Corporate restructuring - mergers and acquisitions

7/24/2019 Corporate restructuring - mergers and acquisitions

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Corporate restructuring is as likely to be a

failure as a success. Discuss this statement

with reference to the relevant theory andempirical evidence on mergers and

acquisitions (M&!.

TABLE OF CONTEXT

INTRODUCTION 3

NET PRESENT VALUE 4

FINANCE AND THE CAPITAL MARKET 4

STRATEGIC MANAGEMENT 7

ORGANISATIONAL BEHAVIOUR 9

CONCLUSION 13

REFERENCES 14

APPENDIX A - EXPANDED M&A DEFINITION

18

APPENDIX B - MOTIVES BEHINDTHEORETICAL FRAMEWORK OF M&A

THEORIES 19

APPENDIX C- THE INCREASE IN GLOBAL

MERGERS AND ACUISITIONS BETWEEN

!"1" TO !"14 !"


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I#$%'()$*#A merger (M) can be defned as when two companies combine to share assets

and achieve a mutual objective (Bersanko 201) while conversel! ac"uisitions

(A) are when the shares o# one business is purchased b! another (see appendi$

A%) &he justifcation o# M'As can be due to s!nerg! motives profts* market

power* ta$ advantages* risk diversifcation etc* bargain+bu!ing merger motives

undervalued shares and eliminating ine,cient management* and managerial

motives (which can lead to the principle+agent problem) power* status* prestige

etc1% -t can be viewed that the main goal #or M'As would be to increase

shareholder value% Accordingl!* due to mergers being a #orm o# investment* the!

can be evaluated using .et /resent alue (./) although there are some

complicating #actors such as problematic identifcation o# merger benefts%

tudies undertaken across the last decade on M'As show the #ailure rate being

around 03* while the amount that #ailed to achieve merger goals reaching 43

(aat ' 5immelsbach 2016)% -t there#ore could be e$pected that M'A activit!

would be avoided b! senior managers and board o# directors* however the trend

o# M'As over the past 20 !ears have shown to be increasing* and in 2016 there

was a 23 increase over the previous 6 !ear average (see appendi$ B)% &his

parado$ has drawn interests #rom di7erent areas o# business and economictheorists% &here#ore the #ocus o# this essa! will be to evaluate the #actors o#

success and #ailure in M'As* with respect to theoretical and empirical evidence*

#rom the #ollowing perspectives 8inance and the 9apital Market* :rganisational

Behaviour and trategic Management%

8igure 1; Motives #or Mergers


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ource; (=iu* & 2010)

N+$ P%+,+#$ V.(+Be#ore we can begin our discussion o# how an M'A is likel! to success as it is to

#ail* we frst must brie>! discuss how a merger is deemed to be success#ul% :ne

such wa!* mentioned in the introduction is the ./ approach% &he use o# this

techni"ue rests on the assumption that the aim is to ma$imise shareholder

wealth (5wa 2004)% &his is achieved through investing in M'As that have

positive ./ value a#ter appropriate costs are accounted #or% &he ./ e"uation isconstructed as ?t@1 to n tC (1D i)t E * Fheret@ .et returns in period t% Gnder

this simple #ramework* we can sa! mergers that are success#ul will provide

shareholders with value through attained a positive ./%

F*##)+ #' $/+ C0*$. M%+$

uccess can be "uantifed b! the adjustment in the share rates #ollowing thepromulgation o# the merger or ac"uisition* in accordance with economic and

fnance researchers (5itt et al 2001)* know as 9umulative Abnormal eturns

(choenberg 200H) %8or e$ample when Iiscount travel and ticketing compan!

/riceline bought :pen&able* the online restaurant reservation business* #or

J2%Hbn in Kune 2016* hares o# /riceline rose J%4L to J1*21%4L in the #ollowing

morning trading (ushe 2016) &he notion* relative to this perspective* is

in>uenced b! the value semi+strong market e,cienc! h!pothesis which states*

based on available public in#ormation a frms share value is mirrored in an

unbiased manner (ewell 2012)% &he belie# is that altered prospects relative to a


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businesss market price is represented through a instantaneous adjustment in

the share cost* #oreshowing a long run development% 9onse"uentl!* success is

characterised i# an M'A results in an instant increase in value o# shares*

generating shareholder value% 9onversel!* shareholder loss and #ailure is

signifed when #ollowing a merger declaration* engenders a #all in the share

value* #or e$ample in 201* #ollowing Microso#ts ac"uisition o# .okia* Microso#ts

share price dropped b! over 3 (see fgure 2)%

8igure 2;

Microso#ts change

in share value

#ollowing

announcement o#.okia Ac"uisition

ource; 8iegerman

(201)

8urthermore a

belie#

acknowledged toda!* is onl! shareholders o# the frm being ac"uired beneft (5itt

et al 2001)% &his anal!sis is echoed b! a majorit! o# studies that uncover an

adverse association concerning organiational per#ormance and ac"uisition

premiums* 5a!ward and 5ambrick (1LLN) #urthers this point o# the ac"uiring

businessOs shareholders on average losing value #ollowing the ac"uisition b!

maintaining that the defcit is usuall! persistent across the long run* indicated

#rom share returns (irower 1LLN) ' also established #rom measures o#

accounting per#ormances such as the return on e"uit! (Prishnan et al% 200N)%

8rom this assessment* the root source #or #ailure is that in comparison with the

value o# the ac"uired business* the premium paid b! the ac"uiring business islarger* which even with e7ective management strategies* doesnt correct this

appraisal miscalculation% &his assessment is echoed b! Qoold* 9ampbell* and

Ale$ander (1LL4) emphasising the overpa!ment b! the ac"uirer hinders value*

thus it becomes challenging to attain su,cient returns%&his mistake is identifed

b! the capital market that responds b! the adjustment o# the stock price% 8or

e$ample* the da! a#ter A:=s ac"uisition o# &ime Farner was revealed* its share

price declined (see below)%

6


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8igure ; &ime Farner tock /rice #ollowing merger with A:=

ource ; Rahoo 8inance

Appl!ing this anal!sis we can determine the price #or A:= was too high* resulting

in its shares continuing to #all #or a prolonged period #ollowing the ac"uisition%

imilarl!* -nkpen et al% (2000) during 1LL0+1LL0 period evaluated G M'AOs

within the technolog! sector* established due to higher premiums o# 63 paid b!


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ource; (=iu* & 2010)

S$%$+2*) M#2++#$

trategic management tackles a variet! o# methods indicative o# success that

include changes in market stake* competitive capabilities and per#ormance pre

and post o# the M'A (Alam et al% 2016)% According to advocators o# this

approach* these per#ormance indicators are induced through suitabilit! amongst

the frms* indicating the amount o# strategic ft amongst the frms is the crucial

characteristic in determining M'A successC#ailure (helton 1L44)% &his OstrategicftO model postulates that there is superior potential to generate value through

H


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utilising s!nergies* established around economies o# scope and scale* i# the

merging frms are more closel! associated relative to their goods* technologies

and markets (9artwright and choenberg 200H)* fgure shows a basic strategic

#ramework%

8igure ; A trategic 8ramework

ource; /a!ne (1L4N)


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vague2or the relatedness ma! be measure on #actors other than relatedness o#

marketsCproducts% Ret* the #ailure rate is high* even in related mergers (/orter

1L4N)% esearch undertook b! /orter (1L4N) observed the proportion o#

realisation amongst related mergers amongst major G businesses across a

H+!ear period (1L0 to 1L4H)% &he percentage o# organisational separation a#ter

a period o# !ears post merger was the criterion o# #ailure rates% 5ere the

#undamental notion was the aim to retain the target frms #or a period long

enough to realise the potential o# s!nerg!* within related mergers% 5owever

within this sample the rate o# organisational separation was over 0 3% &hese

discoveries suggested the business a#ter several e7orts to relate the

organisations to e$ploit the s!nerg!* is #orced to resell the frm* hence it

Svomits out the frm -n 1LLL Mattel ac"uired &he =earning 9ompan! #or J%

billion* however Mattels proft #ell less than a !ear later due to the =earning

9ompan! losing J20H million (Ioan 2000)% B! 2000 its stock prices continued

plummeting and Mattel was losing J1% million a da!% B! the end o# 2000 the

=earning 9ompan! was sold* in order to cut costs Mattel was #orced to la! o7

103 o# its work#orce (Ioan 2000)%

9hatterjee (200N) advocates s!nerg! potential not being realised in its

application as one source o# e$planation to poor per#ormance o# related mergers%

&his lack o# realisation according to &ing+Pun (2010) is due to two ke! reasons%

&he frst is down to a lack o# prior planning% esearch b! 9ooper and =!brand

cited that on a surve! #or the most commonl! cited reasons #or #ailure* 403

respondents said that #ailures was due to little planning% 9hatterjee (1LL2) states

the s!nerg! potential can be realised through avoiding unnecessar! e$penditures

to recognise the ke! causes o# s!nerg! b! using prior planning% &he subse"uent

rationalisations cited* in related mergers* #or absence o# s!nerg! realisation is

associated with the insu,cient attention on human capital predominantl!e$ecutives and emplo!ees within the attained frm (&obin 1LLH)% Iebated b!

choenburg (200H)* a dominant cause o# worker opposition is con>icting cultures

amongst the ac"uired and ac"uiring business* which acts as a critical #actor #or

M'A #ailures%


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.evertheless* the benefts and actual realit! o# s!nerg! have started to be

scrutinised* disputed b! 5aleblian et al% (200L)* appl!ing per#ormance indicators*

ac"uiring+business value wasnt increased through ac"uisitions* instead the!

were discovered to corrode ac"uiring+business value leading to unstable returns%

9ertain research has advocated that s!nerg! is fctitious T that during M'As it

doesnt essentiall! e$ist as a wa! o# supporting decisions and suggesting the

e$pected value creation (Qaggiotti 2012)%8urthermore* Ii Qeorgio (2002)

disputes there is no logical methodolog! to the anal!sis o# the area* that could

possible justi#! the view* that s!nerg! is alwa!s a crucial #actor #or success#ul

M'As%

O%2#*,$*#. B+/*(%

9ulture is #re"uentl! considered as the basis #or cohesion in the organiational

entit! (Buono etal% 1L4)% -t is upheld b! organiational behaviour academics

that* the absence o# thought o# the human d!namic throughout the process o#

the preparation and e$ecution o# the merger* is the primar! cause o# #ailure in

M'A% &he role o# this issue in successC#ailure o# M'As has produced con>icting

and problematic results6

8igure H; Areas o# di,cult! relative to research on the culture+per#ormance

association in M'A

6 8igure H recognises the problematic areas that rationalise the issue o# determining a cultureTper#ormanceassociation (&eerikangas and er!* 200H)

L


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ource;&eerikangas and er! (200H)

:n one perspective* throughout the previous two decades* man! fndings have

discovered verifcation o# cultural disparities resulting in negative in>uences on

M'A per#ormance (8igure N)%

A($/% P(5.*)$*

# 6+%

F*#'*#2,

D$$ 1LL1 Gsing 9ross+sectional surve! o# 1N domestic Gac"uisitions in manu#acturing ' mining sectors inbetween 1L40+1L46%

Ii7erentiations in top management varietiesimpact negativel! the per#ormance o# domesticG ac"uisitions%

M% 1L42 Ii7erences in organiational cultures lead to

con>icts negativel! a7ecting M'A per#ormance

D$$ G%#$

#'

R20.#

1LL1 Management culture di7erences leading to

negative per#ormance impact

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S)/+#5+%2 1LLH Ii7erences in management st!les leading to

negative merger per#ormance

S$/.

K%++%,/#' L%,,#

2006 :rganisational culture di7erences lead to

negative impact on merger per#ormance

V+%:

L(5$*#

C.%* #'

V+*2

1LLN Gsing cross+sectional surve! o# 10H


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relative to post+merger integration success% 5owever* in realit!* within the M'A

polic!making practice cultural di7erences appear to be overlooked% Angwin

(2001) fnds cultural appraisal to appear to be small* during the due diligence

process* in the priorities o# e$ecutives% enior managers time and again

mismanage cultural management in M'As ultimatel! resulting in #ailure* which

Puhlmann and Iowling (200) highlight in the merger between Iaimler '

9hr!sler%

&o settle this discussion o# #actors o# M'A #ailureCsuccess table 2 highlights

literature summar! on ke! success #eatures in M'AsH

&able 2; ummar! o# ke! success #eatures within M'As

R);+.. D*G+%2* G'*+,/ +$.?

R(.+, $ ..;

E0,$+*#

S$+0, $

,())+,,(.

+%2+%

A,0+)$, #++'+' $5+ )0.+$+'

1% Aims must be -denti#!2% -denti#! beneftsrelative toshareholdersCowners% 9onsider profcienc!and talent o#management6% /ursue suitable ftting

S*2#*)#$ *,,(+,% '+.*5+%$*#

1,$ 0/,+ A))(%$+.:0*)*#2 $/+ )%%+)$* % M&A

1% Qovernance anddirection% -n order #or accurateM'A anal!sis must haveresources* time and tools6% Pnowledge tools% /otential #or success#ulculture ftting

!#' 0/,+ ,())+,,(.

1,$ ? V.*'$*# $5+ +,$5.*,/+'

&he main strategic

justifcations consisto# e7ectivecapitalising*developing scale*the e$pansion o#scope* redefningcommerce* andredefningconscientiousness%

1,$ ? S$%$+2*)C#)+0$ & F*$

Merger validation must

be clearl!communicated* withattention on achievingenduring competitiveadvantage and devised#or s!nergies inmagnitude* scope*consumers* or services%

!#' ? S$%()$(%+ $/+

Based on the empirical studies o# (9hakrabarti et al% 200L ' Brannen and /eterson 200L ' Feber et al%

200L)

H elated to the discussed #actors o# m! discussion o# how it is possible #or mergers to #ail%

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1% 5ead man must beconsulted2% 9ommercial aspectmust be defned% -ndicators o#

per#ormance must beevaluated6% etbacks andcomplications must bedealt with earl!%


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M#2++#$ $/%++ ,$2+, *#$+2%$*#

1+ etting theplat#orm* 2+

Iesigning the newfrm* + Making theintegrationmaterialise%

%

C#).(,*#&he comple$ nature o# M'A has provided an opportunit! #or detailed theoretical and

empirical work to be carried out% &his essa!s goal was to e$amine the #actors o#

successC#ailure #or M'A* relative to di7erent areas o# research


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elations* 4()* pp% 6NNT00%

Brannen* M%R% and /eterson* M%8%

(200L)* YMerging without alienating;

intervention promoting cross+cultural

organiation integration and theirlimitationsY*#ournal of "nternational

$usiness *tudies* ol% 60* pp% 6H4+

4L%

9artwright* % and choenberg* %

(200H)% &hirt! Rears o# Mergers and

Ac"uisitions esearch; ecent

Advances and 8uture :pportunities%

$ritish #ournal of Management*

1N(1)* pp%1+%

9hakrabarti* %* Qupta+Mukherjee* %

and Ka!araman* .% (200L)* YMars+

venus marriages; culture and cross+

border M'AY*#ournal of "nternational

$usiness *tudies* ol% 60* pp% 21H+

H%

9hatterjee* % (1LL2)% ources o#

value in takeovers; !nerg! orrestructuringTimplications #or target

and bidder frms% *trat. Mgmt. #.*

1(6)* pp%2HN+24H%

9hatterjee* % (200N)% Fh! is

s!nerg! so di,cult in mergers o#

related businessesX% *trategy &

+eadership* (2)* pp%6H+2%

9o$* % A% P%* 200H% Merger andAc"uisition; A eview o# the=iterature% Corporate ,wnership &Control* ()* +L%

Iatta* I% P%* Qrant* K% 5%* '

ajagopalan* .% (1LL1)% Management

incompatibilit! and post ac"uisition

autonom!;


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strateg! and parenting theor!% +ong

%ange -lanning* 1(2)* pp%04+16%

5aleblian * K%* Ievers * 9%


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Mashable* (201)% Microsoft *tock

Drops 6: fter okia Deal% onlineE

Available at;

http;CCmashable%comC201C0LC0Cmic

roso#t+nokia+stockC Accessed 21 Apr%

201E%

.akamura* 5%%* 200% Motives*/artner election and /roductivit!


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&eerikangas* % and /% er! (200H)%

S&he culture per#ormance

relationship in mergers and

ac"uisitions; 8rom ResC.o to 5ow

$ritish #ournal of Management* 1N%

&obin* K% (1LLH)% )ssays in economics%

9ambridge; M-& press%

er!* /%* M% =ubatkin* % 9alori and K%

eiga (1LLN)% Selative tanding and

the /er#ormance o# ecentl!

Ac"uired


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A00+#'* A - E0#'+' M&A '+#*$*#

ource; .akamura (200)

1L


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A00+#'* B - M$*+, 5+/*#' $/+%+$*).

%+;% M&A $/+%*+,

20


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ource ; 9o$ (200H)

A00+#'* C- T/+ I#)%+,+ *# G.5. M+%2+%, #'

A)(*,*$*#, 5+$;++# !"1" $ !"14

ource; =emkau (2016)

Corporate restructuring - mergers and acquisitions

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