Why Mergers & Acquisition fail to deliver on the promised?

By

Vijay Prakash Gupta
Lecturer
CMD, Modinagar
 

ABSTRACT

Mergers & Acquisition have become very popular throughout the world in the recent times. This has become popular due to globalization, liberalization, technological developments & intensely competitive business environment. Mergers and acquisition are a big part of corporate finance world. This process is extensively used for restructuring the business organization. In India, the concept of mergers and acquisition was initiated by the government bodies. The Indian economic reform since 1991 has opened up a whole lot of challenges both in the domestic and international spheres. The increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions have also been diverse across the various sectors of the Indian economy.

But the interesting point here is that upwards of 60% of these mergers fail to deliver on share holder expectations.

The reasonable and prudent question then becomes why these mergers fail to deliver on the promised or projected results.                    

MEANING OF MERGERS & ACQUISITION

The phrase "Mergers & Acquisition" refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combination of different company that can assist, finance or help a growing company in a given industry, grow swiftly without having to create another business entity.

SCOPE OF MERGER & ACQUISITION

M&A has become a daily transaction now-a-days. Mergers and acquisitions are vital part of capital market activity in restructuring a corporation and had lately become one of the preferential routes for expansion and consolidation. The reasons to merge, amalgamate and acquire are diverse, ranging from acquiring market share to restructuring the corporation to mount up global competition. One of the largest and most complicated parts of a business merger is the successful integration of the enterprise networks of the merger partners. The main objective of each firm is to gain profits. M&A has a great scope in sectors like steel, aluminum, cement, auto, banking & finance, computer software, pharmaceuticals, consumer durable food products, textiles etc.

When Merger and Acquisition Promise Fails to Deliver

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.

In simple way I can say that "Merger & Acquisition is just like a marriage, interesting point here is that upwards of 60% of these mergers fail to deliver on share holder expectations. But when M&As succeed, they can lay the foundation for a company to be the leader in its sector."

The logical and sensible issue then becomes why these mergers fail to deliver on the promised or projected results. The answer often times is quite simple; it is a direct result of the amalgamation process not being carefully thought with respect to the indirect impacts of changing a business unit. The mindset here is often that when company A buys company B that they rush in to change all policies and procedures to more closely meet their business model. At face value that would appear to be the intelligent course of action however little thought is given to what they are about to change and the implications that follow.

HUMAN RESOURCE:  KEY FACTOR

It is accounted that one of the major causes for malfunction of a merger or acquisition is based on Human Resources disregard. People issues have been the most perceptive but often ignored issues in a merger and acquisition. When a conclusion is taken to merge or acquire, a company analyses the feasibility on the business, financial and legal fronts, but fails to recognize the importance attached to the human resources of the organizations involved. Companies which have failed to distinguish the importance of human resources in their organizations and their function in the sensation of incorporation have failed to achieve success. While it is fact that some of these failures can be largely attributed to financial and market factors, many studies are pointing to the overlook of human resources issues as the chief reason for M&A failures.

CONCLUSION

Mergers & Acquisitions (M&A) has developed into the mainly vital strategic element driving business growth and intensity. Mergers and acquisitions will continue to be an ever-present attribute of the current corporate landscape. Merger and acquisition (M&A) hold uniformly diverse sets of people, processes and technologies with the common aim of creating a larger, unified organization. The organization aims to benefit from the synergies of mixing organizations by consolidation, rationalization and incorporation of the people, processes and technologies of both organizations. Human Resources (HR) has the potential to play an important role during all stages of M&A. However, these issues are rarely considered until serious difficulties arise. The Human Resource aspect of M&A should be accorded the same emphasis and thought given financial, legal, operational and strategic concerns. HR no longer plays a hidden role and is emerging as a strategic business associate where key initiatives undertaken such as communication, training, counseling, career planning, support workshops, building trust, coaching and compensation planning, have significant business impact.

Bibliography

www.wikipedia.org
www.business.mapsofindia.com
Other Economics sites
 

Vijay Prakash Gupta
Lecturer
CMD, Modinagar
 

Source: E-mail January 10, 2010

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