Change in Acquisitions – Manageable revolution or wishful thinking

Neil Monnery and Art Peck wrote in the magazine of the Boston Consulting Group that M’s&A’s are the biggest deal that Top Manager can ever encounter – and that’s probably that, for what they are worst prepared.

Managers are obviously still overextended in cases of Mergers and Acquisitions. According to a study from the consulting company Accenture and the University of M�nster (Co-author Prof.Dr.Schewe Universit�t M�nster) it is noted that 62% of all regarded Mergers and acquisitions failed. The purpose to decrease the cost structure and to increase the profits isn’t achieved at all. Furthermore it is stated that the company which conducts the “right” steps in the pre-integration process achieves up to 90 % better synergy effects than the average. According on that study it is quite obvious that many boards underestimate the challenges which encounter after the M&A – decision.

In fact, the consulting company KPMG noticed a worldwide decrease of 56% on M’s&A’s in the first half of 2002. But at the same time you can see that in particular branches of business the rate is still increasing.

Mergers and acquisitions of other companies have been getting easier and more attractive in a certain way than in former times.

It’s getting easier to overtake a company by the method of stock change as well as by a hostile over-take like the Mannesmann/Vodafon case shows us.

The acquiring company offers to payout the shareholders of the acquired company by own stocks.

Furthermore, it is getting more and more attractive for managers to overtake other companies instead of being overtaken by companies which have a good financial situation cause of the stock market. Top-managers are getting paid better and better, also outside the U.S.

You can say, that the size of the company, is one of the defining factors for the managers’ salary. Nowadays it could be also a “temptation” for a manager to increase the size of the company by M&A – also, if there no sensible reasons for this procedure.

The new economy structure withdraws the base of former time successful concepts.

Today it is not very difficult to make business in mass production, also due to the fact, that the production plants are distributed all over the world.

Innovations are copied as fast as never before. Nowadays it isn’t anymore a privilege only for some big companies to have a management know – how and a stock-market access, which belonged in former times to the main reasons to conduct a merger.

The step to conduct an Acquisition consist opportunities as well as threats.

Acquisitions have a unique potential to transform firms and to contribute to corporate renewal.

They can help a firm renew its market positions at a speed not achievable through internal development.

They can provide an ability to gain all the benefits from combining assets and sharing capabilities in a way not obtainable through partnerships.

More profoundly, however, acquisitions can bring into accompany capabilities the organizations find hard to develop, or they can provide the opportunity to leverage existing capabilities into much more significant positions.

A good example for a successful merger is HOECHST – RHONE/POULENC. Both companies decided in December 1998 to provide a completely new company with a concentration on their core activities in pharma, agriculture and animal health branches. Segments which didn’t match to the new strategy were sold. The new so called Life-Science-Company AVENTIS is a product of a “merger of equal”, and a showcase of successful systematic long term restructuring from both companies.

But the history of M&A is full of miscarries. Also, by the fact that it is pretty hard to proof – misleading is not getting always obvious.

It is noticed that the majority of the M’s & A’s in former times are flopped as well as nowadays.

Best example was the miscarry merger of BMW-Rover. After the acquisition from BMW in spring 1994 the car manufacturer endeavoured six years long to provide a successful integration. In spring 2000 the merger was made reverse by selling Rover.

The reason for the flopped merger was not only due to external basic conditions in that period rather the failing in providing a successful Post-Merger-Integration.

Too much autonomy in the different company units, a wrong estimation of potential synergy-effects and a misleading of the top management in the whole integration process are the main mistakes of the BMW strategy.

For instance, the former CEO from BMW, Pieschetsrieder, wanted to learn from Rover. Due to the fact that he failed to provide a clear vision combined with the fact, that he kept the whole Rover management without any changes, the British company started to make losses.

Nevertheless, the failing was rather surprisingly according to the good initial position of the merger. The horizontal type of the merger (both companies are dealing in the automotive industry) is normally one of the lower risky ones.

“There is a relatively high risk of failure in concentric acquisitions and a relatively low one in horizontal mergers.” (John Kitchen, 1991)

May be today it is more important, particular easier and for manager more attractive to admit in such a M&A monopoly-game – but it is definitely not at all granted that it is getting easier to win that game.

The literature is full of advises to accomplish successful M’s & A’s, and I would going too much into detail, if I would start to enumerate them, especially for a working paper. But let me do a short sum up:

The most underestimated phases of M’s & A’s are definitely the pre-acquisition decision making process as well as the post-acquisition integration process. They are important parts of the assumption of a successful Merger or Acquisition. But the hard work begins after the signatures of both CEO’s in the Merger or Acquisition contract – to implement the preparatory integration work, which decides at last over failing or gaining – or over manageable M’s & A’s and wishful thinking to accomplish that.

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