Mergers & Acquisitions and Impact on Stakeholders

Introduction

The process of business consolidation is currently have become commonplace. Goals and tasks set before such transactions at the time of the announcement, in most cases, are related to the growth of business efficiency, obtaining a synergistic effect in one form or another. However, despite optimistic plans, only a small part of transactions in the world (according to various estimates, no more than a quarter) are successful. At present, businesses are actively developing other forms of business integration. Strategic alliances, associations, and different types of informal associations are characterized by greater flexibility in decision-making in a changing environment.

This essay will discuss the quality of mergers and acquisitions and the social and economic impact on various stakeholders to evaluate the current state of M&A development.

The Quality of Mergers and Acquisitions

In the context of unstable economies, decisions on mergers and acquisitions need to be carefully analyzed. Assessment of the quality and effectiveness of such transactions in recent decades has received considerable attention paid both by practitioners (consultants and business analysts) and from the scientific community. Researchers suggest that the idea behind making decisions about a transaction is much broader than the concept of future efficiency of business integration (Akrofi, 2016). Overoptimism of decision-makers may be linked to a more general understanding of the success of a deal, which comes down to profit and emerging perspectives that are difficult to assess (Zipkin, 2015). Therefore, the quality of M&A is usually evaluated by the financial and operational performance of the business.

The effectiveness of the M&A on the level of integration is expressed in the efficacy of solving individual tasks in the post-transaction period. For example, the degree of solving system alignment problems represented by the level of control, exchange of sales experience, and information systems integration may present information that M&A is thriving, according to specialists (Taylor, 2019). The assessment of individual tasks of integration generates an overall performance indicator of the M&A process, which is expressed in the degree to which the integration objectives of the merged companies are achieved. At the transaction level, the effectiveness of mergers and acquisitions can be shown in a financial value created as a result of an M&A related to reduced costs, increased revenue, or other monetary goals. The assessment of the financial performance of the M&A covers all stages of the transaction.

There are a significant number of financial performance models. There are several widely used approaches to assess the quality of M&A value: net asset value estimation (cost-based approach), comparative approach, and discounted cash flow method. Each of the methods compromises the uncertainty of the source data and the adequacy of the cost estimation. Asset valuation operates accurate historical data but does not represent the company’s full fair value in the future (‘Valuation Methods,’ n.d.). The coefficient (comparative) method operates with accurate data about similar transactions but does not fully reflect the value of the specific companies involved in the merger (‘Valuation Methods,’ n.d.). Discounted cash flows method might give a better idea of the quality of the M&A as it is based on the company’s value and uncertainty since the technique is based on forecast data (‘Valuation Methods,’ n.d.). Financial methods may give a general idea of the post-merger performance of the business.

There is a substantial amount of data suggesting that the quality of M&A and its assessment is relatively controversial. According to the theory, the company’s effectiveness and value do not significantly increase because of a merger (Wuebker, 2015). Since the company’s management usually overestimates its abilities and capabilities, the expected results systematically exceed the merger’s actual effects (The Deloitte M&A Institute, 2017). Therefore, the evaluation of the quality of M&A may not be accurate. However, there is a transfer of value from the shareholders of the buyer company to the shareholders of the acquired company, which can be assessed before or after a merger or an acquisition. Overall, the merging parties’ market value shows that the quality of mergers varies widely, leading to an increased value or the reduction of the company’s cost.

Still, the level of potential synergetic effect can reflect the quality of post-merger or acquisition. Researchers suggest that M&A simulation models may help to assess the effectiveness of transactions based on specific, ad hoc features of companies (Bonnet and Schain, 2017). Qualifying and quantifying effects of the synergy that appear after the M&A might present the information about the quality and collaboration that companies achieved due to the transaction.

The Social Impact of M&As on Various Stakeholders

From a social and managerial point of view, mergers and acquisitions can be traditionally perceived as painful processes that cause distrust and fear among many employees. Fear of transition is inherent not only in ordinary employees but also in senior management, which bears the most pressure during M&A and becomes a vulnerable link between owners and junior employees. Nevertheless, the unification of companies is stress and test for all categories of employees.

Mergers and acquisitions have both positive and negative social effects on various stakeholders. Thus, the positive social aspects of mergers and acquisitions include the ability to combine and save complementary resources of the merging companies. This leads to a collaboration of people, their experience, and skills (Marks, Mirvis, and Ashkenas, 2017). The communication and interaction of employees strengthen the synergetic effect and may lead to better performance results. Another essential social impact of M&As is the improved quality of decision-making, which is achieved due to the necessity to overcome obstacles together and the exchange of knowledge and data between management teams (Weber, Knyphausen-Aufseß, and Schweizer, 2019). Overall, it can be said that the positive social impact after M&As depends on the degree of companies’ correspondence, willingness to communicate effectively, and having common goals.

Nevertheless, the newly established company after the M&A may have adverse consequences impacting the transition’s social aspects. The negative sides of transactions may include social conflicts between employees due to the differences in corporate culture and the company’s perspectives and the inability to collaborate (Sarala, Vaara, and Junni, 2019). Furthermore, the social effects of M&As may lead to the complexity of integration due to problems with personnel and the lapping of organizational structures. Finally, it is reported that mergers and acquisitions might not increase jobs, but rather reduce them, mostly affecting ordinary employees as the main stakeholders (‘Managing Human Resources in Mergers and Acquisitions,’ n.d.). The negative social sides of transition may appear as severe conflicts, employees’ resistance to change if the management teams of companies do not convey the information correctly.

The cooperation of companies is stress and test for all categories of employees. The absorption process during M&As may cause a sharp destabilization of the internal situation. According to the researchers, managers of the acquired firm may feel conquered, and notice the loss of social status (Trapczynski, Zaks, and Polowczyk, 2018). The consequence of this situation is characterized by possible high staff turnover and active resistance to organizational changes. Employees of companies are aware of the insecurity of their status position, limited opportunities to influence the situation, and might experience uncertainty (Jordan, 2019). The consequence of this uncertainty and fear is the social disruption of employees, which destroys the internal corporate unity, exacerbates the contradictions between different companies’ groups of employees, and destabilizes the companies.

Current trends in management systems help to facilitate the implementation of business cooperation processes to improve social outcomes that influence various stakeholders. Various categories of employees begin to feel more confident and secure when restructuring the company as a social system (Caiazza and Volpe, 2015). The emergence of new cross-functional teams in mergers and acquisitions improves the situation for junior and senior managers that can work together, communicate changes, and eliminate cultural and organizational features (Caiazza and Volpe, 2015). Therefore, it is crucial to retain critical managers, encourage various teams’ associations’ establishment, and decrease differences in labor and promotion systems. Social consequences after M&As may disrupt the operations of all stakeholders; thus, the formation of staff relocation and collaboration should be addressed as an initial step after the closure of a deal.

The Economic Impact of M&As on Various Stakeholders

Mergers can improve the economic state and efficiency of associated companies, but they can also worsen the results of current production activities and increase the burden of expenditures. As previously discussed, it is difficult to estimate in advance how substantial the changes caused by a merger or acquisition might be. However, the results of many studies on measuring the net effect of mergers and acquisitions that have already been made give very contradictory, often wholly opposite conclusions. According to Forbes, 83% of all mergers and acquisitions of companies fail and do not recoup the funds invested in them (Bradt, 2015). Thus, the economic impact hits shareholders initially as they might not boost their return on investment. M&As also influence CEOs and senior management teams because their compensation, bonuses, and performance indicators might start based on different vital targets and strategies (Bradt, 2015). Therefore, economic efficiency issues might firstly affect executives and significant shareholders.

There is evidence that stakeholders of one company might benefit more from the M&As than another company. According to analysts, the seller rather than the buyer who wins the deal gets the most positive economic impact from the merger or takeover (Moreira and Silva, 2019). The buyer gives the seller the additional value in the form of a premium even before the transaction’s announcement that is not economically beneficial for the acquirer. The economic effect of mergers and acquisitions can be expressed in economies of scale based on the implementation of the most advanced operating practices in the combined company, according to Harvard Business Review (Blonigen and Pierce, 2016). The creation of new opportunities and the emergence of a stimulating need to survive acquisition or a merger gives all stakeholders potential economic growth and benefits. The reduction of costs, capturing a more significant market share, or purchase of new technology opens opportunities for better financial performance for ordinary employees and senior managers whose economic state depends on the company’s performance.

Employees and external stakeholders of both companies that merge or experience a takeover might have both negative and positive economic impacts on their activities. Job losses are the primary problem for employees of the new company because the company does not need similar departments, which leads to plant closures and an economic downturn for employees. The situation might also affect the communities, suppliers, and clients that will become irrelevant, reporters suggest (Semuels, 2017). When creating economic efficiency for the company, the management team overlooks the financial losses of employees who execute the company’s operations. At the same time, academic researchers also highlight that only 30% of the board of directors can save their posts after M&As (‘Save My Seat,’ n.d). The data suggest that economic perspectives for all stakeholders during M&As are unpredictable, which emphasizes the view that there might not be a win-win situation for all.

Conclusion

To conclude, one can say that mergers and acquisitions allow companies to increase the value of a business, create a genuinely useful and competitive product, and gain unique competitive advantages. Nevertheless, companies that execute a merger or a takeover sometimes misjudge the assets of the companies they are interested in or their liabilities, which leads to inefficient collaboration and adverse social, economic, and organizational influence on various stakeholders. While ordinary employees have to work on the newly established operations of the company and experience uncertainties about their job positions and compensation, senior managers and executives bear the complicated decision-making process and might not become members of the new board of directors. Thus, the need to balance the interests of the majority of stakeholders is essential for mergers and acquisitions to be conducted properly.

References

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