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Do Mergers and Acquisitions Fulfil Desired Objective?

Do Mergers And Acquisitions Fulfil Their Desired Objective? And How People Are Affected By the Result of These Mergers?


Table of Contents



Restructuring of a firm has become a major area in the financial and economic environment all over the world. A company may grow internally, or externally. The aim of the management is to maximize the profit. Most firms grow through internally which take place when firm’s existing divisions grow through normal capital budgeting activities.(S.Vanitha 2007) The industrial restructuring has raised important issues both for the business and for public moreover merger and acquisitions may be critical to the strong expansion of business firms as they evolve through successive stages of growth and development and most important for new product markets by a firm may require M and As at some stages in the firm’s development . The successful competition in international markets may depend on capabilities obtained in a timely and competent fashion through M & As. (M Selvam 2007)

Merger and acquisitions continues to experience dramatic growth. Record breaking mega mergers have become popular in the world. In the last ten years and onwards some of the largest mergers and acquisitions took place in Europe. This was underscore by the fact that the largest deal of all time was a hostile acquisition of a German company by a British firm.(Beena P.L 2000)

Since the start of twenty first century the nature of merger and acquisition even more common in the economical growth. It becomes even more global especially in Asia, Latin and South America. Over the past quarter of the century we have noticed that merger waves have become longer and more frequent in between shrunken as well when these trends combined with the fact that M&A has rapidly spread across the modern world, we see that the field is increasingly becoming as ever more important part of the worlds of corporate finance and corporate strategy. (Canagavally , R.2000)

Merger and acquisitions are plays very important part in corporate strategy. They are the interesting and controversial tools if the firm do not want to grow internally by capital investment and it can affect the shareholders wealth of both the firms (Legare.1998). The management of the target companies is worried about their jobs that can be affected; the cost reduction strategies consists of reduction in labour force (Gould, 1998) the strategies at both local and national levels are important and concerned at transactions in their industries. e.g (defence utilities etc.) Customers and suppliers are interested , as they want to know who they will be dealing with in the future (Buono. 2003). All the big deals are therefore reported in the media, receive a large coverage, and get the attention of the public as well.

People are very important part of any organization but due to the increasing numbers of mergers between the companies they are largely affected and most of them get caught up in a merger or acquisition-by chance, Many of the people after working four –to five years period are losing their jobs and facing severe reductions in status and responsibility and, in general, being confronted with major questions about their careers, As a result , at times we are unsure whether our own feelings about what is happening to these individuals are biasing our interpretation of what is going on. In this project the writer going to research on mergers between the professional services firms.

According to Steven et al (2000) mergers and acquisitions decisions that are undertaken based on financial analysis, influence and legal positions , However , it has been proved by a number of researchers that factors like informal power, low productivity , poor quality , reduced commitment , hidden costs and voluntary turnover prevent the combined banks from reaching expected performance levels (Legare 1998). This is the reason that many companies face difficulties then they pass through their post-integration processes (Buono 2003)

According to Catwright & Cary (1995) that mergers and acquisitions should be seen like marriages where both parties will is very important for the success of new entity. At the time two different companies decide to come together as a result of M&A activity, then the levels of instability in the macro and micro environment of both companies is challenged. So it is therefore been recommended that companies should chose the most appropriate merger and acquisition process and strategy. However Buono (2003) has suggest that each possibility has its own strengths and weaknesses and therefore context of M&S and its main objectives play important role.

Cartwright and Cooper has pointed out that M&A depends upon combination of related functions like integration of people, systems, practices and culture. The critical review of the literature has recommended that most of research has been focused at studying single characteristics of M&A in isolation. Moreover the dynamics of M&A variables that impact on success and failures ratio has not been undertaken in the literature and there is a gap for research.

This study will be focus to explore the major drivers and variables and their effect on the success of merger and acquisitions across industries from a corporate strategic perspective.

1.2 Rationale behind Research:

Mergers and acquisitions is one of the common strategies in today’s business world. Gould (1998) has conducted a survey involving 12000 managers from different countries and according to the result of his survey more then 1000 companies were involved in acquisitions or a merger in two years between 1995 and 1997.moreover merger and acquisitions has become the leading strategic options. However, the performance of the combined companies has been lower than expected. According to Buono (2003) the basic drivers of M&A only involved in financial, operational and strategic aims and objectives. So therefore my main area of focus of this research is to explore the major drivers and variables and their effect on the success of merger and acquisitions across industries from a corporate strategic perspective.

1.3 Aims and Objectives:

The basic aim of this project is to understand whether mergers and acquisitions always fulfil desired objective. The aims specific areas are as follows.

  • To explore the major variables that impact on the success of merger and acquisition different industries from a corporate strategic perspective
  • To explore the corporate strategy in achieving desired results from M&A activities
  • To evaluate the impact of the mergers on an employees and examining the programmes for dealing with separation anxiety for employees.

1.4 Dissertation Structure:

The official Structure of the dissertations is being applied which is provided by the university and analysis has been done which suit the theme and the objectives of the research. The structure of this report is summarized as follows:

Chapter 1 Introduction of the research topic and lays the basis for the rationale of selection of the theme under scrutiny. It introduces the effect of M&A on business and effects that they expected. The chapter also summarizes the rationale for selection of topic and states the aim and objectives of this research.

Chapter 2 Consists of review of the literature that has been produced in the domain of mergers and acquisitions and their desired effects for companies. It has highlighted some of the highly respected literature in the field of aims and objectives of this research.

Chapter 3 Provide the methodology and strategy adopted by the researcher to undertake this research. It points out the strength and weaknesses of using different data collection mechanisms and has shown how they fit in the larger context of aims and objectives of this research.

Chapter 4 very important chapter consists of analysis and findings regarding the importance of strategic alignment within a merger or an acquisition activity with the help of a range of case studies. The chapter developed recommendations for companies under the light of macro indicators, theories and qualitative data gathered through this research.

Chapter 5 provides a comprehensive conclusion from this research and gives a list of recommendations for companies that can be drawn from this focused research.

Chapter 2: Literature Review

In this chapter an attempt has been made to briefly review the research already undertaken and methodology employed moreover the study has been produced in the domain of aims and objective of the project and it has been divided into number of different sections so that reader understand with ease.

2.1 Overview:

Concept of Merger and Acquisition:

Over the last few years different companies have engaged in domestic and international mergers and acquisitions to match the macroeconomic trends operating on a worldwide scale in the market place. Up till now the ultimate success of a company’s global strategy may depend on how well it manages the dangerous human resource “fit” issue associated with strategic customer cantered decisions and strategies. The literature presents the understanding and resolving interpersonal management issues that result from organization, team, and individual misalignments. An actual merger and acquisition integration project is used to discuss the application of this approach (Thomas L. Legare in his paper “Understanding and Managing Human Resource Integration Issue”) M & A defined by Arnold (2002) as “combination of two firms of roughly equal size on roughly equal terms and in which the shareholders remain as joint owners”

M & A activities in late 20th century:

In 1960’s Mergers and acquisitions first became an important topic within the organization management meetings. It is usual to consider merger and acquisition in terms of the extent to which the activities of the acquired organization are related to those of the acquirer. The most common classification proposes four main types (Walter 1985; Hovers, 1973; Kitching ,1967). These being:

1- Vertical

The process in which two organizations combined within the same industry.

2- Horizontal

The process in which two similar organizations combined within the same industry

3- Conglomerate

In this process acquired organization is in completely different field of business activity

4 Concentric

In this process the acquired organization is in a different but related field in to which the acquiring company merge its business.

According to Schweiger and Ivancevice, 1987 mergers and acquisitions can be considered to differ in terms of

  • Motive and transactional type
  • The envisaged degree of integration

Common objectives behind M& Activity

According to Napier (1989), in a review of the literature, draws the distinction between financial or value maximizing motives, and managerial or non value maximizing motives. Mergers known as financial or value maximizing motives when the main objective is to increase the profit and decrease the risk involved in business moreover non value maximizing motives relate to merges which occur primarily for other strategic reasons ( Halpern, 1983). Moreover according to handy (1993) creation of shareholder’s value is the underlying aim behind any M&A activity. However , there is a range of strategies involve to improve financial performances and consequently increase shareholder’s value.

According to Marks, (1988b). There is lots of risk involved in activity like Mergers and acquisitions involving the collective annual investment of billions of pounds and affecting the working lives of millions of employees. It has been recommended in future that 50 to 80 percent of all mergers are considered to be financially unsuccessful (Marks 1988b), most probably in financial return, represent ‘at best an each way bet’

(Lorenz, 1986)

The popularity of Merger and acquisitions is still strong despite of the fact that it has been frequently fail to achieve the financial growth (Hovers 1973 & Farrent 1970; Jemison and Sitkin, 1986). Indeed there is lots of evidence that Britain and the USA are currently experiencing an unprecedented wave of merger activity (Morgan, 1988; Hughes, 1989). In the last 10 years , there have been over 23000 registered acquisitions in the USA , and before the end of this decade one in four of the Us workforce will have been affected by merger activity ( Fulmer, 1986) with the approach of 1992 , a similar trend is predicted for Europe.

The Merger and acquisition is facilitated by number of factors.

Market Conditions

Market conditions are changing day by day and in this environment there is a need to consolidate or capture new market so strategic mergers and acquisitions become more attractive and expedient alternative response to the setting up new outlets, and at the same time provide a tool to finish the competition ( Meeks , 1977)

Increasing Availability of Capital

Mergers and acquisitions activities has been increased because the organization and financial institution may need of capital from outside countries because of low interest rate.

More companies for sale.

There are lots of companies come in to the market because of number of reasons like successful entrepreneurs of the post war years reach retirement age , because of families issues and there is not natural successor within the family.

The Easing of Regulations.

According to McManus & Hergert, 1988. Gartrell & Yantek suggested that acquisition activity is related to political climate in that right of centre administration stimulate activity.

The Need to share Risk

Mergers and acquisitions is very important if u need to share risk like new product development often results in the formation of joint ventures , mergers and other types of strategic alliance.

The existence of complex Indivisible Problems

All of these can be considered to be logical economic and marketing factors, which make possible the decisions to acquire, These conditions , particularly the need to share risk and problems solving, have also contributing to the increasing trend towards the formation of joint ventures and Mergers (Harrigan, 1988)

(vii) Unrecognized Psychological Motives

According to Levinson (1970) suggests one such motive to be fear of risk McManus and Hergest (1988) suggest that the decisions happens when ‘CEO is bored and wants to find a new game to play’ or to create some excitement amongst senior managers (Hunt, 1988)

2.2 Impact of Mergers and Acquisitions

Merger and Acquisitions have the prime aim to maximise the firm’s profit and shareholders wealth like any other strategic growth option, but there has been a risk of failure so the debate in the literature among theorists and practitioners as to the real strength of the strategy in creating shareholder’s value worth the risk of failure. The review literature that surrounds different prospects like shareholders, acquirer , targets has been studied on short , medium and long term value creation through the M&A activity . The following different categories of studies can be highlighted.

Affect of M&A Activities on People

The Human Side of Mergers and Acquisitions is about to impact that mergers and acquisitions have on people in the workplace: the psychological difficulties that people experience, the culture clashes that can emerge in organizations that can emerge in organizations during the post –merger integration period, and the ways in which these problems can manifest themselves –such as communication breakdowns a “We-they” mentality between the component organizations in a merger, lowered commitment , drops in productivity , organizational power struggles and office politicking , and loss of key organizational members. We adopt primarily and organization development (OD) perspective on mergers and acquisitions: given the myriad problems (Thomas L Legare)

The Existing evidence on the effects of mergers and acquisitions on efficiency or value comes from two basic types of large sample studies: event studies and performance studies

Event studies consider the returns to the shareholders of targets and acquirers in the days before and after an acquisition announcement .These studies consistently find that the combined returns to acquirer and target stockholders are unequivocally positive .These positive returns imply that the market anticipates that acquisitions on average will create value. These studies and reactions do not, however, provide insight into the sources of the value changes in mergers or whether the expectations of value changes are ultimately realized. Furthermore, the combined returns cover a broad range of responses from very positive to very negative.

Cross sectional analyses of event period returns provide some evidence that the broad range of combined announcement period returns reflects the market’s ability to forecast an acquisitions success. For example both Mitchell and Lehn (1990) and Kaplan and weisbach (1992) find the there is a relation between (1) acquirer and combined returns and (2) the ultimate outcome of the acquisition. Other studies examine a number of different determinants of the cross-sectional variation in returns associated with acquisitions. (see e.g Lang , Stulz, and Walkling 1991 . Maloney , McCormick , and Mitchell 1993; morock, Shliefer , and Vishny 1990)These Cross-Sectional analyses of event –period returns provide some understanding of the nature of the market reaction to acquisition announcements.They do not , however , examine whether the anticipated value creation or improved productivity materializes, Nor do they have a great deal to say about the organizational mechanisms and management practices that drive acquisition success or failure.

Studies of post merger performance attempt to measure the longer-term implications of mergers and acquisitions using both accounting and stock return data. Studies of accounting data fail to find consistent evidence of improved performance or productivity gains. (see e.g, Healy , Palepu, and Ruback 1992 and Ravenscraft and Scherer 1987) similarly , studies that focus on acquirers long term stock performance find mixed results abnormally negative stock returns after the acquisition ( agraqwal , Jaffe, and Mandelker 1992), no abnormal returns (franks , Harris , and Titman 1991) and negative abnormal returns only for stock mergers (Mitchell and Stafford 1996) Like the announcement period event studies, longer term performance and event studies document substantial cross sectional variation in performance , but do not study the sources of value changes in mergers and acquisitions.

In sum , there are a number of questions that the existing economics and finance literature on mergers and acquisitions leaves unanswered , Existing work provides mixed results on the average impact of mergers and acquisitions More importantly , existing work offers little insight into the determinants of an acquisitions success or failures.

Research on the basis of Capital Market

Capital market is one of the research category used as central information point. According to Healey (1992), the stock market data reflects the effects of M&A as it reflects future profits and dividends expected by the post integration entity moreover these researchers believe that the result has been found swayed by the researcher’s personal orientation an hypothesis. It is been analyse that majority among studies that have been covered lower then desired effects created through analyses based on capital market data.

Event Study Methodology

According to data et al (1992) have indicated that these studies are based on the hypothesis that markets across the industrialized world are highly well-organized and therefore soon after the M&An announcement moreover it depends on the future financial benefits or losses. The result of such studies have highlighted the majority of M&A activities do create affects that can range from significant to normal (Sudarsanam 2003) but the people working along with the field and many other critics have argued that the methodology is only affective for small projects to obtain the desired affects and does not represent long term desired affects in the medium to long term.

Short Run Objectives:

A large number of organizations plan for financial gains within a short period of time when the merger date is finalized they are looking to achieve this objective, 30% and 10% abnormal returns have been found for the target shareholders Sudarsanam et al (1996)

Long Run Objectives

According to Agarwar (1992) the organizations long term desired affect through M&A activity that has gained an increasing interests among researchers after the data is available for the last wave of M&A in the 1990’s. There has been a mixture of results as- 10% abnormal returns over 5 years M&A periods; Fama & French (1993) showed positive 9% abnormal returns for the acquired and negative -4% abnormal returns for the acquirer; and sudarsanam & Mahate 2003 showed a range of negative -18% to positive+1% abnormal returns in M&A situation. Although it has been found out that many of these studies have used different models, benchmarks and organizational data, but there is a general consensus that M&A abnormal desired affects in the long term.

Operational Planning Research:

The best way to analyse the affect of M&A activity is to study the operational performance of the firms involved. The operational data consists of accounting data like cash flow and profit and loss statement are used by such studies (Healey 1992) Herman and Lowenstein (1988) used these technique on data gathered during 1975 to 1983 and found that no significant improvements in the performance of post M&A entities. Healey et al (1992) found a meagre 3% operational performance among companies analyzed. However the same data was later analyzed under improved methods and found no operational performance. The results show large number of failures in creating substantial desired affects through operational analysis.

Recent Merger and Acquisitions trends

In the above table shows the recent trends in the field, let us being with our full dissertation of the subject of M&A. This will be begin with a discussion of the basic terminology used in the field.


According to Cartwright and Cooper (1995) in order to get the desired objective during the M&A activity the internal environment of firms should be synchronized. It can therefore recommend that integration of people, their systems, procedures, practice and organizational culture is extremely important in order to get the desired objective.

Mr David (2007) suggest that the internal aspects of firms that are going to merge can be divided into two core competencies that can help to minimize the factors involved the failure of M&A strategies.

These core competencies lie in the field of corporate strategy which usually lack coordination during M&A activities. The main limiting aspects of M&A in terms of strategic importance that can play a vital role by using their core competencies have been highlighted as follows

Organizational culture

The cultural differences is the single largest cause of lack of proposed performance, achieving the desired target and objective and time consuming issues in the running of successful business ( Bijilsma frankema , 2001) according to him culture plays a important part in employees motivation in the development to new business he says that cultural clash is the most dangerous factors when two companies decide to combine moreover the things like styles , values and missions is the part of factor influencing the M&A.

According to (Covin et al, 1997) the employees required five to seven years after the merger to feel truly incorporated. Due to the multitude of these changes many problems arises like loss of job, also financial debt and fears of jobless.(Mirvis and Marks 1992) moreover he says that after merger the new team is also distressing and anxiety for the people other fear include the loss of effective and close team members,

as well as the uncertainty about the new team members and supervisors to be inherited the employees when forced to deal with new team members and managers they may develop fears of taking risks and raising sensitive subject. This may adopt us verses them thinking, where trust for the new team members will be minimal (Mirvis and Marks, 1992).Management facing this kind of behaviour may have to pay the high price of loss of coordination and initiative among the employees of the new business combination. Moreover the issues and disagreement will be more difficult to resolve, so the time after the merger is the most difficult time for the management and new team members to move forward as a whole. Appelbaum etal, (2000)


According to (Datta et al , 1992) the process of merger and acquisitions consists of biggest change at the individual and organizational level in the history of organizations because of this the process is stressful. When one culture combines with another the employees feel as through they have lost control over important aspects of their loves, and in an attempt to regain control, they often withdraw. So it creates stress within individual , i.e reduced performance and job satisfaction . ( Berger and Ofec 1996)

According to Schweiger & Denisi (1991) the employees after the M&A go through a time of increased anxiety uncertainty and stress. They are concerned about their new position it will create more stress in them so communication plays the vital role during the merger so that employees know what is going on and how they might be affected during and after the post integration period. Thus it can be suggested that while negotiations have been compared to flirting before marriages , and the closing of the deals to forming a new family , employees reaction can be associated with “bereavement” (Katinka , 2004)

Organizational change and resistance

Changes after merger announcement like stress, symptoms, work related factors, health status, and lifestyle. Personal characteristics were composed of age, sex, height, weight, and marital status in both surveys. Moreover stress related symptoms like anxiety, impatience and depression were dichotomized by either having a complaint or not so following a M&A , a complex set of organizational , managerial and personal changes or inevitable.

Jensen & Rubock (1983) claim that in order to cope with the changes and resist with the changes there is a way to select a strategy and a set of specific approaches for implementing an organizational change effort. It is very important for managers to implement changes successfully in order to cope with the changes. The researchers have introduced six different strategies in order resist the changes after the merger and four major reasons why peoples resist changes.

Image, Identity and confidence

According to (Ravenscraft and Scherer 1988) image , identity and confidence of the human resource may reduced after the combination process it has been send that most of the employees will feel uncertain and will need some relaxation environment .

It can be recommended that the peoples effected by this process can prove dangerous for the management they can change the ownership moreover the employees who are affected by the process tend to protect their identity and confidence through tolerance and humble and hence they try to maintain their status and confidence with experience that they are the part of new entity, if the cultural factor is not adequately taken into account at this stage of the merger , there will be so less time to contain it after the merger.

Weston et al (2001) discuss the fear and stress associated with a merger. Schwert (1996) argue that when the objectives after the merger are not met , the managing teams of both companies are the employees of the acquired company enter a “cycle of escalating and distrust”. In other words, managers of the acquiring company press for increased control, while employees of the acquired company resist and demand their autonomy. Others view mergers and acquisitions as power games , which create some excitement fro bored CEOs.


Tompkins (1984) defined organizational communication as “the study of sending and receiving messages that create and maintain a system of deliberately corresponding activities or forces of two or more persons”

Organizational communication is the exchange of messages through collective creation maintenance and transformation of organizational meaning. Members develop commonly understood patterns of expectations of organizational action through communication. Moreover communication with the employees is a very important factor throughout the entire M&A process and creates a positive effect on employees through the trying time.

According to John et al (1999) that communication plays a vital role in the combination of different and various cultures. The cultures can be at conflicting ends and therefore should be understood by the top management during integration period moreover according to Richard et al (1999) the human resource department should plan for the change in organization and they should know before this process that what going to happen with the company when two cultures combine as the result of merger. So in the process of merger only decision is not enough but the proper communication of these decisions among the company is very important moreover management works horizontally and vertically through leadership, control and organization.(Sudarsanam and Mahate, 2003)


Despite of the fact that many people loss their job in the process but the same time high rate of voluntary turnover linked with the process moreover it includes substantial outflow of talent and expertise. According to Ravenscraft and scherer, 1988) report executive turnover rates as high as 75% in the first three years of post acquisition period. Unplanned personnel losses are not necessarily confined to the more senior levels of the organization. Typically, acquired or merged organizations experience on overall rate of staff turnover of at lest 30% in the first two years post merger period (Cartwright and Cooper 1995)

2.4 Success and Failures

A large number of mergers and acquisitions are unsuccessful .Over the last fifteen years, 23% of all merged firms worldwide reported lower profits than comparable non-merged firms (Gugler et al.(13)) Daimler Chrysler, the effect of the largest industrial merger ever, for example , has only posted low or negative profits since its birth in 1998-including the biggest loss in German business history in 2001. The disappointing results of mergers have been puzzling commentators and academics alike.

In the management literature, poor merger performance has often been connected to unsuccessful addition of different corporate cultures. Cultural differences, however, are not enough to explain failures. First, firms seem to be aware of organisational difficulties when taking merger decisions. DaimlerChrysler, for example, anticipated post –merger Challenges. Second, mergers between partners with closer corporate cultures sometimes perform worse ( Morosini et

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