FREE online courses on Corporate Strategies - Diversification Using Mergers
and Acquisitions - Problems in Achieving Acquisition Success
1)
Integration Difficulties
Integration problems or difficulties that companies often
encounter can take many forms.
Major amongst them are linking different financial and control systems, building
effective working relationships (especially when management styles differ),
problems related to differing status of acquired and acquiring companies'
executives and melding disparate corporate cultures.
The importance of integration success should not be
underestimated. Without successful integration, a company achieves financial
diversification, but little else. The post-acquisition integration phase may be
the single most important determinant of shareholder value creation (or value
destruction) in mergers and acquisitions. Managers should understand the large
number of activities associated with integration processes. For example, Intel acquired Digital
Equipment Corporation's semiconductors division. On the day Intel began to
integrate the acquired division into its operations, six thousand deliverables
were to be completed by hundreds of employees working in dozens of different
countries.
Research shows a positive relationship between rapid
integration of the acquiring and acquired companies and overall acquisition
success. Rapid integration is one
of the guidelines that DaimlerChrysler CEO Juergen Schrempp recommends to
companies for successful company integration in a global merger or acquisition.
He also suggests that managers deal with unpopular issues immediately and
honestly so employees will be able to anticipate the effects the integration is
likely to have on them. M&A king, Cisco Systems, is quick to integrate
acquisitions with its existing operations. Focusing on small companies with
products and services related closely to its own, some believe that the day
after Cisco acquires a company, employees in that company feel as though they
have been working for Cisco for decades.
2)
Inadequate Valuation of Target
Another potential problem is that acquiring companies may pay
too much for acquired businesses. This can occur for a number of reasons:
Acquiring companies may not thoroughly analyze the target
company, failing to develop adequate knowledge of its true market value.
Managerial hubris--overconfidence in one's own ability--may
cloud the judgement of acquiring company managers.
Shareholders (owners) of the target must be enticed to sell
their stock, and this usually requires that acquiring companies pay a premium
over the current stock price.
In some instances, two or more companies may be interested in
acquiring the same target company.
When this happens, a bidding war often ensues and extraordinarily high
premiums may be required to purchase the target company.
An example of effective due
diligence was DaimlerChrysler's 1999 decision not to acquire Nissan Motor
Company. DaimlerChrysler was interested in Nissan as a means to expand its
access to global auto markets, especially those in Southeast Asia, but the
target had $22 billion debt, which caused concern among DaimlerChrysler
executives and derailed the acquisition.
3)
Large or Extraordinary Debt
Many acquirers, in addition to overpaying for targets, may be
forced, due to market conditions, to finance acquisitions with relatively
high-cost debt. Top-level managers
were encouraged to finance acquisitions with high-cost debt because of the
managerial discipline that accompanied such use. A number of well-known and well-respected finance scholars
argue in favor of companies utilizing significantly high levels of leverage
because debt discourages managers from misusing funds (for example, by making
bad investments) because debt (and interest) repayment eliminates the company's
"free cash flow."
But the use of debt has both positive and negative effects.
On the one hand, leverage can be a positive force by allowing the company to
take advantage of expansion opportunities; however, excessive leverage can lead
to negative outcomes such as postponing or eliminating the investments that are
necessary to maintain strategic competitiveness over the long term.
4)
Inability to Achieve Synergy
Acquiring companies also face the challenge of correctly
identifying and valuing any synergies that are expected to be realized from the
acquisition. This is a significant
problem because, to justify the premium price paid for target companies,
managers may overestimate both the benefits and value of synergy. And, to achieve a sustained competitive
advantage through an acquisition, acquirers must realize private synergies and
core competencies that cannot easily be imitated by competitors.
Private synergy refers to the benefit from merging the
acquiring and target companies that is due to a unique resource or set of
resources that are complimentary between the two companies and not available
among other potential bidders for that target company. However, private
synergies are rare. In fact,
misinterpreting common synergies as
private may explain why acquiring company shareholders rarely receive
significant positive returns.