Introduction
In their operation, organizations are guided by several predetermined objectives. The objectives form the basis upon which the firms formulate their operational strategies. Growth is one of the core objectives that firms intend to attain as a going concern entity and is considered as a key driver. A firm may intend to achieve growth in profitability or size. There is a wide range of strategies that organizations can select from to attain the desired growth. One of the ways through which organizations can achieve this is by undertaking the takeover strategy. According to a study conducted by PricewaterhouseCoopers in Europe, 58% of the companies surveyed revealed that the main reason why they incorporated the concept of the takeover was to attain a high market share. This arises from the fact that attaining a high market share is associated with gaining market power. For example, a firm can attain a high negotiating power amongst its suppliers and customers. Additionally, they also revealed that the takeover was also aimed at increasing sales revenue.
According to Fuchs (2010, p.6), companies adopt the takeover strategy to attain high growth within a short period. Despite the benefits associated with takeovers, they are faced with an enormous risk of failure. If a merger fails, it means that the intended synergy cannot be attained. In this paper, the researcher intends to analyze the reasons that lead to the failure of mergers and acquisitions. Because there is a wide range of reasons for failures in mergers and acquisitions, the researcher concentrates on three main reasons. These include poor motivation and evaluation, excessive outlays, and poorly planned and executed integration.
Poor motivation and evaluation
In their operation, organizations in different economic sectors have developed their own corporate culture. According to Daft and Marcic (2011, p.64), corporate culture defines values that employees should portray in executing their duties. For example, a certain organization may lay more emphasis on cooperation, avoiding differences amongst the employees, and customer focus. Daft and Marcic (2011, p.65) further emphasize that the development of a strong corporate culture can result in the emergence of a climate conducive for conducting innovation. This arises from the fact that the employees are highly motivated. The resultant effect is that a firm can attain long-term growth.
However, takeovers present the employees with enormous challenges. Takeovers require the employees to adjust to certain changes so as align themselves with the needs of the new entity established. In most cases, takeovers present the employees with a high degree of uncertainty. For example, the employees may fear the effect of the takeover on their job security. They may associate the takeover with losing their job. Takeovers are associated with job loss because organizations also implement cost-cutting measures. The takeover may also result in a change in the way the employees are used to executing their duties. This may lead to a conflict with the management team. The resultant effect is that the employees’ level of motivation is adversely affected.
During the takeover, employees require a certain degree of motivation. One of the sources of employee motivation is from the line managers. However, line managers may have a workload which means that they may limit them from helping the employees. Additionally, the managers may be experiencing similar uncertainties. Lack of motivation culminates in a decline in the employees’ level of productivity. The resultant effect is that the firm may not attain the desired synergy. For example, the firm may not attain the growth resulting from increased sales and business expansion.
Takeovers also fail due to poor evaluation (McDonald, Coulthard & Lange, 2005, p.4). Before conducting the merger; organizations are required to undertake a comprehensive evaluation of the firm it intends to take over. The objective is to determine whether the takeover will result in the attainment of the desired synergy. However, most organizations are not effective in their evaluation. There is a wide range of issues that organizations should evaluate in executing their takeover strategy. These include communication competence, innovation competence, social-cultural competence, technical change competence, organizational competence, internal cooperation competence, process competence, market competence, conflict competence, functional competence, and motivation competence (Harrison, 2008, p. 110). Evaluation of these issues is vital to determine the degree of congruence between the firms’ objectives. For example, assessing conflict competence evaluation would play a vital role in a firm’s effort to resolve and prevent disagreements regarding issues such as values and organizational norms. Evaluating technology competence between the two firms is also vital in that the organization may be able to determine the degree of similarity between the two firms. High technology relatedness between the two firms increases the effectiveness with which the new entity undertakes joint production. On the other hand, communication competence evaluation would enable an organization to assimilate the best communication strategy.
Excessive outlay
Implementing a takeover is very expensive for an organization. A substantial amount of money is required to complete the takeover. This arises from the fact that there are several requirements that the firm undertaking the takeover may be required to fulfill. For example, the firm executing the takeover may require the other party to pay a higher premium for its share. For example, the acquiring organization may be required to pay $75 per share for a share whose worth in an efficient stock market before the actual takeover is $ 50. This means that the firm will have to pay a premium of $25. For a takeover to be successful, substantial transaction costs are incurred. Some of these costs relate to advisory fees. The firms undertaking the takeover consult on various issues from lawyers, brokers, advisors, and financiers. In most cases, these consultants charge exorbitant amounts thus making the cost of takeover to orchestrate to million of dollars. Other administration costs incurred during the takeover relate to document preparation fees and filing fees.
To complete the takeover, an organization may not have the required amount. As a result, it may revert to debt sources to finance the takeover. According to Harrison (2008, p.118), most organizations which are intending to undertake takeovers use borrowing as their main source of finance. For example, the firm may decide to source finance from financial institutions in form of loans. According to Harrison (2008, p.118), external sources of finance may be very costly. This arises from the fact that an external source such as a loan may be linked to high interest. By using debt finance, it means that the organization will be faced with a significant financial burden. In its formative days of the takeover, the firm may be required to have a substantial amount of working capital. However, the debt burden may limit the firm’s efficiency of operation during the initial days of operation.
Poor integration
For a takeover to be successful there must be effective integration. Integration aids in preventing possible failure arising from culture clash (Sadri & Lees, 2001, p.890). Effective integration increases the probability of a takeover succeeding. Before the actual takeover, the acquiring party should analyze the existing firm being acquired to determine the degree of congruence between the two firms. Through an effective evaluation, an organization can align the corporate strategies of the two firms. After the takeover, the number of employees in the acquiring organization may increase. Poor management of the acquiring firm may fail the new entity. Some constraints may limit the integration process. As a result, an organization needs to consider several elements.
One of the most important aspects of the integration process is the employees. If the employees do not support the takeover, then the entire process is doomed to fail. Effective management of the human resource during the takeover is vital. A significant proportion of the employees may not be conversant with how the new entity will operate after the takeover deal is consummated. This uncertainty may be a barrier to the success of the takeover (Hewitt, 2009, p.47). Lack of incorporation of the employees may result in a high degree of resistance from employees. Additionally, the firm may experience a high turnover of its employees. This means that the takeover may not result in the intended synergy. During the takeover, the acquiring firm should incorporate the firm’s key personnel early in the process. Additionally, the firm should put in place certain incentives to safeguard against a high rate of employee takeover. Effective communication should also be implemented to ensure that the employees understand the importance of the takeover.
Takeovers also fail due to a lack of considering other constituents such as suppliers, customers, unions, and regulators. These parties may constrain the execution of the takeover. As a result, it is paramount to communicate with these stakeholders. For example, the employees union may bar the takeover, if they are not aware of the benefits that the takeover will present to the employees. One of the reasons why takeovers fail is due to a lack of due diligence in the takeover. Due diligence refers to the process of paying more emphasis on the employee’s priorities.
Additionally, providers of capital such as credit financiers may raise some issues which may limit the success of the takeover. For example, they may raise barriers to the provision of finance.
Conclusion
The analysis has illustrated some of the main reasons why takeovers fail. One of these reasons arises from poor motivation and evaluation. For example, employees may access the news of a possible takeover long before the formal communication through informal means such as grapevine. For example, the employees may use meetings between the executives of the two parties involved as evidence of a possible takeover. The situation is worsened if there is no formal communication. Most employees perceive takeovers as a threat to threat to their job. Most takeovers culminate into massive job losses. This is because the takeover may force the parties involved to implement cost-cutting strategies such as downsizing. Additionally, takeovers may also result in a cultural clash between the two organizations. Culture clash arising from the existence of corporate culture differences between the two firms adversely affect a firm’s operational efficiency. Culture clash is ranked as one of the most reasons for failures in takeovers.
The existence of differences in culture between the two organizations involved in the takeover, for example, how the organization’s practices are undertaken leads to conflict amongst the employees. Additionally, the employees of the two organizations may have differences in values and opinions. These differences may impede the takeover due to the existence of arguments and disagreements regarding the internal process that the new entity should adopt. The resultant effect is that the employees’ level of motivation is adversely affected.
Takeovers also fail due to a lack of proper evaluation of various operational aspects between the two firms. Evaluation is necessary to determine the degree of congruence between the strategies implemented between the two parties. Some of the issues which the organizations should evaluate before the merger relates to conflict resolution strategy, communication strategy, innovation competence, social-cultural competence, technical change competence, organizational competence, internal cooperation competence, process competence, market competence, conflict competence, functional competence, and motivation competence.
Takeovers also require a substantial amount of finance to execute. This is because there is a wide range of administrative costs that must be covered. Some of these costs relate to legal costs which are relatively high. Additionally, the firm may also be required to pay a premium on the share of the firm being acquired. The resultant effect is that the cost of the takeover is further orchestrated. This may constrain the amount of working capital required to ensure the success of the takeover. The resultant effect is that chances of failure are further increased. The firm undertaking the takeover may not have the required amount; as a result, it may resort to sourcing for capital from external sources. Some of these sources may include debt sources such as loans. Using debt finance means that an organization will be required to pay a higher amount due to the interest. In most cases, financiers charge high interest to firms’ undertaking the takeovers.
Takeovers also fail due to a lack of undertaking an effective integration. Takeovers result in culture clashes due to the existence of differences between the two organizations. For the integration process to be successful, the parties need to undertake a comprehensive cultural analysis. The analysis will aid the acquiring firm to identify existing gaps concerning culture. As a result, it will be possible to formulate strategies for improvement. Additionally, the integration process should integrate all the parties involved. Some of the stakeholders that should be considered in the integration process include the employees, financiers, customers, and suppliers. Integration of these parties will increase the probability of the merger succeeding.
Reference List
Daft, R. & Marcic, D., 2011. Understanding management. Mason, OH: South Western Cengage Learning.
Fuchs, E., 2010. The success factors of international mergers and acquisition. Cologne: Munchen GRIN Verlag.
Harrison, J., 2008. Foundations in strategic management. Mason, OH: Thomson.
Hewitt, I., 2009. M&A transaction and the human capital key to success. Global report. New York: Hewitt Associates.
McDonald, J., Coulthard, M. & Lange, P. 2005. Planning for a successful merger or acquisition: lessons from an Australian study. Journal of Business and Technology. Vol. 1, issue 2, pp. 1-11.
Sadri, G. & Lees, B. 2001. Developing corporate culture as a competitive advantage. Journal of Management Development. Vol. 20, issue 10, pp. 853-859. California: Emerald Group Publishing Limited.