Bachelor Thesis Sources of failures in Mergers and Acquisitions. The effects of employee identity.

Table of Contents

Abstract........................

1. Introduction....................

1.1Literature review

2. Mergers and Acquisitions.

2.1 Theoretical background

2.2 Motives for M&A

2.3 M&A process

3. Why M&A's fail

3.1 Possible reasons of failures in M&A

3.2 The role of employee identity

4. Organizational culture and M&A

3.1 Types of organizational culture

3.2 A Tentative model

Conclusion

Discussion

List of references

Abstract

The main object of this paper is to consider the potential sources of failures in Mergers and Acquisitions and to determine the dependence of overall performance of the company on social identity of employees. Observation of the Merging and Acquiring companies' motives provide a clear explanation why despite the high risk and probability of failure organizations keep seeking to reach the M&A process. The changes that appear as a result of M&A activity lead either to positive as to the negative results, but this paper is concerned on the unsuccessful performance influenced by the human factor and cultural differences. The use of a Tentative model will show the mechanism of how the culture impact on the overall M&A performance.

Introduction

During the last few decades the topic on Mergers and acquisitions (M&A) is one of the most discussable. There are a big number of studies have been made by economic and financial researches such as : Weber Y., Stahl G., Kummer C., Nguyen H. et al. They tried to determine the value, that the companies seeks to get while entering into the M&A process and compare it to the degree of the riskiness.. Despite the distinctions in the meaning between the merger and acquisition, in this paper it is treated as one of equals and based on Social Identity Approach (SIA)

Complicated and

Does it worth it for the company to take such a high risk?

Many of the existing firms are struggling to survive on the global market. The competition between them is very high. In order not to go bankruptcy and generate profit they cooperate with each other that is known as merger. In this process one firm sell its item of value to another in exchange for cash , which calls assets(Research Journal of Family, Community and Consumer Sciences Vol. 1(7), 6-10, September (2013)

2. Mergers and Acquisitions.

2.1 Theoretical background

One of the popular and fastest way of the corporations to create growth is through the mergers and acquisitions (M&A). Since several decades companies started using this approach in order to generate returns for the investors, stakeholders and owners. To deal with the competitors through the development is one of the main goals as well (Güntler, Voigt, 2003, p.4). Mergers and acquisitions are closely related, because they both form the relationship and cooperation of industries in order to achieve strategic or financial objective, however it is important to distinguish them (Sherman,2006, p.12; Straub,2007, p.16).

According to Sherman, mergers is "a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity". Straub defines merger as "unification of two or more firms into a new one", an exchange of the shares plays a main role (Straub, 2007,p.14). Also an acquisition is "the purchase of an asset such as a plant, a division, or even an entire company" (Sherman 2nd add, 2006, p.11). Straub defines it as "one company's purchase of the majority of the shares from another". In other words, this is a process of two economic agents, when one-buyer, acquires the assets or shares from the other-seller. A purchase can be realized by using cash or other assets of value to the seller (Straub ,2007,p.14). The reason why an assets are attractive for the buyer is that additional assets purchased give a hope to get financial benefit. There is an expectation that the value created by the assets will exceed the price paid over time and help a company to become better off (Sherman, , p.11). Despite the differences in terms, the core idea remains the same, since both results in ownership and make the companies to operate together, so to say under the one roof.

It is important to distinguish the words consolidation and takeover, because they are widely used in the field of M&A transactions. According to Guaghan, consolidation refers to the combination of two firms which aimed to create an entirely a new company. The term of takeover he describes as the hostile transactions, and sometimes it may refer to friendly and unfriendly mergers. A friendly merger is also called "merger of equal" (Guaghan, 2011, p.12) and acquisition refers to the situation when there is one dominant such as acquiring company, who controls the acquired. Weber stays that, in reality "merger of equal" does not exist, because with time one of the companies become to act as a dominant and it is easy to notice who is controlling and who is being controlled (Giessner, 2011, p.10; Weber, et.al., 2013 p.3).

Despite the fact that M&A is widely used among companies and was popularized in the last years, the probability of failures increased. According to surveys conducted in WilmerHale report, the number of failed deals reached 83 percent. Nevertheless, the senior managers and boards of directors still seeking to reach profitability goals through M&A deals. A report shows that worldwide M&A transactions increased up to 17% from 2013 to 2014, but the highest level was reached in 2007, when the number of deals increased on 57% compare to 2000 (WilmerHale report, 2015, p.2).

High number of failures can be explained by a wide range of aspects that M&A include. They are: management, strategic, cross-cultural, financial and behavioral. These aspects are potential sources of failure. In the case of M&A, failing means not achieving the objectives within the planned time path or not at all. The greatest opportunity to fail is during the integration process (Simpson 2000 sited in Nguyen 2003, p.447). A lack of communication skills, planning, cultural differences and bad managing are barriers for the integration. As Weber stays : "the primary reasons for failures is related to the fact that it is easy to buy but hard to perform an M&A" (Weber et al, 2013,p.4). Stahl argues that corporate culture, especially cross-cultural management plays a key role (Stahl and Voigt, 2008, p.172). Corporate culture is a synonym to organizational culture, which means a set of norms, values, beliefs, symbols and taboos that operate in a company in an unconscious way (Cartwtight, Cooper, 1993, p.60).

The combination process of two companies implies the changes in corporate culture, either the target company as the acquirer. During this period both companies experience extreme situations and difficulties, one of them refers to the social identity problems (Ulrich& van Dick,2011,p.8). According to Reicher et al., social identity is able to determine the level relatedness of individual toward others. It provides a better vision of how person can adjust and operate within another (different group) society (Reicher, p.2). There are two types of membership groups. First is out-group, include those who tend to act only on its own behalf, by expressing individual characteristics and trying to be different from the others, kind of being "out of the circle", that indicates on personal identity. But the ability to work, cooperate, share opinions and make decisions together are components that defines social identity- in-group (Ulrich& van Dick,2011,p.5). The mechanism that makes the in-group work, supposed to be the most complicated since it has to deal (with issues concerning) national and organizational culture issues (Vaara, Sarala, Stahl, 2012 p.8). According to Stahl and Voigt, person usually tend to communicate with those, who has similar point of view, religion, language, manners. All this aspects increase trust and solidarity between communicating parties (Stahl, 2008, p.162).

Trust is the most significant asset in M&As, it provides the opportunity for knowledge transfer (by reducing) and reduce difficulties in communication among the staff. Knowledge transfer is necessary for the merging firms with different types of products. Because switching from one product line to another demands sharing of skills (Sarala, Cooper, 2014, p.7)

Human side of M&As is the primary task of management and plays a significant role in determining merger outcomes (Cartwright & Cooper, 1993, p.58). Cultural differences have either positive, as negative effect on synergy realization and overall M&A's performance (Weber, 2011, p.320) (Mitchell Lee,2011, p.861). But a significant number of studies shows that the high percentage of failed deals is due to the cultural incompatibility (Han Nguyen, 2003,p.447). Statistical data collected in WalmerHales report shows that attractiveness and number of M&A deals increasing worldwide (WilmerHale report, 2015, p.2), however there are minor improvements in the success rates ( Marks& Mirvis, 2011, p 161) This is called M&As Paradox : high rate of M&A failure versus the growing activity and volume of M&As (Weber, 2011, p.320). If the companies decided to take a high risk, that means they have some strong motivation for doing so.