Since the 1800s firms have turned to mergers and acquisitions in efforts to expand their operations. The number of mergers and acquisitions continue to increase across the globe on a daily basis. However, despite the increasing quantity, many of the mergers and acquisitions continue to struggle with the integration process which often determine the success or failure of these firms. In the cross-border take-overs and acquisitions, the post-merger integration process is ten times difficult due to the issue of varied markets that demand application of procedures and operations that are consistent with the penetrated market. Indeed, the dynamic international market increases the issues and controversies associated with mergers and take-overs. To find answers to the research problem, a single case study was used.
The study uses the automotive industry when German Daimler merged with American company Chrysler in 1998 and the desire of the new company DaimlerChrysler to concur the Asia market in 2000 through a partnership with Mitsubishi Motor Corporation in Japan.
A few years after the merger with Japanese Mitsubishi Motor Corporation, evidence of failed merger were apparent with reduced stock value, decreasing profits and high debt margins. In 2004, DaimlerChrysler made a decision to cut ties with Mitsubishi but the decision was ineffective in saving the company’s operations as in 2007 Daimler sold Chrysler to Cerberus Capital Management. The research invested in analysing the problems firms face on cross-border collaborations and the determinants of success and failure. The study found out that there are indeed several issues and controversies facing firms after a merger in a global context including the failure of management to consider firm operational, cultural and environmental differences. The study concluded the international market is dynamic hence the necessity to consider cultural, organizational and operational appropriateness during mergers and acquisitions.
ACKNOWLEDGEMENT
I am indebted to several individuals for not only supporting but guiding me in this research making the process not only possible but also a fulfilling process. I take this opportunity expresses my sincerest appreciation to my professor, who provided valued support and guidelines. This dissertation has greatly benefited from the support of my friends and family who encouraged me to keep going. Their love and friendship grounded me to continue to seek what I consider important to me.
INTRODUCTION
Mergers and acquisitions are among the top most ways of market penetration. Mergers and acquisitions are prominent corporate events in the business world. The extent of the influence of mergers and acquisitions is evidently showcased by the recent wave of mergers and acquisitions. At the peak of the 2000s wave in 2007, businesses across the globe spent more than four trillion USA dollars on mergers and acquisitions. Mergers and take-overs affect the distribution, allocation and re-allocation of significant resources within and across firms and industries hence the profound effect on the corporate world. A well-constructed and executed merger and take-over often result to noteworthy value to the merging businesses or the acquiring firm. The major benefit of mergers is related to the ability to enhance operational efficiency through economics of scale as a result of synergistic gains of collaborated activities. However, acquisitions and mergers often are affected by several issues and controversies. Indeed, the difficulties highly pronounced when the merger of acquisition is occurring at an international capacity. Despite the wide-spread knowledge of procedural and operational activities in the businesses owing to the upsurge in information technology, the international market remains extremely dynamic. Bad merger and acquisitions choices often result to lose of employment and destruction of a viable business when the firm is eventually liquidated.
Background of the Study
Mergers and acquisitions are often analyse together in majority of the literature review. However, the two terms represent different transactions where mergers indicate a combination of two or more firms while an acquisition describe a situation where one firm buys enough shares that provide controlling rights. In this particular study, the focus of mergers and acquisition is similar since the research concentrates on the issues and controversies faced by such corporations on a global scale. The determinant of the success of failure of a merger and acquisition varies considerably depending on the type of company and the motives for the partnership. However, irrespective of the indicators and interpretations of success, almost 50 percent of mergers and acquisitions fail. Studies indicate the number is even higher in cross-border partnerships (Milner, 2010). The failure of international mergers and takeovers is related to certain attributes such as clashing culture at both the national and firm levels. The issue of different national environment creates difficulties in the integration process between two companies. In the past two decades, the upsurge in foreign market mergers and acquisitions validates a study in the issues and controversies affecting international partnerships.
The evolution of mergers and acquisitions since the 1800s is categorized into six different waves. The initial one between the 1800s and early 20th
century was characterized by many horizontal mergers. The second was indicated vertical mergers and lasted between 1919 1nd 1929. The third wave which occurred between 1955 and 1969 showcased lateral integration with partnerships of organizations from different businesses. The fourth wave between 1980 and 1989 varied in the USA and Europe where the USA was characterized with hostile take-overs and many European countries started to invest in cross-border partnerships (Martinson & Edgren , 2013, p. 13). The fifth wave began in the early 1990s and ended in 2000. The wave indicated an increase in international mergers and acquisitions. The sixth wave began in 2002 and fuelled by the need to globalize hence many cross-border associations due to friendlier trade barriers coupled with extensive development in information technology. Additionally, the sixth wave describes mergers and acquisitions between developed economies and emerging economies.
Scope of the Study
This research focuses on the issues and controversies associated with international mergers and acquisitions. While the whole study centres on the different concepts associated with mergers and acquisitions such as motives for the partnerships and pre and post integration analysis the paper particularly addresses the failure and success determinants. In this regard, the influences on the failure and success of a merger or an acquisition reflect the issues and controversies with international partnerships. Mergers and acquisitions are among the most influential corporate activities. Being context-bound, complex, multidimensional concepts, the study of the issues and controversies related to cross-border mergers and acquisitions should be done from varied perceptive. Research in mergers and acquisitions influencing important discoveries that have the potential to influence the actions shareholders and individuals take.
Problem Statement
When analysing the concept of mergers and acquisitions, it is necessary to establish that a lot of research has been dedicated to analysing the motives, pre and post mergers strategies and the different waves. However, little has been in regard to the analysis of international mergers and acquisitions especially in the sixth wave that is characterized by developed firms merging with emerging economies. At the dawn of international merging, most western firms preferred to collaborate with other western firms who shared similar market characteristics and majority of the external environmental factors including national and organizational culture. There is extensive research on the motives and pre and post merging aspects such as finances, culture and the strategies applied. However, the focus of this study is the issues and controversies associated with international merger irrespective of the stage, whether during the identification and selection, the evaluation process or the integration phase. Recent research indicates despite the development in information technology and the subsequent extensive sharing of information individual national business environments remain diverse indicating the inevitable issues and controversies during merges and acquisitions especially in the sixth wave.
The purpose of this article is to analyse the issues and controversies in international mergers and take-overs during the entire process from identification, selection, evaluation and the integration process.
Research Objectives
General research objectives
The general focus of this study is to enhance knowledge and perception of the issues and controversies associated with the dynamic cross-border mergers and acquisitions. Specifically, the research aims to provide an extensive insight on the variability in the international market and how the differences impact the decision shareholders and managers make. Indeed, the research analyses the factors for the success and failures of cross-border mergers and acquisitions.
Specific research objectives
To establish the determinants of the favourable and unfavourable outcomes in international mergers and acquisitions.
To determine the issues and controversies that may arise during the different stages of mergers and acquisitions.
To analyse how managers tackle the different issues in efforts to determine the success and failure of international business mergers and acquisitions.
Research Questions
What are the determinants of the favourable and unfavourable outcomes in foreign market mergers and acquisitions?
What issues may come up during the distinctive stages of a merger or acquisition on a global context?
How do managers tackle the issues and controversies in the global market to determine the success or failure of a merger or acquisition?
Case Introduction
The study will evaluate the study questions by analysing the DaimlerChrysler Mitsubishi merger. This particular case study is appropriate as it describes two distinctive collaborations within a time span of two years. The German automotive firm Daimler merged with US-based Chrysler organization in 1998. Two years later, the newly formed DaimlerChrysler sought to increase their global presence by seeking opportunities in the Asia market and opted to merge with Japanese Mitsubishi Company. However, their partnership with Mitsubishi ended in 2004 and in 2007 Daimler sold off Chrysler marking the end of their collaboration. This is a study in failure where the study seeks to answer the research questions using the failed attempt by DaimlerChrysler.
Dissertation Outline
Chapter 1: Introduction
The section provides the reader with the background information necessary for the understanding of the area under investigation. It introduces the reader to the background information related to history of international mergers and acquisitions. The section provides context for the research problem as well as stating both the research objectives and questions. Additionally, this shape introduces the case study.
Chapter 2: Literature review
This particular section analyses the theoretic and empirical works available on the concept of mergers and acquisitions. Initially, the chapter studies the history of mergers and acquisitions, followed by the discussion of motives for mergers and acquisition. The section also evaluates the issues and controversies facing international mergers and acquisitions as presented by other researchers.
Chapter 3: Research methodology
In this part, the research techniques used is presented and justified. Additionally, the section deliberates the quality of the research through the analysis of the validity and reliability.
Chapter 4: Results
The section analyses and compares the theoretical and empirical data related to mergers and take-overs and the DaimlerChrysler- Mitsubishi merger respectively. The analysis of the two provide the outcomes of the research.
Chapter 5: Recommendations and Conclusions
The final chapter concludes the findings of the research and offers recommendations that will help managers in decision making.
Chapter Overview
The upsurge in the application of mergers and acquisitions as a market penetration techniques in the foreign probes research on the factor influencing their activities. Indeed, despite their popularity many mergers and acquisitions continue to struggle to stay in business and a good number eventually decide to part ways. This particular research focuses on the issues and controversies international mergers and acquisitions. The intention of the research is to examine and describe these issues by analysing the determinants of favourable or unfavourable outcomes in mergers and acquisitions. The research questions reflect the research focus on describing the issues and controversies in cross-border mergers. A single case study of DaimlerChrysler-Mitsubishi merger is utilized in the study.
LITERATURE REVIEW
Introduction
A multitude of researches have been dedicated on the concept of mergers and take-overs in different industries including the manufacturing and service industries. Researchers devoted their resources on two main aspects, the validation that drive mergers and acquisitions and the pre and after-merger or acquisition of both firms with special focus on the acquiring business entity (Bioye Tajudeen & Abdul-Rasheed, 2005, p. 182). The aim of a merger or an acquisition is the ability to trade efficiently in an increasingly competitive international economy. In recent years, mergers, acquisitions and take-overs are considered an effective method of market penetration since they are not only cheaper but also faster compared to organic growth. A merger illustrate a result of common agreement between two or more organizations and usually involves the mere trading in shares. Acquisitions, on the other hand, entails one business entity taking over another firm through the bid and attainment for their shares. In many cases, take-overs are viewed as hostile since it indicates that the acquired firm loses its ability to make decisions. However, acquisitions are often welcomed by businesses that have difficulties including impending bankruptcy.
History of Mergers and Acquisitions
Abundant literature on mergers and acquisitions indicate there are several separate “waves” in the nature and volume of merges and acquisitions over time. Two theories explain the rationale behind the occurrence of mergers and acquisitions in waves. The neoclassical theory affirms that mergers and acquisitions waves are a result of the different industries reacting to economic shocks which provides the validation of why mergers are often clustered in industries (Georgopoulos & Preusse, 2009, p. 594). According to this theory, the time-span and volume of each wave is often influenced by the number of industries affected by the economic shocks. The second hypothesis claims that market valuations is the reason behind waves. Conferring to this theory, when the value of the firm diverge from the normal managers make a decision to use the overvalued stock to buy shares in undervalued firms(Fuller-Love, 2008, p. 94). Indeed, the hypothesis explains the evident interaction between mergers, acquisitions and the stock market performance. According to this hypothesis, more mergers and acquisitions occur during economic bubbles (Jensen, 1988, p. 106). The peak of the recent aligned with the 2007 housing bubble in the USA which was one of the reasons for the 2008 recession.
There are six mergers and acquisitions waves which are predominantly categorized on the basis of years. The first wave is between 1893 and 1904, which was evident in horizontal mergers that well-defined the manufacturing and transport sectors in the USA. The First World War marked the end of the wave. The second wave occurred between 1919 and 1929(Golubov , Petmezas, & Travlos, 2012). This particular wave was characterized by substantial vertical integration. The stock market clash and associated Great Depression of 1929 ended the wave. The third wave which was witnessed from 1955 to 1969 valued the concept of conglomerate. While many firms were born in this period including LTV and Litton their stocks eventually declined since the mergers did not rip their anticipated advantages.
The wave between 1980 and 1989 differed between and among countries and continents. For instance in the USA, the period was characterized by hostile take-overs and leveraged buyouts. However, in Europe international horizontal mergers were born during this era. The international mergers and acquisitions were influenced by the desire for a common market associated with the European Union (Martinson & Edgren , 2013, p. 40). The wave ended due to capital issues in commercial banks. The fifth wave of mergers and acquisitions between 1993 and 2000 was driven by the concept of globalization and penetration into the international market. Several mergers were witnessed during this period including; Exxon and Mobil, Citibank and Travelers, and the Chrysler and Daimler (Golubov , Petmezas, & Travlos, 2012). The wave ended with the economic integration of the technology. The sixth wave, between 2003 and 2007was fuelled by globalization and the desire for good relations among different countries. The period was characterized by extensive cash-financed deals associated with low interest rates.
Motives of Mergers and Acquisitions
The rationale for mergers, acquisitions and take-overs if often based on strategic issues which are driven by the need of the firms or the acquiring firm to enjoy economies of scale and subsequent high profit margins. The most common goal of all mergers and acquisitions is the drive for synergy gains. The term synergy illustrates the advantages accorded to firm due to their combination where the value of the collaboration is higher than the total gains of the two respective firms. The collaborations gains may be either operational, financial or both. There are various forms of synergy from enhancements in operational efficiency, increased market share related to increased output and elimination of a certain proportion of competition and several financial benefits such as tax proficiency (Golubov , Petmezas, & Travlos, 2012, p. 28). The basis of synergies are related to economies of scale in influencing suppliers. Moreover, the combine-effect may accord advantages to the firm as a result of collaborated managerial competence.
The improvement in corporate governance associated with merger synergies are particularly important in international mergers and acquisitions since leadership and management techniques vary considerably across the different markets. Additionally, diversification may be another motive for a merger or an acquisition. When two firms involved in different but close products collaborate, internal capital market is created which allows for effective allocation of resources between and among the different divisions. Indeed, in the international market, business mergers and take-overs allows the new firm or the acquirer to expand their operational benefits while maintaining several internal advantages that would be otherwise unattainable due to the concept of market clashing (Marimuthu, 2008, p. 10). Others firms collaborate purely for financial reasons such as tax considerations. Different countries across the globe have different tax rates that affect international mergers and acquisitions. Extensive research supports the concept of synergies benefits illustrating that when two firms combine, the collaborated firm value is often on average ten percent more than total of the two respective firms (Brouthers , Van Hastenburg, & Van den ven, 1998, p. 350).
Other motives for mergers and acquisitions include: agency motivations, managerial overconfidence and industrial shocks. In agency motive, managers aim to undertake a merge or an acquisition against the interest of the company owners. Managers often seek mergers in efforts of job security through diversification and smooth earnings that are associated with conglomerates. The theory of free cash flow maintain that when company management enjoy a certain degree of cash favour they tend to invest the extra cash to acquisitions rather than profiting the shareholders. The prospect of higher compensation associated with working as an executive manager in a large corporation often fuel managers decisions. Managerial overconfidence is also known as hubris hypothesis indicate that managers are bribe into mergers and acquisitions due to their overestimation in their capabilities to create company value and miscalculations of the synergies advantages (Seth, Song, & Petit, 2001, p. 392). Hubris often results to fail and later liquidated companies since most overconfident leaders tend to make uninformed decision that lower value of the company. Industry shocks prompt mergers and acquisitions as organization estimate to benefit from synergies. Some of the examples of industry shocks that have influenced the mergers and acquisitions waves in the past include; advancements in technology, input prices and supply and change in currency movement directions.
Planning
The acquisition and merger process is often complicated. However, researchers insist there are three main stages in the process of merging. The initial stage involves the identification and selection of the firm to merge with. Indeed, it is necessary for mangers to exercise caution when choosing the partner since it is advisory to consider “organizational fit” to ensure an effective collaboration. The merging process must involve executive members including the operational managers from either firms. The firms may opt to use outside consultants that are more aware of the issues and controversies that may arise upon the merge (Shimuzu, Hitt, Vaidyanath, & Pisano, 2004, p. 330). Additionally, since a merge involves the consent of both firms a period of “courtship” may be necessary to allow the two firms to practice working together. During the “get to know each other period”, the respective firms may assess the dominant characters and weaknesses of each firm regarding products, capabilities and management. The SWOT analysis on how and at what prices to trade the shares (Zhang & Ebbers, 2010, p. 107). The second stage involves the negotiations where the two firms decide on how to collaborate their shares in efforts to maximize on the merger. Upon negotiation and closing of the deal, the integration phase follows. The incorporation process is the final step in the process of merging.
Integration Phase
The integration phase entails the post-merger strategies. It is necessary to mention that no two firms are alike despite the establishment of “organizational fit” during the selection process. Similarly, no two mergers are similar in terms of implementation strategies. When a merger is driven solely for financial reasons, in most cases the firm acquired is allowed to “bring-in” the new firm hence maintaining a level of independence. However, if the rationale of the merger is to maximize on operational goals of the collaboration, it is necessary for the firms to specialize on integration. The high-ranking administration of the purchasing firm has the responsibility to design and implement the post-merger approach. The tactic may entail using the current management, employing a new team or drawing from both firms to indicate the integration. It is essential for the post-merger strategy to illustrate the complimentary roles which will enable collaboration regarding organizational culture, operating techniques, personnel management among other aspects (Shrivastava, 1986, p. 67). At the integration stage, quality leadership is the core determinant of the success or failure of the merger. Indeed it is necessary for the senior managers to be offered lucrative compensation benefits to bribe them to remain with the firm (Krug , Wright, & Kroll, 2014, p. 152). Managing the cultural differences often involves the illustration of sensitivity on the variations and the application of informed techniques on the management of the differences.
Issues in Merging and Acquisition Process
The mergers and take-overs have not proved to be a panacea for organizational issues since many of them fail to attain the goals managers originally envisioned. In many circumstances the expected advantages from collaborations in fiancé, technology, and research and development sector fail to materialize. Studies indicate that the share prices fall from their initial levels before the merger (Brouthers , Van Hastenburg, & Van den ven, 1998, p. 350). Indeed, it can take as long as ten years for mergers and takeovers to rip the full benefits of combined-effect. Researchers indicate that the downsize for a number of years after the merger is related to different stages of development among the firms and the utilization of dissimilar operational techniques(Begley & Donnelly , 2011, p. 40). The clarifications and pointers of the success and the failure and success of mergers vary considerably. Studies indicate the most common indicators of merger and acquisition success include; the prices of the stocks, financial capabilities, the assessments of managers among others (Capron , 1999, p. 1003). The absolute gauge of failure of a merger or an acquisition is when they are divested or liquidated at a later date. Additionally, other signs of failures include lack of net growth and share valuations that are below the industry’s average.
During the 1950s and 60s which illustrated the boom in local and several international mergers and acquisitions, most collaborations were related to the conglomerate type. Academic research during this era concluded the main causes of merger and acquisitions failure were related to senior management struggle for power, relative partner size and insensitivity towards the issues of the respective firms (Shrivastava, 1986, p. 72). In the 1980s and 90s majority of the acquisitions and mergers were of the horizontal type and involved collaborations between and among business entities in the same category. During this wave of mergers and takeovers, most of the integrations were successful since they involved the opportunity to transfer product knowledge while maximizing on a larger firm through the economies of scale (Bertrand & Zitouna, 2005, p. 18). The success of the partnerships involved extensive integration between the two firms regarding their procedures, practices and organizational culture.
According to Vaara (On the discursive consruction of sucess/failures in Narratives of postmerger Intergration , 2002), the descriptions of the success or failure in mergers and acquisition encompasses several categories such as; strategic appropriateness, cultural fit, management, employees’ resistance among others. On an international level, these explanations may include; external environment factors such as legal-political and socio-economic factors, method of financing and the organizational age. Indeed, studies indicate that corporate culture among other smaller organizational issues are the main determinants of the success or failure of a merger or an acquisition (Bioye Tajudeen & Abdul-Rasheed, 2005, p. 180). Moreover, low productivity and subsequent failure of a merger or an acquisition may be related to layoffs associated with the partnership (Alaranta , 2008, p. 44). High levels of downsizing often result to anxiety which decreases morale and employee performance. Additionally, in most cases during a merger or takeover, the talented employees often seek employment opportunities elsewhere hence affecting performance.
In addition to cultural fitness, strategic appropriateness, financial issues and taxes play a vital role on the analysis of mergers or an acquisitions. Strategic appropriateness relates to the status of the partner. Whether the company in question is a public, personalized or subordinate firm is a key influence on the after merger or take-over gains. Indeed, research indicates for public listed companies, the returns are low while for private and subsidiary organizations often lead to positive returns for the acquirer (Golubov , Petmezas, & Travlos, 2012, p. 23). Financial issues relates to the method of payment. Organizations offering stock as a method of payment experience lower returns compared to those using cash. However, when the transactions takes place in a less competitive environment, the acquirer does not experience low or negative returns even when stocks are used as a means of payment.
Another factor affecting mergers and acquisitions regards the industry relatedness of the two organizations. Historical evidence showcase that during the wave in the 1960s firms welcomed across industry acquisitions with relatively successful returns (Capron , 1999, p. 999). However, studies report different information on the success rate of acquisitions involving firms that do not align in the four-digit SIC code. In this regard, some researchers suggest that vertical mergers and acquisitions tend to be more successful than diversifying deals. Organizations that share the same product description tend to generate higher incomes. The size of the two respective firms is another issue with mergers and acquisitions. Size is considered in respect to the firm market capitalization. Returns are often negatively related with the size of the acquired firm. The organizations valuations impact the acquisition or merger returns.
Chapter Overview
Mergers describe an agreed agreement between two or more firms to share a business through trading of shares while take-overs represent buying out of one firm, the acquired, by another organization, the acquirer. Mergers and acquisitions have been applied in businesses since the 19th century since they are only cheap but fast. The history of mergers is categorized two six distinctive waves depending on the volume and motives for merger in the particular time period. The motives for merging and acquisitions differs from one firm to another, however, the most common factor is the synergies associated with collaboration. Synergies include economies of scale, amplified market presence and efficient managerial resources. The most common issues associated with international mergers relate to lack of strategic appropriateness and organizational fit.
