Reasons for Mergers and Acquisitions
M&As used to be thought as cyclical phenomena which emerged and faded according to the economic circumstances of the period. However, these phenomena have become more common and we have witnessed a huge number of such activities, especially since the 1990s, and this is mainly because M&As have the unique potential to enable firms to grow quicker than through the normal internal development procedures (Collett, 2010; Kyriazopoulos & Drymbetas, 2015; Nikandrou & Papalexandris, 2007; Steynberg & Veldsman, 2011).
The world economy, through globalisation, leads companies to engage in M&As. M&As have evolved and constitute an integral part of the economic world internationally (Guerrero, 2008). M&As take place in all sorts of environments, both nationally and internationally, and in all kinds of industries and businesses irrespective of size and economic situations (Alam &C Ng, 2014; Hajbada & Donnelly, 2013; Hutzschenreuter et ah, 2014; Lawlor, 2013; Srivastava & Prakash, 2014; Tang and Metwalli, 2013; Wagner & de Hilal, 2014).
Several factors have fuelled the growth of M&As. Technological change and deregulation have stimulated the growth of M&As as well as the search for synergies, diversification, enhanced capabilities, competences and market expansion (Konstantopoulos et ah, 2009; Shook & Roth, 2011). In addition, other factors include increased competitive pressure from the external market environment, the need to maintain a strong market position and gain a competitive advantage, as well as the continuous search for diversity and growth (Gadiesh et ah, 2001). Several authors regard M&As as one of the easiest strategies to achieve organisational goals such as the ones outlined above (Collett, 2010; Klendauer & Deller, 2009; Mavrides & Hadjichristodoulou, 2008). There are, in fact, different approaches towards M&As, some of which are these: vertical mergers, which aim at controlling the supply chain, and conglomerate mergers for achieving diversification, new market entry and new product development (Schuller & Jackson, 2001). Irrespective of the motives or approaches that are behind M&As, the process per se encompasses several risks and challenges and thus it has been accurately described as a high-risk, high-return game by Gulati and Teo (2008).
Measuring the Results of Mergers and Acquisitions
The outcomes of M&As are often inconclusive. More than three-quarters of corporate integrations following M&As fail to fulfil the expected results (Alam & Ng, 2014; Hajbada & Donnelly, 2013; Hutzschenreuter et al., 2014; Lawlor, 2013; Lupina-Wagener, 2013; Rossi et ah, 2013; Srivastava & Prakash, 2014; Stahl & Voigt, 2008; Steynberg & Veldsman, 2011; Retensa, 2012; Riviezzo, 2013; Tang and Metwalli, 2013; Wagner & de Hilal, 2014). Some empirical studies support that more than half of M&As fail to produce results, and at best they simply break even (Bansal, 2015; Bertoncelj & Kovac, 2007; Jayesh, 2013; Newton, 2015). M&As often fail to meet stakeholders’ expectations (Mavrides & Hadjichristodoulou, 2008). Even though M&As are very popular among managers, the performance of the majority of them is disappointing.
Companies engage in M&As with optimistic expectations (Cartwright & Cooper, 1992) and on the assumption that the new entity will have a greater value than the two companies ever had individually (Mirvis & Marks, 1992). However, M&As often fail because managers often neglect critical human resources issues (Bansal, 2015; Newton, 2015).
A percentage as high as 60%-85% of all M&As fail (Krug & Aguilera, 2004). In the United States only 15% of M&As achieve their financial targets (Schuller & Jackson, 2001). Bertoncelj and Kovac (2007) claim that this is primarily due to an emphasis given by managers to economic capital and not human capital. Harding and Rouse (2007) though highlight the importance of people, the firm’s most valuable asset to the success of M&As.
In general, there are various factors leading to the failure of M&As such as financial, strategic and human issues. For several decades M&As have been studied extensively in an effort to identify the variables that contribute to this very complex process. Although the financial aspects of the process are important, the human elements are regarded as critical (Bansal, 2015).
Why Do M&As Fail?
Researchers have identified the key factors that contribute to ineffective integration and, thus, the failure of M&As (Charoensukmongkol, 2016; Joslin, et al., 2010; Konstantopoulos et al., 2009; Maimunah et al., 2016; Milner, 2010; Nikandrou & Papalexandris, 2007; Reus & Lamont, 2009; Saksonova & Kantane, 2016; Weber & Tarba, 2012). The most common reasons are the following: lack of a strategic integration plan, unforeseen market changes, ineffective implementation and management of the integration process, high costs, ineffective leadership, internal power struggles, conflict and politics, lack of shared vision, conflicting organisational cultures and major human resource problems.
Some authors claim that most M&As fail primarily because of problems relating to the workforce during the integration process but also in the period following it since there is a lack of focus on the difficulties associated with integrating employees (Kennedy et al., 2002; Risberg, 1999; Schweiger & Denisi, 1991). The overall lack of understanding the implications and the consequences of the integration process on the organisational members very often causes the transaction to fail. Very often, the failure or success of the merger or acquisition depends on the effectiveness of the post-merger integration process (Schweizer, 2005), which is to a large extent dependent on the human factor (Bansal, 2015; Jayesh, 2013; Newton, 2015).
Based on the current literature, the human factor is a major reason for the failure of M&As (Bansal, 2015; Jayesh 2013; Newton, 2015). A meta-analytic study of merger performance showed that the primary explanation for M&A failures are human issues since often the most difficult task during M&As is the handling of people issues (Hughes, 2015; Kummer, 2008). It is acknowledged that one of the most important factors that arises during M&As and directly impacts the employees is the complex process of organisational change. Employees’ perceptions, feelings, attitudes and behaviour are critical for the effective management of an organisation but they become even more important when significant organisation changes take place, such as M&As (Lupina-Wagener, 2013; Wagner & de Hilal, 2014). Many employees have rival reactions due to mergers or acquisitions.
In the existent literature, there is ample evidence to support that M&As emphasise the financial aspects rather than the human aspects of the two organisations integrating (Nikandrou & Papalexandris, 2007). As a result, business transactions such as M&As often fail (Chun, 2005; Kummer, 2008; Schuller & Jackson, 2001; Weber & Tarba, 2012).
In a study carried out by PricewaterhouseCoopers in 1997, the findings revealed that M&As will fail if the management ignores the importance of resolving the various human resource issues and problems that are likely to occur during the merging process. Another study carried out by Antila and Kakkonen (2008) corroborated these findings. There is a need to integrate and motivate employees to accept the changes brought by the integration process in order to make the transition process smoother. Retensa (2012) postulates that 70%-80% of all mergers fail due to the new organisational entity’s inability to successfully combine and resolve those problems related to the workforce (Guerrero, 2008; Retensa, 2012). The importance to organisational success of a firm’s intellectual capital is growing (Bertoncelj 8c Kovac, 2007) and with it there is a heightened need to adopt innovative human resource strategies to overcome the challenges created by the M&A process (Jayesh, 2013). Thus, there is a need for the human resource management function and to take on a more powerful role during M&As (Newton, 2015). The adoption of an effective human resource strategy will contribute significantly towards the retention of employees during the implementation of the M&A process.