Mergers & Acquisitions: Part 2

MERGER & ACQUISITION: MOTIVES
Why do companies merge or acquirer other companies? There seems to be a number of reasons given to merge/acquire a company, many of which involving the market and an extension of the customer base. These are: -

•    Coordinated Strategies -  To create a number of new business opportunities and to gain competitive advantage

•    Scale- Purchasing companies in the same space to gain revenues, streamline cost structures, and diversify sales channels;

•    Geographic reach- Tapping into previously inaccessible geographic markets;

•    Customers- Acquiring companies with good customer lists that can be sold more products;

•    Products- Access to new products which in turn can be sold to existing customers or to reach a new customer base;

•    Segments- Entering new vertical markets;

•    Channels- Finding new ways of delivering the same products and services;

•    Employees- Adding needed engineering, sales, or other talent quickly;

•    Technology- Adding key technical capabilities or acquiring a disruptive technology.

•    Shared Knowledge- in the form of process knowledge, market knowledge and talent

FAILURE OF MERGER & ACQUISITION
Mergers and Acquisitions (M&As) have become the dominant mode of growth for organizations seeking a competitive advantage in an increasingly complex and global business economy. Every merger, acquisition, or strategic alliance promises to create value from some kind of synergy, yet statistics show that the benefits that look so good on paper often do not materialize. Unfortunately, many mergers and acquisitions fail to meet their objectives, which are typically to accelerate growth, cut costs, increase market share or take advantage of other synergies.

A global A.T.Kearney study suggests that 58 percent of all mergers, acquisitions, and other forms of corporate restructuring fail to produce results rather than create value. Similarly, a KPMG survey found that "83 percent of mergers were unsuccessful in producing any business benefits regards shareholder value. A major McKinsey & Company study found that "61 percent of acquisition programs were failures because the acquisition strategies did not earn a sufficient return (cost of capital) on the funds invested". Between 55 and 77 percent of all mergers fail to deliver on the financial promise announced when the merger was initiated. Even though most mergers and acquisitions are carefully designed, they still face major challenges. Nearly two-thirds of companies lose market share in the first quarter after a merger; by the third quarter, the figure is 90 percent. In the first four to eight months that follow the deal, productivity may be reduced by up to 50 percent.

The failure rate of acquisitions is unacceptable and unnecessary. This motivates us to look for other solutions and identify the real causes for the high failure rate. Each acquisition is a complex process from pre-deal research and planning (selecting the target), due diligence and integration planning, through to post-acquisition integration and value extraction. Priorities have to be set and rational decisions under time pressure have to be made for the proper performance.

CONTINUED IN PART 3....