Literature Review of Post-merger Integration

The 1990s featured the most intense period of mergers and acquisitions in U.S. economic history. This period is now recognized as the fifth merger wave in U.S. history. Merger waves are periods of unusually intense merger and acquisition activity. There have been five such periods since the start of the twentieth century, with the previous one occurring in the 1980s. This wave featured many record-breaking mergers. When it ended in the late 1980s, many thought that there would be an extended period of time before another one began. However, after a short hiatus, an even stronger merger wave took hold, far eclipsing that of the 1980s. The merger wave of the 1990s was path breaking due to the dollar value of the transactions and the unusually high number of deals. While the fourth wave of the 1980s was known for both its megamergers and its colourful hostile deals, the fifth wave has featured far larger deals, as well as a good supply of hostile transactions.

While the fourth merger wave of the 1980s was largely confined to the United States, large-scale mergers and acquisitions finally made their way to Europe in the mid-1990s.In recent years, cross-border deals within Europe have grabbed the headlines. Even hostile takeovers, long thought to be exclusively American phenomena, started becoming more common in Europe. This is underscored by the fact that the biggest deal of all time was the Vodafone-Mannesmann $183 billion hostile takeover. In addition to deals within Europe, trans-Atlantic deals, with European buyers of U.S. companies and vice versa, started to become commonplace. With the development of the European Union and the erosion of nationalistic barriers as the continent moved to a unified market structure with a common currency, companies began to see their market as all of Europe and more. It became clear that a European consolidation was in order. Although there are many indications that there will be realizable benefits from such a consolidation, only time will reveal the magnitude of these benefits.

Beginning in the mid-1990s, several consulting firms commissioned surveys concerning the outcome of recent mergers. The surveys and related analyses were used to examine three general questions: First, did the mergers tend to achieve the goals and objectives of the executives involved in the deals? Second, on a more objective basis, did the deals enhance shareholder value relative to industry benchmarks? That is, were the deals a financial success?

Third, and perhaps most important to the consultants, what were the characteristics of the more successful deals compared to those of the less successful deals? The surveys tend to focus on larger, transnational mergers and acquisitions examining the views of top managers in the acquiring companies regarding the success or failure of a deal. The questions to be answered often include the original purpose of the merger, how the merger performed relative to plan and expectations, how the acquiring firm went about the post-merger integration process, what types of synergies or strategic advantage were expected and achieved, and what types of problems developed in implementing the merger.

In addition to summarizing and analyzing the results of the interviews, the consulting studies often bring objective data to bear on deals covered by the surveys, examining whether the post-merger stock prices rose or fell relative to the pre-merger trend and/or relative to the industry average share price. The results of this financial analysis often differ from those obtained in the executive survey portion, because the firm perhaps succeeded in the deal, but paid too much for the assets. In that instance, executives might think that the deal achieved their strategic and cost reduction objectives (e.g., reducing real costs or positioning the firm for future growth), but it did not achieve an increase in shareholder wealth. Indeed, unless the deal improves the position of the firm relative to its rivals in the race for consumer patronage, it may not increase shareholder wealth at all.

The first question – did the deal meet the objectives of its creators? – receives a positive response in most of the surveys. Executives often indicate that their mergers achieved their objectives in 70% to 80% of cases.3 Many of these same studies, however, indicate that the full potential of the merger was not attained. One can readily ask whether these surveys, using executive opinions as a benchmark for success, provide a valid test, because one can hardly expect the executives involved in the deal and responsible for its success to be unbiased evaluators of the deal.

The second question – was the deal a financial success? – Often elicits a negative response.

• When compared to industry share price indices or broad-based averages, mergers are often found to succeed less than half the time. In many cases transactions fail to enhance shareholder value (as measured against overall stock market performance, industry average returns, pre-merger trends, or a variety of other definitions). If, however, the trend found in KPMG’s 1999 and 2001 surveys is correct, firms are getting better at doing mergers and are less frequently reducing share value.4
• Revenue growth is found to decline post-merger for both the target and the acquiring firm in majority of cases.

2. Research Problem Statement:

To evaluate the Mergers and Acquisition process and to evaluate the post merger integration through various business consulting reviews.

3. Hypothesis:

H1: Merger and Acquisition process has direct relation with the financial performance of the organisation.

H2: Mergers & acquisition is directly related to the cultural changes inside the organisation.

H3: Mergers and Acquisition process is inversely related to the Policies of the merging process.

H4: Mergers and Acquisition creates a positive relationship between the Cross border countries or nations.

3. Literature Review:

According to the journal of American Academy of Business, Cambridge, investments in new technologies play a crucial role in helping high tech companies to gain competitive advantages over their competitions. If a company can utilize Merger & Acquisition (M&A) method to acquire new technologies, then this company can quickly generate substantial values from its technology portfolio within the fast-paced and rapidly-changing business environment.

Changes in technologies triggered by new implementations need to be considered closely. Strategy researchers argued that Merger & Acquisition (M&A) between related firms are superior to mergers between unrelated firms (Lubatkin, 1983; Porter, 1985). Since innovation involves many factors beyond research, the technical team and manufacturing engineering teams must constantly coordinate and facilitate the integration of research finding from other research teams in order to develop, adopt, implement and take advantage of new technologies ( Singh and Sohal, 1995 ) .

In the competitive technology arena, investors perceive corporate value through a different set of standards and experts with industry insight may spot undervalued assets (Boer, 1999). Mergers between similar companies are combinations of firms that sell the identical or similar products, serve similar markets or are vertically linked to each other. (Blackburn, Lang & Johnson, 1990). However, when identifying related synergies between companies is difficult, a new evaluation model composed financial performance criteria can be useful for both the sellers and the buyers. Buyers who are not familiar with the target companies in an M&A deal may overlook or overestimate potential synergies in marketing, production or management. Rockart (1979) suggest that the relative importance of functions varies among firms according to the type of strategy adopted. While many merger researchers have been previously argued that mergers play different roles in a company’s development, there are only limited empirical researches linking these separate roles together.

Booz-Allen & Hamilton (Swerdlow et al. 2001, p. 2), and A.T. Kearney (Habeck et al.

1999, pp. 6-7), and CSC Index Genesis (McCauley 1997, p. 9) all come to this conclusion, as does Bower (2001, pp. 99-100). Better outcomes for mergers in the same or related industries may be due to the possibility of scale or procurement gains around the time of many horizontal mergers and the greater predictability of mergers in a known industry.

A.T. Kearney (Habeck et al. (1999)). Interestingly, this is one common business consultant survey result that was not found by Ravenscraft & Scherer (1987, pp. 194, 219) in their extensive review of 1960s and 1970s deals. They found mergers of equals worked better than less equal deals. In their sample, the mergers of equals tended to be conglomerate in nature.

Several studies criticize the fundamental idea driving certain transactions,16 because a

viable basic idea is a necessary condition for a successful deal. Sometimes problems with the fundamental idea occur because the acquired assets did not fit into a broad strategy of the acquiring firm. Sometimes the broad strategy includes the intention to move the firm beyond its traditional area of competence and the firm is simply unable to effectively integrate the assets in this new area of endeavor. The first case is a mistake in matching, the second case is a mistake in over-reaching.

Presentations by certain consulting firms have focused on management hubris or uninspired ideas as reasons for failure. The consulting firm surveys do not, however, provide sufficient information to distinguish those mergers that were “bad ideas” from those that were simply “badly implemented.” Indeed, knowing that a transaction is a bad idea, is much easier in hindsight, than it is at the time the transaction is conceived. For example, before the fact it is hard to tell whether an expansion into a new area is a bold stroke of managerial genius or an egomaniacal power grab doomed to failure. Furthermore, the inherent uncertainty in bringing together two or more disparate organizations is undoubtedly one reason that the returns to merging appear so difficult to capture. In addition, knowing how much to pay for the assets in these one-of-a-kind deals is difficult. Overpaying for the target company’s assets is only occasionally mentioned explicitly as a problem in the consulting literature, although it is a key factor in the business/finance literature.17

Both bad ideas and bad implementation are less likely to occur if the acquiring firm has experience with the type of assets it is acquiring. One factor that has often been found to make deals work more frequently is a close relationship between the acquired assets and the core expertise of the acquiring firm. Geographic market extension and capacity expansion deals are thus more likely to be successful than are cross-border transactions aimed at corporate diversification.

Bower (2001, p. 101) criticizes the front-end of the merger process. Likening late 1990s

CEOs to bluefish in a feeding frenzy, he implies that too little thought goes into the initial plan, forcing managers to try to salvage what they can in the post-merger period. McCauley (CSC Index Genesis 1997) also notes that deals to expand revenue with no other discernable goal were more likely to fail than those that had a more well-defined purpose. Also see Business Week/Mercer (Zweig 1995, pp. 122, 124). Booz-Allen Hamilton (2001, p. 3) however notes that failure of deals to meet expectations has more to do with poor implementation than a poor initial fit.

Shay of PriceWaterhouseCoopers (2000) and McCauley (1997) both argue that overpaying is not a driving force behind the failure of deals. They argue that deals fail due to poor implementation, not because the buyer just paid an unrealistically high price for the assets.

McCauley (p. 5) finds no correlation between the percentage premium paid and the “success” of the deal, based on an industry benchmark standard.

Bower (2001), Habeck (1999), and Booz-Allen & Hamilton (Harbison et al. 1999, p. 4). Business consultants indicate that firms often do not have good estimates of efficiency potential prior to closing a deal and the efficiencies that ultimately are realized often come from unexpected sources. In addition, firms usually underestimate savings, in part, due to the fact that a failure to produce any savings claimed prior to a merger is punished by downward stock price revisions.

Compare PwC’s emphasis on rapid post-merger integration to reduce “uncertainty and its debilitating effects” (Shay et al. 2000, p. 11) with Accenture: “We found that successful

Post merger integrations do not necessarily depend on speed. Rather it is the way in which speed is applied – where and when – that distinguishes integration winners from losers” (Spence and Johnson 2000, p. 5). For a description of the experiences of five integration managers and the need for speed from deal announcement through the first 100 days after closing, see Ashkenas and Francis (2000).

BCG, A.T. Kearney (Habeck et al. 1999, p. 5), Booz-Allen & Hamilton (2001, p. 9) and

Bower (2001) place emphasis on scale effects, sometimes noting that up to two-thirds of mergers are undertaken to obtain increased scale in the same or related industries, while McKinsey places more weight on revenue-side effects and KPMG (Kelly 2001) lists several revenue enhancement synergies. Although BCG focuses on scale effects from mergers, they also note that revenue losses in banking mergers can be substantial (Viner, et al. 2000, p. 3).

It may be difficult to gain and retain in-house experience with mergers because the staff with the knowledge tend to leave the firm. At least two sources indicate that such experience does not improve merger performance: McKinsey (May 8, 2002 presentation by Shelton and Sias); and KPMG (Cook and Spitzer 2001, p. 11). Studies by several others however, indicate that experience is valuable: Business Week/Mercer (Zweig 1995), PwC (April 23, 2002 presentation by Don Shay), A.T. Kearney (1999, p. 3; Habeck et al. 1999, p. 6), McCauley (1997, p. 20), and Booz-Allen & Hamilton (Harbison et al. 1999, p. 4).

See Meckstroh (1998, p. 11). A recent paper provides a theory, based on stock market valuation errors, that explains why mergers that might have appeared to be financial errors actually enhanced firm values when the market returns to an equilibrium. The outcome is caused by the incentives of highly over-valued firms to use stock to purchase those firms that are less over-valued. See Andrei Shleifer and Robert Vishny, “Stock Market Driven Acquisitions,”

The consulting literature uses its interview technique to search for factors that likely apply to a large number of merger implementation situations. Differences between types of mergers may, however, be an important factor in determining which deals are likely to work and how each deal might be best implemented. Bower (2001) provides a categorization of differing types of mergers and indicates various deals in each category that have succeeded or failed.

Consistent with Bower’s work, various consulting studies indicate that many (perhaps most) recent mergers are undertaken to increase size geographically or to expand current product lines in the same or related industries. These transactions have readily understandable motivations and appear to be somewhat more likely to succeed than are other mergers. Deals that are intended to move firms into completely new product areas or to expand the use of a technology where it had previously been unused, appear to be more speculative ventures. The recent consulting firm studies demonstrate an increasing awareness that different types of mergers must be handled in somewhat different ways, but that certain generalized recommendations about post-merger implementation are applicable across almost all categories of deals.

Failure rates for mergers in the range of 35% to 60% are common in academic studies depending on the benchmark chosen for success.27 The largest studies done by industrial organization economists indicated that about one-third of 1960s and 1970s mergers later lead to divestitures and of those mergers that held together, more than half were associated with profit declines relative to the pre-merger upward trends of most target firms (Ravenscraft & Scherer 1987, pp. 192-194, 219). Lower market shares post-merger were also found for most mergers (Mueller 1985). Having said this, a subset of the economics literature implies that mergers may produce good outcomes, such as improved productivity in plant-level studies, at least for asset transfers and ownership changes if not for whole mergers, and lower costs in hospitals where post-merger concentration is not high. Some large scale studies have also found significantly improved cash flow returns following mergers. Very recently, results from a 1980-1997 sample of Fortune 500 takeovers indicated that post-merger firm performance improved in some important dimensions (e.g., costs per unit revenue) relative to 2-digit industry benchmarks.

The consulting studies and the academic literature on merger success raise a major question: What rate of return or success rate should we expect from risky ventures undertaken with lots of rival bidders for the assets? Should returns resemble those seen in the pharmaceutical industry, or should we expect to see the minimal returns that we see on average, with large returns limited to a few very successful deals that cannot be easily imitated? After all, competitive markets tend to limit the upside success of mergers, while downside loss is bounded only by zero.

Healy, Palepu, & Ruback (1992) studied 50 large 1980s mergers. In an extension of this test, Andrade, Mitchell, & Stafford (2001, p. 116) report that from 1973 to 1998, mergers produced an average post-merger increase in the cash flow to sales ratio of about one percent relative to pre-merger trends in that measure. Scherer (2002, pp. 14-15) argues that these results are either biased or inconclusive.

Managing Acquisitions is an early model of many of the current consulting firm reports that attempt to provide a “how to” book for top managers of acquiring firms. A brief description of its contents is useful in framing discussion of the genre of merger studies examined in this paper. The book provides 270 pages of advice for managers on how to best handle M&A decisions: deciding who to buy, how to plan the deal, how to handle employees of acquired assets, how to integrate various assets and obtain synergies by transferring learning and capabilities, and how to follow-up and measure the end results of the transaction. Haspeslagh and Jemison prepared the book over the course of eight years and utilized the results from two major research projects. One to two hour interviews were held with over 300 top executives and operating managers of 20 acquiring companies based in 6 countries, which had done deals in 10 countries. The deals ranged in value from $3 million to over $1 billion.

The authors also obtained contemporaneous documents about the deals in many cases. Jemison was most interested in “strategic capability transfer” and so focused on deals where that was the avowed purpose. He examines mergers in four industries: banks, food, steel, and financial services. The acquisition integration process was studied in seven acquisitions among twelve firms (Haspeslagh & Jemison 1991, p. 275). Some of the 75 interviews with 63 managers occurred as many as fifteen years after the close of the relevant transaction, but most were conducted two to eight years following the deal (p. 278). Much of this work was previously described by Jemison and Sitkin (1986).

Haspeslagh focused on “acquisitive development” and conducted interviews with three large chemical firms (BP, ICI, and an unnamed US firm), covering eleven transactions in the 1980s. He validated the results later at BASF. Two rounds of interviews were conducted one year apart from each other (p. 286).

The main advice and conclusions of the studies are listed on page fifteen. The authors point out that value creation happens after the deal and managers have to insure that the strategic capabilities of the target are transferred efficiently or that they are effectively retained by a semi independent target. Managers must determine the optimal level of interaction between the merging organizations to maximize capability transfer and begin the post-merger integration process in an evolutionary way that maintains that level of interaction. The authors’ advice is based on a large number of 1980s interviews with acquiring managers in a half-dozen firms and on insights obtained from previous management, finance, and industrial organization literature.

Little information is provided about how successful various transactions were. The authors discuss some of the deals in detail, but it is impossible to ascertain whether the deals outperformed an appropriate benchmark, such as an industry-specific stock price average. Some instructive results of the authors’ literature review are that transferring learning seems to be a major source of potential synergies especially in international deals where the knowledge possessed by the merging organizations may vary considerably (p. 205); and value creation in mergers often comes from places that the managers did not originally envision. In addition, the authors mention a 1962 Mace & Montgomery finding that the post-merger integration process was a key to making deals work. They imply that this insight was perhaps lost for 20 years until the late 1970s and early 1980s, when the point again became a focus for investigation as business researchers began interviewing businesspeople on the causes for their deals’ success or failure (p. 307). Many similarities to the methodology followed in Managing Acquisitions will be apparent in the discussion of consulting firm literature.

4. Conclusion:

What can we learn from the business consulting literature? Mergers and acquisitions are risky undertakings that achieve the primary goals of the surveyed managers substantially more than half the time, but are only successful in a more quantitative financial sense (i.e., raising shareholder value relative to pre-deal levels) about 30 to 55 percent of the time.59 Can they be made to work better? It seems so. Mergers in the 1990s are believed to have been more successful than those in the late 1980s, and there is some evidence that the results of mid-1990s deals have been surpassed by those in the latter 1990s. There are some factors that business consultants identify as being keys to enhancing the chances that a deal will succeed. The first factor is choosing a deal that makes strategic sense – one that fits with the firm’s larger goals and objectives. Once it becomes clear that the deal suits the firms’ purposes, then implementing the deal and integrating the assets becomes important. Certain types of deals, such as mergers of equal-sized firms with strong differing cultures, seem particularly difficult to implement, even if they meet the strategic goals of the acquiring firm. On the other hand, those deals that occur in the same or related business and that make use of existing firm strengths appear to work somewhat better. The consulting literature stresses several factors that are thought to improve the chances that the deal implementation will prove effective. These factors include: early planning for the integration process, setting and communicating clear goals, identifying the responsible managers and providing them with appropriate incentives, moving quickly to define those areas where gains can be achieved, keeping everyone informed with tailored messages including employees and customers, integrating systems quickly, being sensitive to cultural issues, retaining key employees, and retaining sales force activism to avoid the loss of customers to rivals. The importance of these factors may vary from deal to deal as characteristics of the deals change, but the one over-riding factor is the need to plan early for the integration of the new assets. This early planning is intended to allow the combined firms to obtain the merger-related gains quickly and to build an early period of enthusiasm surrounding the transition.