The high failure rates of cross-border mergers due to the focus of companies on hard factors
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By failure the author does not mean a complete failure, but that the merged company has not achieved its expected goals. Based on preliminary research and existing knowledge, the analysis of critical success factors will mainly refer to soft factors. In cross-border mergers cultural issues in the form of organizational and national culture play an important role Gertsen et al. Furthermore, the author will focus on change management, as mergers bring along major changes that have enormous impact on managers and employees.
In this context the effect of knowledge management and communication will also be analysed Buchner, Der Mensch im Merger, There is a need for this topic to be examined to find out which various factors have impact on the transaction process and thus exploring methods for improving the success rate. As some companies give priority to hard factors, they are not familiar with critical soft factors see p. This, however, is necessary when companies intend to expand through merging.
Although, cross-border mergers have become a preferred means in international business to establishing own subsidiaries abroad, the failure rate remains quite high see p. The aims of the dissertation refer to exploring key reasons of failure in cross-border mergers by analysing practical examples in form of case studies.
Furthermore the goal is to analyse how the success rate can be improved through strategic due diligence and by laying more emphasis on the planning and integration phase. In order to meet these aims, the author will compare Corus, a less successful cross-border merger, with Aventis a more successful merger. The literature review is based on books, articles and reports from newspapers, journals and the internet. Companies usually come together voluntarily, as they try to seek synergies. In practice, however, mergers of equals do not take place very often.
It is more often the case that one partner dominates, which gives the other partner the feeling that the merger is actually a takeover. Horizontal mergers refer to the consolidation of companies producing the same products. It usually leads to quick synergetic effects involving least risk.
Concentric mergers refer to two companies consolidating that produce related products and wish to diversify. Compared to the other types, the prospects of success are very low. A company usually has several aims, so that merging is not the actual aim, but a means for achieving goals. Companies combine forces to be more competitive and have access to international markets, as it is quicker and cheaper than developing organically or establishing a subsidiary abroad.
The high failure rates of cross-border mergers due to the focus of companies on hard factors
Furthermore, risks can be minimized by ensuring the supply of raw materials, especially when a strong dependency on external suppliers exists, e. While scale economies are achieved when costs are spread over an increased output of a single product, scope economies are realized when costs are spread over an increased range of output of different products Sudarsanam, , p.
Companies tend to consolidate when there is an economic downturn in the hope of achieving synergies to increase share price Galpin, , p. Not so good reasons for merging with another company are:. Merging with another company should not be a defensive measure without having precisely examined whether the strategic approach is feasible, as it determines synergetic effects.
Johnson, it is the right time to merge if the strategic plan can be accomplished best by combining with another enterprise Dr. This, however, is not enough to ensure a successful merger. Even though, the other company may have important resources, there are many other factors that play an important role when merging.
It is not only about synergies, but also about cultural issues, environmental factors and the way post-merger integration is implemented. Nevertheless, the failure rate remains quite high. In the s there was a period of merger mania. A study by KPMG shocked the business world in Typical process problems refer to a too rough analysis and to laying more emphasis on a quick closure of the transaction. This leads to neglecting planning activities which are necessary to achieve the aims after having completed the deal Sewing, , p.
Key symptoms of failure include the loss of staff, poor customer service and inefficient supply chain Gibson in Business Spotlight, , p. The prospects of success, however, can be increased by planning the merger systematically.
Each new text counts as one lot! Furthermore, risks can be minimized by ensuring the supply of raw materials, especially when a strong dependency on external suppliers exists, e. It depends on the way the different cultures are managed. But we have found that quantitative analysis—something PMI managers have largely overlooked—can evoke both surprising questions and even more revelatory answers. The larger the pile, the more intricate the challenge and the harder it is to keep track of things. At its core, our research identified those factors that influence the post merger risk based on solid statistical criteria. Not so good reasons for merging with another company are:.
Studies have shown that a high percentage of mergers fail to meet their aims, although they should have been successful according to economic and financial aspects Sewing, , p. Therefore, obviously economic and financial success factors are necessary, but no guarantee for successful mergers. Cross-border mergers refer to the consolidation of companies that have their headquarters in different countries Sewing, , p.
Global mergers are more complex due to political, economical, legal and social differences Sudarsanam, , p. Even though the EU facilitates cross-border transactions through having more integrated financial markets and a common monetary policy, differences still remain Dr. Fiscal policy may be converging, but there are still no harmonized tax systems and not all member countries have the euro as a currency. Challenges, however, not only refer to hard factors, but also to soft factors, which tend to be neglected more often.
Companies tend to focus on operational and financial aspects of the deal. Companies find it difficult to deal with soft issues, because they cannot be easily measured and do not occur in the balance sheet Mergers and Acquisitions, the HR Dimension. The hard HR approach deploys human capital as a commodity of achieving profitability. The soft approach, however, treats people as a valued asset and regards motivation, involvement, communication and leadership as crucial ingredients Reilly, P.
Although data show that cultural incompatibility is the biggest barrier to successful integration, this area is the least researched during the due diligence process. Culture refers to values, norms and behaviour Sewing, , p. This, however, does not have to be the case, as it depends on how the acculturation process [9] is managed. Differences play a role in the integration process, however, the existence of differences itself is not enough to create a culture clash.
Furthermore, companies from the same nationality do not automatically have the same organizational cultures. Even within a nation subcultures exist. Especially today, in times of globalization it is often the case that there are employees and managers from different national backgrounds within an organization.
Different national cultures do not necessarily have to create additional barriers to the development of productive joint corporate cultures. It depends on the way the different cultures are managed. The lack of market and culture knowledge is often linked to geographical distance Grundy, , p. It is true that geographical distance makes integration and controlling efforts more difficult, however, geographical nearness does not generally imply similar economic regulations and cultures that are easier to overcome.
What is required is to refine the way companies manage the post-merger integration process. They need to adopt an approach that looks beyond the pure mechanics financing, technology, marketing. Taking these challenges into account, the author will examine the hypothesis by applying the following methodology. In order to find out why the failure rate of cross-border mergers is so high, it is important to carry out desk research by analysing secondary data that already exist. Documents are usually cheaper and easier to access.
Documents can be used to provide basic knowledge, important background information and as reference to support own findings. They also help to find data that cannot be obtained by using primary field research. Simply put, we have witnessed a lot of good and bad merger aftermaths and know it is possible to approach the next one armed with a quantitative understanding of the risks involved.
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How can we quantify merger success? Many studies use capital market-based indicators. But doubts are emerging as to how to isolate the single effect of a post merger integration on share prices. How can we separate this specific effect from other influences — e.
Expressing these 35 factors with sufficient rigor required precise definitions. We operationalized execution plan viability by analyzing integration steps that were performed e. Our research included the number of months covered by the integration plan and the number of people involved in the integration planning process from both the buyer and the target companies. As for business process heterogeneity, we measured this through the revenue split by customer segments, regions and product groups.
Post merger integration: Hard data, hard truths | Deloitte Insights
Changes at the managerial level included factors that are easily measurable such as scope of redundancies and the magnitude of relocations as a percentage of management positions. At the steering committee level, we calculated the percentage of steering committee members that had previously conducted large scale organizational transformation projects.
Limited human resource capacity was also measured along the organization for the steering committee, integration manager, team leader and project teams. The major question we asked: What percentage of time did they dedicate to project work? We began by defining PMI success based not on share prices but on the extent to which targets like cost synergies, cross selling or know-how transfer were met. Factors like implementation costs going over budget or key personnel leaving the company in droves may result in major delays, even as key targets are attained.
Our team examined over factors discussed as potential risks. At its core, our research identified those factors that influence the post merger risk based on solid statistical criteria. When the number-crunching frenzy had ended, we found only 35 factors within four categories to be statistically significant in influencing PMI success.
The high failure rates of cross-border mergers due to the focus of companies on hard factors [Tracey Roberts] on www.farmersmarketmusic.com *FREE* shipping on qualifying. The high failure rates of cross-border mergers due to the focus of companies on hard factors - Tracey Roberts - Bachelor Thesis - Business economics.
We then statistically condensed these 35 factors into four categories of risks—synergy, structure, people and project—that can undermine the success of post merger integration. Synergy risks comprise all factors stemming from inadequate synergy realization planning, while structural risks arise from mismatched organizational structures and processes. People risks refer to factors based on personnel resistance. Project risks, the last category, involve project-related obstacles to post merger integration.
Drawing from these four categories of risks, it is possible to assess in advance the comparative difficulty of a specific post merger integration. Our analysis suggests that post merger integrations differ fundamentally in terms of risk profile as well as success potential, and that managers face very different post merger challenges.
Faced with the challenge of a post merger integration, managers are confronted by one of four risk types, each derived from empirical analysis of our PMI database. Each is named with an allusion to the type of challenges it poses. Each is defined by the levels of risk in the four categories just described: Going a step further, we can calculate how a particular merger is to be rated in each of these risk classes by assessing the underlying factors via benchmarking with our PMI database. This lends some structure to what can be an otherwise well-intended but unsubstantiated assessment.
First the good news: Three times out of four, these PMIs ended well, in that they met our criteria for success. We saw no more than low to moderate levels of risk in any of the four risk classes synergy, structure, people and project. The flat risk profile points to a high probability of success, but these kinds of transactions are by no means risk free. The larger the pile, the more intricate the challenge and the harder it is to keep track of things.
As in the game, Mikado post merger activities were above all about having the right, delicate touch. Less encouragingly, another one third or so of post merger managers we evaluated were forced into what we call the Poker variety of merger. In our study, these types of transactions had an 83 percent failure rate, in that they did not meet one or more of our criteria and posed very high post merger risks in three of the four risk classes: The Poker-variety mergers were marked with a high degree of heterogeneity in both organizational and process structure.
In terms of project risks, almost all Poker transactions evaluated were marked with insufficient human resource capabilities: Mikado and Poker are the most common variations of PMI scenarios, occurring two-thirds of the time in our study. The remaining one-third of integration projects were distributed between the other two risk types: Dominos and Russian roulette. Representing 17 percent of all PMI efforts we evaluated, Dominos mergers were symbolized by high synergy and project risks, with relatively minor threats stemming from structure.
Also, especially compared to Poker, people risks were quite marginal for this merger type; there was likely no resistance from managers and employees. The riskiest type of PMI transaction, the Russian roulette, accounted for approximately 16 percent, or one in six, of PMI situations evaluated. Within Russian roulette, the following risk areas were more prevalent than in any of the other three merger types: Fully 90 percent of efforts evaluated that fell into this risk type lacked a viable execution plan. With dangers in all four risk classes, the Russian roulette mergers we evaluated failed 99 times out of — a rate higher even than that of its namesake.
It is important, therefore, to recognize the circumstances leading to this type more than any other and manage accordingly. Beyond enabling us to assess the overall factors impacting a successful post merger integration effort, the data point to some common misconceptions.
Sixty percent of the managers we interviewed felt that the faster the integration process is implemented, the better the prospects of realizing synergies and ultimately of PMI success. Yet according to our analysis, this is untrue. Our analysis indicates that the underlying factors driving synergy risks are mainly three: Integration hazards also increase with the complexity of implementing synergy goals.
The third risk driver arises from inadequate implementation planning, which overlooks important integration steps such as employee training, alignment of incentives or IT systems, and involvement of line management sufficiently early in the process. The margin for error, both in assessing synergies and in capturing them, can be slender to the point that even minute mistakes can wipe out projected economic benefits. But take your time and do it right and the results can be gratifying.
We saw this in the merger of two global high tech companies where operational management from both sides were heavily involved in the integration planning process; the final tally stood at 1, managers, representing about one percent of the entire personnel. Twenty eight percent of managers interviewed agreed with this view — yet statistics suggest otherwise. Our analysis shows that PMI risks are driven not primarily by external factors like the nationality of the buyer or target but by internal structural risks.
These risks fall into two broad categories: Structural incompatibility can exist, for example, because of conflicting degrees of centralization in decision making. The union of two European engineering companies is a prime example of a merger that brought together companies with very different structures — a business unit of a much larger corporation and a stand alone company. The business unit had a more decentralized management approach with responsibilities delegated within functional areas such as procurement and IT.
In contrast, the stand alone company had a more centralized approach with a strong corporate headquarters retaining control over IT, finance, procurement and HR. Bringing these two disparate structures together without reconciling these differences almost destroyed the new company. Sales plummeted and key people left, unable to adjust to the new corporate structure.
Within three years the company collapsed, to be swiftly scooped up by a competitor. Yet these risks are misunderstood: But our findings show that post merger integration projects face resistance at all levels, from regular workers to middle and top management. Perhaps counterintuitively, resistance is especially high at the top management level. This is likely because personnel risks in terms of layoffs are more pronounced at the management level as the new company will probably shy away from retaining two marketing heads or two finance managers on the organization chart. The magnitude of people risks is influenced by the extent of redundancies: However, there are other factors amplifying people risks, such as the delayed selection of NewCo management or a larger-scale relocation of jobs requiring managers to travel extensively or even relocate.
The unbalanced distribution of downsizing between the merged organizations intensifies the scope of employee-related risks; the emergence of a winner-loser mentality inevitably leads to resistance among staff who believe that their units drew the short straw when jobs were sacrificed. The following questions can serve as a starting point for those contemplating integration in the wake of a merger. If your leadership team can answer all nine questions concerning your next PMI transaction, that bodes well.
Management issues get all the more murky when a corporation acquires a founder-led company that has conflicting management and organizational approaches. A deeply embedded culture or one that is idiosyncratic and personality-driven can result in power struggles that draw attention away from vital decisions concerning the integration.
What to do with the founder? Forty-six percent of the management interviewed share the opinion that soft factors like motivating people are more essential to merger success than hard factors like project management.
Post merger integration: Hard data, hard truths
Our analysis suggests that it is important to address both soft and hard factors. Even if a merger appears to pose little risk in terms of synergy, structure or people, project risks can still undermine a PMI. If a formal project organization to integrate the target company is not established, for example, there is a strong likelihood of exceeding the initial expected investment. Know-how shortcomings—whether an overall lack of expertise or, if experts do exist, their being too busy or unwilling to dedicate themselves to the integration efforts—can also hinder a project team in dealing with integration challenges.
Most companies do not possess the right skill set for post merger integration, largely because there is no need for an organization to have PMI know-how until it finds itself facing a PMI. These skills are highly specific and not something that, for example, a sales manager needs for day-to-day work. Yet PMI know-how is critical for line managers as they will lead the implementation charge, and it is essential that managers are recruited from the companies being merged.
The lesser the PMI experience of line management in both organizations, the higher the project risks. Even in cases where companies possess PMI know-how, these managers are usually not available to take on a post merger integration.