Understandings and effects of

Mergers and Acquisitions

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The chapter is surfing through literature which has been produced in the context to
achieve the desires goals and objectives of this research. The literature review had to
be divided different parts and sections for the better understanding and to focus on
numerous aspects or proofs of literature which has already been researched on the
topic of research.

2.1 Mergers and Acquisitions - Overview:

Conceptual Understanding:
Literature has put spotlight on need and importance of mergers and acquisitions, it
one of the main strategic option for the organisations in todays dynamic and complex
business environment. After looking at the literature there have been three different
words which are in interchange to explain or indicate this main strategic option and
that are merger, acquisition, take-over. Formally a merger has been defined by
Arnold (2002) as "unification of two companies of roughly equal size on roughly
equal terms and in which the shareholders remain as joint owners". Acquisition,
according to Brealey et al (2004) is defined as a "combination of two firms into one
with the acquirer assuming assets and liabilities of the target firm", while take-over
has been highlighted as "purchase of that firm's common stock or assets". The
common thing or part to be understood from all the indications is that to form a
single organisation by combining two separate organisations that had their own
business ethics, culture and performance.

Evolution in M&A activity:

In 1920 the early years of business development the activities of merger and
acquisition have been seen in the U.S, but the number one reality activities of such

nature were seen during 1970 when the competition in the business was increasing
so different firms were joining in hands by forming oligopolies to evacuate this
competition. This trend was intervened by the laws against anti- competition and
thus this was the time every one shifted towards making conglomerates houses in the
beginning of 1980's in which rather than going for mergers the organisations went
for diversifying their business interests in order to decrease the risk by competition
(Sudarsanam, 2003). The effects of these were not that positive they were diverted
negatively this has been also shown by study conducted by Berger & Ofec it shows
that conglomerates which went for mergers directed towards diversification went
under 15-16% losses from 1986-1991. And due to these circumstances the things
began to change in 1980's with conglomerates they concentrated on only one
business and withdrew the concept of diversification. This was another wave within
M&A activity with losing desired goals from diversification because firms were
becoming takeover targets by organisations which already had the competencies in
that particular business. Thus one of the reason given by Andrade et al (2001) have
suggested that M&A activity is clustering among different industries due to the
varying regulatory, technology and economic indicators faced by these industries.

Motivations behind M&A:

It has been analysed by Handy (1993) that the creation of value of shareholder is one
of the major goal and objective behind the M&A activity. However, there is huge
range of interpretations and justifications spotted by the literature and these are
goals and strong points achieved through any M&A activity that would lead into
increasing share holder's value and better performance for the entire organisation
Abellan (2004), the achievement of synergies that is associated with most M&A as
the joint organisation can help in reducing cost, improving technology, extra
dynamic management and it does provide the competency of larger scope and scale
(Abellan, 2004). The study in the literature further lays spotlight on these positive
gains by the organisation in short these could be tax reductions, monetary policies
and in long run creating a bigger brand for the organisation and higher value of the
entire business project. Among other motivations for an acquisition is when a firm is
noticed as undervalued in the stock market (Roll, 1988).Thus the undervalued stocks
could be perceived as inefficient operational management and improper utilization of
company's resources. Literature has also put the spotlight on some non-financial
reasons for mergers which are orientation of mangers (Steven et al, 2000), influence
of consultants, some third parties, dealers and middlemen (Katinka, 2004)
overpayments for acquisition target (Roll, 1986).

2.2 Desired Effects of M&A:

Mergers and acquisitions main goal and aim is creating and increasing shareholder's
shares value and it is like any other strategic option to do so, but in literature the
consideration of this facts has lead to big debate among the researchers and
practioners has these as the real strength of the mergers and acquisitions is in
creating a greater value for the shareholders is worth the risk of failure. The review of
the business literature around this topic is highlighting the relationship which has
been studied from different aspects that include shareholders, targets to be achieved,
acquirers and the most important the employees. The theorists have kept their range
of research depending on short, medium and long term benefits or creation of value
through merger and acquisitions. The categories that could be highlighted are stated
below:

Capital Market Based Researches:

The information centre of this category is the capital markets which are prime basis
of the research. Capital markets are used as the central information point by this
category of researchers. The researchers believe the stock market depicts the effect of
M&A as this depicts the dividends and profits expected from organisations before
M&A activity (Healey et al 1992).The research through this method have resulted in
mixed results and the outcomes have been assessed on researchers personal
orientation and analysis. The argument can be brought to the point that the research
and analysis most of the times based on stock value difference between before M&A
effects and desired results in the absence of such a event, so this factor could make
the analysis go through different problems and thus incorrect. After all these studies
it should be highlighted that the major portions of all studies have highlighted the
effects lower than the effects which are created by research based on capital market
statistics.

Event Study Methodology:

Literature has put the spotlight on large number of studies have said M&A desired
and the effects caused by this activity through study of events methodology. The
indication is that all these studies are based on analysis and hypothesis by looking
upon all industries in the world which have become more efficient by the M&A have
been annouced, the market then starts making calculations and representing the

future financial investments in terms of profits and losses (Datta et al, 1992). The
results of such studies have marked that majority of M&A activities can create effects
which can be very large or very normal in nature (Sudarsanam, 2003). However, the
researchers and critics have always put an argument about the methodology used is
only effective for a shorter time period and thus the desired effects, but does not
show any view of long- run desird effects moving in from medium to long run.

Short-term Focused Studies:

An ample of empirical research have been targeted at the monetary profits or gains
within a short period of time frame after the M&A event's date has been annouced.
These kind of studies after careful study have founded abnormal returns between
30% and 10% to each target shareholder as explained by Sudarsanam et al (1996).

Long-term Focused Studies:

The long period desired results received through M&A activity has received an
increasing interest topic among different type of researchers that has gained an
increasing interest among researchers as longitudinal data has become widely useful
and available since last phase of M&A in the 1990's. There has been a mix of findings
e.g. Agarwal et al (1992) shows negative (-) 10% abnormal returns over 5-year M&A
periods; Fama & French (1993) showed positive (+) 9% abnormal returns for the
acquired and negative (-) 4 % abnormal return for the acquirer; and Sudarsanam &
Mahate (2003) showed a range of negative (-) 18% to positive (+) 1% abnormal
return in M&A situation. The one thing to be noticed is that though it has been found
that all of these studies have used different models, frameworks, research basis and
different organisational data, but the general results from all the studies shows that
M&A lacks behind in showing desired effects beyond expectations in the long period.

Operational Focused Studies:

There are an ample of studies which have focuses on the producing synergies is one
of the main competency achieved through M&A, in accordance to the statement
above the best way of finding or to analyse the desired effect is through operational
performance change in the firm after such activity. Literature has proved that
financial accounting data like profitability and cash flows are used for such research
(Healey et al, 1992). Herman & Lowenstein (1988) used this technique on data
gathered during 1975 to 1983 and found that no important improvement in the
operational performance of after M&A organisation. Healey et al (1992) found a mere

3% difference in operational performance among companies analyzed, but as the

same data was later analyzed under new methodology which was improved and it
was found no significant change in operational performance. Through his study it
shows that random selection of sample of M&A activity, there is huge number of
failures in getting desired results through operational performance attributes of an
organisation.

2.3 Strategic Issues:

Cartwright and Cooper (1995) Marriage and M&A have almost the same analogy as
described by Cartwright and Cooper (1995). According to researchers and
practitioners, the key to success of M&A is compatibility because the internal
environment of the organisation should be matched and balanced to achieve desired
results from merger and acquisitions. Review of the literature has highlighted about
this argument is by many researchers, theorists and practitioners that have learnt the
process through making some mistakes and evolution of M&A process through
times. So therefore this process has progressed in telling people about the
importance of it to nourish the attributes of the internal environment characteristics
like the procedure an practices followed by them, the system of authority they use
and most importantly the organisational culture they follow.
Drawing upon David (2007), the most important internal environment aspects of
such firm that are undergoing M&A process can be classified in two core
competencies this helps organisations to help them minimize and balance out the
factors leading to failure of M&A strategies. These core competencies are the one
which are not well coordinated during M&A processes. The main limitation side
aspects of M&A in terms of the vital role played by the strategic importance of using
core competencies which have been discussed as below:

Corporate Culture:
Corporate culture has lately achieved great importance in management literature as
it has been defined in number of ways. One of the widely used definitions have been
given by Schein (1993), according to which it is the "collective manifestation of
human nature, such as human dynamics, wants, motives as well as desires that make
a group of people unique" (p. 41). According to literature it has been found that
culture difference and compatibility issues had lead organisations not to achieve the

goals or targets projected by them due to mergers and acquisitions activities. This
can be further be highlighted that when the M&A activity takes place the two
companies coming together not only start using each other's plants, building
equipment and labour ,but also have to adapt to each other's internal working
environment, the governance and the way the things are handled in a particular
organisation. The main thing to be noticed from this study is that there can be large
scale negative effect on the performance of an organisation if the working culture of
two organisation conflict with each other or is not at all adaptive this could bring
about a huge conflict in overall human resources of the new company and it will
create a feeling of fragmentation among them. Have highlighted that combining the
different culture types can result in requiring differing leadership skills, individual
behaviour, and managerial styles. It should therefore be noted that integration of
organizational cultures is very important for success of merger & acquisition activity
(Cartwright & Cooper, 1995).
Several researchers have argued that the organization's cultural compatibility can
reduce the total stress at individual level and with it also smooth the compatibility at
organisational level (Jensen & Rubock, 1983). Herman & Lowenstein (1988) have
proposed that the existence of a 'strong culture' in acquiring company can potentially
have a performance impact of it is transferred effectively to the acquired company
(Barney, 1986). The extent to which cultures are included into a productive internal
organization culture had been strongly dependant on integration within the top
management team and the amount of leadership in such position can produce over
normal management qualities (Ghosh, 2001).

Stress:
Mergers and acquisitions are important life events for the companies and its
employees, involve a major long-term process of change the structure, working of
organisation and include changes at the individual and organizational level because
of the potential for tremendous change and loss, mergers are intrinsically stressful
(Datta et al, 1992). The mergers and acquisitions have to undergo a social adjustment
phase rating scale where adaptively by human resource becomes important and
stress of adding a new company to the group is higher and higher risk of bankruptcy
(Comment & Jarrell, 1995). The result when one organisation merges with another is
when the employees start feeling their lost of control over the significant aspects of
their day to day life, so they try to regain this control and they makes attempt to do so
and most of the times they withdraw. This withdrawal to less satisfaction leads to

stress thus leading to lowering the entire productivity of the organisation and also
reduces job satisfaction (Berger & Ofec, 1996).
(((It has been highlighted by Schweiger & Denisi (1991) that after the communication
of acquisition or merger, the human resource go through a time of increased anxiety,
uncertainty and stress. They have their concern about how the new entity will impact
on their position and role. Birkinshaw et al (2000) have indicated that therefore
communication plays a vital role during the merger or an acquisition activity so that
employees know what is going on and how they might be affected during and after
the post integration period. Thus it can be suggested that while negotiations have
been compared to "flirting" before marriage, and the closing of the deals to "forming
a new family", employee reaction can be associated with "bereavement" (Katinka,
2004).

Resistance to Change:
M & A mean change. As management consultant Laurence Stybel describes it, "
you don't have a merger because you are happy with the status quo. You buy a
company to make it more efficient, more profitable" (Buono, 2003). Following a
merger or acquisition, a complex set of organizational, managerial and personal
changes are inevitable.
Jensen & Rubock (1983) claim that in order to "offer a systematic way to select a
strategy and a set of specific approaches for implementing an organizational change
effort". Their underlying idea is at once one can identify why people resist, one so
able to cope with the resistance through specific strategies. A classification of reasons
for resistance matched with appropriate measures to overcome the resistance is
thought to allow managers to implement change successfully. The researchers have
postulated four major reasons why people resist changing, and describing six
different strategies for coping with resistance.

Image, Identity and Confidence:

Image, identity and confidence can be seen as problematic in an organizational
integration situation. It should be noted that human resource will feel sense of lose
and their pride and confidence may shatter. Some of the employees will feel
uncertain and will need encouragement to look for employment elsewhere
(Ravenscraft & Scherer, 1988).

Moreover, it can be suggested that people who are affected by the merger and
acquisition activity can change the ownership because are subsided and become
cynical regarding the underlying intention the new ownership. Therefore it can be
indicted that hindrance that comes from people can be a source of declining
performance from mergers and acquisitions. Individuals that lose something in the
cultural conflicts tend to protect their own situation and consequently resist. They try
to maintain their status quo while highlighting that they are a part of the new entity,
if the cultural factor is not adequately taken into account at this stage of the merger
or acquisition, there will be little time to contain it after the deal is done.
Weston et al (2001) discuss the 'merger syndrome' as a 'defensive' towards or 'fear
the most response' to the uncertainty and stress associated with a merger. Schwert
(1996), argue that when the expectations from post-acquisition performance are not
met, the managing teams of both companies are the employees of the acquired
company enter a 'cycle of escalating and distrust'. In other words, managers of the
acquiring company press for increased control, while employees of the acquired
company resist and demand their autonomy. Others view mergers and acquisitions
as power games, which create some excitement for bored CEOs. According to Roll
(1986), arrogance of this type results in the imposition of tighter control, squeezes
employee potential; and creates problems from the very beginning of the acquisition
process.

Communication:
Organizational communication is the collective creation, maintenance and
transformation of organizational meaning and expectations through the exchange of
messages. Members develop commonly understood patterns of expectations for
organizational action through communication. Some of these expectations are
norms, roles, agendas, motives and values.
Communication with the employees is a very important factor throughout the entire
M&A process. Its effects on employees through this trying time are pervasive and
significant influence the adoption of a new culture, the change process itself, and the
level of stress employees can experience (Hopkins, 1998). Within any organization
there are various forms of communication including: memos, telephone, emails,
newsletters, annual reports and face-to-face interaction. The richer the medium not
only enhances communication but also represents the culture prevalent in the
organization. The form of communication used by members becomes part of
message itself. For instance, individuals belonging to an organization with a highly

formalistic culture may consider decision official only when they have been written
down (Gould, 1998)
It ahs been highlighted by John et al (1999) that communication plays a vital role in
the integration of different and diverse cultures. The cultures can be at conflicting
ends and therefore should be understood by the top management during integration
period. It has therefore been highlighted by Richard et al (1999) that organizations
should never assume that human resource will understand by them that why such
changes are taking place and what is their role in the merger process. It has been
highlighted that similar tactics should be used as companies employ during an
organizational change. Literature has highlighted that changes in companies does
not only require decisions that impact on quality, production and profits but also that
such decisions are communicated effectively through the organization. It has been
recommended that management link functions horizontally and vertically through
leadership, control and organization (Sudarsanam & Mahate, 2003).

Turnover:
M & A invariably results in enforced job losses. However, it is also associated with a
high rate of voluntary turnover, which is likely to include a substantial outflow of
talent and expertise. A number of studies (Ravenscraft & Scherer, 1988) report
executive turnover rates as high as 75% in the first three years post acquisition
period. Unplanned personnel losses are not necessarily confined to the more senior
levels of the organizations. Typically, acquired or merged organizations experience
on overall rate of staff turnover of at least 30% in the first two years post merger
period (Cartwright & Cooper, 1995).

Summary:
It can be summarized in the light of above discussion that there are mix evidence that
have been presented in the literature regarding the impact on desired effects through
a merger or an acquisition. It can be argued that like any other strategy, success of
M&A depends upon a range of factors and effectiveness of management. However, it
can be stated that empirical data from different perspectives has shown that
management achieve short-term gains from the activity but do not achieve success in
the long term. There have been a range of issues that are highlighted in the literature
that illustrate factors that play significant role in the low levels of achieving desired
effects than anticipated.))