MERGERS & ACQUISITIONS WITH RESPECT TO ORGANIZATIONAL CULTURE

INTRODUCTION

1.                  According to some anonymous sources, Mergers and acquisitions have had an important impact on the business environment for over 100 years. They have often come in waves of activity that were motivated by different factors. Further 1890 to 1905, more than 200 mergers of major importance occurred as many small companies in the same industries merged to form monopolistic entities. After 1905, merger activity was particularly heavy during the 1920s as small companies in similar industries continued to merge to gain market power. According sources, the capacity of merger activity was also heavy after World War II as large companies completed friendly acquisitions of small privately held companies. Another large wave of mergers occurred in the 1960s and 1970s, motivated largely by the quest for risk reduction through diversification. (Anonymous, 2014)

2.                 Investopedia explains “Mergers and Acquisitions – M & A” as general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. (investopedia.com, 2013)

3.                M & A and corporate restructuring are a vital part of the corporate financial world. According to Ben McClure everyday Wall Street investment bankers arrange M & A transactions, which bring separate companies together to transform into large ones.

4.                Furthermore describing on Mergers and Acquisitions, two terms separately. Mergers: two similar-sized firms are combined – so are their names. Acquisitions: a larger firm buys a smaller firm – which becomes a subsidiary.

5.                  Types of M & A Activity:

Vertical >> suppliers or customers, example: Jonson & Jonson/ MENTOR

                           Horizontal       >> competitors, example: ABInBev

 Related            Product Extension  >> complimentary products, example: kraft foods/ Cadbury

                           Market Extension        >> complementary markets, example: kraft foods/ Cadbury

Unrelated         Conglomerate             >> everything else, example: General Electrics

HORIZONTAL MERGERS & ACQUISITIONS

6.                       Horizontal mergers are described as non-financial mergers. It is undertaken for reason that have little to do with money, at least directly. Rosemary C. Peavler, a retired professor of Business Finance has stated, “a horizontal merger is usually the acquisition of a competitor who is in the same line of business as the acquiring business. By acquiring the competitor, the acquiring company is reducing the competition in the marketplace”.

7.          AssetOne Bank and TaurusBank Bank are also example of a horizontal mergers and acquisitions. More examples of horizontal mergers like the Coca-Cola Company ("Coca-Cola") had announced a plan during September 2008 to acquire China's biggest domestic juice manufacturer, China Huiyuan Juice Group Limited ("Huiyuan"). (Ping Lin, P., Zhou, W., Chan, P. 2011)

8.                  Ping Lin, P., Zhou, W., Chan, P. (2011). Coca-Cola and Huiyuan (B): Antitrust Barriers to Buying Top Chinese Brands. http://hbr.org/product/coca-cola-and-huiyuan-b-antitrust-barriers-to-buying-top-chinese-brands/an/HKU945-PDF-ENG

  

WHY COMPANIES CHOOSE M & A s

9.               When describing what causes mergers and acquisitions, and why do they affect the economy, Alan J. Auerbach says that the recent wave of merger and takeover activity in United States has led many leaders of business and government to ask about the same questions of how M & A formed. And some have concluded that there are undesirable results. So governments discourage corporate combinations through financial tax restrictions. It has been difficult to identify the cost and benefits of mergers and acquisitions. Commonly accepted criterion is that the outcome is socially desirable if the benefits exceed the cost, and the problem continues in the variations of the magnitudes of these cost and benefits. (Auerbach, A.J. 1998)

 10.              According to Ulrich Steger and Christopher Kummer, “When failures are realized on a critical level, the M&A wave collapses quickly as shown from the life cycle of M&A waves (see fig. 1). Periods with little M&A activity (near the natural rate) are used by the whole industry to develop new concepts and strategies that will later give rise to new M&A transactions”. Thus plenty of rationales for Mergers and Acquisitions had been proposed and most of these conventional lists lack a categorization of the strategic intentions which are labeled as rational explanation for M & A. So the irrational explanations focus on individuals who are engaged in empire building like the managers. Bottom line being it might be the most appropriate because each M & A transaction seems mixed and caused by a variety of motivations concurrently. (Sterger, U and Kummer, C. 2007, p.04)

 

Fig 1. The Life Cycle of Merger and Acquisition Waves

11.                 When AssetOne decided to acquire TaurusBank, it has been looking for new opportunities in personal investment business. Choosing Taurus, AssetOne’s management staked on a more flexible business that had numerous professionals that had brought new bright ideas into the businesses of online banking and personal investments. This approach was quite opposite to the trend AssetOne had in human resources management. And this has certainly caused some strains in the ranks of TaurusBank employees.

UNDERSTANDING of MERGERS and ORGANIZATIONAL CULTURE from the CASE STUDY

12.                  According to Alan J. Smith, CEO of the San Francisco – based Bay Pacific Group, one critical reason for failure in mergers and acquisitions is poor planning and manage integration. Further underestimating the challenges involved in blending corporate cultures. According to Smith, always one company will dominate over the other, which is depending on the executive body of mangers. (Smith, A.J. 2011)

 13.                  Most of the CEOs consider the cultural blending the last or is too late. Smith also says that any company considering acquiring another company should carefully consider the risks involved in combining different cultures. And should not be too soon to blend the companies according to the new executive’s vision. Further Smith describes that the employees of both companies are not aware of the changes at the beginning. They can feel threatened by the combination. The solution can be educating the employees to the dynamics and people will be prepared to appreciate differences that may help build a stronger organization in the days to come. In the end Smith says that because of the personal nature of firms the consequences of not dealing effectively with cultural integration issues can be devastating.

 14.           When considering these concepts the problems faced with the merging of the two companies, AssetOne and TaurusBank would have had similar cultural issues at the beginning of the transition and the merger process. Once again when highlighting the most critical issue CEO of AssetOne was too self centered and never want to consider his subordinates and employees of TaurusBank.

 15.                  When merging, it is very important to make sure employees know their job is secure, and they will not suffer. It is often better to emphasize nothing will change or that the changes will be minor, and will not worsen the course of business life. When the CEO of AssetOne proclaimed TaurusBank would become a “seamless extension of AssetOne”, he had certainly shocked the employees and brought panic into their minds.

 16.                  Being part of a bigger business has fewer opportunities for career development. As in this case study within the first year one third of TaurusBank’s fund managers were lured away by competitors.

 17.            As private investment and online banking are the businesses subject to rapid change, AssetOne management should have considered leaving Taurus’ managerial style as it was, and not bringing “the value of detailed analysis and cautious decision making”. Sometimes, quick decision-making is critical for greater profits, and it is obvious TaurusBank’s specialists were good at that. Bringing more bureaucracy and decision making at the top was harmful for the success of the business.

 18.                  Corporate culture is a very vulnerable aspect. It is being learned for years and it not easy to change. No wonder, AssetOne has faced confrontation from the employees of the TaurusBank – the corporate culture they had was changed without their accordance and participation. With further mergers and acquisitions, it might be beneficial for the AssetOne to leave the merged company’s culture and way of doing business “as is” for a certain time. If the changes are to take place, the employees of both companies should feel they are one team and they both should learn new rules of behavior and gain common experience in the corporate culture.

PROBLEMS THAT OCCURRED IN THE MERGERS AND AQUISITIONS

19.                  There were several problems caused due to the merge. One is the merge was very poorly handled by the AssetOne’s CEO. Mainly he did not understand the TaurusBank’s organizational culture. TaurusBank was forming affinity alliances with other companies and is well known for its edgy marketing, innovative products, and innovative products, and tendency to involve employees to generate creative ideas. But on the other hand the CEO of

20.                  AssetOne left the employees of both companies blindsided during the secret negotiations. Further he insulted the TaurusBank’ employees publicly by downgrading them about their capability in the internet banking system. The employees prefer to have a secure future and any changes within their workplace are desired to be known beforehand. Psychologically it is quite difficult to accept even minor changes, acquisitions are almost often treated as “hard times”, and, of course, the secrecy has caused negative effect in the acceptance of the deal among the employees.

STRATEGIES TO AVOID CORPORATE CULTURE CLASHES IN FUTURE MERGERS AND ACQUISITIONS

21.                  One important recommendation is educating the companies on the modern concepts of strategic planning in the M & A process. Ashridge Business School, one of the world’s leading business schools and leading provider of tailored executive education, provides executive and management education programmes, leadership training, organization consulting, executive coaching, MBA and MSc degrees, E-Learning, team building and other business services. And they do teach the best M & A tips.

22.                  Secondly treating the TaurusBank employees as valuable corporate capital instead of just incidental appendages to a business deal. Accepting and appreciating employee abilities and their cultural values of is very necessary to gain their trust and commitment. Also keeping the employees informed about the changes that are going to happen will build their confidence towards the company.

23.                  Another thing to emphasize is the value of specialists. In further acquisitions, AssetOne’s management should make sure the employees of the company acquired do not have the feeling the opportunity of growth and development is threatened. 

CONCLUSION

24.                  Hence a merger is a pivotal event for the companies involved and both parties benefit from the greater efficiency and competitive strength found in the combined company. Strategies are altered and as a result product lines are broadened, strengthened, or refocused. Management systems and personnel are changed, and levels and growth rates of profits are shifted. However, one side or the other loses substantial sums of money, special employees and executives. Merger costs, including the direct costs of attorneys, accountants, investment bankers, and consultants, are substantial even though they are not a large percentage of the value of the merger. And to conclude, more than half of all mergers and acquisitions fail or do not achieve the desired results. Most mergers fail because projected synergies do not materialize, often due to human obstacles.

35.                  Furthermore AssetOne’s management to reconsider their strategies by aligning to the recommended strategies to succeed in achieving the costs and benefits and human resources.

REFERENCES

1.              Anonymous, (2014). An Overview of Mergers and Acquisitions. Available from: Mergers and Acquisition: A Strategic Valuation Approach E-Book. [Accessed 09 Jan 2014]

2.      Auerbach, A.J. (1998). Mergers and Acquisitions. Available at: http://books.google.co.uk/books?id=fRjKTTlIcBoC&printsec=frontcover&dq=mergers+and+acquisitions+-+alan+j.+auerbach&hl=en&sa=X&ei=XNnMUvXBOM77rAfzr4DQBQ&ved=0CDoQ6AEwAA#v=onepage&q=mergers%20and%20acquisitions%20-%20alan%20j.%20auerbach&f=false [Accessed 07th Jan 2014]

3.  McClure, B. (2009). Mergers and Acquisitions: Introduction. Available at: http://www.investopedia.com/university/mergers/ [Accessed 08th Jan 2014]

4.                  Peavler, R.C. (2012). What Are Horizontal and Vertical Mergers? http://bizfinance.about.com/od/Basic-Financial-Management/f/what-are-horizontal-and-vertical-mergers.htm [Accessed 08th Jan 2014]

5.            Ping Lin, P., Zhou, W., Chan, P. (2011). Coca-Cola and Huiyuan (B): Antitrust Barriers to Buying Top Chinese Brands. http://hbr.org/product/coca-cola-and-huiyuan-b-antitrust-barriers-to-buying-top-chinese-brands/an/HKU945-PDF-ENG [Accessed 07th Jan 2014]

6.   Smith, A.J. (2011). How to Blend Company Cultures in a Merger. Available at: http://www.entrepreneur.com/article/219333 [Accessed 07th Jan 2014]

7.          Sterger, U and Kummer, C. (2007). Why Companies and Managers Choose M&As. Available from: Why Merger and Acquisition (M&A) Waves Reoccur – The Vicious Circle from Pressure to Failure E-Book. [Accessed 09 Jan 2014]