Here is how mergers can fail if not taken seriously
One of the major mistakes committed by the parent company is that it neglects the interest of the employees and the shareholders during due diligence
Companies look to mergers and acquisitions (M&As) as a source of new growth and revenue. But there is an even greater chance that these M&As will go bad. It is often debated regarding the key issues in mergers and acquisitions-why some deals fail miserably and why others prosper. It provides a complete road map for what potential buyers should look for when picking a target and what characteristics of sellers they should steer clear of, as well as pitfalls to avoid during the M&A process. When companies merge, most of the shareholder value created is likely to go not to the buyer but to the seller. Indeed, on average, the buyer pays the seller all the value generated by a merger, in the form of a premium from 10 to 35 per cent of the target company's preannouncement market value. This fact is well-established, but the reasons for it are less clear. There can be various disadvantages of mergers.
Over-estimating the value of the target company
Companies undergo mergers for increasing the shareholder value. Though the basic aim of a company is to provide benefit to its shareholders and maximize its profits but most of the companies are not able to achieve this. A survey says many parent companies often over-estimate the value of their target company due to lack of due diligence. Also, sometimes, two or more companies are interested in acquiring the same company and this greatly shoots up the amount they eventually have to shell out for the target company.
For example, when Google made its move for Motorola in 2012, to many, a transaction between the two made perfect sense from a strategic perspective. Google's Android operating system was already the second biggest player in the market and acquiring Motorola would give it an opportunity to develop high-quality mobile handsets. But this second part of the equation - making high-quality handsets - has been the undoing dozens of companies in the telephony industry.
The same awaited Motorola. Google thought so poorly of its new handsets that it contracted others, including Samsung and LG, to develop its Nexus handsets. In 2014, Motorola was divested for just $2.9 billion.
The acquirer many a times gets submerged in large and extra ordinary debts during merger and acquisition. Most of the mergers and acquisitions are financed through unsecured debts which carry a huge rate of interest with them. These high-cost debts eventually lead to a fall in the stock prices of the parent company. Also, when two or more companies bid for the same company, they may end up paying more for the target company. This over estimated price is usually raised by the company through high-cost debts. As a result, the company will try to cover these high-cost debts which leads to a fall in the stock prices of the parent company which eventually hampers the company
For instance, Tata Motors acquired Jaguar in 2008. The analysts believed it was Tata's ambition to become a global company in quick time that led them to purchase Jaguar. Since a very high cost was paid, the deal was financed by Tata's through high-cost debts. Later the shares of both the companies suffered a huge blow as Tata tried to raise money to cover this huge acquisition debt.
Why mergers and acquisitions are feared amongst the employees is because of job loss.
According to the statistics provided by the UNI-Europa, nearly 1,30,000 jobs have been lost because of mergers and acquisition in the European financial sector. Also, according to the European Restructuring Monitor, of the 3.7 million job losses, approximately 2,40,000 jobs were lost because of mergers and acquisition. This job loss is mainly the result of the company going into cost cutting schemes to give some breathing space to its highly skewed balance sheet because of the merger or acquisition. The other reasons leading to job losses are:
a. Company wanting to save on its payroll
b. The parent company may already have surplus workmen
c. The target company may not be trading efficiently due to a large staff
Taking example of Microsoft and Nokia, it seemed like they all viewed the short-cut to achieving this being acquiring an existing handset maker. Although once the world's biggest handset manufacturer, Nokia had failed to keep up with developments. By the time Nokia downed its shutters in 2015, Microsoft had written off $7.6 billion and laid off over 15,000 Nokia employees. In USA due to the merger between Chemical Bank and Chase Manhattan in 1995, nearly twelve thousand jobs were eliminated. Also, when Nation Bank acquired Bank of America in 1998 it included plans to lay off nearly 18,000 employees. The merger between UBS and SBS in Switzerland led to a job loss of 1385 employees
This is one of the biggest issues which companies face during mergers and acquisition. No two companies can do the business in same way. The working and organization culture of every company is different. A company may be different from the other based on the way they project themselves in the market, how they treat customers, suppliers and employees, how much freedom is given to the employees and so on. The merger or acquisition between two culturally different companies eventually leads to lower productivity if this issue is not addressed by the management right from the beginning.
The merger of automakers Daimler-Benz and Chrysler is an example on how culture clashes will inevitably lead to the failure of a deal. It has been said in some quarters that the two cultures were too different to ever be brought together. Decision making at Daimler-Benz was methodical, at Chrysler it was creative and unstructured; salaries at Daimler-Benz were conservative, much less so at Chrysler. Finally, there was the flat hierarchy that existed at Chrysler compared to the top-down structure at Daimler-Benz.
A monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to significantly determine the terms on which other individuals shall have access to it. A merger can lead to a monopoly where there are not many competitors in the market giving the parent company the power to control the price of the product and increase it according to its will in order to increase their profit. As a result, the bargaining power is shifted from the consumer to the producer. However, this situation can't arise anymore because of the stringent laws made by the government to check the menace of monopolies.
For example, a report made by Judge Thomas Penfield accused Microsoft of enjoying a huge power in the market for Intel compatible PCs. Their position in the market gave them the power to dictate the price in the market without any fear of losing customers.
Shareholders and employees interest overlooked
One of the major mistakes committed by the parent company is that it neglects the interest of the employees and the shareholders during due diligence. The shareholders who are being taken over often feel hostile. Mergers and acquisitions make the employees shift their focus from productive work to issues related to conflicts, layoff, compensation etc. It also puts a huge question mark in the minds of the employees regarding their job security. It is required that during merger and acquisition a proper communication should be maintained between the management and the employees to avoid such issues. As a result of the merger between ABB-Flakt at the global level, its branches in India also merged. However, a study conducted on this merger in India revealed that no proper due diligence was conducted because of which the gain on the merger was less than the capital market growth due to which the shareholders of Flakt lost heavily.