Idea 34 - Mergers and acquisitions (50 Management ideas you really need to know)



Idea 34 -  Mergers and acquisitions


The hostile takeover is about as exhilarating as it gets up at head office. It's the chief executive suite as campaign tent, complete with hurrying advisers, councils-of-war and swift- changing tactics. For leaders who favor the military style, this is as close as it gets to being a real general - the plan, the strike, the capitulation and the prize. Sadly for them, the hostile bid is becoming less fashionable, but acquisition remains a perfectly reasonable, if usually less dramatic, strategic option for companies of all kinds.

Mergers and acquisitions - 'M&A' in investment-banker speak - attract more public attention than anything a big company does except, perhaps, firing half the workforce or going bust. Typically, they happen when one company acquires all the assets and liabilities of another. Is there a difference between a merger and an acquisition? Not very often. A true merger is a marriage of equals in which shares are pooled in a new company, and these are unusual. Car makers Daimler-Benz and Chrysler merged in this spirit of equality in 1998, taking a new name- DaimlerChrysler - to reflect this. Even so, American commentators now complain it was a de facto takeover, with German management and know- how calling the shots - and even, it's said, now preparing to sell Chrysler.
Unlike DaimlerChrysler, most 'mergers' are obvious takeovers in which the separate identity of one party disappears, if not immediately, then over time. The M-word is mere diplomacy, a face-saving veil for the acquired. Whatever form they take, mergers are driven by one overriding motive: to make one and one equal three. Some call it 'synergy' or 'adding value', but it boils down to creating a business worth more than the sum of its parts. Quite often though, it ends up as less, as we'll see later.
Up and down, or sideways classically, there are three kinds of merger. 'Horizontal' mergers mean acquiring a company in the same industry, to grow market share the quick way. 'Vertical' mergers involve vertical integration, by buying a supplier or a distribution channel, and are usually about controlling costs. Finally, in what's known in the US as a 'conglomerate' merger, a firm buys an unrelated business as a form of diversification.
The synergies that the buyer seeks can be found in various places. The most common is by eliminating duplications to cut costs. Simply closing down one head office can save worthwhile sums of money. Two human resources departments can be collapsed into one and the same goes for accounts and finance, perhaps marketing, and research and development. This has its ugly side, since most of the savings come from sacking people.

Though it applies to most mergers, eliminating duplication is easiest in horizontal takeovers, where the organizations may be mirror images of each other. That's also true of the next synergy, economies of scale - if you are buying more, it'll be cheaper, whether sub-assemblies or paperclips. There are sometimes tax advantages in mergers if, say, the target has tax losses that the acquirer can put to good use.

These are generic benefits from going out and buying a company, but they might be more specific: to acquire new technology, expand into new product or geographic markets, or even - it has happened - to kidnap a particular CEO. A 'reverse' takeover or merger happens when an unquoted company wants a stock exchange listing but not the trouble and expense of an initial public offering (IPO). It buys a listed firm, disposing of its unwanted assets and reversing itself into the shell, like a hermit crab. WPP, one of the world's largest advertising groups, was shopping trolley manufacturer Wire and Plastic Products until present chairman Martin Sorrell 'reversed' his interests into it in the mid-1980s.

Fewer than half of all mergers work. That's to say that the failures don't add the value envisaged when the deal was done. Sometimes it's because the strategy was misguided in the first place. More often it's because companies make a mess of integrating the acquired business into the existing one. As post-merger integration (PM!) specialists keep saying, it's not over when the deal is done - it has just begun.

A common failing is the inability to knit two different cultures into one. Staff in the acquired company is invariably fearful and mistrustful of their new owners. They need to be reassured and respected, and made to feel part of the new enterprise. Management should concentrate rather more on this issue and less on the new logo. Another pitfall is to reproduce in the new organization practices and process that didn't work very well in the old. Perhaps most important is that the acquirer should have a vision and a plan ready to go on day one remember the Iraq war - and  that everyone in the organization should know what it is. If PMI doesn't work, it can precipitate mass defections of the best staff, customers, suppliers and investors.

Paying too much one preprogrammed reason why some acquisitions don't add value is that management paid too much in the first place. That's inclined to happen in contested auctions for a company, when the CEO cares more about the size of his empire than about doing the sums. Extravagant prices are more likely to be paid when the business world is gripped by yet another fit of merger mania. These come and go, dating back to America's 1897-1904 wave, which ended in a stock market crash and anti-trust legislation. Most of the 1980s and the latter half of the 1990s were years of peak M&A activity in both the US and the UK. The 1980s spawned the corporate raider, the 'mega-merger' and a rise in foreign takeovers. The 1990s wave, which ended when the high-tech stock market bubble burst in 2000, was less about sheer size than about strategic restructuring.
M&A waves are fuelled by high stock prices, which give companies cheap currency in which to pay, and/or cheap debt, which allows them to pay in cash instead of shares. Cheap borrowing has nourished a new breed of acquirer - the private equity fund. Acquisition is the sum of their strategy, which is to buy companies relatively cheaply, squeeze out the fat and sell them on.


Reference: 50 Management Ideas You Really Need to Know


Book by Edward Russell-Walling


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