Why Mergers And Acquisitions Fail Pdf

why mergers and acquisitions fail pdf

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Growth through mergers and acquisitions: how it won't be a loser's game

To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Godfred Koi-akrofi. Download PDF. A short summary of this paper. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Despite this, it is common knowledge that mergers and acquisitions do fail and they do not necessarily create shareholder value. The main aim of this piece of research work was to contribute to the general body of knowledge in the area of failure rates, and the perspectives on why mergers and acquisitions fail.

It was found that the integration stage of the whole merger and acquisition process was the most problematic area which contributes to merger and acquisition failure, and that the problem in the integration stage has to do with the human factor the employees-coping with cultural differences, politics, lack of effective communication, etc.

Another factor that occurred most after the human factor is poor strategies that are rolled out after the deal is sealed. Merger connotes the fusion, the union of two or more companies or entities into one through a purchase acquisition or a pooling of interests. It differs from a consolidation the combining of separate companies, functional areas, or product lines, into a single one.

In this particular case, a new entity is created. For a merger, no new entity is created. Purchase acquisition is an accounting method used in any merger in which the purchasing company treats the acquired as an investment, adding the acquired's assets to its own balance sheet, and recording any premium paid above market price as goodwill, to be charged against future earnings. Pooling of interests is also a method of accounting for a company merger, in which the balance sheets of the two companies are combined line by line without a tax impact only allowed under certain circumstances-used when Merger involves stocks only.

An acquisition or a takeover is simply acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly. In corporate law, a merger is the joining together of two corporations in which one corporation transfers all of its assets to the other, which continues to exist.

In effect one corporation consumes the other, but the shareholders of the consumed company receive shares of the surviving corporation.

An acquisition, on the other hand, typically involves purchasing the assets and stock of the acquired company. The methods of merger and acquisition are varied and in practice the distinctions often blurred but the key difference between merger and acquisition lies in the position of the shareholder.

Shareholders in merged companies typically exchange their shares for shares in the new company. Acquisition occurs either through buying substantially all the assets in a full takeover or buying part of the stock in a partial takeover. Sudarsanam [1] indicated that a merger occurs when corporations come together to combine and share their resources to achieve common objectives. The companies involved remain joint owners of the new entity. European Central Bank [2], Gaughan [3], and Jagersma [4] also defined merger as the combination of two or more companies in creation of a new entity or formation of a holding company.

To those who are not privy to the agreement document, the following are some of the things that can influence their definition as to whether a particular agreement is a merger or an acquisition: Name of resultant entity or company: If the name of the resultant entity bears the name of the investor, it is easier for people to conclude that it is an acquisition.

If it bears the name of the existing entity, then people will think of the agreement as a merger. Sometimes the resultant name may be a combination of the names of the two companies involved, and people will still consider it as a merger. How the board and management are constituted: People will easily go for a merger if the board and management of the resultant company are fairly constituted. People will easily go for an acquisition if the investor has more representation on the board and management.

This is not always true especially when a merger allows for one party to be a management partner. From the above discussion, it can be clearly deduced without any ambiguity that a merger simply is made up of the fusion of two or more companies or entities into one, where none of the entities involved has complete dominance over the resultant entity, and also all the individual entities involved still maintain their identity as separate entities.

The resultant name normally does not differ from the name of the existing company. The name can also be a combination of the two or more companies involved.

Mergers and acquisitions represent the ultimate in change for a business. No other event is more difficult, challenging, or chaotic as a merger and acquisition. It is imperative that everyone involved in the process has a clear understanding of how the process works. Mergers and acquisitions have had an important impact on the business environment for over years [13] Gaugan, They have often come in waves of activity that were motivated by different factors.

This is in part due to pressure from key stakeholders vigilant in their pursuit of increased shareholder value. International mergers and acquisitions also constitute the most frequently used means through which multinational corporations undertake foreign direct investment. According to Banal-Estanol and Seldeslachts [14], mergers and acquisitions are normally established to open up or expand a current organization or operation seeking or aiming for long-term profitability and an increase in market power, as cited in Chambers What this works intends to do is to try to unravel the reasons why this occur from documented facts by authorities and researchers in this field.

Pablo [23] defined post- merger and acquisition integration as the implementation of changes in functional activities, organizational structures and cultures of the two organizations to expedite their consolidation into a functional whole. This is not to be achieved so easily, taking into consideration the coming together of two separate and different entities.

Koetter [24], Cartwright and Cooper[25], Child et al. Research has been able to show that one of the key areas contributing to these failures is the employee factor in the dynamics.

Cascio and Young [37] also revealed that Psychological responses of people are shown to have an impact on organizational performance and, they become more visible during situations of drastic change like Mergers and Acquisitions.

In a particular research work, when failure rates were analyzed in more detail, the overwhelming majority of senior personnel highlighted culture and communication to be the two areas that prove to be the most challenging.

It continued to say that issues ranging from corporate governance to employee satisfaction become complex when different cultures are involved retrieved from www. The uncertainties of Merger and Acquisition situations cause a series of psychological processes that result in manifest positive behaviors like commitment and loyalty, or negative behaviors like absenteeism, and sometimes, even acts of sabotage [39], [40], [41], [42], [43], [44], [45], [46], [47], [48], [49], [50].

ISSN : Vol. Farnham and Horton [51] defined organizations as social constructs created by groups in society to achieve specific purposes by means of planned and coordinated activities. These involve human resources to act in association with other inanimate resources in order to achieve the aims of the organization.

In as much as employees cannot achieve anything without the inanimate resources, the same applies for the reverse. This implies the importance of the employee in achieving good performance, especially in a post-acquisition era cannot be said to be over emphasized.

Despite the upsurge in international acquisition activity, the fact still remains that up to 83 percent of these transactions are unsuccessful [54], [55], [56]. Thus, international acquisitions constitute an unexplained paradox: although academic research and business practice have shown that the majority of these transactions fail to achieve pre-acquisition objectives, acquisitions across borders continue to be very popular and remain the main vehicle through which Multinational Corporations MNCs undertake foreign direct investment [57], [10].

In fact, some research studies suggests that with the right strategy and the right approach to post-merger integration, cross-border acquisitions can create value for the acquiring firm [58], [59], [60], [61].

Thus, even though research suggests that most acquisitions fail, it may make sense in some cases. He enumerated a number of research findings pointing to different failure rates.

So the question is posed: why do mergers and acquisitions work for some and not for others? Differences in organizational culture have a negative effect on acquisition performance [74], [75], [76] , and national cultural differences too have negative effect on acquisition performance [77], [78], [79].

Balmer and Dinnie [80] found that there was an over-emphasis on short term financial and legal issues, at the neglect of the strategic direction of the company. This neglect included failure to clarify leadership issues, and a general lack of communication with key stakeholders during the merger or acquisition process.

Gadiesh and Ormiston [81] list five major causes of merger failure: Poor strategic rationale. Mismatch of cultures. Difficulties in communicating and leading the organization. Poor integration planning and execution. Paying too much for the target company.

Of the above five causes of merger failure, Gadiesh and Ormiston [81] believe that having a clear strategic rationale for the merger is the most significant problem to overcome, as this rationale will guide both pre and post-merger behavior. They stress that this issue alone may result in the other four causes of merger failure taking place, as cited in Mcdonald, Coulthard, and de Lang [82].

Lynch and Lind [83] also list other reasons for merger failure such as: Slow post merger integration Culture clashes and Lack of appropriate risk management strategies. The confident managers are more likely to succeed because they will also work harder to overcome difficult obstacles.

Promoters convince managers that they can succeed, which may not be true in the end. Distrust- Steger and Kummer [84] pointed out that at the grass root level, that is, below the top level management, the attitudes and moods of the employees are often quite the opposite of over confidence — namely distrust.

First, there is doubt about what will happen in the future. Is there the danger of losing their jobs? If not, how will their jobs and tasks be changed? How will the restructuring affect them personally? Will they have to move to another department, work with other colleagues, work for a different boss?

Will the entity of the company that they work for be divested? These are uncertainties that can last quite some time. Second, companies are often reorganized at least every two years. Third, if people are fired the workload is not reduced which results in fewer people having to produce the same amount of work. Fourth, stakeholder management is performed poorly, if at all. In addition, employees are among the stakeholders who are often treated the worst of all.

Rumors spread rapidly, all over the company. Even months after the closing, integration plans are sometimes far from being settled; insecurity among the staff persists longer than necessary. It is shared among the board members. Haspeslagh and Jemison [6], and Pablo [23] link cultural differences and integration issues with merger problems.

Depamphilis [85] pointed out that overpayment leads to expectations of higher profitability which is often not possible, and that excessive goodwill as a result of overpaying needs to be written off which reduces the profitability of the firm. Straud [86] said inefficiencies or administrative problems are a very common occurrence in a merger which often nullifies the advantages of the merger.

They lose focus of the fact that they have to concern themselves with the strategic benefits of the merger.

Reasons for Frequent Failure in Mergers and Acquisitions

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We use cookies essential for this site to function well. Please click "Accept" to help us improve its usefulness with additional cookies. Learn about our use of cookies, and collaboration with select social media and trusted analytics partners here Learn more about cookies, Opens in new tab. Our research shows that in any given year, about 10 percent of all large mergers and acquisitions are canceled—a significant number when you consider that about such deals are announced each year. The consequences of deal abandonment can be severe, affecting both the reputation and share price of the parties involved. Besides companies incurring the obvious one-off costs like advisory and termination fees, senior managers in these businesses are often perceived as having wasted precious time and resources pursuing a strategic path that turned out to be a dead end.


Request PDF | Why Mergers and Acquisitions Fail? | This chapter tries to identify and inculcate few of the major reasons for failures of M&As. The probable.


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Additionally, the authors also investigate whether announced deals reflect an expectation about likelihood of deal completion. In the probit model, the dependent variable is the probability of deal i being failure depending on four sets of explanatory variables: method of payment, target status, diversification and acquirer bidding experience, along with a set of control variables. The findings from event study confirm that market reaction is indifferent to whether announced deals are likely to be successfully completed or not, consistent with the efficient markets hypothesis. However, the results from cross-sectional, cross-country regressions confirm that the aforementioned deal characteristics, as well as certain firm and country level attributes do influence the likelihood of whether an announced deal is subsequently completed or terminated. Tanna, S.

At least seven out of The high end? Nine out of And these are no misprints.

It turns out that this is more of a problem for companies that are acquiring complementary businesses that they know quite well. Your customers need to have a reason to like the new combination, which may require change as well as integration. According to most studies , between 70 and 90 percent of acquisitions fail.

A Comprehensive Analysis

Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. Mergers and acquisitions represent the ultimate in change for a business. Despite this, it is common knowledge that mergers and acquisitions do fail and they do not necessarily create shareholder value. The main aim of this piece of research work was to contribute to the general body of knowledge in the area of failure rates, and the perspectives on why mergers and acquisitions fail. Save to Library.

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Done deal? Why many large transactions fail to cross the finish line

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M & A failure rate is very high; averaging about 50%, regardless of the initial high hopes. K. EYWORDS.: merger, acquisition, failure, perspectives.

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