In today’s complex and dynamic corporate world, there is a tremendous allure towards mergers and acquisitions. Companies, in the pursuit of rapid growth and gaining competitive advantage over the other market players, opt for mergers and acquisitions as a key to corporate success. In the recent years, the number of mergers and acquisitions has increased immensely, but evidence shows that as many as seven out of ten fail to add value and succeed (Dealogic mergers ; acquisitions review, 2002). Companies are lured by the merger mania, but the success rate of such strategic moves (Andersen, 2000) has been disappointing.
This research is an analytical study of the essence of mergers and acquisitions. The main purpose of this research area is to develop a good understanding and insight into the relevant previous research and trends of mergers and acquisitions and determine the authenticity of such development in the corporate world. The strategic logic behind mergers and acquisitions is benefits from ‘synergies’ and ‘economies of scale’ due to increase in size and large scale operations. So is bigger necessarily better to create success in the corporate world?
Some experts consider mergers and acquisitions as an instrument of corporate success and hence a preferred option and others consider it as a disappointing marriage. This is the area of study for this research proposal which presents an intriguing field of study in the light of increasing trends of mergers and acquisitions. Literature Review Literature review is trivial to a research proposal as it is both useful and informative. Also, such review will add value to the research study by providing scope for critically reviewing the literature (Saunders, M. et al, 1997).
The literature sources used for the purpose of this research proposal have been a mix of primary, secondary and tertiary literature sources. The research parameters have been restricted to the aim and objectives of the research area under consideration. Mergers and acquisitions are undertaken by companies to achieve certain strategic and financial objectives. Existing empirical research have highlighted the recent peak of mergers and acquisitions putting emphasis on the essence of mergers and acquisitions and throwing light into the reasons for companies to adopt such strategic options for growth and success.
Increasingly, mergers and acquisitions have assumed an international dimension due to global economic integration and elimination of trade barriers. Definition of mergers and acquisitions Mergers and acquisitions involve the bringing together of two organizations with often disparate corporate personalities, cultures and value systems. On the basis of findings of research undertaken by different experts, mergers and acquisitions have been termed as the chosen strategic tool for growth and expansion on the offset.
Neoclassical perspective stresses on the shareholder wealth maximization as the objective for mergers and acquisitions for organizational growth. The stages in the acquisition process provide a framework for strategic analysis of mergers and acquisitions. Though it is an agreed fact that mergers and acquisitions are difficult, disruptive and highly unpredictable, companies are still allured towards it owing to its essence and the benefits obtained from such strategic moves. Some mergers succeed but surveys and research outcomes demonstrate the failure rate to be very high.
This puts companies looking at mergers and acquisitions as a strategic choice in jeopardy. According to Mercer Management Survey, large deals are more likely to fail. Consultancy firm, KPMG’s global survey (2001) reports that 70% of the mergers and acquisitions failed. As per Harvard Business review (June 2000), most senior managers are of the view that majority of the mergers end up being failures. So what is the motive behind adopting such a risky strategy for expansion inspite of the failure rates being so high? This brings about the need for determining the motives behind mergers and acquisitions. Motives for mergers and acquisitions
In the quest for bigness, in order to gain greater market share and outstrip the competitors, companies enter into the merger mania. The immediate objective of such a strategic leap is growth and expansion of assets, sales and market share with maximization of shareholders’ wealth as suggested by White, B. , (2000). However, a more fundamental objective may be enhancement of shareholder wealth through the process of mergers and acquisitions aimed at adding value and creating wealth. Based on the study of experts, following are some of the reasons for mergers and acquisitions to be the preferred option for companies.
According to Sudarsanam, P. , (1995), the fundamental objective of mergers is enhancement of shareholders’ wealth. Shareholder wealth maximization may, however be replaced by the self interest pursuit of managers seeking power and desire for empire building or perquisites which may impact the net outcome of mergers. Many a times, companies, in the fear of lagging behind in the corporate race, want to expand and acquire smaller companies and gain an edge over the other smaller players in the market. Thus, companies, in pursuit of the above benefits consider mergers and acquisitions as a plea to success.
Mergers and acquisitions – a success or failure ‘Mergers and acquisitions are like atomic reactions, they release bursts of energy within companies, some of which are creative, some of which can be destructive. Some mergers and acquisitions are successful in creating a stronger and more capable company. Others buckle under the stresses involved’ (Devine, M. , 2002). Studies from all around the world show that it is difficult to ensure if mergers and acquisitions will generate any lasting financial value (give a website address). Meeks, G.
, (1977), is of the opinion that mergers and acquisitions could be a disappointing marriage. Goldberg, W. , (1983), on the basis of his study in this area, suggests that mergers and acquisitions have the potential to disrupt business performance, often damage profits over the short term, distract the management and ultimately add little or no value to the new business. Evidence from the corporate world shows that companies take the risk and choose to go for mergers and acquisitions. WPP, a global advertising company, has a spectacular track record of mergers and acquisitions.
They believe in filling the gap for growth in the company through acquisitions and they have been reaping super success (Harvard business review, 2001). Yet another massive merger success story is that of AOL Time Warner who have benefited immensely through their combination of intellectual and intangible assets. But mergers of companies such as Chrysler and Daimler-Benz have failed miserably. So why do mergers fail? Merger success is clearly linked to effective integration planning even before the merger takes place. Mergers and acquisitions provide opportunity to add value through innovation and specialization process.
But it indeed depends upon the merging entities to effectively undertake the integration process by giving due weightage to one of the most important elements of merger who apparently are often ignored – personnel. In this section, a critical review of theories, views and opinions of various experts has been undertaken. The motives for adopting risky but interesting strategy of mergers have been discussed. This research has also designed the path for primary search to study and find out the strategic options of mergers availed by companies for seeking growth.