MODULE 3

WHY MERGERS
FAIL
 OBJECTIVES
1 Introduction

2 Some common questions about M &A Failure

3 Merge Failure Drivers

4 The development of a Process Model

5 Characteristics of a successful Merge

6 Rules for avoiding an unsuccessful Merge

1.Introduction

- It is clear that mergers and acquisitions do not always prove to

be successful in the context of the original objectives set for them.
This module considers some of the primary drivers behind merger
or acquisition failure.

-The question therefore arises: If mergers are so common and so

much money is involved, why dont companies make a better job
of merging? Mergers fail because failure drivers impact on them
and because whoever is in charge of the merger is unable to
negate the impact of these failure drivers

- In one case, a particular driver might be the most important

element in determining whether or not the merger will succeed. In
another merger, the deciding factor could be an entirely different
failure driver.
2.Some common questions about M & A Failure

What exactly does merger failure mean?

Merger success and failure can be measured in numerous diff
ways, failure on one measurement scale but could be interpreted
as success on another measurement scale. Most analysts look
primarily at shareholder value.
Why do mergers go wrong?
+ a large proportion of M are not planned in sufficient details
+ Non-specialist, in-house staffs often inexperienced cover the
deal
Why are mergers allowed to fail?
Senior managers tend to loose interest and long term integration
process is often left to inexperienced teams, senior manager
allow this happen because they always have other thing to do.
2.Some common questions about M & A Failure
How widespread is merger failure?
Majority of Merger will be failed if it is viewed in short term. In
terms of achieving a set of long term strategic objectives, the
success rate is probably around half and half
What is the most common problem?
+ The erosion of senior management interest as the integration
process take place
Is merger failure more pronounced in particular sector or
industry. No evidence to suggest that
What are merger failure drivers?
Ranging from cultural elements to information technology
elements. Cultural elements are key issues in the companies that
employ larger numbers of people in a highly interactive
environment.
3. Merger Failure drivers

3.1. Shareholder Rejection

In Merger: Shareholders of both companies have to vote by
a majority in favour for the move to proceed
In Acquisition: a majority of the target shareholders have to
agree to sell target shares to the acquirer
If a majority of shareholders rejects the proposed M or A, the
move cannot go ahead.
 Offer a cash and stock
bid worth $3.2 bil

Princes Royal
Carnival
Cruises Carnival

A break-up fee of
$40 mil

Hostile offer
A hostile stock and cash
bid worth around $3.5 bil Shareholders

New company to be listed

on both the US and UK
stock exchange
3. Merger Failure drivers
3.2. Negotiation failure
Merger sometimes failed to concluded because the two companies are unable
to agree on merger terms and conditions that are mutually acceptable

Negotiations fail more than

one

United
US Airways
Airlines

United Airlines concerned the deal would not be approved by regulators

Worry about the condition of global economy and unsure it was the right time

7/2001

US regulators made their position clear: concerned about the effect on

competition and fares
3. Merger Failure drivers

3.3. Regulator Block

Regulator act as a control against companies making M or A
that would allow the combined company to exercise any
significant influence over the market price of the good or
services involved:
- reduce number of players in the sector and then affect
consumer choice
3. Merger Failure drivers
3.4. Strategic Failure
3.4.1. Lack of Valid Strategic Rationale and Focus
3.4.2. Lack of Valid Implementation and Integration
Strategies
3.4.3. Multiple Acquisition and Lack of Control
3.4.4. Hostility (Opposition)

3.4.5. Cultural Failure

3.4.6 Financial Failure
3.4.7 Integrative Failure
3.4.8 Information Technology Failure
3.4.9 Leadership Failure
3.4.10 Risk Management Failure
3. Merger Failure drivers

3.4. Strategic Failure

3.4.1. Lack of Valid Strategic Rationale and Focus
Merger often fail because they do not demonstrate
sufficient strategic alignment.
Unrelated acquisitions do provide a means of spreading
risk across a number of different sectors or industries,
but they can also be very dangerous. In some cases
companies use successful core businesses to finance
unrelated acquisitions.
3. Merger Failure drivers

If the target is acquired, there is a danger that the motivation and

commitment of the key individuals who built and expanded the
target in the first place may be weakened
Even if these key people do not leave, they may find themselves
less motivated to perform well, simply because ownership of
their company has now passed to the acquirer. The overall
performance of the target may diminish to a point where it is
unable to fulfill the strategic expectations of the acquirer
3. Merger Failure drivers

3.4.2. Lack of Valid Implementation and Integration Strategies

Mergers sometime fail to live up to expectations because

implementation and integration are not executed effectively. The
reasons are: inaccurate, unachievable, contradictory; obsolete by
external events

The objectives may be acceptable, but the implementation

planning process may be: incomplete; wrongly structured
3. Merger Failure drivers

Based on inaccurate or unreliable assumptions;

Based on assumed resources that are not forthcoming;
Insufficiently flexible to allow for change

There may still be problems in implementation

Priorities change;
Some areas cannot, in fact, be implemented;
Resources are withdrawn;
Cost limits are reached before full implementation
has been achieved;
Major unforeseen cultural issues arise.
Example of Long-Term Integration strategies
3. Merger Failure drivers
3.4.3. Multiple Acquisition and Lack of Control

Strategic failure sometimes occurs because the chosen

strategy includes multiple acquisitions in areas that are not
sufficiently related. Where this does occur, the company may
suffer from a lack of control across the full range of its
Acquisitions.
Reasons: - very difficult to design and maintain control and
management systems across a wide range of different
organization and company types.
- difficult to identify individual sections or areas of
the group where things are going wrong in time to take
action.
 Example of Non-related
Diversification and Control
3. Merger Failure drivers

3.4.4. Hostility (Opposition)

Targets threatened with takeovers can sometime successfully
repel the attentions of potentially hostile acquirers. Shareholder
hostility tends to be most powerful when the shares are held by
a small number of shareholders.
3. Merger Failure drivers
3.4.5. Cultural Failure
3.4.5.1 Ineffective Cultural Integration

3.4.5.2 Ineffective Communication

3.4.5.3 Ineffective HR Control

3. Merger Failure drivers
3.4.5. Cultural Failure
- The cultural aspects of mergers and acquisitions are very often
underestimated when the implementation process is being both
planned and executed.

The probability of cultural failure can to some extent be foreseen

in the pre merger stages, a number of indicators will show where
the existing culture may be somewhat weak and where the
extreme pressures of a merger or acquisition may push cultural
integrity beyond breaking point, these indicators include:

High staff turnover;

Difficulty in keeping hold of key staff
Increasing assertion of harassment;
Increasing employee conflict and stress;
Decreasing employee motivation, energy and commitment;
3. Merger Failure drivers

3.4.5.1 Ineffective Cultural Integration

The largest single cultural failure driver is ineffective cultural
integration. The degree of integration required depends largely
on the extent to which the M or A will involve transitional
change within the organizational structures of one or both
companies

- Takeover for speculation will allow the target operate with

complete independence. In other cases, it is common for a
significant proportion of target senior managers to leave either
during or immediately after the merger is concluded.

- The highest risk of cultural failure occurs where the degree of

cultural integration required is greatest. This scenario tends to
occur in the case of a merger of equals
3. Merger Failure drivers

3.4.5.2 Ineffective Communication

The value generated by a merger is sometimes reduced because

key people leave. due to uncertainty about future

The more a company communicates with its employees, the lower

the degree of uncertainty will be

The initial notice should therefore provide some specific clarifying

points, as shown below:

All appointments will be based on merit

In all cases, existing employees will be required to formally apply

for any new posts (positions) that are created under the new
merged organizational structure.
3. Merger Failure drivers
All created posts should be advertised internally and where
relevant, externally. Ideally, all posts should be advertised
internally first. External applications should be advertised only
where there is insufficient internal capability.

The consideration of each applicant must be based on

experience, qualifications and compatibility with the position
applied for.

Internal applicants who are unsuitable for a given post should

be actively considered for the next post downwards in the chain
of authority.

Dispute handling should be formalised

Standardized disputeresolution techniques should be used

where possible, either from a company or national perspective.
3. Merger Failure drivers

3.4.5.3 Ineffective HR Control

Key people may go during the M&A. there are three primary
phases when people might leave a merging company. These
are: Announcement, Negotiation and Deal, Complementation

It is also vital that any preventive action is taken by HR at the

earliest possible time. But, the HR function is just as
vulnerable to disruption caused by the uncertainty resulting
from the announcement as every other part of the
organization.
3. Merger Failure drivers

3.4.6 Financial Failure

3.4.6.1 Inaccurate Target Evaluation and Excess Premium

3.4.6.2 Lack of Financial Slack and Poor Debt Position
3. Merger Failure drivers

3.4.6 Financial Failure

3.4.6.1 Inaccurate Target Evaluation and Excess Premium

In the simplest sense, competitive analysis is concerned with:
the assessment of industry attractiveness;
the valuation of the companys competitive position within that
industry;
the identification of sources of competitive advantage

The price an acquirer is prepared to pay for a target depends

on the potential that the target has to add value to the acquirer.
This variable is sometimes known as the value creating
potential of the target.
3.4.6.1 Inaccurate Target Evaluation and Excess Premium

In order to estimate the value creating potential of a target it is

necessary to consider:

the stand-alone value;

the value of the potential synergistic benefits;
the asking price.

In simple terms, in order to break even:

Asking price = stand-alone value of target (t) + value created by
acquisition (VCA)

The asking price itself is usually set by the market, as the VCA
benefits may be perceived differently than from the acquirers
viewpoint. The stand-alone value is the value determined by
standard financial appraisal and due diligence techniques
3. Merger Failure drivers

3.4.6.1 Inaccurate Target Evaluation and Excess Premium

The VCA element is the most difficult variable to calculate,

and will vary depending on the nature of the acquirer and
the nature of the target. The VCA can therefore be
considered as:

Value created by acquisition (VCA) = value (a + t) (value

4. Business strategy

(a) + value (t))

where value (t) = stand-alone value of target;

value (a) = standalone value of acquirer.
value (a + t)= combined value of the acquirer and the target
after the acquisition has been completed
3. Merger Failure drivers

3.4.6.1 Inaccurate Target Evaluation and Excess Premium

The maximum acceptable price to pay for the target. This can be
expressed as the difference between the post merger value of
the combined companies and the pre merger stand-alone value
of the acquirer

Maximum purchase price = stand-alone value (t) + VCA

Therefore:

Value created for A = max purchase price price paid for target

Note therefore that, from the acquirers point of view, the

maximum price is a breakeven price in terms of economic
viability
3. Merger Failure drivers
3.4.6.2 Lack of Financial Slack and Poor Debt Position

Debt and debt position may have a significant impact on the

success or failure of a merger or acquisition, the debt position
is expressed in terms of the debt to equity ratio. Normally
anything up to 50 per cent is regarded as being low to
medium.

Acquirers may seek to finance acquisitions with shares rather

than borrowed finance in order to keep their debt position as
low as possible. In practice, acquirers often use a
combination of cash, debt and stock when financing
acquisitions
3. Merger Failure drivers
3.4.7 Integrative Failure

3.4.7.1 Management Team Selection and Project

Management

3.4.7.2 Change Experience and Flexibility

3. Merger Failure drivers
3.4.7 Integrative Failure

3.4.7.1 Management Team Selection and Project Management

Implementation processes often run into trouble because the

team placed in charge is not entirely suitable because the
merger process is not planned and controlled using formal
project management tools and techniques.

3.4.7.2 Change Experience and Flexibility

To be powerful drivers in achieving successful integration

companies with previous acquisition experience are better at
analyzing potential new acquisitions, planning them, and then
being flexible enough and able to apply sufficient control in
detail to actually make them happen
3. Merger Failure drivers
3.4.8 Information Technology Failure
IT issue is a major source of merger failure. IT allows
companies to operate more efficiently and it is central to modern
business

3.4.8.1 The IT issue

Many large organizations that are about to merge underestimate the
scale and complexity of their IT systems
Merging IT systems tends to involve a number of specific areas.
These include the following

-Staff. The IT staff can sometimes be the single largest obstacle to

the successful integration of IT systems
-Hardware.
-Software: banks, for example, may have essentially similar software
for analyzing applications for personal loans
-Operational system
3. Merger Failure drivers

3.4.9 Leadership Failure

Leadership and team building are equally important in terms of
achieving project success. There are numerous examples of
mergers that have had reasonable objectives and have been well
planned, but have failed to achieve objectives because of poor
leadership

3.4.9.1 Inappropriate Leadership Style

Mergers and acquisitions are a form of project;
Mergers and acquisitions are usually planned and implemented
by a team appointed for the purpose;
The team has a leader

A leader is primarily responsible for clarifying the path between

what team members do and the rewards that team members
value
3.4.9.1 Inappropriate Leadership Style
in order to clarify the pathways between production and rewards
there are four primary behaviors that the leader can adopt

Directive: where the leader tells team members what to do

Supportive: where the leader adopts a supportive role
Participative: where the leader involves himself or herself directly
with the team
Reward
Leaders should possess the following traits:
Decision making skills.
Problem solving skills.
The ability to integrate new team members.
Interpersonal skills.
The ability to detect and resolve conflict.
Communication skills
Interface management skills
Factor-balancing skills.
3. Merger Failure drivers
3.4.9.1 Inappropriate Leadership Style
One of the most useful and popular published models for
lifecycle leadership behaviors considers the relationship between
task oriented and people oriented leadership as a function of
lifecycle stage

Task oriented: leadership relates to the leadership required in

order to achieve the task itself

People oriented: leadership relates to the leadership required

to form and develop the project team and the individual people
within it

If the lifecycle of the team is considered in terms of four phases

or stages, the leadership characteristics required in each phase
may be as shown in Table
3. Merger Failure drivers

3.4.9.1 Inappropriate Leadership Style

Phase 1 is characterized by high task related, low people related

leadership
Phase 2 is characterized by high task and high people leadership

Phase 3 is characterized by low task and high people leadership.

Phase 4 is characterized by low task and low people leadership.

3.4.9.2 Inappropriate Team-Building
Teambuilding in a project management context is the process
of taking a series of individuals from different functional
specializations and welding them together into a unified project
team. Generally, there are nine primary sections in any good
teambuilding process

Establishing commitment: team members must have a level of

commitment
Developing team spirit.
Obtaining the necessary resources
Establishment of clear goals and success/failure criteria
Formalizations of senior management support.
Demonstration of effective programme leadership.
Development of open communications.
Application of reward and retribution systems
Control of conflict
3. Merger Failure drivers

3.4.10 Risk Management Failure

3.4.10.1 Ineffective Risk Identification and Analysis

In the mergers and acquisitions context the first stage in running

any kind of risk management system is risk identification. This is
simply the process of identifying all the various obstacles and
hazards that lie in the way of the acquisition or merger meeting its
success criteria (case page 215)
3.4.10.2 Ineffective Risk Management, Monitoring and Control
Large scale mergers and acquisitions involve a great deal of risk, It
is important that these risks are addressed using a formal and
reliable risk management system that manages and controls risk
during both planning and implementation. the impact can generally be
reduced by making some relatively simple investigations at different stages
of the lifecycle. Some examples are given below.
3.4.10.2 Ineffective Risk Management, Monitoring and Control
Pre deal stage
Analyze the product and service compatibility of each
organization in order to achieve the best possible strategic fit.

Evaluate the impact of the proposed deal on all stakeholders,

including shareholders, employees, customers, suppliers and the
community.

Identify and detail any potential weak areas or vulnerabilities in

relation to customers and potential loss of customers.
Identify any areas that may cause costs to increase, such as the
integration of complex IT systems.
Carry out any necessary modeling calculations to test the
proposed economic viability and the returns that can reasonably
be expected.
Apply characteristics mapping to understand the degree and
extent of changes required to be made
3. Merger Failure drivers
3.4.10.2 Ineffective Risk Management, Monitoring and Control
Due diligence stage
Carry out detailed analysis of all stakeholder issues including
the impact that the different cultures, operating philosophies,
social responsibility and corporate governance of the two
organizations will have on stakeholder interests.

Consider customer base overlaps and making best use of

marketing and sales.

Consider potential synergies from a risk management

perspective
.
Determine the likely offensive actions of competitors.

Calculate detailed financial projections based on the floor value

and values of synergies created by the acquisition.
3. Merger Failure drivers
3.4.10.2 Ineffective Risk Management, Monitoring and Control
Implementation
Ensure continued customer satisfaction with the product and/or
service.
Ensure that suppliers remain committed to the acquirer rather
than seeking work elsewhere.
Ensure that clear and effective communications are maintained
throughout the organization at all levels, particularly in relation to
employment security and possible job losses.

Ensure that shareholders remain committed to the acquirer.

Ensure that the implementation plan is executed quickly and
effectively, and that all associated monitoring and control functions
are carried out.

Monitor employee migration, especially that of key people, in

order to ensure that talent erosion is minimized.
4. The Development of a Process Model
4.1 Introduction
A process model is a representation of the processes and sub
processes involved in carrying out any given operation. The
model acts as a kind of simple map to show the main stages
involved in moving from one condition to another. The process
model can be used as a guide in that it shows the main actions,
and also the sequence of actions, required to achieve an
acceptable outcome

4.2 The Development of the Process Model

The three primary stages or phases are:
the strategic logic phase;
the valuation phase;
the implementation phase.
4. The Development of a Process Model
The merger integration team, or whoever is in charge of planning
and implementing the merger, faces different challenges during
each phase. The merger failure drivers that were considered in
the sections above can be considered in terms of these primary
phases. The obvious distribution is listed
below.

Phase 1. Strategic logic

Shareholder rejection. Negotiation failure. Regulator block.
Strategic failure
Lack of valid strategic logic and focus.
Lack of valid implementation and integration strategies.
Multiple acquisition and lack of control.
Hostility.
4. The Development of a Process Model
Phase 2. Valuation
Financial failure.
Inaccurate target evaluation and inflated premium.
Unrealistic synergic realisation.
Lack of financial slack and poor debt position
Phase 3. Implementation
Cultural failure
Ineffective cultural integration.
Ineffective communications.
Ineffective human resources control.

Integrative failure.
Inappropriate approaches to integration.
Management team selection and project management.
Change experience and flexibility.
4. The Development of a Process Model

Information technology failure.

The IT issue.
IT evaluation phases.

Leadership failure.
Inappropriate leadership style.
Inappropriate teambuilding.

Risk management failure.

Ineffective risk identification and analysis.
Ineffective risk management, monitoring and control.
4. The Development of a Process Model
4.3 The Mergers and Acquisitions Process Model
The model comprises three phases. These are:
Phase 1. Strategic logic.
Phase 2. Valuation.
Phase 3. Implementation
The mergers and acquisitions process model
5. Characteristics of a Successful Merger

The characteristics most commonly associated with

successful mergers are listed below:

The merger or acquisition reinforces the strategic focus of

the acquirer

The acquirer and the target work in related areas.

The acquirer should ideally have previous merger or

acquisition experience

The target should be innovative and should ideally possess

some kind of unique skill
5. Characteristics of a Successful Merger

Both acquirer and the target should have change

management experience

Low debt position

Acquisitions should be by mutual agreement

The target should be thoroughly researched

The acquirer should ideally have plenty of cash

Employee acceptability.

Communication
6. Rules for Avoiding an Unsuccessful Merger
List of general rules for avoiding unsuccessful mergers and
acquisitions. they certainly do not apply in all cases, they do
however give an indication of the most common important areas
to avoid.

Rule 1. Stay focused

Rule 2. Stay tuned. Where possible avoid unrelated

diversification unless the unrelated diversification directly
complements the acquirer in some way.

Rule 3. Be careful if its the first time

Rule 4. Go for targets that chill. Flexible and happy to

change targets are far preferable to rigid inflexible ones.

Rule 5. Look for innovative targets that have unique skills.

6. Rules for Avoiding an Unsuccessful Merger
Rule 6. Dont break the bank: It is very dangerous to
increase debt levels significantly in order to finance a merger or
acquisition
Rule 7. Smile, dont snarl: If a takeover is necessary try and
make it friendly rather than hostile.

Rule 8. Check them out before you agree to a date

Rule 9. Remember this is all going to be expensive

Rule 10. Plan everything carefully and try to see what

could go wrong.

Rule 11. Sell it to the people. If at all possible it is best to sell

the proposed merger or acquisition to them beforehand
Rule 12. Spread the word