professional advisers’, Journal of World Business, 36(1): 32–57.

Berkovitch, E. and Narayanan, M.R (1993) ‘Motives for takeovers: an empirical investigation’, Journal of Financial and Quantitative Analysis, 28(3): 347–62.

Brouthers, K.D., van Hastenburg, P. and van den Ven, J. (1998) ‘If most mergers fail why are they so popular?’, Long Range Planning, 31 (3): 347–53.

Carroll, L. (1865/1994) Alice's Adventures in Wonderland, Harmondsworth: Puffin Classics.

Fluck, Z. and Lynch, A.W. (1999) ‘Why do firms merger and then divest? A theory of financial synergy’, Journal of Business, 72(3): 319–46.

Fowler, K.L. and Schmidt, D.R. (1 988) ‘Tender offers, acquisitions, and subsequent performance in manufacturing firms’, Academy of Management Journal, 31 (4): 962–74.

Haspeslagh, PC and Jemison, D.B. (1991) Managing Acquisitions: Creating Value Through Corporate Renewal, New York: Free Press.

Hayward, M.L.A. and Hambrick, D.C (1997) ‘Explaining the premium paid for large acquisitions: evidence of CEO hubris’, Administrative Science Quarterly, 42(1): 103–28.

Kroll, M.J., Toombs, L.A. and Wright, P. (2000) ‘Napoleon's tragic march home from Moscow: lessons in hubris’, Academy of Management Executive, 14(1): 117–28.

Levinson, H. (1970) ‘A psychologist diagnoses merger failures', Harvard Business Review, 48(2): 139–47

Litz, R.A. (1999) ‘The logic and lure of acquisitions: a case from the steel industry’, Journal of Business and Psychology, 14(1): 119–34.

Lubatkin, M. (1983) ‘Mergers and the performance of the acquiring firm’, Academy of Management Review, 8(2): 218–25.

Napier, N.K. (1989) ‘Mergers and acquisitions, human resource issues and outcomes: a review and suggested typology’, Journal of Management Studies, 26(3): 271–89.

Napier, N.K., Simmons, G. and Stratton, K. (1989) ‘Communication during a merger: the experience of two banks’, Human Resource Planning, 12(2): 1 05–21.

Olie, R. (1990) ‘Culture and integration problems in international mergers and acquisitions’, European Management Journal, 8(2): 206–15.

Seth, A., Song, K.P and Pettit, R.R. (2000) ‘Synergy, managerialism or hubris? An empirical examination of motives for foreign acquisitions of U.S. firms’, Journal of International Business Studies, 31 (3): 387–405.

Seth, A., Song, K.R and Pettit, R.R. (2002) ‘Value creation and destruction in cross-border acquisitions: an empirical analysis of foreign acquisitions of U.S. firms’, Strategic Management Journal, 23(10): 921–40.

Vermeulen, F. and Barkema, H. (2001) ‘Learning through acquisitions’, Academy of Management Journal, 44(3): 457–76.

Merger Motives and Merger Prescriptions

from Strategic Management Journal (1990)

Friedrich Trautwein

Why do mergers occur? Why can we observe premiums and bidding contests as in the case of RJR Nabisco? Is it because ‘the public markets are incapable of understanding the true value of corporate assets [or because] management was trying to steal the company from underneath the noses of its shareholders [or because] Wall Street, steeped in greed and ego, ran amok and overbid for the company’ (Barlett, 1988: Al)? The wave of mergers and reverse mergers during recent years has drawn widespread attention, but most of the academic and public discussion has been devoted to the mergers' consequences. The motives behind these mergers have received only modest attention although they ultimately decide whether a merger is attempted or not.

This article gives a critical overview of merger explanations and relates them to prescriptions for merger strategies. The first main part discusses the explanations put forward for mergers and examines the evidence on the several theories. This is not done to refute or prove a single theory Most observers agree that mergers are driven by a complex pattern of motives, and that no single approach can render a full account (e.g. Steiner, 1975; Ravenscraft and Scherer, 1987). But knowing that the world is complex cannot be the end of scientific endeavor. Therefore an attempt is made to order the merger theories according to their plausibility and consistency with the evidence. There are two possible ways of getting evidence on motives; direct investigation and indirect inference from merger outcomes. Direct investigation may produce unreliable results while inferences may be unwarranted. To offset these shortcomings both kinds of evidence are used here with some caution.

The sec...